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Nasdaq Speaks to…Martin Lipton of Wachtell, Lipton, Rosen & Katz about the New Paradigm in Corporate Governance
Publication Date: February 27, 2017

Martin Lipton, a founding partner of Wachtell, Lipton, Rosen & Katz, specializes in advising major corporations on mergers and acquisitions and matters affecting corporate policy and strategy. We spoke with Mr. Lipton about his most recent publication, The New Paradigm – A Roadmap for an Implicit Corporate Governance Partnership between Corporations and Investors to Achieve Sustainable Long-Term Investment and Growth,” a blueprint for eradicating the short-termism that, he believes, is crippling long-term corporate growth and investment.

Q: Do you see any parallels between the corporate takeover atmosphere of the early 1980’s and modern activism, which has been accused of shifting corporate focus to the short-term?

A: There is a strong similarity between the corporate raiding of the ‘70s and ‘80s and activism. Modern activism is a reflection of the overwhelming control of public companies by the major institutional shareholders, which own somewhere between 65-85% of the stock of most listed companies. The real pressure on companies is meeting the expectations of the institutions that have the ability to control them, versus any other kind of defense to deal with in activist attack.

I believe the best free market approach to protect shareholders from attacks by activist hedge funds is my New Paradigm for corporate governance, which places the deciding power in the hands of a majority of shareholders who are acting with knowledge of corporate strategies and in accordance with their fiduciary duties.

Q: If you had to boil down your “New Paradigm” paper to one takeaway, what would it be?

A: The New Paradigm is a corporate governance framework that derives from the recognition by corporate CEOs and boards of directors, and by leading institutional investors and asset managers, that short-termism and attacks by short-term financial activists significantly impede long-term investment by corporations. The New Paradigm recalibrates the relationship between public corporations and their investors, conceiving of corporate governance as a collaboration among corporations, shareholders and other stakeholders to achieve long-term value and resist short-termism.

In this framework, if a corporation is diligently pursuing well-conceived strategies developed with the participation of independent, competent and engaged directors, and its operations are in the hands of competent executives, investors will refuse to support activists seeking to force short-term value enhancements without regard to long-term value implications. As part of their stewardship role, investors will work to understand corporate strategies and operations. Investors also will engage with corporations to ensure they understand investors’ opinions so corporations can adjust strategies and operations in order to receive investors’ support.

Q: In practical terms, who at the company should collaborate with investors and how do you recommend they do so?

A: The key is a double use of engagement: appropriate corporate governance involves real engagement between management and the board of directors, as well as between corporate management and investors. Institutions want to know that there is an independent, competent and experienced board of directors overseeing and engaged in what management is doing. Corporations need to know what governance their institutional investors expect of them.

As a practical matter, the relationship between a corporation and its investors should be overseen and participated in by the CEO and carried out on a day-to-day basis by the investor relations and corporate governance staff. There should be periodic participation by the lead independent director, independent chair (if any) and members of the board. Director participation is a case-by-case decision depending on circumstances, including whether the investors have interest in meeting with directors.

When engaging with institutional investors, it’s important for corporations to understand what investors want, to communicate effectively what management does not think appropriate and therefore will not do, and ensure investors have confidence in that. It’s also critical to be fully transparent with investors with respect to operations, and earnings, and other material information. Corporations should ensure that investor relations are first rate and that institutional investors are satisfied with the access they have to the board of directors if they desire to communicate directly with the directors.

Q: Your paper states that engagement is a two-way street, with investors holding up their end of the bargain. Do you think the investors are ready for it?

A: Most major investors—especially BlackRock, State Street and Vanguard—have equipped themselves for engagement, and most are committed to strengthening their engagement capability. Engagement is strongly supported by FCLT Global (not-for-profit organization dedicated to developing practical tools and approaches that encourage long-term behaviors in business and investment decision-making) and all of the major investor associations.

Q: While the paper calls for changes through market forces without new regulation, do you think there is anything that exchanges can contribute through the regulation of listed companies?

A: I’m very hopeful that a large number of major institutions, investors, and corporations will endorse the New Paradigm, and that we will see a significant decrease in the pressure for short-term performance as a result. Corporations need encouragement and support from their investors to make the long-term investments that lead to sustainable growth.

The exchanges could make a major contribution to the universal adoption of, and adherence to, the New Paradigm by endorsing it and stating that they believe it is an effective means of achieving long-term investment and growth. If both corporations and investors adhere to the New Paradigm, no new regulation would be needed.

