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outside insight
Clearhouse
Five Steps to Upgrade Your Board Evaluation by Beverly Behan, Author, "Great Companies Deserve Great Boards"
Publication Date: December 6, 2017

Beverly Behan has worked with more than 100 Boards of Directors on board and director evaluations over the past 20 years.

While board evaluations have been adopted by nearly every Nasdaq-listed company, the standard process has often outlived its usefulness and become a rote routine. The better the board, the more sophisticated the board evaluation should be, as it offers a unique opportunity to engage directors in a vibrant conversation about the board's strengths and elicit good ideas that might make the board even more effective going forward. However, the traditional survey format wastes that opportunity by turning the board evaluation into a perfunctory compliance exercise.

What kind of results are boards achieving when they change things up in their board evaluation? Here are some examples:
  • Three years ago, the board of a midcap REIT conducted a comprehensive board evaluation using all five steps outlined herein. They entered the process with no plans to recruit any new directors, but came away in complete agreement of the need to find three new board members to address gaps identified in the board's composition. Not only did they find them, over the next 18 months, these new directors made a tremendous and positive difference in the board's operation – and gave the board, as a whole, the confidence to make some significant changes in corporate leadership that were previously considered "off the table".
     
  • The board of an aerospace company had a practice of diving directly into questions the moment any management presentation began. While this was considered far preferable to "death by powerpoint", management described the practice as creating a "paintball dynamic" where questions were firing before they had even given an overview on the topic at hand. It was resulting in redundancies and inefficiencies; presenters were backtracking and dialogue was unfocused. Many board members also expressed frustration. Some wondered if the most important points had even surfaced when the dialogue had finished, as many questions went to "secondary issues". When these concerns surfaced during the board evaluation, changes were immediately agreed upon that led to a far more efficient process.

  • The board of a financial services company had been including their top management in the board evaluation for some time. When they repeated this process two years ago, the board was starting work on CEO succession planning in earnest with a two-year time horizon. In-depth questions on this topic were included in the board evaluation, which yielded extremely helpful insights for the Succession Committee. As a result, the board incorporated steps into the CEO succession process that they had not previously considered and even changed the timeline. Moreover, board members felt that this exercise provided them a far richer understanding of corporate culture issues (including cultural issues around a recent merger integration setback) that became invaluable in assessing potential CEO candidates.

What, then, are the five steps many boards have been adopting to revitalize their board evaluation and achieve the types of useful outcomes described in these examples?

Switch to a Three-Year Cycle
Companies listed on the NYSE are required to conduct an annual board evaluation. However, no such requirement applies to the boards of Nasdaq-listed companies. As such, Nasdaq boards have the freedom to adopt a three-year cycle, which is the current "best practice" in Britain. British boards typically use a more comprehensive board evaluation process than most of their American cousins and conduct their evaluations every three years rather than annually. After all, a well-executed board evaluation should yield an Action Plan that may require 18 to 24 months to implement; repeating the process a year later typically delivers only marginal returns.

Interestingly, some NYSE-listed boards have adopted the three-year cycle as well – using an interim evaluation process for the two interceding years between board evaluations to satisfy the NYSE's requirements. Interim years often involve a short survey or phone calls from the Chair of the Governance Committee to talk about progress on the Action Plan from the prior year's evaluation.

Replace Surveys with Interviews
The traditional approach to a board evaluation involves a survey form where directors are asked to enter a score from 1 to 5 on a series of questions relating to the board's operations, typically with some space for write-in comments. The design nearly always consists of closed-ended questions such as "The pre-reading materials are adequate" – a format that readily lends itself to numeric scoring but rarely yields insightful or truly actionable feedback. The result is a numeric report that lacks the richness of interview commentary.

To use the example noted earlier about the board that explored CEO succession issues in its board evaluation: Asking some closed ended questions about CEO succession might yield a score with a few write-in's like "Culture is a key concern". By contrast, the interview format they did use produced insightful comments, such as: "We have a bifurcated corporate culture at the moment; our traditional, highly conservative culture is sharply at odds with the entrepreneurial somewhat "cowboy" culture of [newly acquired company]. Our next leader needs to understand and bridge these."; "Since the merger, it's as if no one has been making any decisions. I don't know if that's the board's fault or who is responsible, but what we have right now, I would call a stymied culture and people are frustrated by it."

Interviews are also more engaging for participants. Most directors appreciate the opportunity to share their views and offer constructive suggestions to make a great board even better. They are anxious to see what others have said and whether their views are unique or widely shared. And therein lies one of the reasons greater impact is typically achieved: When relative alignment surfaces through a highly engaged process, the board typically moves swiftly forward to incorporate these good ideas.

Include Senior Management Feedback
As most Nasdaq-listed company CEOs serve as members of their governing boards and routinely participate in the board evaluation. Over the past decade, however, it has become increasingly popular to gather feedback from 3-5 top company executives who are not board members, but regularly attend board and committee meetings. While some directors bristle at the thought of management "evaluating" the board, most find it illuminating to include management feedback in the evaluation. Senior executives nearly always provide worthwhile perspectives. Moreover, including management in the evaluation demonstrates the board's openness to feedback, which nearly always earns kudos and respect from the executive team. It sets the right "tone at the top" in terms of accountability.

If management is included in the evaluation, a decision will need to be made as to whether and how the results of the board evaluation will be shared with those executives who participated. Some topics are probably best limited to discussions among the board itself, such as CEO succession. Others, however, such as enhancements to board pre-reading packages and presentations, lend themselves particularly well to joint board/management discussions.

Using a Third Party
The provisions of the 2016 UK Corporate Governance Code require that board evaluations of FTSE 350 companies be externally facilitated every three years. Even UK companies not in the FTSE 350 must indicate if an independent third party was used to facilitate their board evaluation.

This is clearly the direction board evaluations are heading. In a 2015 Wall Street Journal article on the growth of this trend, Joann Lublin quotes a Spencer Stuart partner who predicts that 35% of American boards will have adopted this practice by 2020. The article suggests that this trend may be driven, in part, "as investors ratchet up their expectations for board performance". Notably, the Chairman of Vanguard, in an open letter to public company directors dated August 2017 specifically includes "effective ongoing board evaluation practices" as one of the firm's expectations for investee boards.

