Six concerns for company boards
Though it may be proxy season and time to plan for company annual meetings, executives and directors need to reassess their priorities by taking a fresh look at a number of new, critical concerns that are on the rise in the business world. In 2015, these top-of-mind issues must be considered by every company board:
Board Performance – The National Association of Corporate Directors (NACD) in its Critical Issues for Board Focus in 2015 states that, “investors will hold directors accountable when they believe shareholder rights have been undermined.” While many larger companies have put in place shareholder-friendly practices (such as declassified boards, majority voting and the right to call special meetings), smaller companies, such as those in Colorado, do not necessarily have these benefits. A board that makes unilateral changes to corporate bylaws can significantly affect shareholder rights as well. Consider, but avoid undue focus on proxy advisory firms’ recommendations. Focus instead on more internal study and input, especially from larger shareholders.
Strategic Planning – Although every boards’ primary responsibility, this topic arises annually in many surveys as a top priority, but only for a particular year. Strategic planning should be a full-time job for directors every year, and an annual strategy review is simply not enough in a world of accelerating change. Boards of directors can no longer wait a year to assess change, review the old plan and adjust to it. They need to expect change, understand how it affects the company’s current strategy and be willing to disrupt old assumptions and choose a new course in real time. See my December column, The annual strategy review isn’t enough.
Cybersecurity – The increasing incidents of major cybersecurity breaches at well-known companies raise this concern to the top of many boards’ agendas, as they should. The oversight of this risk requires ownership by a specific committee for larger corporations (but not the already overloaded Audit Committee), or must be tasked to the full board for other companies. Successful board or committee oversight treats this risk as a business issue. At the board level, this does not require technology expertise, but this concern does demand that the right board members or committee know what questions to ask, and what problems to address. Involve the right management people in helping directors understand the risks and mitigating controls. Board involvement in cybersecurity issues is similar in many ways to the controls around and use of “Big Data,” another issue of concern in 2015 that is relatively new to board oversight and input, as discussed in my November column, Big Data and the boardroom.
Shareholder Activism – This is a real concern for all public companies and should be on every board’s radar in 2015. Beyond the more visible and vocal cause-related activists, today’s economic activism by agenda-driven agitators – those with specific schedules and exit strategies that may be contrary to established boards’ goals – is extremely sophisticated and institutionalized. If an activist shareholder has not yet approached your company, no matter its size, the odds are high that it will. With a caution against short-term views, my experience is that activist representatives on boards usually are constructive, bring value to the company, and raise new perspectives. Hopefully, this will be true in most cases, but it is a critical assignment for boards in 2015 to anticipate an activist intervention and to consider pre-emptive strategies to handle any situation successfully. Read more in my April column, Is your company ready for an activist attack?
Board Composition – Director terms, expertise, and diversity affect the functioning of all boards. Average board tenures are increasing for U.S. corporations, which result from a lack of term limits generally, despite having mandatory retirement ages. While term limits assist in board “refreshment,” a risk of losing directors with critical cumulative knowledge and needed specialized expertise can cause more harm than good. Although “diversity” has many definitions, gender diversity, which requires improvement on U.S. boards, is currently the principal concern. EY’s Spotlight on board composition offers additional insights. “Robust board evaluations, including of individual board members, are critical to meaningful board refreshment and effectiveness,” said Scott Hefner, Managing Partner of EY’s Denver office.
Shareholder Communications – Historically, board members are reluctant to engage in direct communications with shareholders for a number of reasons, including Regulation FD concerns, confusion about who is the spokesperson for the company, and apprehension about covering some sensitive topics in open verbal or written discussions. In today’s environment, shareholders expect better communications about board decisions. Several effective ways for directors to communicate with shareholders exist, including an enhanced website, accompanying management on “road shows,” in-person meetings with shareholder groups, and more accessible or rotating meeting locations. NACD’s 2014 Blue Ribbon Commission Report, Board-Shareholder Communications, is an excellent resource in this evolving area.
This critical topic will be addressed as well at the NACD-Colorado program on May 20. Go here for more information.