Q: Another publication attracting attention in the corporate governance community is “Principal Costs: A New Theory for Corporate Law and Governance.” Why do you think principal-cost theory has taken so long to emerge, allowing instead for the agency-cost theory to dominate?

A: From the very outset of shareholder activism—say Milton Friedman in 1970— it was recognized that the cost of shareholders forcing changes in business strategy and operations could have an adverse impact on investment in research and development, on capital expenditures, on employment, employee training and attracting top executive talent. It just didn’t have a catchy name like “shareholder democracy” or “agency cost.”

What Professor Goshen has made clear is that it’s the function of the board of directors, and of investors dealing with the corporation, to find the optimal governance structure through exercising balanced stewardship. If you pressure for short-term performance, higher dividends or share buy backs, you are causing the corporation to reduce R&D and capital expenditures and increase leverage to the point that companies run into financial difficulties. There’s no better example than what happened in the fiscal crisis in 2008.

As Jack Welch has said, “maximizing shareholder value is the dumbest idea in the world. Shareholder value is a result, not a strategy…your main constituencies are your employees, your customers and your products.”

Q: Do you think the New Paradigm will affect the balance in the capital markets between short- and long-term investors?

A: I believe the New Paradigm will have a significant impact on promoting long-term investment. CEOs, management teams and boards of director are highly responsive to the views and requirements of their investors. If a majority of shareholders are acting with knowledge and in accordance with their fiduciary duties, it will promote a reasonable balance between short-term and long-term goals.

The International Business Council sought signatures from all participants in its January 2017 meeting to The Compact for Responsive and Responsible Leadership: A Roadmap for Sustainable Long-Term Growth and Opportunity. The Compact includes key features of The New Paradigm and I recommend adherence to The Compact and The New Paradigm by all corporations, institutional investors and asset managers.

Read The New Paradigm – A Roadmap for an Implicit Corporate Governance Partnership between Corporations and Investors to Achieve Sustainable Long-Term Investment and Growth >>

Read The Compact for Responsive and Responsible Leadership: A Roadmap for Sustainable Long-Term Growth and Opportunity >>

Read Principal Costs: A New Theory for Corporate Law and Governance >>

Martin Lipton has worked as a partner of Wachtell Lipton since 1965, representing corporations involved in many of the largest mergers, change-of-control contests and boardroom crises of the past 60 years. In 1992, Lipton co-authored “A Modest Proposal for Improved Corporate Governance” which became the template for the basic corporate governance principles adopted in the 1990s.

proxy season
Proxy News
Proxy Season News Roundup: Week #7
Publication Date: February 24, 2017

Is your company ready for the 2017 proxy season? Each week we help you prepare by rounding up recent news articles of interest.

outside insight
Seven Steps to Implementing Board Oversight of Sustainability by Sandra E. Taylor
Publication Date: February 21, 2017

Sandra Taylor is the CEO of Sustainable Business International LLC and a pioneer in the field of sustainability. She has helped many major brands including Starbucks and Eastman Kodak, develop and implement global corporate social responsibility strategies.

Many corporate CEOs and investors have accepted the premise that sustainability issues are material to the long-term success of any business. Effective management of social and environmental risks can improve business performance and produce tangible results. These can include more reliable availability of essential natural resources, significant efficiency gains, reduced transaction costs and access to new capital. The concept of sustainable business seeks to combine environmental and social improvements with financial success.

Investors are increasingly focusing on the role that corporate boards play in overseeing material sustainability issues as a part of their fiduciary responsibility. Between 2010 and 2014, over 250 shareholder resolutions were filed calling for explicit board oversight of sustainability issues. During 2016 alone, 370 proposals were filed related to environmental and social issues, making sustainability the “fastest growing cause for shareholders.” Now is the time for boards of directors to protect and promote shareholder interests by adopting and overseeing a corporate sustainability strategy.

Integration of sustainability into key business initiatives, risk management and compliance are all consistent with corporate governance standards. Here are seven key areas when implementing board oversight of corporate sustainability efforts:

1. Start at the beginning and determine materiality.

As a starting point, boards should define what sustainability means for the company by conducting a materiality assessment. The risks posed and opportunities created by the shift towards greater sustainability present companies with complex, multi-dimensional, and sometimes interconnected issues. By developing a robust understanding of what issues are material to their operations, the environment and communities, companies can better prevent or mitigate these risks and gain access to these opportunities.

