My Perspective on Board Education
I was fortunate to attend the Equilar Board Leadership Forum, an event co-hosted with Nasdaq at the MarketSite in New York City. The Forum featured eight fast-paced presentations and panels focused on creating progressive boards.
The main theme was around better leadership and oversight, in particular in the wake of more shareholder engagement and activism. Over 100 directors attended, some were professional directors on five-plus U.S. and international boards, and the group even included a retired CEO who has served on more than 20 boards. Also in attendance were C-suite professionals who work on behalf of their boards, and in some cases also serve as independent directors on other boards. I found it refreshing to see so many general counsels in the room, which was likely a function of the pervasive theme around risk management overall.
I attend many of these events, and the content I found most valuable at this one was shared by corporate governance specialists from some of the world’s largest money managers. Since they’re not in the boardroom, these investors rely heavily on directors for oversight and governance. As such, the board screening and evaluation processes are critical to them. Board refreshment is also important, and while quotas are not expected to be introduced in the U.S., investors would like to see a stop to age and term limits being waived to ensure new opinions and talents are added regularly. One investor noted that their firm no longer considers a director who has been in the role for more than 10 years to be independent. Cross-pollination from individuals who are on more than one board is viewed as a big plus, and generational diversity to include millennials is percolating as an opportunity to consider.
Since they’re not in the boardroom, these investors rely heavily on directors for oversight and governance. As such, the board screening and evaluation processes are critical to them.
From a screening perspective, investors are evaluating proxies and appreciate and recognize those boards that provide a simple matrix outlining their directors’ skills. In terms of board size, these investors value quality over quantity and would be open to paying up for smaller groups of more highly qualified directors. Qualifications need to go beyond traditional talents or diversity to include candidates with a range of attributes and skills. According to Equilar data, as of 2015, 63 S&P 500 companies disclosed a board skills matrix, up from 32 in 2015, and investors would like to see this trend continue. When it comes to board evaluation, beyond just the number of meetings being disclosed, investors would like to see attendance records differentiated between in-person versus dial-in meetings, which and how many committee meetings are hosted, and a “board wallet” for education that’s not only available but also disclosed when used by each individual director. Coke, Prudential, Intel and GE were noted for having proxies that are considered the gold standard.
Value-added board service goes way beyond good governance and golf these days, with curiosity being noted as the most sought-after attribute in a new director candidate. One seasoned professional director outlined a strategy to stay fresh, which included staying up to date on industry trends and events, paying close attention to the particulars of the company’s strategy relative to its peers and market, and regularly attending traditional board education seminars. Learning was viewed as a life-long commitment to address and anticipate both near-term and longer-term issues, and something that should be shared in the boardroom and with the management teams. That said, consensus was not reached on whether or not directors should communicate directly with senior executives outside of the boardroom, to offer counsel or support, given the critical need to keep management and boards separate. The popular refrain of “noses in and fingers out” was raised, while an overriding goal of wanting management teams to look forward to board meetings and leave with clarity on next steps was underscored. One statistic quoted was that on average, boards have waited two years too long to replace a key executive. It’s imperative that good boards know how to deliver feedback and ensure change is delivered effectively.
By adhering to the best practices that are outlined above, companies are less likely to be targeted by activists. That said, however, on average one new activist campaign is launched each day, which is a 50% increase since 2010. While 42% of campaigns are considered board-related, most focus on concerns about capital allocation, and companies with stocks that are trading at a discount to their peers are most vulnerable. Directors need to understand what the company’s shareholders are focused on and ensure they’re operating and financial targets are being met. Reading research reports and attending research conferences is encouraged to stay up to date on investor sentiment. In the event an activist does engage, professional expertise is available and panelists recommended bringing experts in early to be responsive and prudent.