referencelibrarybanner
Listing ETP Banner
Reference Library - Advanced Search
Find
 


Library 



 
Timeframe
Category
 
Sub-Category
** To make multiple selections, select the first criterion and then press and hold the Ctrl Key **
 
1- 50 of 77 Search Results for:
Libraries:   Governance Clearinghouse
Filters:   All Years; Issues and Trends;
 
Search   Clear


Collapse All
Printer Friendly View
Mailto Link 
Page: 1 of 2
Frequently Asked Questions
  Nasdaq Talks to. . . T. Rowe Price about Their Investment Philosophy on Shareholder Activism
Identification Number 1614
Clearhouse
Nasdaq Talks to. . . T. Rowe Price about Their Investment Philosophy on Shareholder Activism
Publication Date: June 20, 2018

Corporate management teams and boards are under intense pressure to adapt to a business environment that is rapidly and continuously changing on multiple fronts. This rapid rate of change is also driving shifts in investor priorities and tactics: Investors are protecting the long-term value of their portfolios by becoming more assertive and actively engaged with the companies they invest in, particularly in the ESG realm.

As shareholder activism becomes more prevalent in the capital markets, and activist campaigns are more often debated in the public domain, it is increasingly important for companies to understand how their institutional investors manage and respond to these situations. However, ESG issues are not universally prioritized or consistently defined within the investment community, which cultivates fear and uncertainty around activist activity.

T. Rowe Price, a global investment management firm with over $1 trillion in assets under management, proactively addressed this issue by publicly clarifying their investment policies related to shareholder activism. Key message points from T. Rowe Price's Investment Philosophy on Shareholder Activism include the following:

  • Each activism campaign represents a unique set of conditions and should be assessed on its own merits.
  • T. Rowe Price takes a multi-year view when making decisions related to activist campaigns with an objective of sustainable, long-term performance by the company.
  • Proxy voting decisions rest with individual portfolio managers.
  • Proxy contest voting decisions will be shared with both parties in the campaign in advance of the vote, upon their request.
  • Companies are asked to remain open to serious, well-supported ideas for value creation, even if they originate outside the company.
  • T. Rowe Price has adopted internal policies prohibiting investment personnel from attempting to initiate activism campaigns by indirect means, such as pitching ideas to activist investors.
  • Portfolio companies should contact T. Rowe Price directly for the firm's view on any investment or voting matter related to them; activists have no authority to speak on behalf of T. Rowe Price.
By shining a light on the firm's potential actions in managing activist agendas and campaigns, T. Rowe Price has given their portfolio companies—and the activists who may target them—a clear roadmap in dealing with the firm under those circumstances. Public companies, and the capital markets as a whole, could stand to benefit if other major investment firms and asset managers provide a similar level of consistency and transparency in their approach to managing shareholder activism.

We spoke with Donna Anderson, Vice President and Head of Corporate Governance at T. Rowe Price, about the company's investment philosophy on shareholder activism and how clarifying their stance will help their portfolio companies navigate activist investor situations.

Q: What was the impetus behind T. Rowe Price's Investment Philosophy on Shareholder Activism?

A: As T. Rowe Price has grown, and as U.S. style activism has spread to Europe, we kept finding ourselves in situations where it was clear there was confusion—either on the company's part, on the activists' part or within the firm—as to our philosophy on navigating activist campaigns. Our policies haven't changed, but we decided it was time to write them down and share them with the public. We wanted to clearly communicate to our portfolio companies what we believe our roles and responsibilities are, and what they can expect from us, if they find themselves in an activist situation.

We have also increased our disclosure around broad ESG issues in general, to make them more transparent to our clients. We updated our baseline ESG policy and published two other pieces related to ESG this year: an engagement policy and a set of responsible investment guidelines.

Q: The document states emphatically that other shareholders do not have the right to speak on behalf of T. Rowe Price. Does this happen often in activist campaigns?

A: No, I wouldn't say it happens often, but when there's a campaign of some kind there are a lot of voices chiming in, including shareholders, advisors and other investors. Communication can get chaotic and emotional.

At T. Rowe Price, we often speak with both sides in a campaign or proxy contest because understanding investor plans is part of our due diligence in those situations. We want to make it very clear that we are available to our portfolio companies during that time, and that if they hear another party make a statement on our behalf they should confirm it directly with us. We also want to make clear our instructions to other investors: While we may ask a few questions or express a particular viewpoint in meetings with activists, we don't want those conversations to be misconstrued or used out of context.

