We don’t have to look any further than Capitol Hill and the stock market to see the impact that data trust has had on today’s top technology companies. Board members have all become accustomed over the past few years to reducing the somewhat inevitable impact of data breaches and have sought to manage that risk with insurance. Audit committees have generally taken on the burden of conducting regular security reviews, and the appointment of a Chief Information Security Officer (CISO) has become commonplace.
Data privacy is also top-of-mind for any multi-national company that has business or employees in the EU. Many of us have hired the top audit firms to assess risk for General Data Protection Regulation (GDPR) compliance with the upcoming May 25 deadline. But given the recent hearings for Facebook and the potential damage done through data usage, how should we now tackle the impact of data trust?
Let’s first define it. Data trust is the combination of three things: security, privacy and accountability. Security and privacy are being tackled. Accountability, including the appropriate use of data, is the added element that is new to the boardroom. Given the recent Facebook discussions, the U.S. may in fact become the leading regulator about the appropriate use of data. It’s important for forward-leaning boards to start preparation and discussion today on accountability.
Data trust can and should be guaranteed through people, process, and, perhaps most importantly, technology. The software industry has long used data encryption, firewalls and other approaches to secure data going into and out of the company. The next technology wave needs to be focused on the policies that companies can use to control the what, when, who and how data is used. But first the policies need to be in place. And policy oversight is or should be a board responsibility.
At your next board meeting, ask the questions. What data do we own? Do we understand what part of that data is regulated or sensitive? Have we done an audit of where it is? Can we control appropriate use—where, when and how it is used? And most importantly, can we prove our accountability to that data, our company and its brand reputation through audit-ready reports?
It’s now our job.
ionic.com
Marge Breya is COO of Ionic Security, and has served in C-level and senior leadership roles for Informatica, HP, SAP, Business Objects, BEA Systems and Sun Microsystems. She sits on the Board of Directors for Microstrategy (NASDAQ: MSTR), NS1, LSC Communications (NYSE: LKSD), and on the Advisory Board for Incorta. Breya has also served on the Board of Directors for Jive (NASDAQ: JIVE), DataRPM (NASDAQ: PRGS) and Document Sciences (NASDAQ:DOCX).
The new CEO pay ratio disclosure was supposed to be the highlight of the 2018 proxy season. Based on the tepid initial reaction, it is not all it was made out to be by its proponents. While the intent may have been to shame CEOs by drawing attention to their pay relative to the rank and file, the reality is CEO pay levels have been highly visible for a long time. What was really new in the disclosure requirement was disclosing the pay of the median employee, and now that the information is public, there is a recognition that it is not meaningful data. Compensation of the median employee varies across companies for many reasons (e.g., industry, location, outsourcing, etc.). Even within the same industry at companies with similar workforces, the methodology used to determine the median employee and to calculate the pay ratio can vary. At this point, critics of the pay ratio can feel somewhat vindicated, as nobody really knows how to use the CEO pay ratio disclosure.
However, if we look over to the U.K., we can see the first gender pay ratios being disclosed, and the findings give greater cause for concern. While it is natural to expect CEOs to be paid considerably more than rank-and-file workers, there are not as many obvious reasons for women to systematically be paid less than men.
The initial gender pay ratio disclosures are showing that in many businesses, female employees are indeed paid significantly less than male employees. The discrepancies in pay levels may be explained by identifying differences in the jobs that men and women tend to perform in the organizations. However, that explanation raises another question. Why are women systematically in roles that are less highly paid than men? What obstacles stand in the way of women’s progress to the executive levels within the organization?
Given the #MeToo movement and the uproar in the U.S. about continued gender inequality, it may only be a matter of time before there are similar requirements here. We have seen shareholder proposals on this topic over the past two proxy seasons and expect the findings of the U.K. disclosures will add to the momentum for additional transparency about gender pay inequality. We recommend that boards and senior management identify how pay varies by gender in your own organization, what drives the differences and how it will change over time.
capartners.com
Eric Hosken is a partner of Compensation Advisory Partners LLC (CAP) in New York. He has nearly 20 years of executive compensation consulting experience working with senior management and compensation committees. Eric’s areas of focus include compensation strategy development, evaluating the pay and performance relationship for senior executives, annual and long-term incentive plan design, performance measure selection and board of director compensation. A key objective in his executive compensation work is designing executive compensation programs to support the achievement of business strategy and to align with shareholder value creation.
Pay ratio disclosure is here: In this inaugural year, most companies are finding it is not as bad as many feared, and life will go on relatively uninterrupted. Some have even posited it to be one of the most useless points of disclosure mandated in quite some time. That said, a few points are worthy of note.
First, “bad boy” lists are in the works, propelled predominately by geographically-driven compilations and sector or industry-based. We would also expect socially responsible investors to continue heightening visibility of perceived pay inequity. Companies finding themselves on these lists should be attentive to any traction they may garner in the press or otherwise, and ensure there is a well-defined internal process, as well as coordinated messaging, for fielding inquiries from each constituency.
Second, while the employee base was the primary area of concern across most industries, there is no immediate evidence that employee morale has systemically suffered. Nonetheless, it is critical for HR professionals to keep current with internal and peer company data, have their ear to the ground in case any negative rumblings gain traction, and be prepared to address concerns succinctly and expeditiously. Going forward, also be prepared to address any significant deviations in the ratios and/or median employee compensation amounts.
Third, looking forward to 2019, what if anything should companies be thinking about? Year-over-year comparability is top-of-mind for most. The disclosure methodology is not uniform across companies, and facts and circumstances invariably change, thereby impacting companies’ and peer ratios in subsequent years. Moreover, ascribing overinflated weight to the data is a significant concern that could come in the form of highlights in the media, state legislation imposing heightened taxes and a myriad of vehicles in between.
Perhaps the most often contemplated constituency is the investors, and tangentially the proxy advisory firms. Investors have not determined the appropriate use of the pay ratio and accompanying disclosures, with most deferring the policy determination for one year. As for the proxy advisors, most observers agree it is improbable that anyone can incorporate these two numbers into a reasonable and statistically robust quantitative model. We will all have to wait and see.
In closing, most are hard-pressed to ascertain what benefit has accrued to any constituency. The main takeaway at this point is there continues to be a heightened level of board and C-suite attention, and increased allocation of resources, towards an obscure metric whose utility is at best questionable.
stratgovadvisors.com
Amy Bilbija is a founding partner of Strategic Governance Advisors, a Sard Verbinnen & Co. owned company, which helps boards and executives secure shareholder support for a company’s stated strategic objectives—especially in situations where building long-term value may impact short-term financial performance. Formerly a Managing Director at Evercore, a premier independent investment banking advisory firm, Bilbija advised clients on activism preparedness and defense, shareholder engagement and communication, and governance matters.