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outside insight
Board Members Must Open the Aperture Wider to Break the Silicon Ceiling by Betsy Atkins
Publication Date: July 20, 2017

Betsy Atkins, President and Chief Executive Officer at venture capital firm Baja Corp, is a veteran of 23 boards and 13 IPOs.

Changing any corporate culture is a challenge, but I've found bringing diversity to the tech industry is even trickier. Fast-growth "unicorn" companies can quickly outgrow their founding venture-based startup corporate governance and find themselves facing crises with too few adults in the boardroom.

Many reports assert women in technology industries still push against a silicon ceiling when it comes to career advancement and cultural issues. Research from the Society of Women Engineers found that 20% of today's engineering school graduates are women, yet just 11% continue working in the field. Women in IT leadership roles (such as chief information officers or technology vice presidents) are just 9% of the total, according to a recent survey from Harvey Nash and KPMG.

Today's board members should open the aperture wider in terms of their role. The days of a board's role being pure financial oversight was last millennium. This millennium, board members are expected to be an asset as well as an accelerant for the business. In my own experience, I've seen technology companies nurture diverse, inclusive cultures starting with a few one-on-one approaches from the boardroom.

Build internal career networks

At Volvo Car AB, where I serve on the board, we've launched a program where I regularly meet with senior and mid-level women executives on personal career development. We work with these women execs to build on their strengths, clarify their career aspirations, and offer advice on advancement. This is a new program, but it is already proving a success in energizing and motivating the paths of these current and future female leaders.

Group mentoring also harnesses networks and creates supportive environments where women managers and executives can brainstorm effective ways to promote diversity in the organization. According to a recent Harvard Business Review article about changing corporate culture, safe havens nurture cultural ecosystems that model what the organization can become in the future, while networks create coalitions that catalyze change.

Make mentoring personal

On the board of Schneider Electric, I make it a point to directly mentor one-on-one a number of women on the company's senior leadership team. I teach them to advocate for themselves, identify executives within their company who they can network with, build rapport with as their mentors and nurture those relationships into sponsorships.

Women in management may find it helpful to have someone in the boardroom take a personal interest in their career strategy and development. For example, at Uber, new board member Ariana Huffington is in an ideal position to put her mentoring and career savvy to work in helping rising women execs rebuild that company.

One key to a successful mentoring program is a regular ongoing coaching and support. In my experience, a good mentor/mentee match also requires synergy: a strong personal chemistry and an alignment of professional disciplines. I'm a passionate advocate of digital transformation and customer-centric processes, so I tend to mentor women executives who have roles and expertise in line with those disciplines.

Board members don't have to wait for CEOs to ask for mentoring of female executives. When I spot high potential women managers within the companies of the boards I sit on, I approach our CEOs and offer to help these women reach the next level in their leadership potential.

Go beyond mentoring to sponsorship

There is a big difference between mentoring—which is periodic advising and coaching—and sponsoring. Sponsors take a far more active role in helping individuals reach the next rungs in their careers. Women who are already senior managers or board members can kick mentoring up a notch by "sponsoring" women with high potential through career coaching, facilitating introductions to other executives and identifying and importantly, recommending them for new opportunities that will accelerate their careers.

Set a goal

According to the Harvey Nash/KPMG survey mentioned above, only 28% of small-cap companies have a formal diversity initiative in place, versus 72% of large-cap companies. For newer, smaller tech companies that are in hyper-growth survival mode, it's unlikely management will organically implement tactics that foster diversity of management. Hope is not a strategy.

If a company really wants to drive cultural change, a prescriptive diversity goal could be considered. That goal can be defined based on the values of the company, and may include gender diversity, ethnic diversity, age diversity, global diversity, etc.

Highly qualified female candidates ARE out there. I was the only woman on the board of HD Supply when I joined, and just three years later 23% of the board is female. I also sit on the board at Schneider Electric, where we set a goal of 40% gender parity on the board. Today Schneider Electric's board is composed of 38% women, so we have nearly achieved that goal in just 7 years. The Volvo board I sit on has 23% women. These companies all operate in industries traditionally thought of as "male-dominated," yet we were able to recruit highly qualified female board members without compromising one wit on the experience, talent and skillsets we were looking for.

Recognize when women make a difference

When I served as chair of the board's compensation committee at tech firm Polycom, we were active in the annual recognition event for sales staff. I noted that women were leaders in sales, making up less than 10% of the sales force yet 34% of our "President's Circle" top sales performers. Making an added effort to celebrate (and promote) this talent is crucial in sending the message that sales is not just a "guy thing" in the company.

The talents of women are a strategic asset to companies, and there is a growing body of research proving that firms who nurture and empower their gender diversity gain in revenues and stock performance. In any company, balance sheet results are always found downstream from company culture. When it comes to reshaping that culture to be welcoming to women, the boardroom is the ideal place to start.


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 Volvo Car Corporation and served on the board of directors at Nasdaq LLC and at Clear Standards as CEO and Chairman.


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.

Nasdaq Talks to...Morningstar, Inc. about How to Be an Exemplary Steward of Shareholder Capital
Publication Date: July 10, 2017

The importance of good corporate governance has become elevated in recent decades in the wake of increased regulatory compliance responsibilities following high profile corporate governance disasters; increasing global economic uncertainty; and the complexity of doing business in a rapidly evolving marketplace. Business schools, research and professional business firms, and professional associations alike are writing about—and attempting to quantify—the value and qualities of good governance. One of the world's largest independent investment research firms—Morningstar, Inc. (Nasdaq: MORN)—has taken a novel approach to analyzing the strength of corporate management teams by assessing companies' stewardship of investor capital.

Nasdaq recently spoke with Brett Horn of Morningstar's Equity Research team to find out more about the purpose and methodology behind Morningstar's corporate Stewardship Rating program and what it takes for a company to achieve "exemplary" status.