Strive for an Action Plan of 3-5 Constructive Suggestions for Board Enhancement
Achieving a high score on a board evaluation is not the hallmark of an effective board but rather a board evaluation process designed to suppress rather than elicit good ideas from experienced and highly capable board members. Interview-based board evaluations typically yield 3-5 worthwhile suggestions for potential board enhancement; boards with highly engaged and thoughtful directors often surface 8-10. Shifting the desired outcome can make all the difference in how the process is designed and used: From a "tick the box" compliance exercise to an ongoing continuous improvement process aimed at making a good board great and keeping a great board vibrant.

***

Since 1996, Beverly Behan has been conducting board and director evaluations for the Boards of Directors of public companies, having working with more than 100 boards on this issue over the past two decades: www.boardadvisor.net. She recently authored "Board and Director Evaluations in the 21st Century: A Practical Guide for Governance Committees" which is available to Nasdaq Clearing House readers at no charge by emailing the author: Beverly.behan@boardadvisor.net.

 

The views and opinions expressed herein are the views and opinions of the author at the time of publication and may not be updated. They do not necessarily reflect those of Nasdaq, Inc. The content does not attempt to examine all the facts and circumstances which may be relevant to any particular company, industry or security mentioned herein and nothing contained herein should be construed as legal or investment advice.


 
governance news
Clearhouse
November's Must Reads
Publication Date: December 6, 2017

Each month, we will scour the web to bring you the news items and thought leadership pieces you need to get the governance advantage.

1. Preparing For Board Service: One Woman's Story – Boardroom Resources
Evette White, board member with Delta Dental of Tennessee, discusses the journey to her first board seat and outlines several best practices for other women and diverse candidates who are looking to do the same.
Read more >>

2. CEO Pay Ratio Planning: 10 Consensuses from Thought Leading Companies – The Conference Board
Jim Barrall, a senior fellow at The Conference Board Governance Center, discusses how companies are planning to comply with the CEO pay ratio rule, which will require companies to disclose the 2017 ratio of their CEOs' pay to that of their median employees in their 2018 proxy statements. His analysis is based on interactions with approximately 20 companies, as well as on many discussions with executive compensation lawyers and consultants.
Read more >>

3. 2018 Proxy Season: Five Ways to Improve Your Compensation Disclosure – Wachtell, Lipton, Rosen & Katz
This Wachtell, Lipton, Rosen & Katz article states that companies should take a fresh look at their compensation disclosure, including a review of the entire Compensation Discussion and Analysis for comprehensiveness, cohesion and consistency. The article also suggests ways to improve the effectiveness of their disclosure as a tool for investor communication, including a discussion of shareholder engagement and considerations for the upcoming initial pay ratio disclosures.
Read more >>

4. Corporate board structure in 2017 and beyond – Financier Worldwide
In this article, the author explains that Boards must be capable of displaying flexibility and dynamism to effectively protect shareholders' assets and deliver a return on investment. In order to achieve this goal, corporate boards must be appropriately structured.
Read more >>

5. Lessons Learned From SEC Comment Letters on the New Revenue Standard - Financial Executives International
FEI identified 21 companies that received comment letters from the SEC related to FASB's Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers, and summarized key observations and potential pitfalls to avoid during the adoption of ASC 606 and other new accounting standards. The standard is effective for all public entities for annual periods beginning after December 15, 2017 (January 1, 2018 for calendar year-end public entities). Preparers should take note of the areas the SEC questioned, and consider their own accounting policy decisions and disclosures in these potential areas.
Read more >>

6. Audit committee effectiveness – EY
This EY report highlights ways in which audit committees can be more effective, including questions for audit committees to consider at year-end.
Read more >>

7. Women Board Candidates: Going Beyond the CEO Title - Huffington Post
Janice Reals Ellig appeared on CNBC's Squawk Box to speak about the 4th biennial Women's Forum of New York, Breakfast of Corporate Champions where the challenges of gender diversity were discussed.
Read more >>

8. 11 top tools to assess, implement, and maintain GDPR compliance- CSO Online
The European Union's General Data Protection Regulation (GDPR) goes into effect in May 2018, which means that any organization doing business in or with the EU will have to comply with the new privacy law. This article summarizes what companies need to do to meet and maintain compliance with the requirements.
Read more >>

9. The Proxy Statement: 4 Best Practices for the 2018 Season – Boardroom Resources
Each year, Donnelley Financial Solutions publishes a comprehensive resource called the Guide to Effective Proxies, which organizes trends and best practices from the latest season of proxy statements. Several examples are discussed in this Boardroom Resources article.
Read more >>


 
digital iq
Clearhouse
Five Ways to Raise Your Board's Digital IQ
Publication Date: November 20, 2017 

Technology is disrupting virtually every industry in some way, and a business case for digital literacy on the board is emerging. In this post, veteran board director Betsy Atkins shares five ways companies can raise their boards' digital IQ.


There can be little doubt in today's business environment that adding board members with broad experience in technology (including software, services, cloud, analytics and A.I.) will bring critical insights into the boardroom. According to a recent study by Deloitte, the percentage of public companies that have appointed technology-focused board members has grown from 10% to 17% during the past six years. For high performers—those companies that outperformed the S&P 500 by 10% or more for the past three years—this figure almost doubles to 32%.

However, board refreshment may not happen soon enough for some companies, and adding a few tech experts may not raise the digital IQ of the entire board to a level where decision making becomes nimble. In the interim, the question is, how can companies raise the digital expertise that existing board members bring to the table?

1. Conduct a technology IQ assessment.

An appraisal of the board's digital IQ should be incorporated into the annual board assessment to identify any areas of weakness. A digital IQ assessment will be different for each board depending upon the company it serves or the industry it operates in, but may examine some or all of the following elements:
  • Are there enough (or any) board members with relevant technology backgrounds?
  • Have board members worked within a variety of business models?
  • Did board members lead or serve on companies that initiated digital transformation?
  • Have board members experienced a significant change in company business model?
  • How does the board monitor technological innovations and/or looming disruptions?
  • Does the board benchmark technology adoption against competitors?
  • What metrics is the board tracking to measure progress in digital transformation?
  • Does the board meet with the company's CTO or CIO on a regular basis?
  • Is the board comfortable with change?

2. Embark on a technology learning tour.

Every company is a technology company in some way, and all boards should be continuously researching macro trends in technological innovation and digital enablement. An effective way to boost the entire board's digital IQ quickly is a technology learning tour, during which board members spend a few days immersed in one of the major technology hubs, such as Silicon Valley, China, or Tel Aviv.

