BoardroomDirect: Issues in brief

BoardroomDirect®
Update on the current board issues: September 2014

Issues in brief

 

Actions focused on gender diversity

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A combined effort by institutional investors California State Teachers’ Retirement System (CalSTRS) and California Public Employees’ Retirement System (CalPERS) and another by the Thirty Percent Coalition are trying to boost female representation on corporate boards.

Four months after CalSTRS and CalPERS sent the 131 California companies in their portfolios that lack women directors a letter offering the names of prospective board members, 35 companies responded. Of those, 15 have added at least one woman to the board.

“We are pleased that a number of companies we contacted recognized board diversity as an important governance practice,” said CalSTRS Director of Corporate Governance Anne Sheehan. “These companies took rapid action proving that change doesn’t take millennia ¬– it can happen quickly if there’s a process and the requisite will.”

Anne Simpson, CalPERS senior portfolio manager and director of global governance, is optimistic that California can lead the way. “As the nation’s two largest funds, it’s great to have our home state set an example for others to follow,” she said. “It’s also proof that with appropriate, constructive engagement we can influence positive results in our portfolio companies.”

Along with the letter, each company received a copy of the National Association of Corporate Directors Blue Ribbon Commission Report, The Diverse Board: Moving from Interest to Action, which was endorsed by both CalSTRS and CalPERS.

The Thirty Percent Coalition is a group of institutional investors, labor unions, corporate governance experts, senior business executives, national women’s organizations, and board members with a goal of having qualified women hold 30 percent of board seats across public companies by the end of 2015.

For the third year in a row, the Thirty Percent Coalition's institutional investor committee is sending letters to 102 Russell 1000 companies that do not have any female directors asking them to add women to their boards.

The 2014 PwC Annual Corporate Directors Survey found that of those directors who believe there are impediments to gender diversity, the top two cited were a lack of awareness of qualified diverse candidates and little appetite for changing current board composition.

 

What is important about board self-evaluations?

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When it comes to a board self-evaluation, it’s all about the questions – who asks them, how they are asked and what is done with the information gathered.

These were some of the takeaways from the recent Directors & Boards webcast on “What Directors Need to Know about Board Evaluations 2.0: Moving from Fundamentals to True Strategic Value.” The webcast featured Dennis Cagan, a director for Copper Mobile, Acorn Technologies, and Truston; and Catherine Bromilow, a partner with PwC’s Center for Board Governance.

“Questionnaires can be handed out to directors or used to start discussions at a meeting,” Bromilow said. “Two such questions I have seen used at a peer evaluation are, ‘what does this director do well?, and what can he or she do to be more effective?’”

One forward-looking question Bromilow believes board members should answer is: are there other skills we would love to add to our board? “If there are, you need to determine if you want to expand your board or change board members,” she said.

In addition to questionnaires, Cagan sees engaging third parties to conduct director interviews as a good option.

“One of the most effective techniques is interviewing the directors,” he said. “The key is you can’t arrive at an authoritative conclusion unless you get all the answers. And the board has to be assured of confidentiality.”

And when conducting director interviews, the interviewer should evaluate how the directors communicate with each other, according to Cagan.

Overall, the board evaluation process can be used to address board issues that may come up, according to Bromilow. “I would say if there are concerns about the board and its processes, one of the best ways to resolve them is to have thoughtful discussions and do something with the results,” she said.

Half of directors responding to PwC’s 2014 Annual Corporate Directors Survey say they made changes in response to issues identified during their last board self-evaluations.

Boards aren’t the only stakeholders interested in the results of self-evaluations. According to the Council of Institutional Investors (CII), while investors don’t expect boards to discuss the details of the outcomes of any assessments, they do want to understand the process.

In a report, Best Disclosure: Board Evaluation, the CII Advisory Council suggests two approaches boards and management can use for disclosure. One approach focuses on the mechanics of how the board evaluation is conducted and analyzed. The other approach adds a discussion of the board’s most recent evaluation. That discussion should include a recap of the key takeaways from the board’s review of its own performance, including areas where the board feels it functions effectively, areas where it thinks it can improve, and a plan of action to address these points.

 

SEC Chair White: More Dodd-Frank rules coming

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In the near term, the SEC expects to write Dodd-Frank final rules covering derivatives and executive compensation, SEC Chair Mary Jo White recently told the US House Banking Committee.

“While the SEC has made significant progress, more remains to be done on both our Dodd-Frank Act and JOBS (Jumpstart Our Business Startups) Act rulemakings, and we must continue our work with intensity,” White said. “As we do so, we must be deliberate as we consider and prioritize our remaining mandates and deploy our broadened regulatory authority, supported by robust economic analysis.”

Derivatives

According to Chair White, the Dodd-Frank Act established a new oversight regime for the over-the-counter derivatives marketplace, which requires the Commission to regulate “security-based swaps” and to write final rules that:

  • Facilitate the centralized clearing of security-based swaps;
  • Increase transparency for market participants and regulators;
  • Increase security-based swap transaction disclosure;
  • Reduce counterparty and systemic risk; and
  • Address potential conflict of interest issues relating to security-based swaps.

Executive compensation

The Commission proposed rules in September 2013 to require public companies to disclose the ratio of the compensation of a company’s chief executive officer to the median compensation of its employees. White testified that the Commission has received over 128,000 comment letters on the proposal, including more than 1,000 that are unique. “The staff is carefully considering those comments and is preparing recommendations for the Commission for a final rule,” she said.