Governance Practices Survey: top governance challenges

Corporate Secretary’s Governance Practices Survey is our first ever study of major issues affecting governance professionals in the US and Canada. The full survey asked respondents their views on a number of topics, including the top governance challenges they face, how they handle key aspects of proxy season and how they deal with certain job responsibilities.

The 2013 report is based on the responses of more than 350 professionals who subscribe to Corporate Secretary and its newsletters. The survey was conducted between August 7 and September 3, 2013 and the respondents were governance professionals from a variety of industries who hold a number of different positions in governance, compliance and risk management. What follows is an excerpt of the full report. The topic covered here is ‘The top challenges faced by governance professionals’.

Survey respondents

An analysis of survey respondents confirms that they are primarily corporate secretaries and legal department professionals. A majority (54 percent) of those who responded hold the corporate secretary title, with 33 percent identifying themselves as corporate secretaries and another 21 percent as assistant corporate secretaries. Twenty-six percent of respondents are either general counsel (19 percent) or a legal department professional (7 percent), while 9 percent are governance and ethics professionals.

Most respondents (69 percent) work at publicly traded companies; 20 percent work for private firms; and 11 percent are with non-profit organizations. Interestingly, the size of company respondents work for is very evenly distributed: 28 percent work for large-cap companies, 27 percent for mid-cap firms, 26 percent for small-cap companies and 19 percent for mega-caps with a market cap of more than $30 billion.

In terms of sectors, the largest group of respondents (27 percent) comes from financial services, followed by energy and utilities (16 percent) and technology, media and telecoms (13 percent). In terms of their experience, 87 percent of respondents say they have been in the governance, risk and compliance field for six years or more.

Greatest governance challenge

The corporate governance landscape is in a constant state of change so we asked our survey respondents to rank in order what they consider to be their top six governance challenges from a list of 14 possible choices. These 14 options comprise shareholder activism, fraud or corruption, regulatory changes, cyber-security, healthcare cost/reforms, talent retention, global economic and political instability, litigation risk, reputational risk, executive compensation, internal/operational problems, takeover attempts/mergers/acquisitions, technology advancement and information/document management.

The challenge most respondents rate as their number one over the past 12 months is regulatory changes. It is the overwhelming first choice, receiving the highest number of votes from respondents (90). Executive compensation ranks second, with 53 votes. Global economic or political instability and internal/operational problems are more or less tied in third place as a governance top challenge, with 31 and 28 votes, respectively.

Further down the list, the survey responses are more mixed, with several topics garnering similar levels of concern – for instance, shareholder activism attracts 20 votes, while reputational risk, litigation risk and information/document management attract 17 votes each.

Top 10 challenges

Separately, our study also charts respondents’ six selections when answering the slightly different question: ‘What have been your top governance challenges over the past 12 months?’ The results of this are equally, if not more, instructive (see Top corporate governance challenges, below right).

Unsurprisingly, regulatory changes rank number one again with a score of 1,098, which shows that even among respondents who don’t rank them as their top challenge, they are still viewed as a fairly high priority, usually placing second or third out of six. Executive compensation receives the second-highest score (753), suggesting that it too is seen as a relatively high priority, ranked in either second, third or fourth spot among the roughly 300 respondents who don’t choose it as their top challenge. After the top two choices, however, the level of concern for issues affecting respondents evens out substantially.

Information/document management (511) and internal/operational problems (508) are essentially tied for third place as top concerns for respondents. These are followed by global economic/political instability (463) and litigation risk (457). Technology advancement (425), cyber-security (403) and reputational risk (395) are also issues that rate closely together. The 10th-most-highly ranked concern of respondents is shareholder activism (362).

It is interesting to note that information/document management does not rank highly as a top concern for survey respondents, but rises significantly to third place as something companies see as one of their top five or six concerns over the past 12 months. Litigation risk makes a similar jump, ranking low as a number one concern but virtually tied for fifth place within the five or six biggest challenges faced over the last 12 months. This suggests more companies have identified these two challenges as a major concern to deal with than other challenges on the list that were identified as the number one priority.

Further analysis of the 10 governance challenges that received the highest overall scores shows they may actually be split into three categories based on their importance. Regulatory changes and executive compensation receive the highest priority because they involve significant outside pressure to comply. Regulators and shareholders apply the pressure, especially when it comes to governance – consider how say on pay changes the way companies operate when it involves pressure from proxy advisory firms and angry shareholders.

The next set of challenges, information/document management and internal/operational problems, receives the second-highest priority because these two involve pressure to improve and change the organization to make it more efficient and profitable. Most companies understand they can’t hope to beat their competition when information is not managed effectively and there are operational flaws (such as poor internal controls).