Q: Tell us about Morningstar's corporate Stewardship Rating and why stewardship is an important factor in investment decisions?

A: Morningstar's corporate Stewardship Rating assesses management's stewardship of shareholder capital. Essentially what we're trying to answer when we look at stewardship is whether the actions and strategies of corporate management are well suited to drive long-term shareholder value—or not.

We have three stewardship ratings: exemplary, standard and poor. The majority of companies included in our stewardship coverage earn a "standard" rating. What we are doing with "exemplary" and "poor" ratings is identifying companies that we think are outliers in terms of the strength or weakness of management.

While we believe that stewardship is a material factor that investors should consider, it is just one component of evaluating investment potential. A company with exemplary stewardship could still be a "poor" investment even if the evaluation is correct, and vice versa for a company with a poor stewardship rating.

Q: What are the characteristics that earn a company an "exemplary" Stewardship Rating?

A: Capital allocation is the primary factor Morningstar evaluates when rating companies on stewardship.

We review management investment strategy and valuation, both external and internal. A company with "exemplary" stewardship will be one that has an M&A history of making investments and acquisitions that support its competitive advantages and core business, while divesting underperforming or non-core businesses. We assess whether the company is paying a reasonable price for acquisitions. We determine if management is investing sufficiently to take advantage of all the value creative opportunities that are in front of it. We also evaluate whether management is over-investing and moving into areas where the returns are not going to be sufficient relative to the company's cost of capital.

We analyze how companies approach balance sheet structure to determine if they have reached optimal financial leverage—conservative, but not too conservative. We evaluate how they return capital to shareholders. We review accounting practices to determine if a company's accounting methods are aggressive or potentially deceitful, which is obviously going to be a negative.

We also look at executive compensation, specifically at the incentives and the targets that management is awarded and whether those are appropriate targets to align management's interest with shareholders in the long-run.

Q: There are currently 23 Nasdaq-listed companies with an "exemplary" Stewardship Rating. What are some stand-out companies among them that exhibit exemplary stewardship?

A: There are a number that come to mind:

CoStar Group, Inc. (Nasdaq: CSGP)
Founder and CEO Andrew Florence has navigated the company from its start-up days to its IPO in 1998. Since the IPO, the company has gone from $14 million in revenue to an expected $1 billion+ estimated for 2018. While acquisitions have complemented the existing platform recently, organic growth has been the main driver over the past two decades. The proprietary data CoStar has built out puts it light years ahead of its competition, and places a wide moat around the business.

Costco Wholesale Corporation (Nasdaq: COST)
Costco is a great example of a company that plays the hand that they've been dealt very well. The company has built up a very big footprint but stayed firmly within its circle of competence. Costco has prudently reinvested in the business, while also returning excess cash to shareholders. Management has also developed a winning culture that promotes below-average employee turnover, as the attrition rate is 6% among employees who have been there over a year—as opposed to attrition rates of 50% or greater in the general retail industry.

Fiserv, Inc. (Nasdaq: FISV)
Fiserv is a bank technology company that was built by numerous acquisitions since their founding which left a very decentralized management system. CEO Jeff Yabucki came in and centralized the company's operations, which led to material cost savings and margin improvement. We're also impressed by its stellar M&A track record. The relatively recent acquisition of Open Solutions greatly improves its real-time processing capabilities, which appears to be the future for bank software providers. In addition, it appears Fiserv got Open Solutions on the cheap since the price mostly consisted of the assumption of debt.

O'Reilly Automotive, Inc. (Nasdaq: ORLY)
Management has done well to leverage the company's size to capitalize on the firm's ability to provide more consistent and rapid part availability. The benefits of the firm's broad store and distribution network, as well as management's operational prowess, have pushed returns on invested capital higher over the last five years, with returns increasing from 14% in 2011 to 23% in 2016. O'Reilly's leadership has transformed the company from a regional player into a top-four national chain, acting quickly to develop and capitalize on significant long-term brand and cost advantages.

Signature Bank (Nasdaq: SBNY)
Management's strategy of providing deep levels of relationship-based banking has been unchanged since its founding, and bankers are compensated not only on the amount of assets they bring up, but how much they retain over time. The bank's focus on low costs as well has paid off, as it typically locates offices on the upper levels of buildings versus the more expensive street-level locations. Signature has undoubtedly been one of the most successful banks in the nation over the past 15 years, in large part because of Signature's straightforward business model and the nimbleness of its executives.

Steel Dynamics, Inc. (Nasdaq: STLD)
To date, Steel Dynamics remains one of the most efficient steelmakers, not just in the U.S., but also on a global basis. Management is quick to attribute its success to its employee compensation strategy which, modeled after Nucor's approach, effectively treats employees as managers by motivating their performance via weekly and monthly production bonuses.

Q: It looks like about 5% of companies got a poor rating. What characteristics would result in a poor stewardship rating?

A: It's the flip side of everything that would earn a company an exemplary rating. Poor stewardship companies are negatively impacted by short-sighted investment strategies or value-destructive acquisitions. For example, maybe a company has a very attractive core business, but if they make acquisitions that stray from core competencies or don't benefit from similar competitive advantages, their long-term returns are most likely going to be poor. Or a company that makes acquisitions that represent good sense strategically, but pays dramatically too much for them, will similarly dilute long-term returns.

Other examples of poor stewardship include aggressively investing internally in projects that are not going to earn necessary returns; too much leverage; over-aggressive accounting; or compensation targets that are tied to a matrix that would not correspond well with long-term value.

We also look at the extent to which a company is a good day-to-day operator. A company can't create shareholder value if it has frequent operational and execution missteps like industrial accidents, poor customer service, or product recalls.