Q: What is the benefit of sharing voting decisions with companies and investors in advance?

A: T. Rowe Price has always shared voting decisions with the direct parties (the companies and the activists sponsoring proxy contests) in advance of the vote, if they ask us to. There's a message in every vote; we think it benefits management of our portfolio companies to share with them directly how we are voting and what message we are sending with that vote.

Q: Is T. Rowe Price trying to discourage short-term activism by stating the company applies a multi-year timeframe in decision-making related to activist campaigns?

A: These days, it's rare to find an activism campaign that's strictly about financial engineering, at least in our portfolios. Super short-term oriented activism campaigns can't get any traction because they are not going to get the support of long-term shareholders.

We confirmed our timeframe to clarify our decision-making process: We're not looking at the next 50 years, we're not just looking at the next three quarters. We're looking at the next several years, the next business cycle—that's the framework we use generally for our investment research. When presented with two choices, we apply that timeframe in our analysis of which path is likely to create more shareholder value.

Q: Voting independence is a tenet of the T. Rowe Price investment policy. Do proxy advisory firms play a role in contested proxy votes at T. Rowe Price?

A: Our statement about voting independence is not meant as a knock against proxy advisory firms, but to illuminate a unique aspect of T. Rowe Price's investment process: our portfolio managers have autonomy to vote individually.

We value and utilize the research we receive from ISS on our portfolio companies. However, we don't have a standing blanket policy for how we vote in proxy contests. Each contest is analyzed and voted independently in our shop.

We believe that the vote is an asset of the fund, not of the fund company. When one of our portfolio companies is the subject of a campaign of some kind, the multiple owners of the stock within T. Rowe Price—along with appropriate internal advisors and analysts—all attend meetings together to jointly discuss the situation. If multiple T. Rowe Price portfolio managers own a stock and find they ultimately disagree on how to vote, they each have autonomy to represent the interests of their own fund shareholders.

Q: Do you expect other large investment firms to follow your lead on this?

A: No one should be surprised to see an increase in transparency throughout the industry with regards to how and why investors undertake the decision-making processes that they do. It is a growing trend for investors to disclose more, particularly related to ESG issues. I can't speak for the motivations of other firms, but at T. Rowe Price we are experiencing heavy demand from our own clients for case studies, examples, and engagement stories.

Q: What is the most important takeaway for companies that may be concerned about becoming a target of an activist campaign?

A: Again, it's about direct engagement with shareholders. Companies are better off getting shareholder sentiment directly from their shareholders, rather than listening to advisors who may have a vested interest in scaring boards.

The advisory community has grown tremendously in recent years to the point that there is now an unhealthy balance of voices warning boards. Law firms, governance consultants, and others are injecting a level of fear in companies that is sometimes out of proportion to the probability they will be targeted. We meet with companies that surprise us when we hear how nervous they are about shareholder activism, because their risk of being targeted is so low they shouldn't spend much time worrying about it.

Don't assume anyone else can accurately tell you what your shareholders are thinking. Let us speak on our own behalf.

For more information, read:
T. Rowe Price's Investment Philosophy on Shareholder Activism >>
T. Rowe Price ESG Integration: Guidelines for Incorporating Environment and Social Factors >>
T. Rowe Price Engagement Policy >>

***

Ms. Donna F. Anderson, CFA serves as Vice President and Head of Global Corporate Governance at T. Rowe Price Group, Inc. Ms. Anderson leads the policy-formation process for proxy voting and T. Rowe Price's engagement efforts with portfolio companies. She also serves as a specialist for incorporating ESG considerations into T. Rowe Price's investment research process.


The views and opinions expressed herein are the views and opinions of the contributor 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.

Publication Date*: 6/20/2018 Mailto Link Identification Number: 1614
Frequently Asked Questions
  Bringing Lessons From #MeToo to the Boardroom: 7 Questions Boards Should Ask
Identification Number 1576
Clearhouse
Bringing Lessons From #MeToo to the Boardroom: 7 Questions Boards Should Ask
Publication Date: June 18, 2018

This article was originally published by MITSloan Management Review on June 7, 2018. With permission, minor changes to the text of this article have been incorporated in this version.

Boards need to be proactive in shaping a corporate culture that does not tolerate sexual harassment.