The board I sit on at Schneider Electric just toured Alibaba in China. We also visited leading Chinese companies in Shanghai, Hangzhou, Shenzhen, and Hong Kong. This fall, I joined my fellow Volvo board members in meetings with Google, Amazon, venture capital groups in Menlo Park, and other cloud services providers as we seek to understand the potential for connected car infotainment. We also met with companies that specialize in machine learning and AI algorithms related to autonomous driving, to discern how advances in those technologies may apply to Volvo.

There are major macro tech trends impacting Schneider and Volvo that require their boards to establish a framework of tech knowledge in order to adequately leverage the opportunities these trends present. Schneider for example is an industrial energy management company, and board member knowledge of—and experience with—the industrial internet of things is critical as "hardware" companies like Schneider transition to develop and embed software in their infrastructure. For Volvo, cloud services, infotainment, SaaS Software, the digital customer journey, and machine learning/AI algorithms for autonomous drive are all macro trends that are directly relevant to the company's business.

3. Invite subject matter experts into the boardroom.

Continuing education can take place in the boardroom as well as outside of it. Boards can engage external digital experts to update members about emerging tech-related innovations, disruptions and risks. Boards should also monitor how competitors are leveraging technology to delight consumers, bring efficiencies to supply chains, and lower costs.

The Governance Committee of HD Supply brings in outside speakers two or three times a year for a working dinner. We've had cyber-risk speakers from FireEye and digital transformation speakers from Accenture and Boston Consulting Group. An upcoming speaker will be presenting an in-depth discussion of competitive industry assessment.

Internal company technology officers and department heads are also indispensable subject matter experts, and the board should be hearing regularly from the company's top digital managers. (I recently wrote a piece about the evolving role of the CIO.) The Volvo board's Technology and Innovation Committee regularly receives updates from Volvo's head of research and development, Chief Digital Officer, head of product development, and global head of strategy. Schneider has created a role of Chief Digital Transformation Officer reporting to the CEO. The Schneider Board will consider adding a Digital Oversight Committee.

4. Allocate time on the board agenda to technology transformation as well as cyber risks.

There is a lot of buzz right now about cyber risk and how boards should manage oversight of that—and rightly so. However, companies today face a much greater risk than data breaches and ransomware attacks: business model obsolescence. According to a study published by Innosight, businesses are disappearing at a rate of 50% every 10 years, primarily because they don't evolve quickly enough in the face of seismic shifts in consumer behaviors or technological innovations (think Blockbuster, Borders, and Radio Shack). Tenure on the S&P 500 has dropped from 33 years to 14 years during the past 7 years.

Companies that seek opportunities for competitive advantage in evolving technologies will have the greatest chance of survival. To ensure business model vibrancy, boards need to embrace tech trends and new business models, and actively consider integration of them into their companies' strategies. Board agendas should allocate time to digital transformation, just as they do cyber, general enterprise risk management and other risk mitigations.

Digital transformation is a forward-looking perspective, so it shouldn't be tasked to the audit committee (which is traditionally backward-looking). Governance committees, on the other hand, often have additional capacity to absorb tech-related strategic oversight. Governance is the board committee charged with oversight of strategic digital transformation at HD Supply.

As Deloitte reported in the study I referenced at the beginning of this article, it is becoming more common for boards to add technology committees dedicated to digital and technical transformation. Volvo's board has a Technology Innovation Committee, and the Schneider Electric board formed a Digital Transformation Committee.

5. Refresh the board with directors who lean in to change.

The velocity of change is so intense now that corporate survival depends upon the intellectual and emotional experience of people who are more comfortable leveraging change than pulling away from it. To be effective, every director today needs to have past experience navigating a company through rapid and truly transformative change.

It's also important that directors in today's business environment have job experience within a variety of enterprises and business models. If everyone around the boardroom table spent their entire career immersed in a single corporate domain or business model, the board may lack familiarity with change or the conviction to innovate. They will try to apply the one lens or framework that was effective one or two decades ago. Board members who have worked for multiple companies during their careers are more likely to have experience leveraging technologies to refresh or retool business models, bring down costs, or improve the customer journey.

***

Watch Betsy's interview with Nelson Griggs, President of Nasdaq Stock Exchange: Why Your Board Needs Technology Leadership.

Other popular posts featuring Betsy Atkins on the Governance Clearinghouse:
Seven Critical Elements of a Board Refreshment Plan >>
What Makes a Great Board? >>

Betsy Atkins serves as President and Chief Executive Officer at Baja Corp, a venture capital firm, and is currently the Lead Director and Governance Chair at HD Supply. She is also on the board of directors of Schneider Electric, Cognizant, and a private company, Volvo Car Corporation, and served on the board of directors at Nasdaq LLC and as CEO and Board Chairman at Clear Standards.


 
diversity
Clearhouse
Digital Transformation Catalyzes Diversity in Nasdaq Company Boardrooms
Publication Date: November 16, 2017 

"Every company is now a technology company, and boards increasingly require a new kind of director," says Coco Brown, founder and CEO of The Athena Alliance, an organization dedicated to preparing executive women for board service and facilitating board matches. A veteran of the Silicon Valley tech industry, Ms. Brown talked to Nasdaq about how digital transformation is disrupting traditional board composition and creating new opportunities for women to make meaningful contributions in the boardroom.


Despite increased pressure from investors, gender diversity on boards is improving at a glacial pace of just 1% per year. Why? Because boards are still accustomed to—and most comfortable with—appointing former and current CEOs and CFOs of large enterprises, and women comprise a very small percentage of those roles.

There is, however, an intriguing exception to the male majority in the boardroom: the gender composition of non-executive digital directors. Russell Reynolds has been tracking statistics on digital directors in the boardroom since 2013. Their most recent survey tracking digital directors appointed to the boards of the Global 300 uncovered encouraging trends:

  • 37% of Global 300 digital directors are women.
  • 58% of digital directors added to Global 300 boards between 2014-2016 were women.
  • Global 300 boards with a digital director have greater gender parity than traditional boards.
The advent of digital directors heralds a larger evolution taking place in the boardroom. Companies today face a wide range of threats and opportunities related to digital transformation, most of which didn't exist 10 years ago. These include cyber risk, technology innovations (including AI and machine learning), business model shifts, digital marketing, and brand management. The rapid pace of change has left traditional boards lacking in two fundamental areas:

Cognitive and relational diversity: Cognitive refers to diversity of thought, while relational diversity is the ability to relate to a company's constituents directly (customers, employees, and communities).