However, materiality in the sustainability context is not simply about reporting or disclosure. The materiality determination should reflect the organization’s significant economic, environmental and social impacts, and stretch far beyond just the production of a sustainability report: it should also touch on the company’s overall strategy, risk management, relationships, communications and even the design of products and services with sustainability impacts in mind.

Just as the board oversees or approves sales and financial targets, it should also approve targets (both long-term and short-term) for the company’s sustainability performance that can attain the same level of value and influence as other key elements of business performance by driving profitability, innovation and engagement.

In terms of sustainability reporting, there remain questions regarding whether sustainability report issuers, and investors as report users, identify the same topics as material. SASB is an effort to bridge that gap. SASB standards are designed to determine those environmental, social, and governance topics that are reasonably likely to have material impacts on the financial condition or operating performance of a company. SASB is able to identify and standardize disclosure for the sustainability topics that are most important to investors—those that are reasonably likely to have material impacts on companies in an industry.

2. Focus on the supply chain.

Of all the strategies, integrating sustainability into the supply chain and ethical sourcing may be the most critical. Ethical sourcing means ensuring that the products being sourced are created in safe facilities or under safe conditions for workers who are treated well and paid fair wages to work legal hours. It also means that the supplier respects the environment during the production and manufacture of the products.

3. Be innovative.

Rather than approving projects and then asking how the product, feature or service can be developed and delivered more sustainably, the board should add a sustainability lens (through scorecards, lifecycle analysis and indices) at decision-making points, ensuring sustainability is factored in before any go/no-go decision. The board should ensure that environmental sustainability and social responsibility values become important screens that are included in the company’s most senior hiring decisions and enterprise risk management framework, and considered when approving major decisions like capital projects, new business lines, mergers and acquisitions, new product launches and expansion into new geographic markets.

4. Be the impetus.

Through their core duties related to setting strategic course, audit and monitoring, and their long-term perspective, boards are uniquely positioned to ensure the full integration of sustainability into business strategy and practices. Integration means incorporating sustainability into the business strategy so that the business model itself creates social and environmental value in addition to financial value. In other words, by the very act of succeeding as a business, a company creates greater value for society and the environment.

Boards and senior management should ensure that corporate responsibility and sustainability are embedded into every part of the business, including planning, strategy, operations, marketing and human resources. Board compensation committees should incorporate sustainability priorities into both the recruitment and remuneration of executives and identify the most relevant and stretch targets to influence executive performance. A simple way to achieve this is to appoint a Chief Sustainability Officer (CSO) for the company who is part of the senior executive team and involved in all decision-making in much the same way as the General Counsel and Senior HR executive, including regular interaction with board committees.

5. Measure outcomes.

Once the company develops a sustainability strategy and policy, it then must identify major performance aspects, establish objectives, select specific indicators and metrics, and commit to achieving specific targets. Ideally, progress should be benchmarked against a set of time-bound, measureable goals laid out as part of the overarching strategy and publicly disclosed. For example, management systems should measure progress and provide assurances that the sourcing strategy a company pursues is delivering the intended results.

It is critical for the board to track performance, oversee reporting and set clear expectations for improving performance. Establish internal performance, communication, incentive and measurement systems for all sustainability goals and conduct quarterly business reviews. Boards should also set short and long-term sustainability targets — just as they do for financial targets — and ensure that the company’s sustainability strategy and performance are communicated at annual meetings and investor roadshows.

6. Be transparent.

Transparency is about reliable indicators of sustainability progress and honest communication with various stakeholders about policies, practices and progress, including formal external reporting. Whether an organization chooses a full-scale corporate responsibility report, following Global Reporting Initiative (GRI) guidelines, delivers a CSR report directed at consumers and community groups, or simply communicates progress on its website, external communication is critical to gaining consumer trust.

Reporting plays a pivotal role in communicating these management actions to a variety of stakeholders. Boards should review and approve disclosure of the company’s sustainability performance in mandatory and voluntary reporting. GRI Sustainability Reporting Standards are the world’s most trusted and widely used standards on sustainability reporting.

7. Align board structure and composition.

In a UN Global Compact-Accenture CEO study in 2010, 75% of CEOs reported that their board of directors take an active role in overseeing sustainability issues. However, when Ceres analyzed 613 of the largest publicly-traded U.S. companies in 2014, only 32% oversaw sustainability at the board level. Some notable international companies have established a stand-alone sustainability committee of the board, including Ford, Roche, Nike, Lockheed Martin, Monsanto, McDonalds, Coca-Cola and HSBC.