Q: How does the Morningstar Stewardship Rating compare with the ISS QualityScore?

Morningstar's Stewardship Rating differs from ISS QualityScore in a few ways. QualityScore evaluates the extent to which the company's management adheres to standard corporate governance practices. Morningstar's Stewardship Rating is evaluating management's strategy and the likelihood that management's actions will improve or deteriorate long-term returns.

QualityScore is a quantitative numerical score that ranks companies, whereas the Stewardship Rating does not explicitly rank order management teams against peers within their industries but against ideal stewardship. We're not trying to figure out if one management team is slightly better than the other; we are focused on identifying particularly strong or particularly weak management teams.

Finally, QualityScore is a more objective rating, whereas Morningstar has extensive research data and the capability of delivering a rating that considers management's actions in the context of the company's situation, which is inherently more subjective. Morningstar's equity research focuses on competitive advantages, and our analysts have a very detailed understanding of the companies they follow and the industries those companies operate in. Investors primarily care about long-term returns, and our Stewardship Rating speaks directly to that.

Brett Horn is a Senior Equity Analyst with Morningstar who focuses on insurance and credit bureaus. He developed Morningstar's valuation model for insurance companies. Morningstar, Inc. is a leading provider of independent investment research and data insights on a wide range of investment offerings, including managed investment products, publicly listed companies, private capital markets, and real-time global market data.

governance news
June's Must Reads
Publication Date: July 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. SEC seeks to boost market listings through privacy move – Financial Times
US regulators moved to try to boost the flagging number of stock market listings on Thursday, telling large companies that they will be able to keep their financial information secret while they prepare for a public offering.

2. PCAOB OKs First Big Change to Audit Report in 70 Years –
Worrisome matters reported by an auditor to a board audit committee would be disclosed in the auditor's report under a new standard approved by the Public Company Accounting Oversight Board.

3. The Key to Diversity in Tech? Diverse Investors, says New York-based Social Impact VC – Forbes
One often ignored tactic for encouraging diversity among tech founders and employees is to encourage diversity among the investors.

4. Sheryl Sandberg Shares 7 Ways to Build Resilience Into Your Company Culture As You Scale– Entrepreneur
As part of a 10-episode series, Sheryl Sandberg discusses, among other things: What it takes for an organization to be resilient and how a changing staff and culture remain strong despite massive shifts and bumps in the road.

5. Managing brand risk in an age of social media - Deloitte
This Deloitte whitepaper discusses how an organization's Board of Directors can effectively manage brand risk and reputation in the current digital environment.

6. 80% of This Public Company's Directors Are Women –
Travelzoo announces that it has the highest female-to-male ratio of any NASDAQ or NYSE-listed company (a group that includes nearly 6,000 businesses).

7. Webcast » The Corporate Governance Impact of Trump's First 100 Days –
In this webcast hosted by PwC's Governance Insights Center, a panel of experts discusses the current and future actions of the Trump administration and how today's companies can both prepare and respond.
Watch the video here >>

8. Where's the focus this year? –
EY discusses key themes and the shareholder proposal landscape for the 2017 proxy season.

Onboarding New Directors: Beyond the Board Manual
Publication Date: June 27, 2017 

The process of acclimating a new director to a corporate board can have a profound impact on boardroom dynamics. In this post, Joan Conley, Senior Vice President and Corporate Secretary at Nasdaq, shares key elements of Nasdaq's onboarding process as well as insights into the importance of a robust onboarding program.

Ideally, the onboarding process enables a new director to hit the ground running at their first board meeting. Proper onboarding also ensures critical alignment between management, the board and stockholders. Given those ambitious goals, there is much more to onboarding than asking a new director to read a manual and leaving them to tackle their role through trial and error.

Many companies mistake orientation for onboarding. Orientation is a one-time event designed to welcome a new director to the company and the board, outline meeting schedules and board service logistics, define their role, and provide a big picture overview of the company.

Onboarding, on the other hand, is a continuous process. It includes the orientation event and indoctrinates a new director into every aspect of the company's business, culture and the competitive environment it operates in, thereby facilitating meaningful contributions from directors and growth in long-term value for shareholders.

Nasdaq's onboarding process has evolved over time and includes the following key components, all of which are designed to help a new director shorten the learning curve and quickly become a meaningful contributor to the work of the board.

Establish a structured onboarding process.
Given the amount of information new board members need to absorb before their first board meeting, it's critical to have a focused plan in place to deliver that information. At Nasdaq, our onboarding educational process includes:

  • An orientation program that covers the following: board membership and meeting logistics; governance and director responsibilities; Nasdaq business strategy, goals, risks, operating environment, and recent financial performance; and presentations from corporate departments related to information security, corporate communications, and investor relations.
  • Face-to-face meetings with key executives and business unit managers.
  • Required reading of board meeting minutes and documents (including strategy, budget assumptions, compensation, and meeting minutes), investor presentations and analyst reports.

The different elements of governing a company fit together like a puzzle, and the onboarding process should help a new director fit the pieces of that puzzle together. New directors benefit tremendously from granular context on a company's operating environment, corporate strategy, goals, risks, opportunities, financial performance, and cyber security programs.

For example, at Nasdaq, we provide strategy slide decks from the prior year that outline the 1, 3, and 5-year strategies, along with minutes from subsequent update meetings, so new directors can see how the strategy has been followed. We encourage them to spend time researching our largest long-term stockholders and what motivates them to hold Nasdaq stock in their portfolio. We provide new board members with current and historical analyst reports, to give them a sense of how the company's strengths and weaknesses are perceived in the investment community.

Start the onboarding process before election day.
Don't wait until election day to engage new board members--start the onboarding process as soon as the proxy is released. At Nasdaq, onboarding of new directors starts as soon as a new director's nomination has been confirmed by the board and it is determined that the nomination is uncontested. That means even before the vote is final, we begin the very robust educational process outlined above.

