Inside the mind of the corporate director

Confidence is one of the most important things in business. Management needs to feel confident that it understands the market, has the best information and is making the right decisions. Lately, however, management confidence has taken a pretty stiff beating. General counsel, corporate secretaries and everyone else in the governance space are all reeling from rapid regulatory change and a court system that is becoming more shareholder-friendly with every passing decision. Senior managers have also been expressing concern about regulatory change and the general attitude toward them in the press and among politicians. Total compensation is down for many and every dollar they receive is under great scrutiny.

Despite the changes and uncertainty, however, members of corporate boards remain stubbornly upbeat. Most experts predict that 2011 will be one of the most active in terms of shareholder activism, and directors have seen many traditional protections stripped away, but most claim to be relatively unconcerned and many feel confident that next year will be better than 2010.

Is this confidence dangerous self-delusion or an important driver for improvement and innovation? Several recent surveys help to shine a light on what directors think of the recent changes and what they think their role should be in the future. While there is an overall level of confidence, directors are concerned about regulatory reform and the legal environment. Many question the value of some new disclosures and are worried that some new rules will interfere with their ability to work effectively.

Why do we care what directors think? The short answer is that their mood affects the ability of the corporate secretary or general counsel to do his or her job. Furthermore, boards have become far more important in terms of strategy, performance and risk management.

How much value do you believe the following new SEC proxy disclosure rules provide to investors?

‘Today’s public company board directors are an increasingly influential constituency because their input on corporate strategy, risk management and regulatory oversight reverberates throughout the larger economy,’ said Kenneth Daly, president and CEO of the National Association of Corporate Directors (NACD) in launching the first Board Confidence Index in 2010. ‘It’s imperative the opinions of active directors from public company boards be gauged and their voices be heard.’

Publicly many boards are silent on governance reform while others purport to support the new rules. Perhaps the most interesting piece of information to emerge from a raft of end-of-year surveys is that addressing shareholder concerns is not among the top five priorities for most directors. This is surprising given the increasing level of influence investors have over boards, and shareholders’ ability to vote in director elections.

According to the Spencer Stuart Board Index (SSBI), when asked which are the top governance issues for boards, only 29 percent of directors list shareholder concerns as the main focus.

As the report’s authors explain: ‘This past year, as in the previous two, executive compensation comes up as the number one issue, ranked first by 80 percent of survey respondents. The board’s role in corporate
strategy and risk management again comes in second and third, respectively.

‘Risk management, in particular, appears to be garnering more time and attention: 63 percent of respondents, up from 50 percent last year and 11 percent in 2008, cite this as an issue requiring significant focus. CEO succession planning is also looming larger on the board’s radar screen: 57 percent of respondents flag this as a key topic in 2010, versus 45 percent in 2009 and only 19 percent in 2008. Director recruiting rounds out the top five issues, at 44 percent.’

Did compensation disclosure and material risk policies result in surprises regarding how individuals in the company are compensated?

The SSBI is particularly relevant because it doesn’t just look at public disclosures or the attitudes of directors but also incorporates interviews with important
governance thought leaders, including corporate secretaries and general counsel. This is done to ‘gain greater insight into the proxy data and hear what is on [people’s] minds. We are always looking to understand how much focus boards are giving to particular governance topics.’

No say on pay

This general lack of stress over shareholder concerns matches the results of the recent PwC annual corporate directors survey, which examines the opinions of 10,000 directors across 44 governance and strategic elements. As can be seen in Shareholder rights (page 16), 82.4 percent of directors do not believe shareholders should be given a say-on-pay vote. While most board members feel determining CEO and senior executive compensation is the most important governance issue they face, they do not believe shareholders should have the right to provide input in the form of a vote.

 Do you believe shareholders should have a say in approving CEO compensation?

Source: PwC

The respondents may have a point, as PwC notes, simply because compensation packages are very complicated and anyone looking in from the outside will not have any real insight into the company strategy and how the compensation structure ties into it. Even so, many shareholders, including influential groups such as CalPERS and ISS, believe this link between pay and strategy should be disclosed and voted upon.

The influence of ISS is an important consideration. Almost 19 percent of directors say ISS and other proxy advisory firms are the single most important influence on the board and the way it makes decisions (see Board influences, left). This supports the arguments that these groups have a significant degree of power in the world of proxy voting.

Which of the following do you think influence your board the most?

Source: PwC

It is this type of statistic that may add weight to calls for changes to the regulation of proxy advisers. The US Chamber of Commerce and the Shareholder Communications Coalition have been strong proponents of this argument in recent months. The only two groups that are said to influence board thinking more than proxy advisers are institutional investors, which 35.6 percent of directors claim are the most significant driver, and government regulators (23.6 percent).

Looking at what directors think of the new disclosure regime, only defining board diversity and compensation disclosure fees are ranked as being of significant use to shareholders (see Valuing reforms, page 13). It is possible to infer from this that many directors do not feel the new rules provide any significant information for shareholders to use in making investment decisions.

Sunny side up

Perhaps the lack of support for changing regulation is a reflection of the somewhat healthy attitude directors have toward the economy and the future performance of their own companies. As the NACD Board Confidence Index highlights, directors feel the current economic environment is far better than this time last year (see Board directors’ confidence, page 12). Even so, a small majority of directors feel conditions have slipped a little from Q2 to Q3.

The Board Confidence Index also gauges directors’ opinions on the Dodd-Frank Act, which was still in the proposal phase at the time the survey was carried out. It reveals that 60 percent of directors are not in favor of the reforms while 32 percent state they are in favor to some degree, and 8 percent are undecided. The most common concerns about the legislation are say-on-pay rules, the elimination of broker voting and proxy access. Since the completion of the survey, proxy access has been stayed and will not become effective for the 2011 voting season, so it is likely to be a continued focus for board directors for at least another 12 months.

Considering the widespread public anger toward companies and the recent spate of corporate scandals – not least the tragic Deepwater Horizon explosion and consequent trouble for BP – perhaps the single most surprising statistic to arise from the year-end surveys is that more than 33 percent of boards have not discussed what action the company would take were it to be involved in a major crisis (see Crisis planning, page 15). This is despite 63 percent of directors saying the most important focus should be the board’s role in risk management: what greater corporate risk could there be?

In the past 12 months has your board discussed an action plan for a major crisis?

Source: PwC

As corporate secretaries and other governance leaders look to next year, they should determine what the
attitude of the board is toward these important issues. Failure to understand the board’s thinking will likely result in management and directors working at cross-purposes, which will severely hinder the possibility of efficient board process and effective risk oversight.

Governance topics requiring the most focus from boards

Executive compensation:   2008 - 52%

                                       2009 – 79%

                                       2010 – 80%

Board’s role in corporate strategy discussions: 2008 – 31%

                                                                    2009 – 67%

                                                                    2010 – 67%

Board’s role in risk management:  2008 – 11%

                                                  2009 – 50%

                                                  2010 – 63%

CEO succession planning: 2008 – 19%

                                      2009 – 45%

                                      2010 – 57%

 Director recruitment:      2008 – 31%

                                    2009 – 49%

                                    2010 – 44%

Addressing shareholder concerns:  2008 – 34%

                                                   2009 – 40%

                                                   2010 – 29%

Note: 92 companies in 2010; 123 in 2009; 127 in 2008

Source: Spencer Stuart