Board oversight can take several forms. In some companies the role is combined with the governance committee. This combined committee supervises compliance of internal business principles and principles of behavior with respect to legal as well as safety and environmental matters, diversity and also oversees the preparation of the sustainability report.

The type of committee is less important than the scope and ambition of its mandate, which should include company-wide oversight on issues such as climate change, human rights, sustainable supply chain management, health and safety, as well as sustainable products and services. Nike provides board members with regular training and education on key sustainability issues. This education promotes a more strategic, long-term approach to the board’s overall assessment of the company’s business performance.

Companies should actively seek to recruit directors with relevant knowledge and expertise – including executives from corporations with a sustainability track record or topical experts coming from specialized positions in business. Ceres found that only 19 percent of directors serving on board sustainability committees of large U.S. companies have discernible expertise in relevant issues. Even if there is just one board member with relevant expertise, he or she may be able to significantly improve the quality of the board’s deliberations and, over time, improve the understanding of sustainability among other directors.

Sustainability is a proxy for good governance. Shareholders and other stakeholders look to board engagement as an indication that sustainability risks and opportunities are adequately dealt with at the highest level.

Sandra E. Taylor is the CEO of Sustainable Business International LLC and served on the Sustainability Committee of DE Master Blenders NV of the Netherlands and the Compensation Committee of Capella Education Company. Sandra previously served as the senior vice president of corporate social responsibility for Starbucks Coffee Company and the vice president and director of public affairs for Eastman Kodak Company.

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.

shareholder engagement
Interactive Proxy Statements Transforming Online Shareholder Engagement
Publication Date: Februrary 8, 2017

Nasdaq reported last year that “interactive proxy statements are revolutionizing the way companies tell their corporate governance stories.” Designed for web browsing versus print browsing, the features of interactive proxies continue to evolve, making it easier for shareholders to locate the information they want and to access shareholder voting platforms.

A number of providers offer a range of interactive proxy design and hosting services, including EzOnlineDocuments,  ISS Corporate SolutionsRR Donnelley, and Mediant. Nasdaq spoke with Rich Andrews, CEO of EZOnlineDocuments, a provider of online proxy services since 1998, to find out how interactive proxies have begun to impact online shareholder engagement: “Interactive proxies visually marry corporate branding with a vastly superior user interface that anticipates intuitive reader navigation and offers robust searchability. The user analytics of our clients’ interactive proxy statements show that 80% of online readers don’t bother looking at the linked PDF version of the proxy statement at all—they engage solely with the interactive version.”

Interactive proxies allow online readers greater control over which elements of the proxy they choose to engage with. Companies can leverage that behavior by tracking analytics in real time to anticipate investor concerns and improve shareholder engagement. Online proxy platforms also make it easy and cost-effective to highlight important corporate messaging by embedding videos and graphics within the proxy. According to Andrews, “The sections of our clients’ interactive proxies that are most popular are tiles navigation, proxy summary, election of directors, ‘Meet the Board’, executive compensation, and videos.”

To the online reader, there is a profound difference between the experience of reading a static PDF and navigating an interactive proxy platform. Progressive Nasdaq-listed companies are offering interactive proxies that are much easier to navigate than their PDF version. To compare, see how each of these companies provide stronger branding and a better user experience in their interactive versions: Atlas Air Worldwide (interactive proxyPDF version), Galena Biopharma (interactive proxyPDF version), and Inovalon (interactive proxyPDF version).

According to a recent study conducted by EZOnlineDocuments, 80% of S&P 500 companies have invested in making their websites responsive to mobile devices, yet only 11% of them created interactive proxies during 2016. “Most companies don’t realize that static PDF proxy statements are not engaging online readers. And they may not fully meet SEC compliance standards for readability and searchability of online proxies,” said Andrews. (His company’s website summarizes certain of the SEC's rules for posting proxy materials online.)

So why aren’t more companies utilizing an interactive format for proxy statements?