Modern digital competence on a mass scale: Any company that expects to be around 5-10 years from now will need to digitize supply chains, sales engines, business processes, and customer and employee engagement, if it hasn't already.

Savvy boards recognize that to stay competitive, they must address these deficits, and continuing to recruit board members from the ranks of former CEOs and CFOs is not the answer. It is becoming increasingly common for boards to "widen the aperture" beyond traditional executive roles to recruit non-executive directors who have engineering, technology, operations, human resources, and marketing backgrounds. As a result, a whole new generation of thought leaders is beginning to take seats at boardroom tables:

  • Human Resources Officers (CHRO, CPO): These are a company's workforce and culture experts and are under-represented in the boardroom. They also advise on compensation, succession planning, stock programs, and employee and community relations.

  • Digital Technology Officers (CIO, CISO, CTO, Chief Product Officer, Cyber Security): These experts are attuned to some of the biggest technology-related threats, challenges and opportunities of the next 3 - 5 years.

  • Digital Delivery & Operations Officers (Head of Business Strategy, CMO, COO, Chief Customer Officer, Chief Revenue Officer): These roles have a pulse on the industry, shifting business environments, and evolving business models; they also have connections that can make a big difference.
Recent data indicates that recruiting outside of the CEO/CFO realm and into other C-Suite roles in small to mid-cap companies, or even SVP/VP roles of mid to large cap companies may accelerate progress towards gender parity in the boardroom: Russell Reynolds reported that while the total number of female directors of Global 300 companies stands at just 19%, women represented 26% of all digital directors appointed to Global 300 company boards between 2014-2016.

A number of Nasdaq companies have recently "widened the aperture" in board refreshment, appointing women to help lead their digital transformation in the boardroom, including:

Axon Enterprise, Inc. (Nasdaq: AAXN): Julie Cullivan is CIO and Senior Vice President of Business Operations at ForeScout Technologies, Inc. (Nasdaq: FSCT). Axon can leverage Julie's extensive sales operations, IT, and cybersecurity expertise as the company transforms its product line through AI and cloud technologies.

Banner Corporation (Nasdaq: BANR): Merline Saintil is the head of operations of Intuit's (Nasdaq: INTU) product and technology group. Banner recruited Merline to bring information technology expertise to the financial company's board.

Forrester Research, Inc. (Nasdaq: FORR): Yvonne Wassenaar, former CIO of New Relic and current CEO of Airware, is described by Forrester as "a thought leader in cloud, big data analytics, and business digitization." Forrester tapped Yvonne for the board to help guide the company as it undergoes the digital transformation of its business.

MobileIron, Inc. (Nasdaq: MOBL): Jessica Denecour is CIO of Varian Medical Systems. MobileIron believes its shareholders will benefit from Jessica's expertise in using IT to positively influence business outcomes.

Morningstar, Inc. (Nasdaq: MORN): Caroline Tsay is a technology start-up founder and former online channel division vice president at Hewlett Packard Enterprise. Morningstar's investment services have moved from analog to digital technologies, and Caroline has the mix of leadership experience and information technology expertise that Morningstar's board needed.

Telenav, Inc. (Nasdaq: TNAV): Karen Francis DeGolia is on the board of AutoNation, the largest automotive retailer in the U.S., and Executive Chairman of AcademixDirect, a technology marketing company serving the education industry. She joined the board of Telenav last December and was recently named Lead Director, adding her extensive experience in the automotive industry and emerging mobility technologies to Telenav's board.

Another unexpected statistic came from the Russell Reynolds survey mentioned earlier: 78% of the Global 300 still has no digital representation on the board. As companies continue to awaken to the realization that they need digital innovation expertise and diversity of thought on the board, women will find opportunities in greater numbers to demonstrate value and relevancy in the boardroom.

***

Coco Brown is founder and CEO of the Athena Alliance, an organization dedicated to advancing diversity in the boardroom by preparing executive women for board service and facilitating board matches. Before founding the Athena Alliance, Brown served as the president and chief operating officer of Taos, an information technology consulting and services company based in San Jose, California. She is also the founder and CEO of Executive Kinections, a Silicon Valley consultancy that advises executive teams in strategic planning and organizational design.


 
ransomware
Clearhouse
Ransomware Payment: Legality, Logistics, and Proof of Life
Part Two: Investigation and Response
Publication Date: November 6, 2017 

This is the second in a three-part series of white papers authored by Cybersecurity expert John Reed Stark. The series offers guidance for boards of directors on the legal issues, logistical considerations and financial implications of responding to ransomware threats.

When confronted with a ransomware attack, the options all seem bleak. Pay the hackers – and the victim may not only prompt future attacks, but also has no guarantee that the hackers will restore their dataset. Ignore the hackers – and the victim may incur significant financial damage or even find themselves out of business. The only guarantees during a ransomware attack are the fear, uncertainty and dread inevitably experienced by the victim. That is why it is critical for all companies to approach ransomware response in a thoughtful, careful and meticulous manner, which is the focus of Part Two of this three-part series.

This three-part series of articles provides guidance on the legal issues, logistical considerations and financial implications when managing ransomware threats, including an exposition of the unique issues which can arise when seeking proof of life and opting to meet the monetary demands of ransomware attackers.

Part One of this series, Background and Reality, provided the keys to understanding the impact of recent ransomware strains, including a discussion of the nature and growth of ransomware; the dangerous aspects of some recent ransomware attacks; and the role (or lack thereof) of law enforcement when managing a ransomware attack.

Part Two of this series, Investigation and Response, examines the intricacies involved in ransomware response, including ransomware investigative tactics; ransomware payment logistics; and the legalities of ransomware response.

Part Three of this series will cover the remaining range of key ransomware essentials, such as notification requirements; ransomware remediation; and ransomware cyber insurance.

