When Directors & Boards started publishing 40 years ago, little was known about what went on behind closed doors of the boardroom. Becoming a corporate director was often seen as the ideal way to cap a successful CEO's corporate career — a lifetime achievement award, a victory lap.
Yet the gradual evolution in board governance accelerated dramatically when the government began asserting itself after the crushing bankruptcies of Enron and WorldCom and later the global financial crisis.
The first of the sweeping regulations, the Sarbanes-Oxley Act of 2002, mandated strict reforms to improve financial disclosures and prevent accounting fraud. Examples of this include the establishment of independent directors, especially in board committees; the appointment of lead directors; and the adoption of executive sessions at every meeting. But more far-reaching reforms were still to come following the global financial crisis of 2008-2009, with the passage of 2,300-page Dodd-Frank Wall Street Reform and Consumer Protection Act, mandating an advisory vote on executive compensation, or “say-on-pay,” and proxy access.
More precisely, the Securities and Exchange Commission adopted rules concerning shareholder recommendation of executive compensation in an advisory vote starting in 2011 for large companies. While smaller companies were given two additional years, by 2013 all public companies were required to ask their shareholders to approve the pay plans for CEOs and top executives.
And oh how the world of corporate governance continues to change.
Part and parcel of the advisory vote was a new role for directors — actively engaging with shareholders. It didn't happen immediately, but five years after Dodd-Frank it became routine for directors to talk to shareholders on a semi-regular basis. In essence, investors get to kick the tires, to test the directors chosen as their representatives and the efficacy of the board itself.
The say-on-pay vote, while only advisory, lifted the curtain on boardrooms. Seeing the opening, activist investors asserted themselves, using the new rules to get the board's attention. In the past few seasons, many activists proved that they only had to threaten a proxy fight to win concessions from the board, including the award of a board position.
As a result of the new regulations, board work has changed. Governance has become much more integrated. Financial analysts learn more about governance in their training. At the same time, there's more financial understanding on the part of investor governance teams. Even portfolio managers have become boardroom savvy, with a better sense of what boards do.
While boards were criticized during the global financial crisis for failing to provide the oversight to protect investors, board accountability is the new rule of the day. How is the board overseeing risk and strategy? Is the board engaged in effective succession management of the CEO? Is the board itself taking the necessary steps to refresh the skills and capabilities in the boardroom by recruiting new directors and retiring those with outdated skills?
Today, corporate board work has changed dramatically. The workload has increased as boards participate more fully in overseeing strategy and risk. Corporate board members serve on fewer boards and spend more time doing board work. Much of the board's work is done in committee, which has become more demanding and time consuming. Meetings are more substantive and longer. According to the National Association of Corporate Directors, board members now spend 278 hours on board work, up from 207 hours just a decade ago.
Board oversight is no longer limited to risk and strategy, but sustainability, political contributions, and the company's position on climate change.
The evolution of boards is far from over. NACD, also 40 years old, has played a leadership role in the board's evolution, providing training and rich educational and networking opportunities. Now, 17,000 members strong, the NACD influence on best practices continues to grow.
And it's not just education but a move toward certification. In addition to NACD alone and its governance fellows certification, a host of distinguished universities now offer certification. Many go beyond attendance at director education seminars to actual testing of directors to attain certification.
Say-on-pay put directors in the position of not only approving executive compensation, but talking directly with investors about the components of the long-term and short-term compensation plan. And, when management misbehaves, there's an expectation that compensation will be “clawed back.” Having a director who can speak effectively for the board is now an unspoken requirement.
Looking ahead, we are seeing a growing practice of conducting board and committee performance evaluations, a growing presence of independent chairmen, board oversight of cybersecurity, and growing diversity in the board positions.
One of the most dramatic aspects of the new board transparency and board accountability is a better understanding of how boards work. What was once a mystery is now a better known. Through this new engagement, directors themselves have a better sense of their investors. This improved understanding has value for directors, investors and the company itself.