As 2009 turned into 2010, while the churning economic waters seemed to have calmed a bit, boards are now facing a new challenge — a flood — of regulation, legislation, and SEC rules seeking to address the issues that led to the economic meltdown and the blowback from the missteps of some high-profile companies. Boards, already laboring under 10 years of steadily increasing responsibility and accountability, will face in 2010 more such regulation than ever — and individual directors need to be prepared.
Consider just some of the new reporting and proxy rules described in the SEC's 129-page “New Proxy Disclosure Enhancements” of last Dec. 16. The new rules, which went into effect as of Feb. 28 this year, require new disclosures about:
⢠The Relationship of a Company's Compensation Policies and Practices to Risk Management. The intent is to help investors determine whether a company is incentivizing excessive or inappropriate risk taking by employees.
⢠Enhanced Information about Directors and Nominees. This includes their experience, background, qualifications, and legal proceedings against them in the prior 10 years (instead of the current five).
⢠How Diversity Is Considered in the Director Nomination Process. Companies must disclose whether they consider diversity in selecting directors and, if so, how.
⢠Board Leadership and Structure, and Its Role in Risk Oversight. Companies will have to explain why they have the board structures they do — whether a combined or split chair/CEO arrangement — and explain why they think their structure is appropriate. They will also have to disclose the extent of the board's role in risk oversight.
⢠Enhanced Information about Compensation. Companies must report the value of stock options when they are awarded and, under certain circumstances, disclose the fees paid to compensation consultants.
Three basic strategies
Meanwhile, on Oct. 27 of last year, the SEC's Division of Corporation Finance issued a legal bulletin that says it will no longer let companies exclude shareholder proposals requesting that “companies adopt and disclose written and detailed CEO succession planning policies.” As of last August, shareholders of Delaware corporations — half of all public companies in the U.S. — can adopt bylaws that allow them to put forward director candidates on their companies' proxy statements. New SEC rules about proxy access are waiting in the wings. And all of this is to say nothing of various bills relating to corporate governance that are wending their way through the Congress.
No one, of course, can predict how any of these issues will ultimately play out. But there is no question that many of them go right to the heart of board policies, practices, and composition — and that regulators, shareholders, and the media will be watching closely. To prepare for this increased scrutiny and the deluge of new regulations, you as a director should adopt three basic strategies: educate yourself on the issues; discuss them thoroughly; and reflect on these from a shareholder's vantage point. That means:
— Learning all you can about new requirements and others in the offing.
— Making sure the board is collectively discussing the issues.
— Thinking like a shareholder in order to get out in front of the challenges the new rules might raise.
Educating yourself
The best defense is a good offense. Given the number, complexity, and importance of these emerging regulatory issues, individual directors should do as much as they can to learn about them first hand. You should of course stay abreast of developments with the SEC, the Congress, and, when applicable, the Delaware state legislature and Supreme Court. You should also read the briefings that you receive from the company's law firm, executive search firm, and compensation consultants. And you should read this magazine, similar publications, and related Web sites.
Directors should also be on the lookout for conferences offered by universities and such organizations as Women Corporate Directors (WCD) that address the changing regulatory landscape. These events can go a long way toward helping you quickly understand the issues from a variety of perspectives.
Conducting board conversations
Make sure that your nominating/governance committee is helping guide your board on these issues. Start by having the corporate secretary put these items on the agenda. Ask the head of your nominating/governance committee for their thoughts — they should be examining the complex issues raised and then providing the board with their thinking on how to address them.
In addition, once a year, consider having the board's outside advisers make presentations to the full board on the changing landscape. Outside counsel can provide legal perspective on the new regulations. Your company's compensation consultants can offer their views on the new regulations that affect their activities. And your executive search firm can address director selection in relation to the new diversity rules and CEO succession planning.
With so many moving parts, it is unlikely that the board will be able to nail down a specific and detailed strategy in every instance. But an open dialogue and a conversation that starts sooner rather than later will certainly help the board be prepared to act knowledgably and smartly as the flood of new regulation washes over them.
Thinking like a shareholder
Even if you are well-informed and having the right board conversations, 2010 is likely to be an unpredictable year in regulation. The best way to be prepared for the unexpected is to think like a shareholder. Thinking about the shareholder's perspective is already the chief duty of a board member. Ask yourself if, as a shareholder, you are genuinely satisfied by the level of the company's transparency in reporting on risk management, compensation, CEO succession planning, and on diversity in the boardroom. Boilerplate responses in reporting and proxies are not likely to satisfy anyone — shareholders, policy makers, or regulators.
Board members should also ask about the adequacy of the company's investor relations activities. Does the company understand the composition of its shareholder base? Is it having fruitful conversations with institutional investors and other key shareholders? What are those investors saying? Are we taking action to improve our relations with the decision makers among those investors? Are we talking with the people who make proxy voting decisions, not just the people who make investment decisions? With power continuing to shift toward shareholders and with regulations proliferating, thinking like a shareholder will be doubly important in 2010.
Must rise to the challenge
Where will directors find the time to do more reading, attend conferences, face additional agenda items at board meetings, and strategize about responses to the new regulations? Over the past decade the hours that directors devote to board work yearly has been steadily increasing. In 2001, the year before passage of Sarbanes-Oxley, the average estimated time that directors spent on board matters was 156 hours. Now, according to a 2009 National Association of Corporate Directors survey, public company directors devote an average of 222 hours yearly to board work.
The continuing drive for good governance was likely to increase that burden already. But the regulatory reaction to the recent economic climate has redoubled the pressure, and once again directors will have to add more time to an already demanding schedule to ensure that they execute their roles well. â
The authors can be contacted at bgwin@heidrick.com and tdysart@heidrick.com