***

John Reed Stark is President of John Reed Stark Consulting LLC, a data breach response and digital compliance firm. Formerly, Mr. Stark served for almost 20 years in the Enforcement Division of the U.S. Securities and Exchange Commission, the last 11 of which as Chief of its Office of Internet Enforcement. He also worked for 15 years as an Adjunct Professor of Law at the Georgetown University Law Center, where he taught several courses on the juxtaposition of law, technology and crime, and for five years as managing director of a global data breach response firm, including three years heading its Washington, D.C. office. Mr. Stark is the author of, "The Cybersecurity Due Diligence Handbook," available as an eBook on Amazon, iBooks and other booksellers.


 
q&a
Clearhouse
Effective Boards and the Need for Emotional Intelligence
Publication Date: October 31, 2017

In this Q&A, Nasdaq talks to Caren Merrick, veteran board member, angel investor and entrepreneur, about the importance of emotional intelligence or "EQ" on boardroom dynamics.

Q: Based on your experiences as a board member and a former CEO, how would you complete this sentence: "For a board to be effective . . ."

A: For a board to be effective, its members must demonstrate emotional intelligence. I don't see much written about the impact of emotional intelligence or EQ on board dynamics, yet it's an issue that someone raises almost every time I speak about boards. A general lack of EQ seriously handicaps a board's ability to problem-solve and make informed decisions.

When a board is recruiting a new member, emotional intelligence and relationship building skills are as important to vet as subject matter expertise and experience. Some of the biggest board blowups I've observed had to do with a board member who was more ego-driven to be a star contributor, or didn't know or respect the difference between their role and the CEO's role, or dug in and refused to budge on a particular issue.

A measured approach to navigating highly-charged situations is another often overlooked and undervalued ingredient of an effective board. When disagreements are handled poorly, boards can build factions and become very political.

Q: How has EQ impacted the boards you are sitting on now?

A: I am fortunate at this point in my career to be sitting on some of the most effective boards I've ever been associated with. The boards I'm serving on now have excellent EQ: We don't always agree on everything, but when we do disagree we are mindfully very constructive in our approach to resolving issues.

One board I sit on in particular, the Metropolitan Washington Airports Authority (MWAA), which oversees the $800m business operations of Washington Dulles International Airport and Washington Reagan National Airport in addition to the $6b Dulles Corridor Metrorail and other entities.

This board presents a unique challenge to the CEO Jack Potter, because his board members are all appointees. I've learned a great deal watching Jack cultivate a productive boardroom dynamic between a group of individuals he had no say in appointing, who were each put in place to represent distinct constituencies.

When there are disagreements—and there often are—Jack's approach is deliberative, measured, and involves all of the stakeholders. He's patient, asks a lot of questions and implements a rigorous process to analyze the pros and cons in order to uncover what's really at stake. He's also encouraged board members to think more regionally in their approach to governing the Authority. Since Jack became CEO and began implementing this approach, the MWAA board is functioning at a higher level than before and, I believe not coincidentally, our bond ratings have gone up.

Q: A board can be comprised of successful executives who represent a perfect balance of the right professional skillsets, yet still be dysfunctional. True?

A: Absolutely true. As an angel investor, I'm hyper aware of the high number of startups that ultimately fail, and one of the biggest reasons for that failure rate is investors having a different agenda for a company than its founders.

As an entrepreneur, I'm somewhat biased. In an ideal world, founders could build their public company boards from scratch with people who are wise, aligned, generous and completely independent. In reality, it's difficult to launch a company without using outside capital, so newly-public boards are often faced with the possibility of competing stakeholder agendas. It's very important to get transparency and clarity around those agendas right at the beginning, so the board can build consensus. Otherwise, there is a high risk of factions developing among board members aligned with existing investors versus those aligned with the CEO.

Alignment doesn't mean the board won't disagree—there should always be healthy debate in the boardroom—but alignment does significantly increase the odds of reaching constructive solutions and sustainable growth. This is important, because CEOs find it challenging to rotate investors off a board when major disagreements become a stumbling block.

Entrepreneurs are becoming increasingly savvy to the investor/founder alignment issue, and mindful of it when shopping for capital. I recently met a woman who walked away from venture funding because her investor changed the terms at the last minute. She decided, rather than bring on an investor board member who had their own agenda, she would patiently pursue other sources of funding.

Q: Are there any other factors, in addition to stakeholder alignment and EQ, which contributed to your own company's successful transition from a basement startup to a publicly-traded enterprise?

A: I learned from my own experience that the personal networks of board members are an indispensable resource in scaling a new company, particularly when it reaches an accelerated growth phase. A company requires different skillsets from the board at different stages of its lifecycle: During the early phase, a company is consumed with early wins and surviving; once it gains momentum, it needs board members with experience in scaling an enterprise from $20 million to $200 million, for example. Seasoned executives know the patterns involved in rapid growth, can spot challenges ahead, and help a company block and tackle.

When we took webMethods public, our entire board—angel investors, venture capitalists, founders, and management—were all focused on growth. We deliberately composed a board that was skewed toward functional expertise in growth, and had extensive personal networks we could leverage to make introductions to potential customers, influencers, partners, and key critical employees.

There are a lot of technology startups here in the D.C. region, because so many people here work for government agencies on various projects requiring a high level of technical expertise: DOE, Homeland Security, and EPA, just to name a few. When local tech innovators leverage their technical expertise and experience to start companies, one of the smartest things I consistently see them do is tap former agency heads to join their boards. Not only does the company get that person's technical and government expertise, but it gains access to their network and benefits by association from their professional credibility.

Q: If you knew then what you know now, is there anything you would have done differently when launching your own company?

A: Now that I'm a sitting board member, I realize in my past leadership roles, I should have taken much better advantage of my board members' expertise and the wisdom of their experiences. CEOs—myself included—move so fast defending so many fronts that they don't give themselves the time to check in with directors to discuss challenges or opportunities. Sadly, they leave a lot of valuable insight on the table.

Q: What is the greatest challenge boards face right now?

A: I think the greatest challenge most boards face is trying to stay ahead of what is going on in their markets and industries, and trying to imagine what the future looks like in light of major shifts in local and global economies. Obviously cybersecurity is a huge concern. My boards are requiring more and more of my time to stay current on market and industry dynamics to identify opportunities for the company to create value and avoid crippling risks.

Diversity in the boardroom is crucial for companies to successfully navigate the rapid pace of change happening now: not just gender and ethnicity, which are important, but also diversity of perspective, skillsets, age, and professional disciplines. Boards can no longer afford to be composed solely of former CEOs and CFOs, because they need functional expertise in customer relationship management, digital marketing, cybersecurity, ERP systems, and social media marketing (which is a huge new frontier for boards to understand and tackle).