Finally, the rest of the list of top governance challenges falls into the category of concerns that require risk-mitigation strategies. Risk management has emerged as a major issue for boards to consider when mapping out corporate strategy, and whether they are talking about global economic/political instability, litigation risk or shareholder activism, companies must factor in some way to keep those issues from turning into a crisis that could erode shareholder value. Governance best practices can often help mitigate some of the risk in these areas, so companies are demonstrating that they are looking at putting measures in place to keep these issues from becoming real problems.

It’s worth noting that the four lowest-scoring challenges respondents voted for – talent retention (347), fraud/corruption (218), healthcare costs/reform (211) and takeover attempts/mergers/acquisitions (181) – remain significant risks to all organizations. Given the results of other recent surveys (conducted by organizations other than Corporate Secretary), these scores suggest respondents to our survey may be underestimating the risks associated with these challenges. For example, it’s not yet clear what impact the emerging requirements of the Affordable Care Act will have on many organizations’ group health plans and the ability of those organizations to remain profitable.

Meanwhile, new resources that countries such as France and Brazil are devoting to cracking down on fraud and corruption, and more enticing awards being offered to whistleblowers in the US, indicate that this is also an area organizations cannot afford to assume they are on top of.

Corporate secretaries and general counsel

When it comes to governance challenges, our study reveals that corporate secretaries and general counsel express differences of opinion on which areas should be priorities. Although the two groups of respondents select virtually the same items in their top 10 lists of governance challenges, they rank them differently. Notable differences include:

•  Both corporate secretaries and general counsel list regulatory changes and executive compensation as their top two governance challenges, but corporate secretaries list regulatory changes as number one, while general counsel choose executive compensation. As corporate secretaries routinely handle the regulatory filings for their companies, it makes sense that regulations would top their list of concerns, and as compensation issues often require complex legal agreements, it’s not surprising that general counsel would have more concerns in that area.

•  For the same reasons, litigation risk ranks third on the list of governance concerns facing general counsel, while it ranks last (10th) as a governance concern for corporate secretaries. This makes obvious sense: litigation risk is bound to be a priority for general counsel because so much of their job centers around helping companies avoid legal problems. Conversely, litigation may rank further down on corporate secretaries’ lists of governance challenges because those corporate secretaries who are not lawyers are likely to have significantly less responsibility for handling legal matters.

•  Reputational risk ranks highly (fourth) on corporate secretaries’ list of governance concerns, but near the bottom (eighth) of concerns for general counsel. Because corporate secretaries deal directly with corporate boards, the reputation of the company and its individual directors must always be a top priority for them, whereas general counsel can treat such issues with less urgency.

•  Talent retention ranks sixth as a governance concern for corporate secretaries, while it doesn’t even make it into the top 10 for general counsel.

•  Shareholder activism ranks 10th on the general counsel’s list of top governance concerns but is not listed as a top concern for corporate secretaries.

Size matters

When our researchers considered whether the size of company the respondents work for might change the degree of urgency and priority they give to governance challenges, some important indicators emerged. While regulatory changes and executive compensation remain the top two challenges across companies no matter what the market cap size, there are some differences worth reporting.

Larger companies have a greater concern about shareholder activism. While shareholder activism ranks at the bottom of the top 10 governance challenges for all companies, it ranks fifth on the top 10 list of governance challenges for mega-cap companies and fourth on the list for large-cap firms. By contrast, shareholder activism places ninth on the top 10 list of challenges for small-cap companies and doesn’t even make the list for mid-cap companies.

This indicates that shareholder actions against larger companies like Carl Ichan’s recent push to get Apple to give more of its profits to investors and last year’s proposal by activist investors asking JPMorgan to split its chairman and CEO positions have made the largest companies aware they are not too big to be targeted by shareholder activists. When these types of issues come up, stock prices can be affected, and larger companies have become more sensitive to that.

Smaller companies have a greater concern about litigation risk. Litigation risk ranks in the middle (sixth) of the top 10 governance challenges for all companies, but ranks third on the top 10 list of governance challenges for mid-cap companies and fourth on the list for small-cap firms. By contrast, litigation risk ranks eighth on the top 10 list of challenges for large-cap companies and at the very bottom of the list for mega-cap companies.

Smaller companies’ concerns about litigation are well founded due to a number of factors. A long legal battle can devastate small and mid-sized companies, which often don’t have the resources or budgets to effectively fight major lawsuits. Larger companies have bigger and better prepared legal departments with huge budgets to help them defend against troublesome lawsuits. If a smaller firm loses a major lawsuit, it could bankrupt the company. Larger companies are more able to withstand a legal loss or a settlement.

Smaller companies are more concerned about information/document management. The smaller the company, the higher information/document management ranks on the list of top governance concerns: it ranks third for small-cap companies, fifth for mid-caps, sixth for large-cap firms and ninth for mega-cap companies.  