“The greatest hurdle is that many companies are satisfied with meeting the bare minimum of SEC requirements for online proxies. They fail to take into account that static PDFs are not optimized for online reading, that reading a PDF online is a cumbersome and time-consuming process for investors and shareholders,” shared Andrews. “The second hurdle is cost. Most companies don’t realize that the cost of interactive proxy statements isn’t prohibitive at all and that it’s nothing near the substantial investment most companies have already made to improving the mobile responsiveness of their websites.” Research indicates that the cost of developing a standard interactive proxy statement is reasonable, with prices starting as low as $3,000 up to around $15,000 depending on provider and services selected.

Rich Andrews and his colleagues foresee further evolutions in proxy design and content on the horizon as companies begin to digest and leverage data from online proxy analytics. “Reformatting content so that it’s accessible via ‘click-to-learn’ navigation, like our ‘Meet the Board’ feature, is becoming increasingly popular,” shared Andrews. “Online readers primarily engage in content that is structured that way. We also expect companies to evolve their proxies by redesigning the summary so that it is entirely readable on the phone and tablet. We tell our clients to stop thinking landscape and start thinking Wall Street Journal—information is best presented on mobile platforms in columns and tiles to optimize online reader experience and engagement.”

Taking into consideration the recent growth of mobile web browsing (it has now eclipsed desktop browsing), it seems clear that interactive proxy statements offer significant opportunities to improve shareholder engagement.

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.

audit committee
Nasdaq Talks to . . . Tom Kloet, Thirty-Year Industry Veteran, about Risk Management and How It Fits into the Audit Committee Mandate
Publication Date: January 30, 2017

Tom Kloet is a thirty-year veteran of the stock exchange industry — a former CEO of both the TMX and Singapore Exchange, he’s served on nearly a dozen boards (both corporate and non-profit) and joined Nasdaq’s board of directors in 2015. He is Nasdaq’s current audit committee chair. Given this breadth of experience, we asked him to share his thoughts on the essential ingredients for building and maintaining an effective audit committee and how risk management fits into today’s audit committee mandate.

Q: How does a company go about building an effective audit committee?

A: It starts with attracting a mix of professionals who have a variety of executive and board experiences. It’s not sufficient to just gather a group of accounting or finance professionals. For example, at Nasdaq, the members of our audit committee represent a broad and varied mix of executive, financial, operating, technology, audit and risk backgrounds. As a result of those different backgrounds, I believe we’re better able to effectively consider and discern what the key risks of the organization are—and where those risks and financial reporting intersect—so that we give our shareholders the value of looking at our business in a very holistic way.

Q: You talked about the importance of different professional backgrounds of audit committee members. What about the personal dynamics of people on the committee? What are the characteristics of a strong audit committee member?

A: Individual characteristics of audit committee members should parallel or support a group dynamic that drives a board towards excellence. So along with a broad mix of executive, operating, risk, technology, audit and finance backgrounds, you want individuals with a commitment to excellence, a willingness to work and perform as a team, and keen attention to detail.

Boards and audit committees of today should be composed of professionals who put the interests of the various stockholders, stakeholders, employees and communities in which they operate at the front of their mind as they work through their responsibilities, on either an audit committee or a board. Those same characteristics that you’d want in strong board members also define who will make a strong audit committee member.

Q: What are the attributes of an effective audit committee chair?

A: The audit committee chair has to have strong financial and risk management acumen, so previous experience as an operating executive in finance is very helpful for anyone chairing an audit committee. Now, that can come from several different experiences—it doesn’t necessarily have to be that the chair is a CPA. Previous experience can be related to corporate finance or banking, so long as the chair understands the financial reporting the company has to do and the requirements that go along with that.

And what is becoming more prevalent for audit committee chairs is deep experience in risk management—particularly for financial services companies—because in many cases, audit committees are now tasked with monitoring a myriad of complex risks faced by an organization.

Q: Speaking of risk, should public company boards form a separate risk management committee?

A: There’s not a one-size-fits-all approach for how corporate boards should deal with risk management, but companies should examine carefully whether to create a separate committee. Risk management oversight should vary with the individual company’s business, its board composition and the risk profile the business operates within.

Nasdaq doesn’t have a separate risk management committee. Risk management falls to the audit committee for oversight, and we actively report up to the full board on corporate risk issues, exposures, and how they are being monitored.

Q: How do audit committees ensure they’re proactive in monitoring and managing risk?

A: I think it starts with understanding the enterprise risk management program of the company, along with a core understanding of the potential risks the enterprise faces. It’s an iterative process that continues to grow as the company evolves.