Some general counsels may be concerned with providing confidential information to new board members prior to the election; in that case, a company can begin the education process with their public investor presentations and after that arrange for meetings with business unit leaders and others that may include confidential and proprietary information.

Make Audit Committee membership mandatory for new directors.
Every new Nasdaq director serves on the Audit Committee. Through audit committee service, new board members learn key enterprise risks, the financial and operating conditions of the company, how management relationships function within the organization, and details of the operations of each business unit. Audit Committee members hear presentations from internal and external auditors and experts within the company, review every internal audit report, and learn detailed financial information about the business. It's the best "on the job training."

Assign a mentor to new board members.
Board members with long tenure are an indispensable resource of institutional knowledge and historical context for new board members. Seasoned directors have seen the company through its most significant events: companies' success, market downturns, lawsuits, shareholder activism, acquisitions, and business model transformations. Pairing new directors with a mentor from the board accelerates cultural acclimation and encourages meaningful contributions from new directors during their first year.

Customize onboarding to individual directors.
Each director is carefully chosen for a board based on their unique skillsets, experiences, and talents. The onboarding process should be tailored to leverage those strengths, ensuring they contribute to their full potential and nurturing their interests in the company.

Ensure onboarding is ongoing.
Onboarding is essentially a process of continuing education. The three main elements of continuing education for board members at Nasdaq are knowledge sharing, rotating committee assignments, and offering opportunities to broaden and deepen their knowledge base.

I see a key role of the Corporate Secretary as aligning executives and board members, so the more opportunities I find to bring them together to exchange information the better. This continues even after new members have completed their first year, and these opportunities to meet with executives and business unit leaders are also individualized to each board member.

Rotating committee memberships is another excellent way to expand a board member's knowledge of the company. When a director is assigned to a new committee, they need a complete orientation on that committee's mandate, charters, and principals. Rotating committees begins a new sequence of onboarding events, refreshes the committee, and opens a whole new information silo for the board member.

I also continuously push news and information out to board members, again on an individualized basis. I send them relevant articles, updated analyst reports, links to subscriptions and alerts they may be interested in, and Nasdaq's daily news clips. I utilize Director's Desk for this, as well as the NACD daily summary. I maintain a budget for events and educational sessions that our board members may want to attend, such as director conferences.

Assess the fit and performance of new directors.
During a board member's first year of service, it's critical to assess whether the director is contributing effectively to the board and fits the group dynamic. That assessment takes place throughout the board cycle, not just during semiannual board assessments. If a new director needs assistance I work confidentially with the board chair to develop an action plan: perhaps a new director needs tutorials on non-GAAP financials, or information about a new product line or context on strategy in a certain business area, we tailor the onboarding plan to meet these needs.

Solicit feedback from new directors.
An onboarding process and curriculum is not something to develop and put on a shelf because it continually evolves with the business landscape and ideally is tailored and individualized. At Nasdaq, we solicit feedback on the onboarding process from new directors during their frequent first-year check-ins with the board chair and CEO. We continually modify our onboarding program based on that feedback, information they share about business units they may not fully understand, topics they felt they spent too much time on, or areas where they have a greater thirst for information.

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

What's New in Shareholder Engagement: Telling Your Own Story
Publication Date: June 22, 2017 

Tactical communication with shareholders is critical, as shareholder activism increases and institutions begin to rely more on their own independent research and less on the opinions of proxy advisory firms. By aligning corporate messaging with investor interests and concerns, companies build better relationships with their investment communities—and in the process, eliminate information vacuums that can be exploited by activists.

Proxy statements are an often-overlooked opportunity for companies to share compelling corporate governance stories and improve stockholder engagement. Investors are keenly interested in succinct and articulate explanations of the following:

  • the company's strategic and risk management plans;
  • the company's corporate governance values;
  • why executive officers are compensated appropriately; and
  • why the company believes it has the right people sitting on the board.

By transforming proxy statements from compliance tools into highly effective communication tools, companies can improve shareholder engagement and nurture investor support for annual meeting ballots. Following are best practices we have observed (and also applied here at Nasdaq) for utilizing proxies to tell a compelling corporate story.

Engage with shareholders proactively.
In addition to building relationships and ensuring shareholders support the company's strategy, a key goal of engagement is discovering investor perspectives on their areas of focus (such as board composition, pay-for-performance metrics, and engagement). Effective shareholder engagement is a two-way dialogue, some of which ought to take place with the company's largest investors outside of proxy season. If institutional investors aren't available to meet during the off-season, take advantage of quarterly earnings calls, industry conferences, and investor presentations to engage.

Bring the proxy process in-house.
Once the company has identified investor concerns and refined its corporate story, it should consider bringing the process for writing and editing the proxy in-house. An outside consultant or vendor cannot do a better job aligning corporate messaging with investor concerns than the company itself. Complex topics such as board composition, executive compensation policies, corporate strategies, and enterprise risk management should be explained succinctly and clearly, a task best left to corporate insiders.

When bringing the proxy development process in-house, it is helpful to create a benchmark of best-in-class proxies that stand out in terms of innovation and formatting. At Nasdaq, we spent months researching and creating a "look book" of noteworthy proxies that our development team used as a reference tool to guide improvements in the messaging, readability, disclosure, and formatting of the proxy.

Enhance disclosure and transparency.
When developing the elements of the company's story that address investor hot buttons, don't settle for the bare minimum in disclosure. Transparency around board composition, executive compensation, and corporate governance builds trust and assists investors in evaluating the board's effectiveness and independence. For example, shareholders like to map the skill sets on the board to the company's corporate strategies and enterprise risks. A holistic overview of board composition—including committee assignments, tenure, experience, and diversity—can be helpful for this, as is a board skills matrix. The structure and philosophy of executive compensation should also be outlined in a thorough and very readable analysis.

