Update on the current board issues: March 2014

Issues in brief


Update on SEC no-action letters for 2014 proxy season

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Shareholder proposals related to compensation, environmental, and independent chairs are among the most common for which companies have asked the SEC to take no action this proxy season, according to NYSE Governance Services.

As of February 28, the SEC has received 167 no-action requests from companies seeking to omit specific shareholder proposals from the proxy statement. Compensation-related proposals lead the way with 28, followed by environmental proposals with 17, and independent chair proposals with 15. The SEC accepted 84 of the requests and denied 41. The others were withdrawn.

Two other topics getting attention this proxy season are board diversity and board declassification. So far, institutional investors have filed proposals with 20 companies that have no women on their boards, according to the 30 Percent Coalition, an investor group led by representatives of California State Teachers Retirement System (CalSTRS) and Walden Asset Management. Those proposals call for charter amendments that would institute a practice to include women and minority directors on those companies’ boards.

Last year, 72 percent of 25 diversity resolutions never went to a vote because the parties reached an agreement before the annual meeting, according to the 30 Percent Coalition, which seeks 30 percent female representation on boards by 2015.

As for declassification, so far in the 2014 proxy season, more than two-thirds of 31 large companies with classified boards that have received shareholder proposals have agreed to bring management declassification proposals to vote at the annual shareholders’ meeting, according to the Shareholder Rights Project. Over the past three proxy seasons, more than 100 companies have entered into similar agreements.


Report: Companies still have much to do about succession planning

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A Report on Senior Executive Succession Planning and Talent Development by The Institute of Executive Development and the Rock Center for Corporate Governance at Stanford University concludes that a majority of executives interviewed think their organizations are not doing enough to prepare for changes in leadership.

“The corporate leaders we interviewed all believe that succession is vitally important today, just as it has been in the past”, said Professor David Larcker of the Stanford Graduate School of Business. “Still, the majority [of executives] do not think that their organizations are doing enough to prepare for eventual changes in leadership at the CEO and C-suite levels, nor are they confident that they have the right practices in place to be sure of identifying the best leaders for tomorrow."

The report is based on in-depth interviews with executives and directors at 20 companies. These interviews were conducted in fall 2013. Key findings as stated in the report include:

  • Companies do not know who is next in line to fill senior executive positions.
  • Companies do not have an actionable process in place to select senior executives.
  • Companies plan for succession to “reduce risk” rather than to “find the best successors”.
  • Roles are not defined and often they are not followed.
  • Succession plans are not connected with coaching and internal talent development programs.

In addition to including viewpoints from sitting directors, the report offers some suggested actions boards could take to improve succession planning. Those actions offered by Prof. Larcker and Scott Saslow, founder and CEO of The Institute of Executive Development, include:

  • Map the future operating and leadership skills required of each executive position and benchmark executives against the skills. Executives should be evaluated not only in terms of their ability to achieve the requirements of their current roles, but also in terms of their potential to assume different or larger roles in the organization.
  • Cast a wide net. The board and management should look broadly through the company’s ranks to ensure that executive talent is evaluated in terms of its ability to meet future – not just past or current – needs.
  • Be comprehensive and continuous. Succession planning should be treated as a continuous practice whereby management and the board prepare for transitions at any time.
  • Assign ownership and roles. Board members, the CEO, senior executives, and support staff should be assigned specific roles and be held accountable.
  • Connect CEO and senior executive succession plans with coaching and internal talent development. These programs should strategically support one another.
  • Assign director coaches and mentors. Board mentors can give senior executives a new perspective on the organization while providing the board with greater insight into the organization.
  • Get strategic assistance when necessary. Companies should survey the practices of other corporations and integrate the ones that are best-suited to their structure and situation.

The Conference Board task force on director-shareholder engagement

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The Conference Board Task Force on Corporate/Investor Engagement has released its first report. This follows the recently released Shareholder Director Exchange (SDX) Protocol. [Read BoardroomDirect February 2014: Issues in brief for more information about the Protocol.]

The Conference Board report concludes that fixing corporate governance – and, ultimately, restoring trust in business – calls for an open, yet purpose-driven process of reestablishing alignment between corporate strategy and investor interests.

The task force was formed to answer three questions: What is the optimal balance in the relative roles of management, directors, and investors in the governance of public corporations? What are the gaps between an optimally balanced system and the current system? How should public corporations and investors engage with one another to lead to an optimally balanced system?

“Corporations and their investors have an important role to play in helping to restore trust in business,” said Pat Russo, co-chair of the task force and director at Alcoa, General Motors, Hewlett Packard, and Merck. “That’s why the task force was assembled and why, after extensive investigation and debate, we developed this set of recommendations as a first step in aligning the interests of investors and the companies they invest in to stimulate economic growth and prosperity.”

The task force worked with an advisory board of leaders in corporate governance from the corporate, investor, and academic worlds, including Kayla Gillan, Leader of PwC’s Investor Resource Institute. The Report is a comprehensive discussion of the need for a strategic approach to engagement and how to carry it out. The findings address and include:

  • Why directors and investors must together reaffirm the principle that the interests of all stakeholders – including customers, employees, suppliers, communities, and the environment – are key to business success, and thus shareholder value in the long term
  • Why board-centric, rather than shareholder-centric, governance remains the optimal model for corporate decision-making, and how directors can adapt this model to incorporate more investor input and build stronger collaboration with them while retaining primary oversight responsibility
  • How investors can most effectively, responsibly, and openly utilize the power of their votes to work with the board and management
  • Which regulatory changes may have a big impact in shaping a more accountable, effective, and transparent relationship between corporate boards, investors, and the public

For more information on board-shareholder engagement, read PwC’s Director dialogue with shareholders – what you need to consider.