Has your board reflected upon the #MeToo and #TimesUp social movements, and about the continuing wave of CEO resignations amid misconduct allegations? Whether you are a member of the board of a public, private, or nonprofit company, procedures for addressing and preventing sexual harassment must be on your board's agenda. Directors need to do the right thing for employees, for customers, and for all stakeholders. The time for boards to act is now. Here are seven questions boards should ask.

As advisers to boards for a combined 40 years, we have had many discussions about the challenges facing companies. Understanding risk appetite and ensuring the company has a process in place for managing its risks is usually at the top of the list.

When we delve deeper into how boards manage risk, we often hear that different risks are monitored by different committees. For example, accounting risks come under the purview of the audit committee, and risks related to cash and stock incentive programs are monitored by the compensation committee.

But what about sexual harassment? Companies generally agree that while sexual harassment in the workplace is unacceptable behavior on the part of an individual, the ensuing silence or lack of consequences for the behavior reflects a problem with corporate culture — and, ultimately, culture is the responsibility of the entire board.

This begs the question: How do we monitor culture and focus board attention on preventing sexual harassment and misconduct at their organizations? Our answer, based on experience helping boards increase effectiveness, is that directors must first implore their board chair to put this topic on the board agenda. Even though it may be an uncomfortable issue, boards must start the dialogue about this "new" risk. To begin, we suggest directors ask the following seven questions:

How do our current policies measure up to best practices?

Too often, the board does not read company policies or require human resources leadership to review policies and procedures annually to gauge the effectiveness of the reporting process. Directors may think this level of review is "stepping on management's toes." However, the board must determine whether the company's current policies and procedures related to preventing workplace sexual harassment and discrimination are adequate. Asking HR how these policies are communicated and to define "best practices" is not crossing the management/board line. Directors should weigh in on whether the CEO and the management team are communicating the right message.

Do employees trust and use our procedures for reporting harassment?

While there are many methods and procedures organizations use for employees to report harassment or complaints, hotline calls to a company's dedicated ethics line are a good example. Board directors sometimes utter a sigh of relief when they hear there have not been any hotline calls at their organization, but it's a common misconception that few calls to the ethics line equates to a "good" company culture. In an open and trusting culture there are many calls — calls for how to handle a matter, calls for clarification, and, yes, some calls that report a potential problem. Informed directors ask how many calls are received in a given time period and require that calls be categorized.

The hotline is an early-warning system, and directors are looking for trends, not individual case details. Not only does this offer a chance for early intervention, it is also an indicator that employees trust the company will do the right thing. The more comfortable employees are raising issues, the lower the potential risk of the company mishandling a case of harassment. If an abuse or infraction of a policy happens, ensure it is treated fairly and consistently and that real penalties, rather than a slap on the wrist, are imposed.

When does the board get notified?

Keeping with our example of hotline reports, let's now think about how and when the board should be notified. We've found that real-time sharing of reports varies in organizations, but regardless of reporting structure, it's crucial that the full board be notified at least semiannually (though preferably more frequently) about trends and statistics of employee reports.

Directors should also understand the escalation protocols. For example, is there a mechanism to ensure that if a question is raised about the CEO's behavior, it gets immediately reported to the board chair? Ask if the right manager oversees incoming hotline calls and talk through the reporting procedures.

What is company culture like at the mid-employee level?

Boards have regular interaction with the CEO and senior executives. They convene at board meetings, strategize at retreats, and enjoy dinner together. Most often, camaraderie is genuine, and it may lead directors to believe that company culture is similarly positive.

But what about the next level down, with managers who directors see once a year, if that often? And what is the culture like among employees these managers supervise, and with whom the board never engages — how do these employees view the company?

To better understand a company's culture, directors might consider unstructured office tours. One director told us he learned more about company culture while walking around the operations floor than he did in the boardroom. Additionally, directors should ask to see the annual employee satisfaction survey results — and not just the cover page. Initiate a discussion with management about how a potential claim of sexual harassment might be handled in-house and how the board could better monitor culture.

Does the board composition need a refresh?

Companies are not static, and boards must evolve accordingly. A regular injection of new talent around the boardroom table will promote fresh ideas and a disciplined challenge to the status quo. Problems can fester when thinking becomes too insular and when no one takes a step back to deliberate on the culture of the business. One board director told us that the mere presence of a new director in the boardroom causes the conversation to change, but when the new director is a woman, this change is magnified.