This indicates the huge burden small-cap companies must feel as they continue to deal with the overwhelming amount of electronic data companies produce and the new regulations that govern how data is to be stored and disposed of in order to protect consumers, clients and employees. Smaller companies have fewer resources and therefore may not be able to afford expensive technology solutions that make document management easier. Additionally, pressure to become more involved with social media creates even more concern for companies, as the rules for handling tweets and other social media posts are still evolving. Mega-cap companies have financial resources to hire staff and buy technology to help them get a better handle on the challenge of information/document management, but expect this issue to remain a major governance concern for companies of all sizes for the foreseeable future.

Global economic and political instability is a top five concern among all market-cap sizes. With global markets being such a major part of the current and future revenue stream for many companies, high-level concerns about global economic/political instability are universal. This is one of only three governance challenges that ranks in the top five for all firms, along with regulatory challenges and executive compensation. It ranks third among the top 10 governance challenges for mega-cap and large-cap companies, fourth on the top 10 list of governance challenges for mid-cap companies, and fifth on the list for small-cap firms. This shows that the larger the company, the more important this challenge is for the company to deal with. Given that mega-cap and large-cap companies are most likely to have international operations that could be disrupted by global economic and political instability, their greater concern for this issue is understandable.

Different sectors and challenges

Our research also explores whether the industry sector a company belongs to has an impact on the degree of importance attributed to some governance challenges. Regulatory changes and executive compensation continue to rank among the top five challenges in all sectors, but there are other findings worth reporting.

Fraud or corruption appears to be a lower-level concern for many companies. The issue of fraud or corruption does not show up on our top 10 governance concerns list, or on the lists of top governance concerns for corporate secretaries or general counsel. It does, however, rank eighth on the list of top concerns for the pharmaceuticals, healthcare and biotech sector, eighth on the materials sector list and ninth on the list for the industrials sector. These industries will be most affected by the Foreign Corrupt Practices Act and other corruption laws due to their higher exposure to international commerce.

With the SEC and Department of Justice signaling they will be looking to prosecute individuals for fraud and corruption more vigorously and with a tougher version of Canada’s Corruption of Foreign Public Officials Act coming into effect in 2014, a bit more concern from firms might have been expected, but even in sectors where it ranks as a concern, it is not a top priority. Companies may feel comfortable their current fraud and corruption compliance programs are adequate and/or the company’s reaction to new regulations may still be under review.

Global economic/political instability is the top concern for companies in the industrials and materials sectors. Global economic/political instability is the only other governance concern besides executive compensation and regulatory changes to top the list of any of the sectors surveyed. Respondents in the industrials and materials sectors rank it highest among their concerns, most likely because companies in these industries rely heavily on import/export revenues and other overseas business interests. World events that could cause the global economy to stagnate or cause disruptions in the economies of nations where companies in these industries conduct significant business would, therefore, be of major concern.

Sector significance

Cyber-security ranks highest as a top challenge among the energy and utilities, pharmaceuticals, healthcare and biotech, and financial services sectors. Cyber-security ranks third on the top 10 list of governance challenges for the energy and utilities sector, fourth on the top 10 list for the financial services sector, and fifth on the list of challenges for pharmaceuticals, healthcare and biotech companies. As the electrical grid and water utilities might be terrorist targets, the energy and utilities sector should appropriately be on high alert when it comes to cyber-security. The pharmaceuticals, healthcare and biotech and financial services sectors have a history of data breaches that compromise customer data, so the higher concern for governance in this area for those industries makes sense.

Interestingly, cyber-security only ranks eighth on the list of top governance challenges for the consumer goods and services sector. With all of the highly publicized data breaches and hacking of consumer data over the last few years, one might expect this sector to show more concern in this area. Many consumer goods and services companies have made efforts to increase their cyber-security in light of some of the reported breaches, however, so that might account for the lower placement on the list.

Technology advancement is a top governance challenge for the business services and technology, media and telecoms sectors. Technology advancement, which ranks in the bottom half (seventh) of the top 10 governance challenges for all companies, ranks fifth on the top 10 list of governance challenges for the technology, media and telecoms sectors and fourth for the business services sector. Technology advancement is a higher governance concern for companies in these two sectors because they rely too much on tech development and use in their operations to ignore any governance issues related to technology in general.

Executive compensation is less of a concern for the pharmaceuticals, healthcare and biotech sector. Executive compensation ranks in the top five on every sector list of top governance challenges except for the pharmaceuticals, healthcare and biotech sector. For this sector, executive compensation ranks sixth as a top governance concern. The lower urgency over issues related to executive compensation could be due to the relatively good performance healthcare and pharmaceutical companies have enjoyed over the last year or two.