Board self-governance is an issue that WomenCorporateDirectors (WCD) and Pearl Meyer explored in a recent report, The Visionary Board at Work: Developing a Culture of Leadership.
For this report, WCD and Pearl Meyer conducted in-depth interviews with more than two-dozen global directors, who formed our WCD Thought Leadership Commission, and conducted a survey of board members from US and multinational companies. A picture emerged of the typical processes by which boards currently evaluate and govern themselves and how, for some boards, this is shifting.
For most companies, the focus to date on board “health” has been on the board’s authority and how it functions. In recent years, boards have made great strides in formalising processes and defining “good governance” as it applies to their company and mission—a path influenced by stronger regulatory pressures and greater media and public scrutiny. But the next stage in the board’s evolution is a concentration on how board members interact among themselves and with management, and how those interactions influence decision-making…..As a normal course of regular business, many boards are adopting formal annual outreach campaigns with shareholders to discuss company strategy and compensation programmes. At the same time, some boards also solicit feedback on overall corporate governance matters as well as the shareholders’ view on the board’s effectiveness. By expanding the concept of “good governance” to one of good self-governance, boards today can inspire even greater confidence, and be on firmer footing for the tough decisions and disruptive times that are inevitable.
VEA Vice Chair Nell Minow returned to the Motley Fool Money podcast to discuss corporate governance, including how boards should handle sexual harassment complaints.
The first question we like to ask directors is about the quantity, quality, and timing of the information they receive from the company. The late Tom Wyman, who served on the General Motors board in the 1990’s, told us that the board materials were delivered “by forklift” but the board agenda never included time for questions or comments. More recently, complaints about over-emphasis on compliance rather than risk assessment and strategy have led to concerns that board briefing materials miss the forest for the trees.
A new analysis by Alex Baum (Value Act Capital), David F. Larcker (Stanford Graduate School of Business), Brian Tayan (Stanford Graduate School of Business), and Jacob Welch (Value Act Capital) assesses the current state of board books and suggests improvements.
The six significant shortcomings they identify are:
Data lacks important context
Data focuses on results (outputs) rather than drivers (inputs)
Data does not inform organic (P&L) investment decisions
Unexplained outperformance is insufficiently investigated
Accounting allocations obscure true economics
Data does not match a manager’s sphere of responsibility
The authors note:
Having access to appropriate data is critical to making sound
decisions on strategy, compensation, and capital allocation.
However, evidence suggests some directors do not receive the
information they need on important drivers of the business. In
general, what is the quality of information that public company
directors receive? Is it sufficient to make optimal decisions? If
not, how widespread is this problem? In situations where the
quality of data is lacking, what discussions should the board
use with management to improve information quality and
A shareholder suit against the directors of Wells Fargo for negligence and complicity in the creation of millions of fake accounts for the fees has survived an effort at dismissal, raising the possibility of a very rare ruling of liability for board members.
[Judge John Tigar] found the complaint properly laid out evidence showing executives and directors made false statements about the scheme in the bank’s filings to the U.S. Securities and Exchange Commission…Tigar found the bank’s board members and managers knew about the illicit account-creation scheme by 2014 and also knew they’d made false statements in securities filings about the program, designed to bump up bonuses for Wells Fargo employees.
“Just as it is implausible that the director defendants were unaware of the account-creation scheme given the extent of the alleged fraud and the number of red flags, it is implausible that Wells Fargo’s senior management, involved in the day-to-day operations of the bank” weren’t aware of the effort, the judge said.
In her last column for the New York Times, Gretchen Morgenson summarizes the best and worst and most improved of the corporate governance issues she has reported on, quoting VEA Vice Chair Nell Minow:
Nell Minow is a corporate governance expert and vice chairwoman at ValueEdge Advisors, a firm that guides institutional shareholders on reducing risk in their portfolios. She has been rattling cages in the governance field since the mid-1980s and says she’s seen a definite improvement in boardroom makeup and practices.
“When I started in this field, O. J. Simpson was on five boards, including the audit committee of Infinity Broadcasting,” she recalled in an interview. “And at another company, the C.E.O.’s father was on the compensation committee. We’ve come a long way.”
That’s not to say that problems arising from sleepy and clubby boards have been eradicated. “Exhibit A is executive compensation,” Ms. Minow said. “The first C.E.O. pay package I ever complained about was $11 million. The very fact that that has gone completely berserk shows that boards are still a long way from where they should be.”
VEA vice chair Nell Minow is quoted in an article about potential liability at The Weinstein Company.
Nell Minow, a longtime corporate governance expert, said the reports of the settlements, and what executives at Fox and Weinstein Co. knew about them, also raise questions of accounting. Earlier this year, there were reports that federal prosecutors were investigating how settlement payments involving claims against Fox News chieftain Roger Ailes were disclosed. Ailes departed last year, and died in May.“I’d point out that both of these companies are in essence controlled by dynamic founders, which makes independent oversight much less likely,” Minow said.
Emily Yoffe writes about the corporate governance failure at The Weinstein Company. She says even in the almost unthinkable case that the board and executives did not know about his constant sexual harassment and abuse (reportedly, his employment contract explicitly recognized it), they did know enough about his public inappropriate behavior to recognize that, as the company’s public presence, he was a huge potential liability.
