Choate Co-Sponsors Roundtable on Reinventing the Corporate Director
Choate Event Announcement
| October 27, 2009
| William Asher and Michael Gass
Event: Challenges in the Boardroom: Reinventing the Corporate Director in an Era of Changing Regulation & Investor Expectations
Organization: Directors Roundtable
TOP 10 TAKEAWAYS
Challenges in the Boardroom:
Reinventing the Corporate Director in an Era of Changing Regulation & Investor Expectations
Choate, together with the Directors Roundtable and PricewaterhouseCoopers, recently hosted “Challenges in the Boardroom: Reinventing the Corporate Director in an Era of Changing Regulation & Investor Expectations.” Through a panel discussion, we addressed the changing role of the corporate director within the current economic and regulatory environment and the reality of investor expectations. Our panelists included senior representatives from RiskMetrics Group and PricewaterhouseCoopers, Professor John Coates from Harvard Law School and partners from Choate’s Public Company and Securities Litigation Groups. Below are ten key takeaways from the program.
The changing role of the Board of Directors
1. Risk monitoring is an increasing priority of the Board. The day-to-day role of the Board continues to expand from one focused principally on business strategy advice, to one that also focuses on active monitoring of the company’s risk levels. This requires active Board involvement in the company’s financial strategy, review of financial results and setting of compensation that incentivizes achievement of corporate goals without incurring undue risk.
2. Boards are no longer viewed as “hired” by management. While Boards continue to work with management to set and achieve corporate objectives, Boards also increasingly operate independently to enable review and feedback on management performance and, in certain cases, to investigate and remediate corporate misbehavior. This is a continuation in the shift from an advisory to an oversight function. Proposed legislation and investor pressure to require that the Board Chair be an independent director exemplifies this shift in mindset.
3. A skill competency matrix is an effective way to evaluate Board composition. Boards and shareholders are increasingly using a skill competency matrix to evaluate current Board composition and determine future Board nominees. This trend is likely to grow as shareholder proxy access emerges. Indeed, shareholder nominees are more likely to carry “bullet proof” credentials consistent with a company’s Board skill competency matrix rather than to espouse narrow special interest agendas.
4. Directors are assuming a greater role in communicating with shareholders. Boards can be expected to take an increasingly direct role in communicating key corporate goals and policies to shareholders, particularly in matters of compensation and corporate governance. Regular two-way communications can be effective in defusing issues that would otherwise come to a head at annual shareholder meetings.
5. There is an increasing focus on Board performance. Board structural issues such as majority voting and elimination of classified Boards will decline in importance with shareholders, as corporate resistance to these trends weakens. In the coming era of broker non-votes for director elections and shareholder proxy access, focus will increasingly shift to how well Boards are perceived as performing their priority responsibilities. As in the post-Sarbanes-Oxley period, increased transparency due to regulatory disclosure requirements will have a more profound effect on Board behavior more than proscriptive regulations.
6. Risk management permeates every aspect of Board activity. Risk management is much more than a compliance exercise and is instead an integral and necessary part of every strategic, financial and other important corporate action. As such, this responsibility should generally reside with the full Board rather than a stand-alone “risk committee.”
7. Effective risk management considers the interplay and cumulative impact of discrete risks. Boards need to heighten their attention to the unknown risks that a company may face, as well as how various risks may overlap and interrelate. However, the role of the Board is not to extinguish corporate risk-taking but to ensure that the level of risk is known, manageable and consistent with prudent, long-term corporate strategy.
8. The impact of cost cutting must be considered. Over the past year, companies have dramatically cut costs. Boards need to consider the impact of these cost cutting measures and evaluate areas where risks have increased as a result. Fewer employees with greater responsibilities in sensitive areas are a traditional red flag.
9. “Say on pay” is coming. A shareholder advisory vote on compensation paid to a company’s executive officers is a likely regulatory development in the near future. “Say on pay” will provide a more direct means for shareholders to influence compensation practices than the current method of voting against a Board nominee. However, director withhold vote campaigns will continue to be used to pressure Boards that fail to heed shareholder input communicated via “say on pay” advisory voting.
10. There will continue to be increasing pressure to disclose current compensation practices. The SEC, organizations such as RiskMetrics and shareholders generally will continue to insist on clear and transparent disclosure of compensation practices, including performance targets for incentive-based compensation.