Gender diversity on boards is a high priority among institutional investors. Additionally, female board members we spoke with reflecting on the #TimesUp campaign felt that if there had been support at the top of the company and better gender diversity on boards, then they might have felt comfortable speaking up earlier.

What's our crisis response plan?

Boards must be proactive in their thinking and planning around the issue of sexual harassment. Even when following best practices and promoting healthy corporate cultures, bad behavior can (and will) still occur. California provides a good example: Since 2005, employers in the state with more than 50 employees have been required to conduct two hours of sexual harassment awareness training for supervisors and executives every other year. However, what about the boards of directors for these companies? They need to be included in at least some part of this training as well.

Part of any crisis response plan requires getting ahead of a potential crisis, discussing these issues and establishing a culture of zero tolerance starting at the board level and then messaged throughout the organization.

How do we vet our board members and CEO candidates?

Sexual misconduct can be prevented, and prevention must be promoted at the top of the organization. While this is often articulated to be the case, the truth is usually more nuanced. Clearly, recent revelations highlight that we have lived in a culture where sexual misbehavior has been ignored, tolerated, and overlooked. Diversity in the boardroom can provide some mitigation in that it tends to curtail groupthink and group complacency. We need strong directors who will not be afraid to speak up or question unacceptable behavior within the organization they serve. It is easy to assume that directors, by virtue of their title, have the fortitude and wherewithal to do the right thing in all situations. But this is not always the case, and boards have a responsibility to interview and reference for these characteristics.

Instances of sexual harassment and other forms of sexual misconduct boil down to bad behavior, power abuse, and poor judgment within the organization. Failing to implement proper protocols around sexual harassment in the organization can lead to many problems including decreased brand reputation, litigation, and a variety of other risks, as well as the associated decrease in shareholder value. Boards must take the lead in fostering a respectful work culture.

***

Patricia Lenkov is founder and president of Agility Executive Search LLC. Known for her work on board diversity and a member of the Women & Leadership Advisory Council at Concordia University in Montreal, Canada, Lenkov holds a BA (with distinction) in psychology from McGill University in Montreal, and an MBA from Concordia University. She tweets @Patricia_Lenkov. Denise Kuprionis is founder and president of The Governance Solutions Group (GSG), a board advisory practice. Kuprionis is a senior fellow at the Conference Board's Governance Center, is a National Association of Corporate Directors Board Governance Fellow, and a visiting professor at Xavier University, Cincinnati, Ohio. She tweets @mdkup.


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.

Publication Date*: 6/18/2018 Mailto Link Identification Number: 1576
Frequently Asked Questions
  Strong ESG Practices Can Benefit Companies and Investors: Here's How
Identification Number 1542
Clearhouse
Strong ESG Practices Can Benefit Companies and Investors: Here's How
Publication Date: June 5, 2018

Veteran board member Betsy Atkins presents a compelling argument for proactively addressing ESG issues through formal corporate governance policies.

Environmental, social and governance (ESG) issues should be a top concern of corporate management and boards. There was a time when a public stance on ESG issues was a public relations tactic. However, in today's rapidly changing business climate, attention to ESG issues is becoming critical to long-term competitive success.

Major institutional investors recognize this and are making it clear that they expect the companies they hold to take a proactive approach to ESG policies and messaging. In his annual letter to CEOs, Blackrock's CEO Larry Fink wrote "a company's ability to manage environmental, social, and governance matters demonstrate the leadership and good governance that is so essential to sustainable growth, which is why we are increasingly integrating these issues into our investment process." During the 2017 proxy season, State Street Global Advisors (SSGA) put this ethos into action by voting against the re-election of directors at 400 companies that SSGA said failed to make any significant effort to appoint women to their all-male boards.

The advantages of proactively tackling ESG issues go beyond appeasing institutional shareholders and creating a good public relations story. A robust ESG program can open up access to large pools of capital, build a stronger corporate brand and promote sustainable long-term growth benefitting companies and investors. Here's how:

1.   Strong ESG programs can increase stock liquidity.

Individual and institutional investors alike are investing massive pools of capital in corporations that proactively govern and operate in an ethical and sustainable manner. Sustainable and impact investing is actively growing at double-digit rates. In fact, according to the US SIF Foundation, total U.S.-domiciled investments using sustainable, responsible and impact (SRI) strategies, reached $8.72 trillion, an increase of 33 percent from 2014 and a 14-fold increase since 1995. That represents about one of every 6 dollars under management.