I learn something new every time I meet with my boards: we have people who have led private equity ventures, enterprise resource planning, supply chain ventures, enterprise marketing, and technology. The questions and insights that come from the diverse perspectives seated around the table at these meetings are impressive and very educational.

***

Caren Merrick is the CEO of Caren Merrick & Co. Previously, she was founder and CEO of Pocket Mentor, a mobile application and digital publishing company that provides leadership development and career advancement. Caren currently serves on the boards of the Metropolitan Washington Airports Authority, WashingtonFirst Bankshares, Inc. (Nasdaq: WFBI), and The Gladstone Companies (Nasdaq: GAIN, GLAD, GOOD, LAND). She is also a co-founder and former Executive Vice President of webMethods, Inc., a business-to-business enterprise software solution, which went public on Nasdaq before being acquired.

 
boardroom
Clearhouse
Seven Tactics to Engineer Better Boardroom Dynamics
Publication Date: October 24, 2017 

Boardroom dynamics can make or break the effectiveness of a board. In this post, Joan Conley, Senior Vice President and Corporate Secretary at Nasdaq, shares seven tried and true tactics for engineering better boardroom dynamics.


Proxy season has come and gone, new board members have completed their orientations, and many corporate boards are wrapping up summer strategy sessions. New board members bring new boardroom dynamics—and shifting dynamics may for a period of time impact the effectiveness of a board. On the other hand, excellent group dynamics can optimize board productivity for shareholders. Nasdaq's playbook for creating a healthy team dynamic in the boardroom includes the following tactics for facilitating director engagement, innovation, and candor in the boardroom.

1. Acclimate new directors to board culture.

Even public company directors need a safe place to ask "dumb" questions. At Nasdaq, we share an overview of board culture during orientation of new directors. Between the board chair, the CEO, and myself, our new directors have the resources to confidentially ask off-line questions related to the board culture, operations, and meeting protocol.

Be prepared to answer questions that delve into the granularity of board culture, including the cadence of the board meeting, how to refer to the board chair, when to ask the CEO direct confidential questions, when to inject comments during the board meeting, and how offline conversations should be handled. Knowing these details in advance can alleviate concerns of new board members, allowing them to focus on building important working relationships and tackling board agenda items.

2. Review boardroom etiquette with new directors.

Generally, the boardroom etiquette list of "dos" and "don'ts" closely mirrors the rules we learned early in life: listen, contribute, take turns, ask questions, treat everyone with respect. However, boardroom culture and rules of order may vary widely from company to company. Providing an overview of the general protocols followed during a company's board meetings can encourage participation in a meaningful way.

3. Avoid over-processing new board members.

There is a clarity of vision that comes with a fresh perspective. The observations made by new board members during their onboarding phase and early meetings are insightful and valuable. It's therefore important to educate a board member about the company's business and culture enough to hit the ground running at their first meeting, but without interfering with the insights and candor a fresh set of eyes brings to the table.

4. Facilitate communication between corporate management and board members.

Energized and enthusiastic directors are keys to positive boardroom dynamics. At Nasdaq, the onboarding program is individualized. We strive to satiate board members' appetites for knowledge related to the areas of our business they are passionate about, whether it's technology, fintech, M&A, market trading, or regulation.

For example, if a board member comes to us with expertise in technology, we have them spend time with Nasdaq's CIO, Brad Peterson, and his team. We also expand their horizons by having them meet with all of the other Nasdaq business unit leaders to cross-pollinate the board member's technology expertise with education and experiences in other areas of Nasdaq's business.

Board members who make tangible contributions stay focused and engaged. In my experience, the more often we bring board members together with executives and business unit teams to share knowledge, the more energized Nasdaq's boardroom dynamics become.

5. Engage all directors.

A board member sitting on the sidelines at any meeting represents a lost opportunity for the group to benefit from hearing and debating potentially important questions, concerns or insights. Listen to who speaks and who doesn't speak during board meetings and employ a strategy to engage all board members. Such a strategy might include:

  • Drafting call-out questions to be used by the board chair to elicit input from all directors.
  • Reserving efforts to elicit engaging discussions from all directors during executive sessions of the board.
  • Allowing directors to process and develop their input ahead of time by alerting them of, and educating them about, key agenda issues in advance.
  • Having the board chair or CEO reach out to board members offline, to solicit their ideas and concerns and find out what may be holding them back.
Typically, once a director has successfully been encouraged to speak in a board meeting, they will continue to do so.

6. Rotate committee memberships.

Rotating committee memberships keeps viewpoints fresh, exposes board members to new aspects of the company's business and governance, and creates new working relationships among board members—all of which contribute to effective boardroom dynamics and the optimization of board productivity for shareholders.

7. Leverage seating arrangements.

There's an art to managing seating arrangements to maximize positive group dynamics, and I recommend every Corporate Secretary pay close attention to it. It's important to plan who sits next to whom during meetings and dinners, based on a number of variables:

  • Which members don't know each other well yet?
  • Which members need to engage based on the meeting agenda?
  • Whose turn is it to sit next to the Chair?
  • How can unproductive side-bar conversations be prevented?
Reviewing seating arrangements for meetings and dinners ahead of time with the CEO and chairman of the board is an extremely productive use of time and contributes to a more successful board meeting.

For more insights from Joan Conley, read Onboarding New Directors: Beyond the Board Manual >>

***

Joan Conley is Senior Vice President and Corporate Secretary of Nasdaq and its global subsidiary organizations and, in that role, is responsible for the Nasdaq Corporate Governance Program and Nasdaq Ethics Program. She also serves as Managing Director of the Nasdaq Educational Foundation and is a Director of the Nasdaq Entrepreneurial Center Board.


 
activism
Clearhouse
The Rise of the Investor-Centric Activism Defense Strategy by Peter Michelsen and Derek Zaba of CamberView Partners
Publication Date: October 17, 2017

CamberView Partners provides advice to public companies on engagement and shareholder relations, activism and contested situations, sustainability and complex corporate governance matters.

Shareholder activism is often thought of in binary terms: activist v. company, dissident nominees v. company directors. Media coverage dramatically frames the "showdown" of prominent and press-savvy activists taking on companies as both sides seek the upper hand on the way to the ballot box. While an "us vs. them" mentality makes for a compelling narrative, this framework has a major flaw: it doesn't include shareholders, who are the most important constituency in driving the outcome of proxy contests.