Equally important are the committee’s skills of asking both the right and the difficult questions and its willingness to probe. Audit committees have a variety of risk reports they receive at regular intervals through their meetings; it’s critically important to take all that data and convert it into meaningful conversation, to investigate the current and potential risks that are important and that need to be monitored. From there, the board or audit committee needs to determine that management has the appropriate infrastructure and processes in place to monitor those risks.

Q: Nasdaq Listing Rules require that a company’s audit committee be entirely compromised of independent directors. But how does a company ensure that audit committee independence is really meaningful, versus just addressing the conflict of interest issue?

A: First, there’s the usual process of annual questionnaires and assessments to ensure the governance committee understands any connection points between the board members (including the audit committee members) and management or the company in general.

Beyond that, it’s an ongoing observation to determine the independence of thought of individual board members. How do they handle various situations that come up? Are they showing independence in thought as well as in fact? Ideally, you want board members who can wear the hats of various stakeholders as they’re reviewing material and asking questions.

Finally, back-end assessments—conversations between the audit committee chair and various board members—should take place to discern the independence of the particular board member they’re speaking to.

Q: What should companies think about as they prepare for the 2017 proxy season, in terms of effective disclosure surrounding their audit committee?

A: When I read public company proxies, I want to learn what was important to the audit committees as they were adjudicating their responsibilities. Don’t just republish the charter (which most companies share on their website anyway); outline for stakeholders what the board did during the year to execute the audit committee’s charter’s mandate.

I would suggest companies begin by reviewing their past proxy disclosures to see if the company has let stakeholders into the mind of the audit committee: Did the company share how the board evaluated risk, what oversight it had of the risk management process? Did the Board evaluate the independence of the company’s external auditors and how did it oversee their work and that of the internal audit department? Did the board meet independently in executive session with various department heads? What did the board do during the year to ensure that oversight of the company’s risk management processes evolved as the organization evolved?

Q: How does a board chair build effective relationships between the audit committee and the board, and between the audit committee and company management?

A: I’ll tackle these separately, as they are two very different types of relationships.

As audit committee chair, I try to be very transparent with the board, as we’re executing some of the mandate that belongs to all of us as independent directors. I’ll report at every board meeting what we've done at the audit committee meetings in between board meetings, so the board has a comprehensive view as to the depth of the work of the committee. It’s important to solicit questions from the board while giving them those highlights, and to invite them to ask questions of myself, the CFO, the heads of IT or internal auditing. I also invite the other audit committee members to report on anything I might leave out during my report or field questions from other directors. In this way, we offer full transparency to the board without replicating all the work we did.

With respect to the relationship with corporate management, some of that culture is set by the audit committee chair, as well as the CEO and CFO of the organization. Nasdaq has a very healthy culture between the company management and its board, including the audit committee. We have active participation from a number of management’s key support and business areas regularly at the audit committee meetings and executive sessions alone with key leaders.

Having a healthy respect between management and the board stems from understanding what each other's roles are and the importance that both parties bring to the success of the enterprise. The board is not management—we are independent directors with a governance role. Our job is to fearlessly ask questions and be willing and able to have the kind of honest discussions that help the enterprise overall.

Q: How should the audit committee structure its relationship with external auditors?

A: Managing the relationship between the audit committee and the company’s independent public accounting firm is an important responsibility of an effective audit committee. It’s general practice at most public companies these days for the independent public accountants to attend the audit committee meetings (with the exception of executive sessions).

That’s our practice at Nasdaq. The two partners from our auditing firm attend audit committee meetings, and they actively participate. I will call on them periodically to jump in on a conversation, all the time being respectful of not violating or impairing their independence. We also meet in executive session with the independent auditors at the end of every committee meeting.

We’ll schedule additional meetings with the independent auditors to share any unexpected developments at the company that we’d like their view on, or to ensure that communication is flowing well between management and the auditors. And offline, I’ll speak to the audit partner ahead of every audit committee meeting to get an understanding of what’s on our auditors’ minds as they’re doing their work.

And as a result of all that, our auditors get a feel for the things that are on the minds of the committee and vice versa.

Tom Kloet was the first CEO and Executive Director of TMX Group Limited, the holding company of the Toronto Stock Exchange, TSX Venture Exchange, Montreal Exchange, Canadian Depository for Securities, Canadian Derivatives Clearing Corporation and the BOX Options Exchange, from 2008-2014. Previously, he served as CEO of the Singapore Exchange and as a senior executive at Fimat USA (a unit of Société Générale), ABN AMRO and Credit Agricole Futures, Inc. He also served on the Boards of CME and various other exchanges worldwide. Mr. Kloet is a CPA and a member of the AICPA. He is also a member of the U.S. CFTC’s Market Risk Advisory Committee and was inducted into the Futures Industry Association Hall of Fame in March 2015.