Investment research and consulting firms like Sustainanalytics and MSCI have developed indices that measure and rank companies based upon ESG criteria relative to their industry peers. The investment funds and ETFs that benchmark these indices are raising trillions of dollars to be deployed toward companies that execute sound ESG policies; these are long-term oriented shareholders that can potentially fuel demand for your stock.

Many investment firms are also incorporating ESG evaluations in their portfolio risk assessment, which is a telling indicator that capital will continue to flow towards companies with strong ESG programs and practices.

2.   ESG initiatives can unlock competitive value.

Companies that recognize the importance of adapting to changing socio-economic and environmental conditions are better able to identify strategic opportunities and meet competitive challenges. Proactive and integrated ESG policies can widen a company's competitive moat relative to other industry players.

Starbucks (Nasdaq: SBUX) learned this as they were trying to expand their market share in China. For years after entering that market, Starbucks struggled to gain momentum on expansion. They stumbled upon the answer when they offered healthcare to their employees' parents. Once they did that, sales growth skyrocketed and now Starbucks has 2,000 stores in one of the fastest growing markets on the globe.

Executives who take steps to improve labor conditions, enhance the diversity of their teams, give back to their communities, and take a stand on sustainable environmental policies also strengthen the company's brand. As millennials in particular become employees, consumers, and investors, they take note of good corporate actors and reward them with loyalty.

3.   A proactive stance on ESG issues can keep activists at bay.

Activists have used governance weaknesses as a tool in proxy contests and campaigns against companies for years, but increasingly they are targeting management teams and boards that fail to take a proactive stance on potential environmental or social issues.

Companies that proactively address ESG issues can set the bar for the entire industry and at the same time help immunize themselves against activist intervention. Wynn Resorts (Nasdaq: WYNN) recently embraced their commitment to gender diversity by increasing the number of women on their board from one to four. With a board that is 36% female, Wynn is now in the top 40 S&P 500 companies in terms of female board representation.

If your company does become the target of an ESG-focused activist, don't despair. Activist investment firms and hedge funds are establishing their own ESG funds, such as ValueAct Capital and Jana Partners. Many of these investors are interested in collaborating with companies to develop ESG policies that unlock the long-term value we mentioned above. For example, Jeff Ubben, CEO of ValueAct Capital, recently joined the board of energy company AES Corporation to help continue the company's transition to clean and renewable energy sources (following divestiture of its coal assets).

4.   ESG Investors are "stickier."

ESG investors are values-based investors who are more interested in what happens during the next decade than the next quarter; they understand that change takes time. Investors incorporating ESG into their mandate often work alongside a company to strengthen it, as they are more interested in building long-term value over a multi-year period than in flipping the stock in the near term for a "sugar high."

5.   Companies that espouse strong ESG values tend to attract and retain the best talent.

Millennials care deeply that the companies they work for (and the businesses they support) embrace values that are aligned with their own, and environmental and social responsibility are very important to them. Employees who are passionate about the organization, who are loyal, and who feel valued drive an intangible good will that strengthens the brand of the company and improves the overall productivity of the workforce.

Best Practices

To realize the full benefit of a proactive stance on ESG issues, it's important to adhere to some best practices for benchmarking and strengthening the company's ESG program:

Identify the appropriate ESG criteria for your industry and your company.

When developing an ESG policy framework, companies should not try to be all things to all people. Rather, identify three to five measurable ESG criteria that are material to your businesses and your constituencies, and are aligned with your corporate strategies.

For example, an oil and gas company that is fracking should measure water and waste management and impacts on scarce natural resources. If your business is centered around service personnel as Starbucks is, social training on anti-harassment and racial sensitivity will make consumers feel welcome and strengthen the corporate brand. Wynn Resorts, as a business that delivers premium services to clientele, focuses on employment initiatives to ensure they attract and retain the best workforce: workplace safety and sensitivity, gender equality, a Women's Leadership Forum, and diversity and inclusion. Wynn Resorts also addresses the environmental impacts of their large hotel properties. They recycle 95% of the water they use, and many properties are LEED certified. Wynn Las Vegas just announced a multi-use development, Paradise Park, powered by 100% renewable energy sourced from a 160-acre solar energy facility, making it one of the most environmentally conscious planned developments in Las Vegas.

