Governance professionals look to 2019

This article originally appeared in the latest Corporate Secretary special report. Click here to view the full publication.

As 2019 begins, professionals see little sign that some of the key trends impacting corporate governance teams over the past couple of years will abate. The enhanced focus on shareholder engagement, director evaluation, board diversity and ESG issues is expected – if anything – to intensify, with human capital increasingly taking center stage.

Human capital issues cover a broad spectrum, taking in workforce diversity, hiring and firing practices, fair pay and opportunities for advancement, among others. Doug Stewart, vice president for securities and assistant corporate secretary with financial services giant Visa, notes increasing investor interest in such topics and expects it to continue, in part as shareholders look for red flags indicating potential problems at companies.

One response has been to include Visa’s head of diversity and inclusion on engagement calls. Stewart says the company now offers to discuss human capital with investors, and that most want to talk about it.

Gibson Dunn & Crutcher partner Lori Zyskowski notes that some shareholder proposals on pay equity were filed in 2018, adding that these may start to emerge in a wider range of industries. She points to restrictive contracting practices as attracting attention. For example, non-compete and non-solicitation measures can be a concern for investors in terms of talent management.

BOARD OVERSIGHT
The emergence of the #MeToo movement and high-profile allegations of sexual misconduct against men in leadership positions have prompted investor interest in companies’ practices – and how boards are keeping an eye on such potential behavior and its attendant reputational risks. In response, some companies have amended their charters to give board committees clear oversight in this field, Zyskowski says. This might be either the audit committee or the compensation committee, on which the head of HR often sits.

Melissa Sawyer, a partner with Sullivan & Cromwell, expects a continuation and perhaps acceleration in executive transitions arising from #MeToo and related matters. Companies have developed techniques for dealing with such incidents and minimizing damage to their brands and the perception of boards’ credibility, she notes. This can include the board being less willing to offer public support to an accused official and being swifter to respond to accusations.

Marc Treviño, also a partner with Sullivan & Cromwell, adds that questions IR teams are fielding about board oversight in this area feed into the broader question of cultural oversight, and the pressure on boards to assign responsibility for cultural issues.

BOARD DIVERSITY
Another response has been for companies to think about what they’re doing in terms of both management and board diversity, according to Paula Loop, leader of PwC’s Governance Insights Center. ‘There are a lot of opportunities for companies to tell their story,’ she points out.

Gender diversity on boards is set to continue as an intensifying focus for many institutional investors and pressure groups. Progress has been mixed, despite significant efforts by governance teams. When the US chapter of the 30 Percent Club launched in 2014, female board representation among members was 21.7 percent and it has now beaten the group’s 30 percent target. But female representation at board level across the Fortune 500 in mid-2018 stood at just 22.2 percent, according to a Heidrick & Struggles report.

Smaller companies are doing even worse. Of the micro-cap companies covered by an Investor Responsibility Research Center Institute and Board Governance Research study released in the summer, 61 percent have all-male boards. That number is much lower across the Russell 3000, where just over a fifth (21 percent) of company boards have no female representation.

Among many bigger companies, board diversity is becoming a check-the-box issue for 2019/2020 as they aim for the 30 percent threshold, according to Treviño. That mark is on the horizon, and management diversity is now becoming a bigger issue, he says. Having 30 percent of director seats filled by women is a function in part of board refreshment, and US companies continue to reject the types of term limits that might speed up the process.

An interim step is to have broader diversity on director nomination slates, Treviño says. As part of this, there is a growing number of non-CEOs being considered for directorships, such as HR executives, academics, former military officials and non-executives, Sawyer notes. 

‘Beyond reaching certain minimum thresholds, the focus is on boards’ processes [for increasing diversity],’ says Bill Ultan, managing director for corporate governance at Morrow Sodali. ‘There is an understanding among institutional investors that change won’t happen overnight.’

TAKING THE BOARD’S PULSE
The evaluation of boards and the governance process they operate within has become a source of greater interest and more modern techniques over the past few years. Changes have included a switch from surveys to live interviews, and conducting reviews annually rather than every other year. Professionals expect to see best practices roll out to a wider population in 2019, particularly among smaller companies.

Peter Kimball, head of advisory and client services at ISS Corporate Solutions, notes that board evaluations are increasingly tied to other issues, such as diversity. Among the benefits of effective board evaluations is that they can provide feedback to help corporate secretaries prepare for meetings, he says.

Stewart describes evaluations as a critical component of governance that, among other things, helps inform board refreshment. In doing so, he notes the chain from improved evaluations leading to effective refreshment that in turn helps promote diversity. He expects this connection to increase the use of better evaluations. Visa uses a third party to conduct in-person interviews every year, and Stewart says evaluations have been useful in tackling larger issues initially, which leaves smaller issues to be tackled later once improvements have been made. ‘It’s like preventative medicine,’ he explains.

Loop agrees that board evaluations are generating more buzz as a topic and can be used to help boost board performance and the refreshment process. She expects to see more disclosure about companies’ evaluation processes during the 2019 proxy season.

Zyskowski, meanwhile, says one useful practice is to alternate using questionnaires and interviews each year, which she says gives better feedback than relying on one method alone, and also helps to refresh the questionnaire in order to get the best feedback.

TMI?
Over the past few years, new tech tools such as board portals have become near ubiquitous aspects of the governance landscape. As the technology matures and improves, so governance teams are having to consider how best to use it. ‘We’re always looking at ways to improve directors’ experience,’ Stewart says. The common concern is that, due to their very flexibility and scope, portals may lead to directors being overwhelmed by the amount of information they have access to.

As a result, Loop says, companies and boards themselves are looking at how to use portals to highlight the key issues, challenges and trends they need to focus on. Directors are diligent at going through materials presented to them, but there is always the danger they might miss something, she adds.

Gardner Davis, partner with Foley & Lardner, is more skeptical of technology, arguing that he would rather receive a hardcopy package of documents. He worries that portals might also create a record of what information the board did not look at.

On the flip side, Treviño says a growing number of companies are proactive in pushing information to directors, via tech tools, summarizing management-level insights and press coverage, among other items. Doing so means boards are better equipped to respond if an issue arises and gives more background information on the company, he says, adding that directors want to feel connected to the companies whose boards they sit on, but also sometimes feel they get too much information.

Sawyer says she has seen a growing number of board retreats focusing on long-term planning where technology is kept out of the room. Some boards have felt technology has been used as a crutch, she explains, and as such has been a barrier to long-term planning.

One area where there may be a growing appetite for technology is investor engagement, particularly in terms of helping with scheduling and generating feedback from shareholders about meetings and roadshows. Professionals in the governance and investor relations fields also see potential uses for artificial intelligence (AI) in areas such as shareholder surveillance.

It has further been suggested that AI could potentially be used to help protect companies from activist investors by seeking out correlations and patterns in trading, and determining what patterns emerge when an activist moves into a stock.

When talking about technology, it’s almost impossible to ignore cyber-security, with widespread media coverage and talk about threats from attackers both internal and external. But Davis suggests boards will become even more worried, in part amid fallout from US government allegations that Russian hackers at least tried to interfere with the 2016 presidential election.