Enhanced disclosure is especially important when a company has a great governance story it hasn't been sharing effectively. Through our own research at Nasdaq, we have unearthed many Nasdaq-listed companies that have quietly achieved exemplary track records with regards to board composition and diversity. However, these efforts often go unnoticed because only a handful of companies highlight board composition metrics in their proxies using charts and graphs.

Transform the proxy into a communication tool.
Different types of investors read and use proxies differently: for retail investors, it's a reading document; for institutional investors, it's a reference document. To motivate institutional investors to support the company's annual meeting ballot, proxy messaging needs to be clear and compelling (and navigation intuitive) so investors can locate topics of interest quickly and understand them easily.

Readability is key—writing content in plain English, eliminating redundancies to condense the document, and hyperlinking a detailed table of contents are all ways to enhance the readability of a proxy. Key messages should be highlighted in such a way that shareholders can't miss them: In addition to enhancing the summary to include critical information, companies can draw attention to (and summarize) main ideas by incorporating charts, matrices, graphics, and bulleted lists.

Launch an interactive digital proxy.
A growing number of investors prefer to access proxies and vote online, and interactive proxies are transforming online stockholder engagement. The intuitive framework and visually appealing layouts of interactive proxy documents make it easy for shareholders to navigate and digest proxy content on their own terms, and on any device. These interactive versions include multiple features allowing for easy search and maneuverability, such as section and sub-section headers, expanded table of contents, and linked page references throughout the document.

Interactive proxy platforms also provide companies with useful analytics regarding which sections of proxy statements, and which search terms, are most popular with shareholders. User analytic data will be valuable to companies seeking to identify proxy content elements that most resonate with investors, as well as fine-tuning digital layouts and navigation.

During the past few weeks, a number of Nasdaq-listed companies published their 2017 proxy statements using an interactive format including eBay, Inc., Intel Corporation, Nasdaq, Inc., Northern Trust Corporation, and Otter Tail Corporation.

Perhaps the most compelling piece of PR advice dispensed by Don Draper, ad man extraordinaire of the series Mad Men, was this: "If you don't like what they are saying about you, change the conversation." By taking control of their own story, corporations can do just that.

Read More about Interactive Proxy Statements Here >>

Read More about Reasons to Bring the Proxy Process In-House Here >>

Public Companies and the PCAOB: Insights from the PCAOB, BDO, and Grant Thornton
Publication Date: June 16, 2017

David Wicks, Vice President of Listing Services at Nasdaq, recently hosted a webinar with Greg Scates, Acting Director of the PCAOB's Office of Outreach and Small Business Liaison; Blake Wilson, National Assurance Partner at BDO USA; and Timothy O'Neil, Audit Partner at Grant Thornton LLP. Panelists shared insights on ways publicly traded companies can ensure their voices are heard at the PCAOB and auditing firms alike.

Excerpts from this discussion are presented below and have been edited for length and clarity. The views expressed here reflect those of the speakers and do not necessarily reflect those of their organizations.

Q: How does the Office of Outreach and Small Business Liaison work with public companies? What's the best way for companies to reach you?

PCAOB: We conduct public forums with smaller public companies and brokers and dealers around the country each year, to provide updates on new standards and new activities going on at the PCAOB. These forums are also a good opportunity for us to hear from smaller firms about problems or issues they are having as they conduct their audits.

The PCAOB Office of Outreach and Small Business Liaison can be reached by phone at (202) 591-4135 or email at

Q: What type of questions should a company direct to PCAOB vs. the SEC?

Our staff responds to questions related to auditing standards and auditing-related matters with respect to the audits of public companies and brokers and dealers. When we get questions about accounting related matters, accounting standards or SEC filing and reporting matters—none of which are in our jurisdiction—we refer those to the SEC.

Q: How can publicly traded companies participate in PCAOB's standard-setting process? Are there other ways public companies can engage with PCAOB?

The principle way companies, accounting firms, investors, and others participate in the standard-setting process is through submitting comment letters to the PCAOB on proposals we have outstanding. Outstanding proposals are always posted on our homepage, with links to the releases describing the proposed changes to the PCAOB standards as well instructions on how to comment on our proposed standards. Those comments are the most valuable to the staff and the Board. We take those comments very seriously as we go through the standard-setting process.

The PCAOB is somewhat unique compared to other standard setting groups such as the FASB or the IAASB in that our standards go through two approval processes. Once a new standard or amendments to existing PCAOB standards are adopted by the PCAOB, changes to PCAOB standards are subject to approval by the SEC before changes to PCAOB standards become effective. It's a rigorous process, but it gives public companies, firms, and investors multiple opportunities to comment.

Management of public companies can also apply for membership in the PCAOB's Standing Advisory Group (SAG), which meets two or three times a year to advise the PCAOB on the standard setting agenda and related activities. Members of the SAG include individuals employed by public companies, accounting firms, investors, and other regulatory bodies.

Q: What role do accounting firms play in the standard setting process? Can you suggest how companies can better participate?

The comment forum is the most predominant way Grant Thornton drives standard setting. Leveraging relationships with the companies, private equity firms and investors on PCAOB's SAG is another opportunity for both auditing firms and companies to have impact.

We urge our partners, when they are meeting with management or with the audit committee, to have a dialogue around the PCAOB's agenda, what standards are coming down the pike, what they should expect when new standards are adopted. If a company is concerned about a given standard, I encourage them to work with their audit engagement team, or the firm itself at a higher level, to collectively craft a comment letter relevant to the company's audit agenda.

