Directors are being forced to respond to more activity by a range of stakeholders, PwC survey shows
Rising shareholder activism, the growing influence of proxy advisory firms, intensified regulatory activity and technological advancements have made 2013 a year of sweeping change for corporate boards, according to the PwC 2013 annual corporate directors survey. Among the most pressing issues directors are facing: increased scrutiny of executive pay, investigations into corruption, compliance with regulations mandated by the Dodd-Frank Act and more attention by investors to directors’ performance.
Directors of public companies have become more distrustful of regulatory initiatives and more wary of the recommendations of proxy advisory firms, the latest survey shows. They are also more openly critical of their fellow board members. However, the survey also reveals higher motivation among directors to tackle fraud and greater commitment to risk oversight.
`We can characterize this as a significant evolution - almost a revolution - in the landscape due to the unprecedented change in the board world,’ says Don Keller, a partner at PWC’s Center for Board Governance. `The survey results are also reflected in the work we do on a day-to-day basis. The stakeholder world is becoming much more active and I think directors are responding to that.’
Executive pay has demanded more attention from directors this year thanks not only to growing public interest in shareholder votes on companies’ say on pay proposals but also to the SEC’s proposed rule that would require publicly traded companies to disclose how their CEO’s compensation compares with that of their average worker.
Of the 934 directors that PwC polled this summer - more than two-thirds serve at companies earning more than $1 billion in annual revenue - 70 percent said their boards took action on executive compensation versus 64 percent a year ago. Making the compensation sections of proxy statements easier to understand was the most prevalent response: 47 percent of this year’s respondents said their boards did this compared with 41 percent in 2012.
A shareholder vote below 70 percent on a say on pay proposal would compel boards to address the issue, according to 47 percent of directors. The 70 percent threshold is also what companies aim for to feel safe from increased scrutiny by proxy advisory firms, the survey notes. Ten percent of directors said only a failed say on pay vote --- below 50 percent -- would prompt a change by their board.
Concern about a potential SEC rule that would require disclosure of the CEO/worker pay ratio was ‘substantial’ or greater for just 29 percent of directors. Roughly 30 percent of respondents rated their concern over such a rule as ’somewhat substantial,’ with the same percentage saying they weren’t very worried and the remainder expressing no concern.
Regarding the top issues demanding greater focus in the upcoming year, strategic planning ranked first with 59 percent of directors saying it deserves more of their attention. Half the directors said they felt a need to spend more time on succession planning, while 44 percent cited risk management as a pressing issue. Roughly 35 percent of directors said they should spend more time on executive compensation.
Reflecting mounting skepticism of proxy advisory firms’ work, 53 percent of respondents described their voting recommendations as `fair or poor,’ the lowest level permitted in the survey, while only 2 percent rated it `very highly.’
There is also growing criticism of fellow board members, with 35 percent of directors expressing a need for their board to replace a fellow director, up from 31 percent in 2012. Age and lack of industry-specific expertise were the top reasons directors gave for underperformance -- 19 percent and 16 percent, respectively.
Keller says he expects shareholder activism, greater regulatory scrutiny and the other factors to continue to drive change in the boardroom in the coming years.
`Boards are much more focused on the corporate environment and getting board behavior right,’ he says. ‘There’s a lot more risk out there,’ stemming from a sharper focus on anti-bribery and corruption and ongoing rule-making as required under Dodd-Frank.
`All of this is causing directors to continuously evaluate their boardroom practices. The velocity of change in the boardroom could very well be sustained for the next several years,’ Keller adds.