Gaining the support of shareholders, in particular large institutional shareholders, through a well-crafted "investor-centric" activism defense strategy is increasingly the key to success in activism situations. Below we outline how activism defense and the investor landscape have evolved and why the "investor-centric" strategy has become the optimal path to victory for most proxy contests, regardless of whether they culminate in the withdrawal of the activist, a shareholder vote or a mutually agreed settlement.

Where it Began – Tactics, Tactics, Tactics

Five years ago, it would not have been uncommon to find a whiteboard on the wall of a company boardroom in a contested situation filled with a list of tactical measures to thwart the activist's campaign: poison pills, changing bylaws, moving meetings to remote locations, lawsuits, and shifting record dates. The primary focus of a tactical strategy was to outmaneuver the hostile acquirer or activist, the latter of which was more often than not pursuing a straightforward "sell the company" or "lever up and distribute" thesis and had limited ability to sustain a multi-year campaign.

Today, investors and proxy advisory firms are more skeptical of actions taken by the Board that appear purely tactical or are otherwise perceived as impinging upon shareholder rights. Often, these actions carry the risk of souring investors who might otherwise be willing to support the company but feel disenfranchised from decisions that materially impact the value of their portfolio company. While such tactics may still be part of the activism defense toolbox, they should be considered with great care and in the context of their impact on maintaining support from companies' increasingly diverse and sophisticated shareholder base.

The Activist-Centric Defense Strategy

As tactical considerations became less effective as an activism defense strategy, boards turned their focus directly to the activists and their agendas. Specifically, some companies took actions with the goal of either preempting the activist or appeasing them, aiming to implement enough of the activist's thesis to make the remainder of their demands not worth fighting for. The resonant concept was that boards should "think like an activist." In some cases, these actions resulted in a settlement with the activist or the activist withdrawing after achieving a partial, but "sufficient," victory.

However, in present times the major problem with a defense strategy focused primarily on addressing the concerns of an activist is that while the activist may have been satisfied by the outcome, some or many of the activist viewpoints may not have been shared by the broader base of long-term investors. In fact, in recent years, there has been significant pushback from large institutional investors, whose risk profiles and investment time horizons often differ from those of a vocal activist fund, about the practice of companies reaching settlements without receiving input from other shareholders. An unsettled shareholder base can leave companies vulnerable to a follow-on campaign either by the initial activist or another activist with a different agenda.

Evolution of the Investor Landscape

The evolution of defense strategies has occurred against a backdrop of recent tectonic shifts in the investor landscape that have reinforced the centrality of the broader, long-term shareholder base in activism situations. The oversight failures of the early 2000s and 2008 financial crisis spurred many investors to become more active owners and voters. Over time, governance-focused institutional investors have built out their proxy voting teams, which has allowed them to engage with a broader range of companies and other market players. Activism itself has undergone a transformation, with activists seeking to shed their "corporate raider" label while building relationships with investors. Additionally, active managers under pressure to generate alpha are more receptive than ever to activist theses.

Underlying all of this is the increasing concentration and acceleration of fund flows into passively managed index funds and ETFs over the past several years. Today, the top five institutional shareholders hold more than 20%, on average, of S&P 500 companies and one of the three biggest index funds (BlackRock, Vanguard and State Street) is the largest single shareholder in 88% of companies in that same index. These passive investors are increasingly important as they tend to have a longer-term perspective which results in them being more willing to support a company if they believe in its long-term strategy regardless of potential short-term negative impacts to the business or stock price.

The growth of assets held by passive investors has also heightened the focus on corporate governance and board-related matters across the market. These topics are now a critical focal point in activism campaigns. As a result, success in an activist situation now increasingly requires companies to persuade and win the support of a range of constituencies much broader than the traditional portfolio manager and buy-side analyst community, including governance teams, proxy advisory firms and key asset owners such as public pension funds.

The Investor-Centric Defense

The evolution of the investor landscape, in addition to the aforementioned problems that have arisen with prior defense strategies, has elevated the concept of an "investor-centric" defense strategy. Unlike previous strategies, this approach begins well before an activist arrives with their demands and is built on companies understanding their investors' concerns through years of engagement and relationship building. As the Chairman and CEO of Vanguard recently wrote, quoting a corporate CEO during one of their engagements, "You can't wait to build a relationship until you need it."

Rather than "think like an activist," the right approach for companies is to "think like a shareholder representative": engage with investors, understand and incorporate their perspectives, and educate them on why the company is pursuing a particular strategy, particularly before an activist appears. Ongoing dialogue enables companies to build credibility with key decision-makers within both the investment and governance teams at institutions, even if there are topics where these disparate teams are not in complete agreement. Even in situations where there is a large and supportive base of retail investors, it is these key decision-makers who will make the ultimate difference between winning and losing.

While companies typically have very active investor relations efforts focused on portfolio managers and research analysts, they must also understand how to engage with all investor constituencies that will drive outcomes in a potential activist situation.

For actively-managed funds, where communication during an activism situation is frequent, feedback will generally be more direct and the decision-making process will be primarily focused on core economic issues. Companies that have built buy-in for their strategy in advance of a fight by being responsive to feedback from these funds will benefit from a higher probability that these investors will vote with management.

On the other hand, governance-focused investors often enter a fight with a limited understanding of the company and are concerned about a range of strategic, financial and governance elements. Building trust with this constituency often means demonstrating that the company has the right board in place to evaluate and oversee long-term strategy, and that the board is operating with a focus on the best interests of shareholders. While this trust can be established in the fast-paced environment of a proxy fight, companies that have proactively built relationships with governance teams and proxy advisors will generally fare better than those that are scrambling to do so under a stormy sky.

With all of this in mind, it is clear that companies in an active defense situation must evaluate every decision through the lens of how investor constituencies will view the action and how it will affect the potential vote. Even if a threatened proxy contest ends in settlement, the leverage that companies have in negotiation derives primarily from the support of these key investors.

Takeaways for Issuers

The delicate balance among boards, management teams, investors and activists is a constantly-changing equation. Over the past several years, a small number of asset managers have amassed trillions of dollars of assets and significant power. These investors represent the ultimate "swing vote" that can effectively determine the outcome of an activist situation and are more willing than ever to exercise their vote. Activists have adapted their approaches to appeal to this increasingly powerful bloc of voters, while public companies have been somewhat slower to proactively build relationships beyond traditional investor relations efforts.