Q: We often hear from our listed companies that the PCAOB might recommend a new control, test or procedure to cover a specific item—perhaps for a specific company or industry—but instead of applying the new control to just the situation PCAOB identified, the audit firm in turn applies it to all clients. Is this the PCAOB's intent when it gives comments to auditors? If a company thinks this is happening, what recourse does the company have?

PCAOB: Based on this question, it seems there may be some confusion about the PCAOB's inspection process. The PCAOB's inspection process assesses compliance with existing auditing standards and is designed to identify and address weaknesses and deficiencies related to how a firm conducts audits under these standards. These are noted in the inspection report. The firm then goes through the process of remediating the deficiencies identified. In response, a firm may revise its existing quality control policies and procedures as well as the firm's methodology.

Q: BDO and GT, what advice would you give companies that feel they are in this situation? What recourse do they have?

In general, companies should expect their engagement team to articulate why they are performing a specific procedure. Responses in that dialogue should be rooted in a firm methodology, perhaps mapped back to a PCAOB standard or inspection finding. A company needs to challenge the auditing engagement team to understand whether they are identifying the right risks and if the responses to those risks make sense in the context of the financial statement that is currently being audited.

BDO: The PCAOB typically will only comment on a material matter, and auditing firms take those matters very seriously. As part of our QC process, we will determine why the issue occurred, if it is specific to that particular engagement and if corrective actions should be limited to that engagement, or if it is a broader QC issue that may be a methodology concern. I would encourage companies that feel they are in an over-auditing situation to have a dialogue with the engagement partner as to why they think a procedure may be necessary and to further understand what is driving it.

PCAOB: If company management is concerned about over-auditing in a particular area, then management should take it up with the audit committee. Each year, the audit engagement team discusses an overview of the audit strategy with the audit committee. This could provide an opportunity for management to have a productive dialogue with the auditor and the audit committee as to a particular auditing issue management may be concerned about.

Q: On June 1, the PCAOB introduced a new audit standard, AS #3101, that will initially make certain changes to the audit report, and eventually change the way auditors describe "Critical Audit Matters" in both the audit report and when interacting with audit committees. PCAOB, can you discuss this new standard?

The new AS #3101 is a standard that's been adopted by the Board, but not a standard of the PCAOB yet, since it is subject to a notice and comment process by the SEC. The SEC will post it in the Federal Register and public companies, broker-dealers, accounting firms, investors and others will have another opportunity to comment on this standard. The SEC will consider public comments received in deciding whether the new standard and related amendments are consistent with the requirements of the Sarbanes-Oxley Act, the securities laws, in the public interest or for the protection of investors.

The new standard retains the pass/fail model that is in the existing standard today and contains a new element related to the communication of critical audit matters, or CAMs, in the auditor's report. Critical audit matters are matters arising from the audit of the financial statements that are communicated or required to be communicated to the audit committee, relate to accounts or disclosures that are material to the financial statements, and involve especially challenging, subjective, or complex auditor judgment. If there are no critical audit matters to be communicated, then that fact should be disclosed in the report.

PCAOB board members don't intend for the CAMs to result in boiler plate language. The Board anticipates the new standard will make the auditor's report more relevant, useful and informative to investors and other financial statement users with respect to a particular company. CAMs are determined using a principles-based framework and should be tied to a particular audit engagement in which they arise. The communication of CAMs in the auditor's report should inform investors and other financial statement users of matters arising from the audit of the financial statements that involved especially challenging, subjective, or complex auditor judgment, and how the auditor addressed those matters. We anticipate there will be different CAMs between companies within the same industry. The point is to make sure the information is useful to the investing public.

We also made some other changes to the audit report in the adopted standard, including a new disclosure of audit tenure (that is the year in which the auditor begins serving consecutively as the company's auditor).

If approved by the SEC, we plan to phase in the effective date for Standard AS #3101 over several years. The new auditor's report format, excluding the reporting requirements of CAMs, would be effective for audits of fiscal years ending on or after December 15, 2017. The communication of CAMs would become effective for audits of large accelerated filers for fiscal years ending on or after June 30, 2019. Communication of CAMs for audits of all other companies would become effective fiscal years ending on or after December 15, 2020.

Q: BDO and Grant Thornton, how do you think the adoption of this standard will change your interaction with your public company clients? What do you think will be the most challenging aspect of adopting this new standard?

I'm not sure the interaction with public companies will change. The CAMs information that's expected to be included in the report is akin to an MD&A in a public company filing, meant to give insight into our audit approach. That information is already communicated not only to management, but also to those charged with governance. I think where the sensitivity will come in is that this is not generally public information currently. While management absorbs it, understands it, and challenges it, audit committees and those charged with governance in a similar fashion will have some sensitivity as to what they would like us to include and not include in a report. I expect certain firms and/or companies will have robust discussions around CAMs, and others will disclose them in more vague and general terms.

BDO: Discussions related to the new standard are already happening with engagement teams, and those are robust discussions, in terms of those CAMs: what those disclosures are, how they will be written, and discussions between the auditor and the companies in terms of the robustness of CAMs disclosures.

Q: We hear from our listed companies that audit fees are increasing because of the additional testing and audits being required by the PCAOB, and auditors have no incentive to keep them down. Do auditors use a cost/benefit analysis when deciding what procedures are necessary? How can this be addressed in a meaningful and constructive way?

We have to perform our audits to achieve high audit quality, in accordance with the auditing standards which govern our work. There's not much in terms of cost that we can do from that perspective. We are in a competitive market across all the auditing firms—margins are actually declining because of what it requires in today's world to perform a high quality audit. So we need to stay focused on performing the procedures that are necessary, and companies need to be involved in a dialogue to understand why we are doing certain things. As we discussed today, companies can also be involved in the standard setting process.

