(FOR NOMINATING/GOVERNANCE COMMITTEE MEMBERS, BOARD CHAIRS AND LEAD DIRECTORS)
This is an exclusive opportunity for public company Nom/Gov Committee members, Board chairs and Lead Directors to share in candid conversation with Glenn Booraem, Principal & Investment Stewardship Officer, Vanguard and Zach Oleksiuk, Managing Director, Evercore, specializing in shareholder engagement, corporate governance, ESG, advising companies on how to deal with activists, and investor relations. It is now more important than ever for directors to understand what governance issues a large institutional shareholder will be focused on in the upcoming proxy season and the kinds of governance issues activist shareholders might be looking at when evaluating your company. Attendees are encouraged to raise issues from their own experiences.
Register early as space is limited to 20 participants.
To register, please contact Gina Barberio at (732) 698-7771 or email firstname.lastname@example.org
Here's What You May Have Missed:
Highlights: Know What Your Investors Are Thinking About This Proxy Season
November 20, 2018
Attendees at our November 20 Nom/Gov Roundtable Discussion had an opportunity to engage with Marc Lindsay from Vanguard and Zach Oleksiuk of Evercore about what investors are focusing on. Marc kicked off the discussion highlighting that while quarterly earnings continue to be important, Vanguard’s primary focus is on the Company’s long-term strategy for sustainability. Companies can benefit from engaging with Vanguard and sharing best practices. Marc highlighted the four pillars Vanguard uses when evaluating corporate governance practices (as highlighted in Bill McKnabb’s open letter to directors of public companies worldwide – https://about.vanguard.com/investment-stewardship/governance-letter-to-companies.pdf). They are:
- The Board: who are they and does the composition of the board reflect diversity of view? Vanguard considers the board members their representatives at the table.
- Governance Structures: Does the company have structures in place that empower shareholders and protect their rights (i.e., classification of the board, poison pills)?
- Appropriate Compensation: Is the executive compensation plan well designed to drive performance?
- Risk Oversight: Is there an adequate process in place for the board to oversee risk & strategy? Is the board engaged and focused on long-term sustainability?
Zach addressed the issue of activism in his remarks. He highlighted that activism preparedness is a risk management activity that all boards should address. In his view, the activists’ themes have not changed - they still focus on influencing strategy, operations, seeking board seats or replacing CEOs, capital allocations and adequacy of returns. Activists tend to be transactional minded, with active managers under near-term performance pressures versus institutional shareholders who can ride out short-term volatility.
Zach also mentioned that some companies are revisiting the value of classified boards. There may be a place for it to protect against hostile takeovers and also to support a longer-term view. Activists tend to target boards that are long tenured with no diversity. In his experience, ISS will support the activists in almost every case.
The full group engaged in a lively discussion, following are the key points discussed:
- Diversity should be viewed holistically addressing gender, age, ethnicity, and skills. Technology and innovation needs may drive the need for younger (under 50) board members. Each company has its own specific situation and industry, which drives the diversity needs.
- Board skills matrix - Vanguard considers the traditional board skills matrix a useful tool, however, looks to ensure it is not a ‘check the box’ exercise, but rather translates into the strategic plan.
- Board refreshment - Boards are encouraged to be thoughtful about board refreshment – retirement age should not be the only driver for replacing board members. European standards were discussed which have evolved from a 9 year replace or explain tenure limit to 9 years limit period. Vanguard indicated that the most meaningful metric to them is average tenure with a view on the distribution. Participants expressed their view that board refreshment as it stands today in the US is somewhat inadequate and slow - and those long-tenured board members tend to stop asking the hard questions. Some expressed their own experiences of self-rotation off boards when they felt they reached this point. Some boards are now discussing refreshment with new board members as they come on board, indicating a shortened cycle of refreshment. There was general agreement that refreshment during periods of company strength is advantageous rather than during activism or other crisis.
- Board evaluations – it is an evolving norm to do board member evaluations, however, within the audience only 3 companies do 360 reviews on board members (i.e., include management’s perspective) and only 6 companies (about a third) do any board member specific evaluation. The conclusion was that boards generally should be doing more board member specific evaluations.
- Board education is important – board members need to stay current in areas that are moving quickly such as cyber security and climate risk. Vanguard said they look to see that board members are not just relying on the company to educate them, but also external sources including those that provide contrary views.
- Getting unfiltered information- as a board member it is sometimes a challenge to get unfiltered information, methods of doing that include listening to activists (outside input) and engaging with staff below those who attend the board meetings (inside input). Various ways to engage internally include site visits, deep dives on specific issues, and 360 reviews of management.
- Adding experts to the board can be useful if the individuals can also bring a broader experience to the table. The group warned against the board dynamics of defaulting to a deep expert on a topic (i.e., cyber security) and losing the collective decision-making process expected of the board. Also, the group discussed the negative aspects of the board developing its own structure of experts separate from management. The board should expect management to have the right expertise and skills on staff. A dual reporting relationships of those experts to a board member can possibly strengthen the boards’ understanding (e.g., like what is typically the case with the Chief Audit Executive or Compliance Officer reporting the Audit Committee Chair).
- Best practices in communication and engagement with shareholders – the amount of engagement with institutional shareholders is increasing. There are limitations to the amount of communication that can occur thru a Proxy statement, which tend to be boilerplate, at the same time organizations like Vanguard cannot engage with every company they invest in during the year or even during a three-year cycle.
- Vanguard encourages companies to offer to meet with significant investors with at least one board member present. Boards should think about building bench strength in terms of who is prepared to speak to shareholders. Shareholders questions to board members should be about board processes over governance and strategy. CEOs should speak to specific strategic and operational questions. Best to be engaged with your large shareholders before an activist arrives at your doorstep, so the Vanguards of the world are hearing about your strategy from the board/company and not an activist. Depth and sophistication of discussions are more about long-term strategy.
- Sustainability is an important focus – when engaging with institutional shareholders. Boards are encouraged to use disclosure frameworks such as the one recently issued by the Embankment Project Inclusive Capital (https://inclusivegrowthforum.org/the-embankment-project-for-inclusive-capitalism/) and the Sustainability Accounting Standards Board (SASB - https://www.sasb.org), which provides metrics specific to industry. Using these standards to report sustainability efforts drives consistent and comparable information.
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