Larry Fink’s Advice for CEOs as They Prepare for Proxy Season
Publication Date: January 26, 2017

Each year, Larry Fink, CEO of BlackRock (the world’s largest investor), crafts his annual letter to “advocate governance practices that BlackRock believes will maximize long-term value creation.” In this year’s letter, dated January 24, Fink wants to know how public companies are incorporating “the underlying dynamics that drive change around the world” into their strategic planning process.

He provides an overview of geopolitical events of the past 12 months and global labor market dynamics and says he wants CEOs to answer these two questions:

“How have these changes impacted your strategy and how do you plan to pivot, if necessary, in light of the new world in which you are operating?”

Fink also highlights how environmental, social, and governance (ESG) factors relevant to a company’s business can provide essential insights into management effectiveness and asks that CEOs discuss the following issues as they engage with stakeholders during the 2017 proxy season:

  • Sustainability of the business model and company operations as they relate to environmental, social, and governance factors. “A global company needs to be local in every single one of its markets.”

  • The company’s priorities for investing in research and technology as well as the development and long-term financial well-being of employees. “The events of the past year have only reinforced how critical the well-being of a company’s employees is to its long-term success.”

  • How capital allocation strategy balances returning excess capital to shareholders with investment in future growth. “Companies should engage in buybacks only when they are confident that the return on those buybacks will ultimately exceed the cost of capital and the long-term returns of investing in future growth."

Fink advocates for corporate and government policies that will help shift “the tide of short-termism afflicting our society”, including:

  • a capital gains regime that rewards long-term investments over short-term holdings;
  • if tax reform includes reduced taxation for repatriation of cash, an explanation of whether they will bring cash back to U.S. and if so, how they will use it;
  • improved corporate capacity for internal training and education of employees to better compete for talent in a global economy;
  • development of a more secure retirement system for all workers; and
  • a concerted effort to build financial literacy in the workforce to help solve the retirement crisis.

Fink warns that where companies are not making sufficient progress toward creating long-term value, “we will not hesitate to exercise our right to vote against incumbent directors of misaligned executive compensation.”

Read Larry Fink’s 2017 Corporate Governance Letter to CEOs >>

Read Larry Fink’s 2016 Corporate Governance Letter to CEOs >>

Top Cybersecurity Concerns for Every Board of Directors: People
Publication Date: January 4, 2017

This is the second of a four-part series of white papers authored by Cybersecurity expert John Reed Stark. This series -- published for the first time on Nasdaq’s Governance Clearinghouse --outlines a strategic framework for boards of directors to effectively analyze and supervise corporate cybersecurity risks.

Companies can invest heavily in top-of-the-line security software and state-of the-art systems, but without the proper approach toward their IT employees, those efforts will be for naught. This article focuses on a board’s cybersecurity oversight pertaining to a company’s most important cybersecurity resource (and threat): its employees.

Given the tumultuous risk associated with cyber-attacks, boards of directors and C-suite executives must address cybersecurity not as an IT issue, but rather as an issue of governance. Boards and C-suite executives should establish a cross-organizational team that regularly convenes to discuss, coordinate and communicate cybersecurity issues and is supported by outside cybersecurity response firms and law enforcement agencies.

This paper provides an overview of cybersecurity governance areas that involve people, including:
  • Cybersecurity recruitment and retention
  • Top-down commitment to cybersecurity
  • Employee cybersecurity training programs
  • Digital forensics/data breach response firms
  • Law firms specializing in data breach response
  • Pre-breach law enforcement liaisons
The first paper in this series provided an overview of the critical components related to the governance practices, policies and procedures of a strong cybersecurity program. The remaining papers in this series will broadly cover the following topics:
  • Technology: the technical systems that provide the foundation for cybersecurity infrastructure.
  • Data Mapping and Encryption: the board’s oversight responsibilities with respect to two of the largest enterprise undertakings in the field of cybersecurity: encryption and data mapping.
By using these white papers as a guide, boards of directors can become not only more preemptive in evaluating cybersecurity risk exposure but they can also successfully elevate cybersecurity from an ancillary IT concern to a core enterprise-wide risk management item. 