What is undeniably true is that Harvey Weinstein’s abhorrent public behavior, toward men and women, in front of witnesses, should have forced his business partners to take serious action against him years ago. If they had, it’s possible that many people would have been saved from his attacks, including the women he assaulted in private — and the spectacular dissolution of the Weinstein Company wouldn’t be a business school case study in how ignoring the bad acts of a key employee can wipe out the whole operation.
Reminiscent of the notorious Dennis Kozlowski contract at Tyco that provided that the only reason Mr. Kozlowski could be fired for cause was if he was convicted “of a felony that is materially and demonstrably injurious to the company or any of its subsidiaries or affiliates, monetarily or otherwise,”
Harvey Weinstein had a contract drawn up in 2015, in which the board of his film company could not terminate his employment over sexual harassment claims if he paid off women to silence them – as long as he paid out the money himself, according to reports.
This is per se malpractice by the board and any director who agreed to it should be barred from ever serving on a board again and liable for damages as an accessory to abuse.
VEA Vice Chair Nell Minow interviewed PwC’s Paula Loop for the Huffington Post:
A report released on October 17, 2017 from PwC finds that on some subjects there is a wide disparity between the directors who oversee corporate strategy and the investors to whom they owe the legal duties of care and loyalty. These findings are reflected in the title of the report, issued by PwC’s Governance Insights Center, The governance divide: Boards and investors in a shifting world.
The report concludes that “directors are clearly out of step with investor priorities in some critical areas,” especially with regard to climate change and sustainability and board composition. “I definitely think there is a gap,” said Paula Loop, who leads the Governance Insights Center. “There are some areas where we made some improvements, where we’ve done some bridging of the gaps but there are some areas where the gap has widened as well.”
The report revealed some surprising dissatisfaction by board members with their fellow directors. There is a significant increase with now 46 percent of the more than 800 corporate directors who responded to the survey admitting that at least one of their fellow directors should not be on the board. The reasons for dissatisfaction were evenly divided between five different categories: overstepping boundaries with management, lack of appropriate skills/expertise, ability diminished by age, reluctance to challenge management, and an “interaction style” that “negatively affects board dynamics.” Loop said, “It gets back to having a board assessment process and to really think about refreshment of the boards. We try to do the follow up discussion: How do you provide feedback to board members? Why haven’t you addressed this issue? Why is it that your board can’t do the right thing to make sure you have the right people on the board or provide coaching to the people on the board that you don’t think are doing a good job? It really gets back to board leadership.”
She noted that board quality is also a significant priority for shareholders. “Something that institutional investors have been talking quite a bit about is board composition, making sure you have the right people in the boardroom. Investors want to understand what your skills matrix is, what are the different things these individuals bring to the room and whether or not you are doing some kind of an assessment process.” She pointed to the New York City Comptroller’s Board Accountability 2.0 project, with Scott Stringer and the $192 billion New York City Pension funds asking for better board diversity, independence, and climate expertise.
But while institutional investors like pension funds raise concerns about board diversity, 24 percent of directors said that they didn’t think that racial diversity was a priority in board composition. Loop said, “We asked whether or not they thought that age diversity was important in the boardroom and 37 percent of them told us that they thought that age diversity was very important. Interestingly enough, 52 percent said they already have it. But in the S&P 500 only four percent of the directors are under the age of 50. So you do wonder, what’s their definition of age diversity?” The report’s findings on gender diversity show little progress. “All but six companies in the S&P 500 have at least one woman on their board, and 76 percent of those have at least two women. But only 25 percent have more than two women, and gender parity is rare. Only 23 companies in the Russell 3000 have boards comprised of 50 percent or more women.” Unsurprisingly, the report found that women directors thought efforts for diversity were moving too slowly, while the male directors thought there was too much focus on diversity.
For me, the most surprising finding was the overwhelming majority of directors who said their board did not need sustainability or climate change expertise. The core priority directors should have is sustainable growth, and it is impossible to do that without directors who are familiar with all aspects of sustainability, from the supply chain to the company’s reputation, technology, and product development. But investors and directors in agreement on the importance of cybersecurity expertise as a board priority. Loop said that many directors acknowledged this as an area where they need to spend more time and get more expert guidance. Only 19 percent said they had enough already.
And on the ever-popular topic of CEO pay, the report found that 70 percent of directors believe that executives are generally overpaid, although they are themselves responsible for it. Perhaps that is the most telling finding of all.
The lion’s share of large-cap companies in the United States now require named executive officers (NEOs) and board members to attain a certain level of stock ownership within a defined time period, and then to maintain that ownership during the course of their tenures.
The rationale for stock ownership guidelines (SOGs) is that when officers and directors have actual “skin in the game,” their interests will be more aligned with shareholders, and they will have more incentive to focus on long-term value creation.
It’s not just large-cap companies that are adopting SOGs though. According to the National Association of Corporate Directors, 46 percent of public companies with revenue between $50 million and $500 million now have some form of SOGs for board members (up more than 25 percent from 2012)…Most institutional investors draw a sharp distinction between shareholders and option holders. Since public companies are operated and governed for the benefit of shareholders, there’s an inherent rub from the perspective of many fund managers when those who are doing the operating and governing aren’t, themselves, shareholders.