Issues in brief

Update on current board issues: November 2012

Issues in brief

Directors and IT -- What Works Best™: Bridging the IT confidence gap

As a way of bridging the information technology confidence gap that exists on many company boards, PwC's Center for Board Governance has created an IT Oversight Framework that is the basis for Directors and IT -- What Works Best™: A user-friendly board guide for effective information technology oversight.

What can the board do to bridge the IT confidence gap? Structured frameworks for IT professionals and management already exist; however, they are not designed with the board's oversight role in mind. The PwC guide is meant to help fill this void. [To learn more about the guide, and to download it, click here.]

“Through our daily interactions with boards of directors, we realized there was a huge appetite for IT guidance at the board level,” said Mary Ann Cloyd, Leader of PwC’s Center for Board Governance.

Our research, which included survey results from 860 public company directors, indicates many board members are uncomfortable with overseeing their company's IT. Although many directors want to better comprehend IT-related risks and opportunities, they sometimes don't have an adequate understanding of the subject. In addition, boards often lack a well-defined process in this area.

The IT Oversight Framework is a six-step process that:

  • provides a structured approach for boards to help with their oversight responsibilities,
  • offers flexibility for customization based on the company's specific circumstances,
  • includes leading oversight practices to facilitate discussions with the CIO, company management, and outside consultants, and
  • can help identify IT issues that may not currently be a focus for management or the board.

New listing standards for compensation committees

NASDAQ and the New York Stock Exchange (NYSE) proposed new listing standards for compensation committee member independence and committee advisor independence requirements pursuant to the Dodd-Frank Act. The listing standards have been issued in accordance with guidance specified by the SEC.

Summary of the listing standards

  • The source of compensation paid to the director, including consulting fees, advisory fees, or other compensation. (Note that the NASDAQ listing requirement goes beyond the SEC guidance by prohibiting any advisory fees or other compensation beyond the fees paid in the role as a non-executive director.)
  • Director affiliations with the company, any subsidiaries of the company, or any affiliates of subsidiaries of the company.

Second, they specify that compensation committees should have broad authority and appropriate funding to engage advisors (and that such authority should be specified in the committee charter). Further, committees must reflect in their charters specified independence factors in engaging such advisors (such as compensation consultants and independent legal advisors). The six factors that were included in the SEC guidance and specified by both listing exchanges are:

  • The provision of other services by the adviser firm,
  • The fees received by the adviser firm from the company, as a percentage of the total revenues of the adviser firm,
  • Policies and procedures in place at the adviser firm that are designed to prevent conflicts of interest,
  • Business or personal relationships between individual employees of the adviser firm that provide services to the compensation committee and any compensation committee member,
  • Stock of the company owned by individual employees of the adviser firm that provide services to the compensation committee, and
  • Business or personal relationships between individual employees of the adviser firm that provide services to the compensation committee and any executive officer of the company.

According to Scott Olsen, US Leader of PwC's Human Resource Services practice, "The independence factors are meant to address potential conflicts of interest that may exist among both large, diversified adviser firms, and smaller, boutique firms."

The NASDAQ requirements also call for companies to have a standing compensation committee. The NYSE requirements already include such a requirement.

NYSE standards related to committee member independence will be effective as of the earlier of the date of the first annual shareholder meeting following January 15, 2014 or October 31, 2014. All other NYSE standards will be effective as of January 1, 2013.

NASDAQ standards related to committee member independence will be effective as of the earlier of the second annual meeting following the approval of the rules by the SEC or December 31, 2014. All other NASDAQ standards will be effective immediately upon approval by the SEC.

What compensation committees need to do:

Generally, the new requirements will not result in material changes to the ways that compensation committees operate. However, "Committees will want to take certain steps to ensure compliance with the new listing requirements," Olsen said. Among the potential steps to be taken:

  • Review committee charters with regard to authority to retain independent advisors and appropriate funding,
  • Review the process for determining independence of committee members,
  • Develop a process for assessing the independence of advisers,
  • Update annual director questionnaires in the areas of company affiliation and business or personal relationships with advisers, and officer questionnaires in the area of business or personal relationships with advisers, and
  • Develop, as necessary, annual questionnaires for any independent advisers regarding potential conflicts of interest.

ISS releases 2013 proposed proxy recommendation changes

Institutional Shareholder Services (ISS) has proposed changes to its voting recommendation policies that relate to votes against directors whose board does not take action on a majority-supported shareholder proposal, and environmental and social shareholder proposals that request linking compensation to sustainability goals. The proxy advisory firm also made changes to its recommendation policies on say on pay and say on golden parachutes proposals.

ISS plans to strengthen its policy on majority-supported shareholder proposals by recommending a vote against or a withhold vote if directors fail to respond to a shareholder proposal that received the support of a majority of shares cast in the previous year. That is a significant change from the current policy, which only recommends such a vote if the proposal received the support of a majority of outstanding shares in the previous year or a majority of shares cast in the last year and one of the two previous years. 

Regarding recommendations on environmental and social proposals linking compensation to sustainability goals, ISS has decided to change its policy to a vote on a case-by-case basis from "generally vote against." The proxy advisory firm is also replacing the list of specific social and environmental factors to consider with sustainability criteria. 

When it comes to management say on pay proposals, ISS is proposing three changes to the criteria for reviewing them. It wants to include company-selected peers in the peer comparison groups, compare realizable pay to grant date pay, and add pledging of company stock to its list of poor pay practices. The last item could possibly lead to a negative say on pay voting recommendation because ISS says such a practice would carry more weight in its say on pay analysis.

As for say on golden parachutes proposals, ISS wants to include existing change-in-control arrangements maintained with named executive officers rather than focusing primarily on new or extended arrangements. Also, ISS wants to place further scrutiny on multiple legacy problematic features in change in control agreements, such as tax gross-ups. The policy would be to recommend voting on this matter on a case-by-case basis, unless the plan has one of several poor pay practices. In that case, ISS would recommend voting against the plan. [To read the full ISS policy change click here.]

The ISS draft policies for the 2013 proxy season are based on the firm's 2012-2013 global policy survey. The comment period for these draft policies ends November 9.

For more information on the ISS proposed changes, you may want to read the following: