Corporate Governance
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Lawyer, Consultant, Researcher
2015 Trends and Answers in Corporate Governance
Posted: 12/11/2014 5:38 pm EST Updated: 12/11/2014
5:59 pm EST
2015
is shaping up to be a year where boards, once again, will be under intense
pressure and scrutiny to get it right. Here is a list of trends and key issues,
along with what boards are or should be doing in response.
1. Greater Director and Advisor Independence
Pressure:
A director or professional advisor can be formally independent, and yet captured inside the boardroom. Forms of capture reported to me include social relationships, donations, jobs or contracts for friends, perks, vacations, office use, director interlocks, supplier or customer relations, and excessive tenure and compensation. Look for more regulators implementing term limits and moving towards an objective standard of director independence. Look for activists going into the background of directors to demonstrate the capture. Look for investors focusing on the origination of each director and service provider, which is to say how he or she came to be proposed, to address social relatedness.
A director or professional advisor can be formally independent, and yet captured inside the boardroom. Forms of capture reported to me include social relationships, donations, jobs or contracts for friends, perks, vacations, office use, director interlocks, supplier or customer relations, and excessive tenure and compensation. Look for more regulators implementing term limits and moving towards an objective standard of director independence. Look for activists going into the background of directors to demonstrate the capture. Look for investors focusing on the origination of each director and service provider, which is to say how he or she came to be proposed, to address social relatedness.
Answer:
Boards can protect themselves by terminating any director or professional advisor who cannot be reasonably seen, by directors themselves and more importantly by an outsider, to be independent from management in their oversight and assurance roles. Assume what boards know internally is what is or will become known externally. This trend towards tighter independence standards will continue: For example, internal oversight functions should also now be independent from senior and operating management, and that includes the risk, compliance and audit functions, who now should report functionally to the committees and board. Any director or external or internal advisor to the board or a committee should be, in law and in fact, independent of all reporting management or any other adverse interest, in order to be free to make recommendations that run counter to that of management. A board fully protecting itself would also require a third party anonymous review of director and advisory independence annually, and acting on the results. Directors know who is captured and there should be a mechanism for this to come through.
Boards can protect themselves by terminating any director or professional advisor who cannot be reasonably seen, by directors themselves and more importantly by an outsider, to be independent from management in their oversight and assurance roles. Assume what boards know internally is what is or will become known externally. This trend towards tighter independence standards will continue: For example, internal oversight functions should also now be independent from senior and operating management, and that includes the risk, compliance and audit functions, who now should report functionally to the committees and board. Any director or external or internal advisor to the board or a committee should be, in law and in fact, independent of all reporting management or any other adverse interest, in order to be free to make recommendations that run counter to that of management. A board fully protecting itself would also require a third party anonymous review of director and advisory independence annually, and acting on the results. Directors know who is captured and there should be a mechanism for this to come through.
2. Better Board Composition and Diversity
Pressure:
Regulators are moving towards prescribed competency matrixes; the production of curriculum vitae (not perfunctory short bios); and interviews with directors and oversight functions to determine whether these individuals are fit for purpose. Activists are searching director backgrounds and track record to determine alignment between competencies and the business model and strategy of the company. Regulators are legislating board renewal and diversification, through quotas or the production of measureable objectives covering recruitment to retirement.
Regulators are moving towards prescribed competency matrixes; the production of curriculum vitae (not perfunctory short bios); and interviews with directors and oversight functions to determine whether these individuals are fit for purpose. Activists are searching director backgrounds and track record to determine alignment between competencies and the business model and strategy of the company. Regulators are legislating board renewal and diversification, through quotas or the production of measureable objectives covering recruitment to retirement.
Answer:
Competency, diversity and behaviour matrixes should: flow from the purpose of the board and the strategic and oversight requirements of the company; be established by the nominating committee; and be independently designed and validated to ensure recent and relevant expertise is possessed by each director. The diversity policy should extend the prospective director pool to previously unknown directors and who may be joining their first board (80 per cent of directors are on one board only). Tenure limits and excessive directorships (beyond two) should now be policied and capped (the average board position is 300 hours). Robust matrix analysis and director evaluation should occur by the nominating committee and its independent advisor, not management. The board should extract directors who do not possess relevant and recent competencies or desired behaviours. (See boardroom dynamics, below, for a separate discussion of director behaviour.)…
Competency, diversity and behaviour matrixes should: flow from the purpose of the board and the strategic and oversight requirements of the company; be established by the nominating committee; and be independently designed and validated to ensure recent and relevant expertise is possessed by each director. The diversity policy should extend the prospective director pool to previously unknown directors and who may be joining their first board (80 per cent of directors are on one board only). Tenure limits and excessive directorships (beyond two) should now be policied and capped (the average board position is 300 hours). Robust matrix analysis and director evaluation should occur by the nominating committee and its independent advisor, not management. The board should extract directors who do not possess relevant and recent competencies or desired behaviours. (See boardroom dynamics, below, for a separate discussion of director behaviour.)…
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