GT: There's a minimum level of effort on an audit, whether it be public or private, and a company should determine that either through their own research or their engagement team articulating what that minimum level of effort is. Because as Blake [BDO] said, that effort is rooted in the standards. There will be issues that go above and beyond the standards, because of unique industry factors or circumstances related to a given transaction or company situation.

Companies can help keep costs down by understanding the minimum level of effort, determining whether the team can leverage internal audit for controls testing, and identifying ways to leverage other information the company is using to get to the right answers.

Q: In other countries, audit reports provide much more detail than is currently provided in the U.S. Do you foresee that audit reports will become more granular in nature and less standardized? If so, how?

The proposed PCAOB standard we spoke about earlier adding CAMs to reports is a first step in that direction. It's hard to make a global comment because every jurisdiction is a little different. For example, in certain European jurisdictions, you see director information, compensation and other information in auditor's reports; this information is already public here in the U.S. but it exists in different areas. I do think we will start to see a bit more standardization across the global economy, because global investors want to see reporting that's somewhat similar, not only from an accounting standard perspective but from an audit perspective as well.

Listen to June 7th webinar >>

Visit the PCAOB homepage to view current auditing standard proposals >>

Read more about the PCAOB's Office of Outreach and Small Business Liaison >>

shareholder approval
Comment Solicitation: Shareholder Approval Rules
Publication Date: June 14, 2017

Click here to read our Comment Solicitation >>

Last year, Nasdaq solicited comments on our shareholder approval rules. These rules were adopted in 1990 and have remained largely unchanged since then. The comment solicitation was designed to elicit views on whether the rules could be updated given changes in the capital markets since then, without sacrificing the crucial investor protections they provide.

Following review of the comments provided, Nasdaq is considering a rule amendment to: (i) change the definition of market value for purposes of the shareholder approval rules from the closing bid price to a five day trailing average of the closing price; and (ii) eliminate the requirement for a company to obtain shareholder approval for issuances of common stock at a price less than book value.  As part of these changes, Nasdaq would also require that an issuance of 20% or more of the company's outstanding securities be approved by the company's independent directors where shareholder approval is not required.

We encourage all interested parties to review the detailed description of these proposed changes in our Comment Solicitation and provide comments before July 31, 2017. 

Electronic responses are preferred and may be addressed to:

You may also review last year's comment solicitation here.

board composition
Thinking Outside the Audit Committee Box: A Better Way to Manage Risk
Publication Date: May 23, 2017

An ever-increasing reliance on evolving technologies has left corporations vulnerable to cyber-attack and business model disruption. At the same time, enterprise risk management has landed squarely in the sights of institutional investors. As a result, boards must enhance their oversight of risk management.

Audit committee members, who have had responsibility for risk management on many boards, are feeling strained as regulatory demands intersect with that increased responsibility; in a recent survey of nearly 1,500 audit committee members by KPMG, half of those surveyed reported their committees may not have the time or expertise needed to be effective in all areas of responsibility.

Thus, there is a growing awareness that boards may need to evolve, including by altering board committee structures and reallocating workflows. To help us better understand these issues, we asked Betsy Atkins, veteran of 23 boards and 13 IPOs, to share her expertise on providing effective oversight of risk management in the boardroom.

Q: What is a board’s primary role with respect to enterprise risk management?

A: The board’s primary roles related to enterprise risk management are ensuring the company’s strategy is still relevant, examining the real risks the company faces and determining what risk oversight mechanisms are most effective. The lifecycle of S&P 500 companies has declined from about 60 years in 1958 to below 20 years now below 20 years now, begging the question “Why do so many established public companies go out of business?”

While some get acquired, go private, or become bankrupt, too many disappear because they don’t innovate or stay relevant. The rate of change in business today is alarming—a very real threat for the shareholders is that a company quietly loses market share for three or four years and then suddenly wakes up to realize they’ve lost nearly thirty percent of their market. When that happens, we see Blockbuster and Borders get replaced on the S&P 500 by Netflix and Amazon. Both of those companies might still be in business if their boards had been keeping an eye on new business models, digitally-born companies, and marketplace disrupters.

Q: What are some strategies boards can employ to better manage risk?

A: There are a number of tactics for load-leveling the risk management responsibility across a board, including:

Separating the oversight of future-looking risks from backward-looking risks.
Divide risks into two main categories: backward-looking risks and future-looking risks. Forensic, backward-looking risks include financial internal controls, review of quarterly financial statements, and compliance with FASB regulations. These are historically—and appropriately—the strength and domain of the audit committee.

Future (and emerging) risks include cyber-attacks, cyber breaches that damage brands, disrupted business models, and emerging digital marketplaces. Technology risk, too, needs to be examined. Although disaster recovery has long been a purview of the audit committee, oversight of cyber security and technology risks do not necessarily belong on the audit committee agenda.

Assigning oversight of forward-looking risks to the governance committee.
Audit committees are disproportionately busy on corporate boards. Compensation committees are also quite busy during certain times of the year, leaving governance and nominating committees as the least busy.

The nominating mandate is clear and happens in short bursts: refresh and renew the board. But what is governance on behalf of shareholders? Often, it’s limited to code of conduct, tone at the top, and preventing foreign corrupt illegal practices and sexually predatory behavior. However, governance really ought to be ensuring—on behalf of the shareholders—that the company is relevant, innovative, and vibrant.

I chair the Nominating and Corporate Governance Committee on the Board of HD Supply. Our Audit Committee looks at internal controls, financial reporting, and other functions that Audit Committees historically have performed. We created a more future looking-role for the Nominating and Governance Committee to look at business strategy, including the digital transformation of the company’s business. We’ve had outside speakers from major consultancies like McKinsey, Boston Consulting Group, and Accenture come in and educate us. We’re also working with artificial intelligence experts who can help us understand how to apply that technology to increase B2B sales revenue.

