Update on current board issues: September 2012

Issues in brief

PwC 2012 Annual Corporate Directors Survey

Board evolution: Progress made, but challenges persist

Significant changes in corporate governance are causing directors to reconsider their oversight approach as they spend more time on board work, according to the PwC 2012 Annual Corporate Directors Survey issued this month.

Insights from the Boardroom 2012, a PwC Center for Board Governance report which captures the survey's results, states that challenges remain for directors who expect to increase their focus on critical areas including board composition, risk management, company strategy, and IT oversight. [See details of the survey's results at the survey web site.]

“Corporate directors are in the spotlight as never before”, said Mary Ann Cloyd, leader for PwC’s Center for Board Governance. “Our annual corporate director survey shows an attitude shift among directors grappling with change – indicating their progress to-date – and reveals ways to enhance performance and adjust to the altered landscape."

According to the survey of 860 corporate directors, more than half of directors say the amount of time they spent on board work rose last year. Two-thirds of those increased their hours over 10 percent, and one-fifth increased more than 20 percent.

Strategic planning topped the board’s "wish list", with over 75 percent of directors saying they want to devote more time to it, up from 60 percent of directors who wanted to do so last year.

One longtime director and audit committee chair has seen a focus on strategy over the past year.

"In all three boards that I served on over the past year, we've spent a lot of time on strategic and business changes", said Denny Beresford, audit committee chair for Legg Mason, who recently retired from two of his boards. "These days in the board meetings the discussion is focused on the challenges of the business."

Some of the areas where directors have enhanced practices to improve their boardroom performance are executive compensation, fraud risk and reconsideration of the board leadership structure (such as splitting the Chair/CEO position) in response to shareholder activism, according to the survey.

Regarding executive compensation, the survey found that almost two-thirds of directors say their companies took some action in response to their 2011 say on pay vote.

"I've noticed on all the boards I sit on that we spent a lot of time ensuring compensation is in line with performance", said Nancy Cooper, a director at Teradata, Guardian Life and Mosaic. "I think that was due to all the [shareholder] focus on executive pay."

For a summary of the PwC survey, read the September 12 press release and watch an archive of the September 13 webcast.

SEC issues conflict minerals disclosure rule

The new SEC rule on conflict minerals disclosure will be effective for calendar year 2013 for nearly 6,000 public companies. There are some questions directors should be asking.

The rule, mandated by the Dodd-Frank Act, requires public companies to disclose whether they use conflict minerals (tantalum, tin, tungsten, and gold) and whether the minerals originated in the Democratic Republic of the Congo (DRC) or adjoining countries. It responds to concerns that conflict minerals mined in these “covered countries” help finance armed groups that are responsible for violence in the region.

The disclosures are intended to strengthen companies' custody controls regarding conflict minerals and reduce funding for armed groups involved in the DRC conflict. [Read PwC's Dataline: SEC adopts conflict minerals rule — Public and nonpublic companies in many industries are affected.]

In a Corporate Board Member Board Governance Series video, Mary Ann Cloyd, leader of PwC's Center for Board Governance, points to three questions directors should be asking management regarding conflict minerals:

  • Do these rules apply to us? (Management needs a process to determine if a company is affected.)
  • If the rules do apply, what are we going to do? (Management needs a process for due diligence to be in compliance with the disclosures.)
  • How much is it going to cost? (Management's estimates will differ between companies. The SEC estimates compliance costs will be $3-$4 billion initially and $200 million annually for all companies.)

When asked about the conflict minerals rule as part of the PwC 2012 Annual Corporate Directors Survey, 85% of directors said they're not going to spend much time discussing the issue and 75% said they were not very concerned about it. (The survey question was asked before last month's release of the conflict minerals rule.)

There are some who speculate the SEC rule may face legal challenges from the business community, just as the agency did with its proxy access rules in 2010.

Study: Most directors with majority of withhold votes don't leave

A study conducted by Governance Metrics International (GMI) Ratings and commissioned by the Investor Responsibility Research Center Institute of withhold votes for director nominees at Russell 3000 companies revealed that most directors who receive more withhold votes than "for" votes continue to serve.

The study found that only 5% of the 175 director nominees who received a majority of withhold votes at Russell 3000 companies from July 1, 2009 to June 30, 2012 no longer served as directors at those companies. The study also showed that in 2012 there were a total of 45 directors who received a majority of withhold votes, of which six resigned.

Directors at U.S. companies are either elected by plurality or majority voting standards. Under plurality voting, a director on a management slate only needs one vote to be elected with no requirement to receive a majority of the votes. Under majority voting, a director needs more than 50% of shareholders' votes. In a plurality system, some shareholders use withhold votes as a way to vote against a certain director or directors.

Key findings from the study are:

  • For companies with majority voting or "plurality plus resignation" standards, directors are more likely to resign in both cases if they don’t get a majority of "for" votes.
  • Only half of withhold votes in the study were due to violations of corporate governance practices. Many were driven by issues specific to a company, such as misconduct or company performance.
  • A majority of withhold votes are more common at smaller-cap companies, which tend to have plurality voting.
  • Companies with majority or plurality plus resignation standards tend to disclose their response to the negative director votes.

The study also included an analysis of companies whose withhold votes were clearly due to certain governance issues such as poison pill approval, meeting attendance, related party transactions, and director overboarding.

In its 2012 Proxy Season Review: U.S., Institutional Shareholder Services (ISS) reported that 46 directors failed to win a majority of votes this year compared to 45 in 2011. This was due mainly to five "Vote No" campaigns.

With the release of this report, GMI Ratings, which encompasses The Corporate Library, has made it clear this is an issue it is tracking when it assesses risks of public companies it rates.