Read John Reed Stark’s White Paper on Top Cyber Security Concerns for Every Board of Directors: People >>

Read John Reed Stark’s White Paper on Cybersecurity Governance >>

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.


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In the News
Monitoring Hedge Fund Activism in Capital Market “Wolf Packs”
Publication Date: February 23, 2017

In a blog entry on the Harvard Law School Forum on Corporate Governance and Financial Regulation, Anita Anand and Andrew Mihalik describe their recent paper examining “wolf packs,” loose networks of shareholders working together to effect change in a corporation without disclosing their collective interests. The article notes that these wolf packs are able to work around disclosure rules by being avoiding being characterized as a “group,” and describes five main conditions that may give rise to this type of shareholder coordination forming including: the nature of the target corporation’s shareholder base; the presence of an institutional shareholder that can make the formation easier; a lead activist; alliances among shareholders; as well as legal conditions surrounding shareholder coordination.

Read more from the Harvard Law School Forum >>

Seven for Seventeen: Seven Tactics for the 2017 Proxy Season
Publication Date: February 22, 2017

As companies prepare for the 2017 proxy season, Teneo Governance advises that the strategies and messages related to stakeholder outreach have become as important as the fundamental governance issues on the ballot. The firm recently published guidance outlining seven helpful hints for the 2017 proxy season. These include being prepared to pivot in response to upcoming regulatory changes, refreshing the messaging used to engage with proxy advisors, and monitoring for rogue social media narratives.

Read more from Teneo >>

ICGN Event in Washington D.C. March 1-2
Publication Date: February 21, 2017

The International Corporate Governance Network (ICGN) promotes effective standards of corporate governance and investor stewardship to advance efficient markets and sustainable economies world-wide. This year’s event will focus on building public trust, reducing income inequality, and driving governance changes. Hosted by the International Finance Corporation, a member of the World Bank Group, this event is produced in partnership with the Council of Institutional Investors.

See the complete agenda here >>

Nasdaq-listed companies can get 50% off registration costs by using this discount code: WCDMEM >>

SEC Announces Reconsideration of Pay Ratio Rule Implementation
Publication Date: February 7, 2017

Adopted by the Commission in 2015 as part of the Dodd-Frank reforms, the Pay Ratio Rule requires a public company to disclose the ratio of the median of the annual total compensation of all employees to the annual total compensation of the chief executive officer. This disclosure is required for a companies’ first fiscal year beginning after January 1, 2017. Acting SEC Chairman Michael S. Piwowar noted that some issuers are reporting unanticipated compliance difficulties that may hinder them in meeting the reporting deadline and requested public input on those challenges and whether relief may be needed. Comments are requested within 45 days.

Read more from the SEC >>

ISG Creates Framework for Improved Corporate Governance
Publication Date: February 2, 2017

The first stewardship code for the U.S. market has been officially launched following the creation of the Investor Stewardship Group (“ISG”). ISG is the result of a two-year project headed by senior corporate governance members at some of the largest U.S.-based institutional investors and global asset managers, along with several of their international counterparts, and is focused on encouraging long-term value creation for U.S. companies. The “Framework for U.S. Stewardship and Governance” is a set of principles for institutional investors encouraging higher principles in proxy voting, engagement guidelines, and acting in the best interest of shareholders, and corporate governance principles for U.S. listed companies. ISG’s Framework is expected to be effective January 1, 2018, and will apply to the 2018 proxy season. Companies should be prepared to discuss the framework with their investors.

Visit ISG’s Website here >>

Learn more from Wachtel, Lipton, Rosen & Katz here >>

SEC To Reconsider Implementation of Conflict Minerals Rule
Publication Date: February 1, 2017

Acting SEC Chairman Michael Piwowar recently announced that he directed SEC staff to consider whether the prior 2014 guidance on implementing the Conflict Minerals Rule is still appropriate and whether any additional relief is appropriate in the interim. The prior relief stayed the compliance date for those portions of the rule found to be unconstitutional, such as the requirement for companies to report to the Commission and to state on their website that any of their products have not been found to be free of conflict minerals from the Democratic Republic of the Congo.

While there was a four year transition period to implement the rule, absent further relief all public companies will be required to implement the remaining provisions of the Conflict Minerals Rules for the reporting period beginning January 1, 2017. Interested parties are invited to submit comments to the SEC through mid-March.

Read Acting Chair Piwowar’s
statement >>

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