Each year, PwC conducts surveys of public company directors and institutional investors. These surveys are structured to gain insight into the trends that are shaping corporate governance and influencing the board of the future. While the investor and director perspectives coming out of these surveys are often aligned, substantial differences exist about certain issues.
Here are some highlights of What matters in the boardroom? Investors and directors provide insights on key governance trends:
Both directors and investors agree that financial expertise is a top director attribute (93% of directors and 82% of investors say it’s “very important”). Both parties also place industry and operational expertise high on their respective lists.
Both directors and investors also believe that diversity is important to board composition. However, investors believe it is more difficult to overcome board diversity challenges than directors — 85% of investors believe there are hurdles to increasing gender diversity on boards compared to just 14% of directors. Investors and directors disagree about the root cause of these hurdles. Investors believe that directors don’t want to change their current board composition to create a position for a diverse candidate. Directors indicate that a lack of awareness of qualified candidates is the primary challenge.
Board performance is also a concern of both parties. We found that 36% of directors believe someone on their board should be replaced. These directors cite diminished performance due to aging, lack of expertise, and lack of preparation as the top reasons for their dissatisfaction with peers’ performance. However, 53% of directors indicate that there are impediments to replacing an underperforming board member. Most frequently, they cite board leadership’s discomfort addressing the issue. Investors are even more skeptical about removing directors — 94% see impediments to replacing a poor performer. Investors most frequently cite a “close relationship between the CEO and the underperforming director” as the greatest impediment.
The SEC advised that it will not publish its final CEO/median pay ratio disclosure rule until October 2015 at the earliest, according to the regulator’s updated rulemaking agenda. The agency was due to issue the rule in October 2014.
With a new deadline for issuing the final rule, public companies wouldn’t have to disclose the compensation ratio until their 2017 proxy statements, which would reflect 2016 compensation.
At the same time, the SEC listed October 2015 deadlines for writing proposed rules for compensation clawback policies, pay versus performance, and employee/director hedging.
The SEC proposed rule regarding the CEO/median pay ratio would require public companies to disclose the median of the annual total compensation of all employees, the annual total compensation of the CEO and the ratio of these two amounts. The proposed disclosure, mandated by the Dodd-Frank Act, would be required in any annual report, proxy or information statement or registration statement that requires executive compensation disclosures. The proposed disclosure requirements would not apply to emerging growth companies, smaller reporting companies or foreign private issuers.
PwC’s 2014 Annual Corporate Directors Survey had the CEO/median pay ratio disclosure rule as the top director concern among proposed and recent regulatory and shareholder initiatives with 65% of respondents saying they were at least somewhat concerned. [For more information on the CEO/median pay ratio rule, read BoardroomDirect September 2013 (Issues in brief).]
The SEC’s Office of the Whistleblower’s 2014 annual report states that the office issued whistleblower awards to nine individuals in fiscal year 2014, up from four in 2013. The office was created in 2011 under the Dodd-Frank Act.
One of the 2014 authorized payments was for $30 million, the largest to date and the fourth award to someone in a foreign country. The office received 3,620 tips in 2014, compared to 3,238 in 2013, and 3,001 in 2012.
The most common complaints reported by whistleblowers included corporate disclosures and financials (16.9%), offering fraud (16%) and manipulation (15.5%). Geographically-speaking, California (556), Florida (264) and Texas (208) had the highest number of whistleblower complaints. Outside the US, India (69) had the most whistleblower complaints.
[See a related article on tips for building an effective whistleblower program in BoardroomDirect July 2014 (Audit committee issues).]