Incorporating working sessions into board meetings.
Like other boards, at HD Supply we have a nominating and corporate governance, audit, and compensation committee readout. But what’s a little different from other boards I’ve served on is that we have a lively discussion around the board table during these readouts, regularly debating our major initiatives of digital and business model transformation.

And we believe in working board dinners, held at our headquarters in the training center versus at a restaurant. We bring in the company’s senior leadership team, as well as contemporary and knowledgeable external speakers, to discuss topics we want to immerse ourselves in.

Leveraging technology to manage risks by monitoring corporate health.
There are a number of metrics that should be tracked to assess corporate health and flush out potential risk factors; these are related to compliance, digital advancement, product and service development pipelines, market share, customer satisfaction, and employee turnover.

There are companies and platforms out there, like Boardvantage that can capture and track those types of metrics to develop an automated corporate health dashboard. Are we as digitally advanced as Amazon? Are we developing and introducing new products and services as quickly as Lowes? Are we an innovation leader, laggard or fast follower? Are we growing market share or losing it? Are we using artificial intelligence as effectively as our competitors? These are the benchmarks we want to monitor.

Viewing board composition as a competitive asset.
It is incumbent on boards to consider, and actively discuss on the governance committee, whether the board should be viewed as a competitive asset to the shareholders or just fiduciaries who do oversight. If the determination is “we are a competitive asset” then the board really ought to look at the competencies around the table the same way a company looks at its management leadership team.

Boards ought to carefully consider, given the turbulent sea of changes that businesses are navigating, how best to refresh and bring on a director or two with skill sets they’ll need in the next three to five years. Boards should forward-appoint members the same way corporations forward-hire, rather than waiting passively for a retirement to free a seat at the table.

By employing these tactics, boards can better fulfill a critical governance mandate: identify business-killing risks before it’s too late.

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 Volvo Car Corporation and served on the board of directors at Nasdaq LLC and at Clear Standards as CEO and Chairman.

A self-proclaimed “veteran of board battle scars,” Ms. Atkins will be collaborating with Nasdaq to produce a series of corporate governance “nuts and bolts” articles.

Other popular posts featuring Betsy Atkins on the Governance Clearinghouse:

Seven Critical Elements of a Board Refreshment Plan >>
What Makes a Great Board? >>


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In the News
FASB Board Member Christine Ann Botosan Discusses New Revenue Recognition Standard
Publication Date: July 20, 2017

In this interview, Christine Ann Botosan, Board Member, Financial Accounting Standards Board, discusses the implementation of the new revenue recognition standard, including disclosure considerations and helpful resources available through the FASB. The new revenue recognition standard is set to take effect for many public companies on January 1, 2018.

Watch the video >>

Shareholder Proposal Developments During the 2017 Proxy Season
Publication Date: July 14, 2017

This Gibson Dunn report provides an overview of the shareholder proposals submitted to public companies for 2017 shareholder meetings, including statistics and notable decisions from the Staff of the Securities and Exchange Commission. The report includes "Top Take-Aways for 2017 Season" for public companies to consider.


Read the full report >>

SEC Chair Jay Clayton Remarks at Economic Club of NYC
Publication Date: July 13, 2017

In his first public speech as Chair of the Securities and Exchange Commission, Jay Clayton gives his perspective on the SEC, discusses the principles that will guide his chairmanship and describes specific areas where the SEC can apply these principles. Notably, he encouraged companies to consider requesting modifications to their financial reporting requirements where those requirements require disclosures that are burdensome to generate but that may not be material to the total mix of information available to investors.

Read the speech >>

U.S. Supreme Court to Decide Whether Securities Class Action Suits May Be Brought in State Courts
Publication Date: July 5, 2017

The Supreme Court granted a petition for certiorari to decide whether securities class action lawsuits under the Securities Act of 1933 may be brought in state courts. The grant of certiorari will let the Supreme Court resolve a split in the lower courts and is an important development for public companies. The Court will likely hear the case during its October 2017 term.


SEC Expands Confidential Filing to all Newly Public Companies
Publication Date: June 30, 2017

The Securities and Exchange Commission announced that effective July 10, 2017, the Division of Corporation Finance will permit all companies to submit draft registration statements relating to initial public offerings for review on a non-public basis. This process also will be available for most offerings made in the first year after a company has entered the public reporting system.


Read the Division of Corporation Finance Announcement >>

Read Nasdaq's Statement >>

Board Evaluations and Getting Aligned
Publication Date: June 29, 2017

In this report, experts from the Center for Board Governance, Shearman & Sterling LLP and Nasdaq explain how Board and CEO evaluations can be catalysts for measuring board peer group and leadership alignment as well for extracting action points to achieve better performance.


U.S. Supreme Court to Review Scope of Dodd-Frank Whistleblower Protections
Publication Date: June 27, 2017

The U.S. Supreme Court agreed on Monday to consider whether corporate insiders who blow the whistle on their employers are shielded from retaliation if they only report alleged misconduct internally rather than to the Securities and Exchange Commission. The Justices will hear Digital Realty Trust Inc's appeal of a lower court ruling in favor of Paul Somers, an executive fired by the San Francisco-based company after he complained internally about alleged misconduct by his supervisor but never reported the matter to the Securities and Exchange Commission. If the Supreme Court ultimately sides with the company, then it could force corporate whistleblowers to report wrongdoing to the SEC in order to be protected from retaliation. The Court will hear the case during the next term that starts in October.


SEC Emphasizes Role of Audit Committee in New Developments and Continuing Trends in Auditor Oversight
Publication Date: June 21, 2017

A recent speech by the SEC Chief Accountant provided guidance for audit committees on several key areas of responsibilities, including with respect to new accounting standards, and on perennial issues of auditor evaluation and independence.


Read the speech >>

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