Given these new dynamics, it is critical that companies view their potential actions through an investor lens, whether three weeks before a meeting or during the off-season. A key step is engagement and relationship-building with all key investor constituencies before being confronted by an activist. If an activism situation occurs, company management and board will be able to draw on the trust generated with key decision-makers, will have had the opportunity to tell their story on critical strategic and governance issues, and will have heard and addressed the feedback and concerns of their investors.

***

Peter Michelsen is President and Co-Head of the Contested Situations Practice of CamberView Partners.

Derek Zaba is a Partner and Co-Head of the Contested Situations Practice of CamberView Partners.

CamberView Partners provides advice to public companies on engagement and shareholder relations, activism and contested situations, sustainability and complex corporate governance matters. CamberView helps its clients succeed by providing unique insight into investors' perspectives on long-term value creation, interpreting the evolving governance landscape and creating proactive strategies to stay ahead of investor challenges.

CamberView's services include: Shareholder Engagement, Governance Advisory, Sustainability, Complex IR Strategy, Say on Pay, "Vote No", Environmental, Social and Governance Shareholder Proposals, Activism Defense, Hostile M&A, Complex "Friendly" M&A, and Defense Preparedness.

 
 

The views and opinions expressed herein are the views and opinions of the author at the time of publication and may not be updated. They do not necessarily reflect those of Nasdaq, Inc. The content does not attempt to examine all the facts and circumstances which may be relevant to any particular company, industry or security mentioned herein and nothing contained herein should be construed as legal or investment advice.


 
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In the News
PCAOB to Hold Webinars on Implementing Recent Changes to the Auditor's Report
Publication Date: December 4, 2017

The Public Company Accounting Oversight Board will host webinars on Tuesday, December 12, 2017, and Wednesday, January 10, 2018, on the implementation of recent changes to the auditor's report that become effective for audits of financial statements for fiscal years ending on or after December 15, 2017. The webinars will highlight specific changes to the auditor's report required this year, such as auditor tenure, independence, and other key elements of the auditor's report. There is no fee to participate, but registration is required and participants are encouraged to submit questions in advance of the webinars.

Read more >>

Read PCAOB guidance >>


SEC Sets Enforcement Priorities
Publication Date: November 27, 2017

The Securities and Exchange Commission's Enforcement Division issued a report highlighting its priorities for the coming year as well as a review of enforcement actions that took place during fiscal year 2017. The SEC described five core principles that will guide their enforcement decision-making: focus on the Main Street investor; focus on individual accountability; keep pace with technological change; impose sanctions that most effectively further enforcement goals; and constantly assess the allocation of resources. Co-Director of the SEC's Enforcement Division, Stephanie Avakian, stated "our goal is to continue to protect investors, deter misconduct, punish wrongdoers and keep our markets the safest and strongest in the world."

Read more >>

Read the Report >>


ISS Announces 2018 Benchmark Policy Updates
Publication Date: November 23, 2017

Institutional Shareholder Services (ISS) recently released the 2018 updates to its benchmark proxy voting guidelines, which focus on environmental, social, and governance matters, for the Americas, EMEA, and Asia-Pacific regions. The updates will generally be applied for shareholder meetings on or after February 1, 2018 and include, among other things, updates with respect to non-employee director pay, gender pay gap proposals, and poison pills. Among the updates, ISS will now recommend an adverse vote "on the re-election of board members responsible for approving/setting non-executive director (NED) compensation when there is a recurring pattern (i.e., two or more consecutive years) of excessive NED pay without a compelling rationale or other mitigating factors."

Read more here >>

Read the 2018 Executive Summary here >>

Read the 2018 Full ISS Report here >>


SEC Speech: Governance and Transparency at the Commission and in Our Markets
Publication Date: November 15, 2017

In a recent speech, SEC Chairman, Jay Clayton, discussed the SEC's agenda. Among the items he highlighted was the proxy process, including how investors participate in corporate governance at public companies. He stated that, given the core role of the proxy process in public company governance, the Commission should be "taking a hard look at whether the needs of shareholders and companies are being met." Citing several factors such as retail shareholder participation and shareholder proposals, Chairman Clayton indicated that the current proxy process may be too cumbersome and stated that he believed the Commission should solicit "updated feedback from market participants about what works and what does not work in our proxy system."

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SEC Issues Guidance on Shareholder Proposals
Publication Date: November 6, 2017

The SEC Division of Corporation Finance has published new guidance in a Staff Legal Bulletin on excluding certain Rule 14a-8 shareholder proposals. The bulletin contains information about the Division's views on: the "ordinary business" and the "economic relevance" exceptions, each of which is a basis for exclusion of a shareholder proposal; proposals submitted on behalf of shareholders; and the use of graphs and images in proposals. In particular, the bulletin notes that "ordinary business" and "economic relevance" exclusions often involve difficult judgment calls, which a company's board is generally in a better position to make and encourages companies to include in requests for no action relief a discussion that reflects the board's analysis and details the specific processes employed by the board to ensure that its conclusions are well-informed and well-reasoned.

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Society for Corporate Governance Complimentary Directors' Cut Newsletter
Publication Date: November 2, 2017

The Society for Corporate Governance is now offering complimentary access to its Society Alert - Directors' Cut® newsletter. This quarterly online newsletter is a compilation of governance-related news from the preceding quarter's weekly Society Alerts, geared with a view toward director and C-suite audiences. Each issue covers a range of relevant developments and guidance in areas such as audit/financial reporting, board composition, board and key committee oversight, M&A, risk, and sustainability, as well as institutional investor developments and perspectives.

Read the 3rd Quarter Newsletter >>

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Center for Audit Quality releases the 2017 Main Street Investor Survey
Publication Date: October 30, 2017

The Center for Audit Quality conducts an annual survey of U.S. retail investors, which measures confidence in U.S. capital markets, global capital markets, public companies and audited financial statements. The 2017 survey reveals that 85% of investors have confidence in investing in the U.S. capital markets, and that 63% of investors feel confident in corporate boards of directors. This year's survey also illustrates that investors are watching developments in Washington, D.C. closely and are concerned with the risks to the economy posed by the national debt, cyber-attacks on financial information and the capital markets, and global political unrest.

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