With the rise of activist investors and advocacy groups calling for more transparency and diversity in the boardroom, the focus on board composition and refreshment has never been greater. Boards must clearly demonstrate an ongoing approach to thoughtful evaluation and succession planning, or risk being targeted by activists.
Earlier this year, Equilar co-hosted the Board Leadership Forum with Nasdaq at the Nasdaq Entrepreneurial Center in San Francisco. This feature details the key issues and insightful quotes that highlight actionable insights to help boards establish more robust evaluation processes and succession planning efforts.
Investors consider many factors in voting decisions, including perceived director independence, level of expertise, compensation structure, shareholder responsiveness and overboarding. Diversity in the boardroom has also come to the forefront, and boards must address deficits in board composition to eliminate vulnerabilities and enhance the board’s value to shareholders.
“Every job has an evaluation, but for boards, there is none. Every board should have an evaluation every year, conducted by an independent party.”
“There is very little to no policy around tenure, and boards should have a balance between long tenure for continuity and fresh blood for new ideas. Having too many directors with high tenure is a red flag.”
“Investors will vote against the comp committee members if they fail Say on Pay, and against the audit committee members if they fail to respond to shareholder proposals. Committee rotation is a big emerging concern.”
“Activists have a lot of tools, and the most potent one is to attack the board. This has become mainstream, and boards need the skillset to oversee strategy.”
What makes a good board great? It starts with understanding the right mix of needed skills, but it is also about establishing the appropriate culture that drives engagement, collaboration and effective decision-making. Directors need to come together to set best practices for a well-functioning board and committees, as well as how to establish a strong onboarding process to quickly integrate new directors into the group.
“It’s important to hear from everyone on the board when doing evaluations, but it’s difficult have everyone engaged in the board meeting. It’s easier in committee meetings to have deep dive sessions to get everyone involved.”
“A typical complaint from the CEO is that the board is trying to be too operational in its thinking. A good percentage is 60-70% strategy and 30-40% operation.”
“When directors are asked to check their own skill sets there’s often a discrepancy. We’ve often found it is better to ask management about directors’ skills.”
As investors continue to emphasize the need for board refreshment, the board evaluation process plays a critical role in assessing whether or not your board composition aligns with your company’s long-term strategy. Assessing director tenure and retirement policies and the best processes for board performance is critical. Boards must use these processes to identify gaps in expertise and skill, along with the developing the art of providing constructive feedback and removing poor directors.
“About one-third of boards have a peer review system, but courage is the missing ingredient. You have to ask other board members for their honest opinions on who the best board members are to find out who the worst ones are.”
“There is no one size fits all for boards, and both quantitative and qualitative analyses with recommendations from outside parties is a winning process to carry forward.”
“Every board should have a two- to three-year board succession plan in place, with an annual review. Board succession planning should be on the board calendar for the first quarter, highlighted by skills matrix development and a gap analysis.”
“The chairman should drive the process and make sure directors are performing. The best boards don’t over-engineer composition, they help each other improve their performance.”
Everything in the business world is changing—markets, technology, demographics—but boardrooms are not. Shareholders are taking more notice of how directors represent their interests, and a significant increase in proxy access proposals—and approvals—occurring in 2015 has materially changed how boards assess themselves. As a result, more proactive and thoughtful succession has become a necessity to prove the appropriate agility and effectiveness of a board. Without honest conversation regarding the skills of the people in the boardroom, turnover will remain low and change in the boardroom will be sluggish.
“Very little turnover in the boardroom can be viewed as suspect by shareholders. Boards will be under more pressure to conduct assessments if there is little board refreshment.”
“Establish a culture of turnover from the beginning. If directors go in expecting to leave and have the understanding that it’s okay and not a reflection of their value, they will feel more comfortable stepping down.”
“When you have a board member leaving, make sure you don’t just replace that director’s skill set. Think about the future needs of the board and what skills will be most helpful in driving the company strategy forward.”
Shareholder engagement is on the rise and will only continue as investors seek to better understand a company’s practices and policies. As a result, more companies are taking a proactive approach to communicate how their governance policies align with company strategy and long-term value creation. The most important components of these engagements are preparedness and having the right people in the room. Now more than ever, investors have expectations of communicating with board members. Companies need to better prepare their boards and set policies and protocol for these engagements.
“Almost every engagement involves some element of compensation—that will not change.”
“There is a generational difference. Older directors are more traditional and have no expectations of dealing with shareholders and may not be as comfortable.”
“Think like an activist, and understand what your activist wants. In fact, having an activist on your board may not be so bad.”
“Shareholder engagement cannot be an ad hoc process. Set the process around your company’s communication with shareholders. Everyone on your board should know the policy/protocol of engaging with shareholders.”
“Say on Pay has been enormously influential, but it’s caused a homogenization of pay practices and fewer pay outliers. The only thing I want homogenized is my milk—we expect pay programs to vary company to company.”