An effective way to benchmark your company's ESG framework relative to your peers is to research industry rankings within a major sustainability ranking index. There are a number of nonprofit global advocacy organizations that identify and rank corporate ESG programs:

These organizations, as well as ESG advisory companies like Sustainanalytics and MSCI, analyze a broad range of criteria for each industry, only some of which include: climate change impacts, natural resource scarcity, supply chain management, labor practices, political contributions, board composition and workplace diversity and inclusion. The influence of proxy advisory firms like ISS and Glass Lewis over institutional investors has grown in recent years, so reviewing the governance scores they apply to your company can be another useful benchmark.

Pursue inclusion within relevant ESG indices.

As mentioned above, inclusion in ESG index funds and/or ETFs can boost demand and liquidity in your company's stock. Once your company has identified the elements of its ESG framework, have your general counsel contact three or four ESG funds or ETFs to research their criteria for inclusion (and exclusion). From there, identify which of these indexes map most closely to your corporate strategy and to the priorities of the shareholder base that you believe represent your best long-term holders.

Most ESG pools of capital apply their own unique set of inclusion and/or exclusion criteria to determine which companies to include. For example, to qualify for inclusion in the FTSE4Good Index Series, companies must be working towards environmental sustainability, supporting universal human rights, ensuring good supply chain labor standards, countering bribery, and mitigating and adapting to climate change. Companies that have been identified as having business interests in tobacco, nuclear weapons systems, or firearms, however, are excluded from that series.

Tell your story and stay true to it.

Once your company has determined the appropriate criteria for its ESG framework, the next steps are to establish metrics, measure them on a regular basis, and share progress publicly; otherwise, you will be accused of "greenwashing." Companies that are guilty of greenwashing spin a PR narrative of high standards for environmental protections and human rights, but don't walk the talk. Greenwashing is going to become harder to get away with as the SEC increasingly calls for companies to file corporate social responsibility and sustainability reports.

Investors have a number of criteria they use to determine whether a company is greenwashing or truly integrating ESG policies in their business practices. Companies that are truly committed to executing their ESG policies make them a senior management priority of the CEO and general counsel, and tie compensation to ESG metrics. They voluntarily report ESG goals, and progress towards meeting them, to all stakeholders via the annual CEO letter, annual reports, internal corporate communications, and/or annual sustainability reports on the corporate website.

***

Betsy Atkins serves as President and Chief Executive Officer at Baja Corp, a venture capital firm. She is currently on the board of directors of Wynn Resorts, Schneider Electric, Cognizant, and a private company, Volvo Car Corporation, and served on the board of directors of The Nasdaq Stock Market LLC and as CEO and Board Chairman at Clear Standards.

Publication Date*: 6/5/2018 Mailto Link Identification Number: 1542
Frequently Asked Questions
  5 Keys to Understanding and Addressing Workplace Retaliation
Identification Number 1536
Clearhouse
5 Keys to Understanding and Addressing Workplace Retaliation
Publication Date: May 29, 2018

The Ethics & Compliance Initiative (ECI) empowers organizations to build and sustain high quality ethics and compliance programs.

An alarming trend is occurring in our workplaces; retaliatory behaviors are on the rise. According to the Global Business Ethics Survey (GBES), a longitudinal study of employees in for-profit organizations, rates of retaliation for reporting suspected wrongdoing have doubled over the past 3 years. Forty-four percent of employees who alerted management to a potential violation said that they experienced some form of retribution for having stepped forward.

Retaliation is very difficult for leaders to address; not for lack of desire or recognition of its importance. It is often not reported and therefore it quietly perpetuates, with victims sometimes experiencing ongoing punishment from management and peers. It can also be difficult to prove, with only circumstantial evidence to rely on, addressing the problem becomes even harder.

Despite the challenge, it is vital for an organization's long-term success that boards and senior leaders acknowledge and prioritize retaliation as a credible business risk.

There are 5 key insights that can help directors and executives better understand and address retaliation:

1.   Reporting and retaliation rise and fall together.

In part, the retaliation trend is the result of corporate investment in ethics and compliance (E&C) programs that encourage employees to recognize and report suspected wrongdoing. When an organization successfully implements an E&C program to encourage employees to report misconduct, they are often successful in creating "speak up cultures" with increases in reports by as much as 33%. However, along with that, they often see the employees who report being punished by their colleagues for coming forward. It is the difficult reality of E&C programs; the more employees attempt to report wrongdoing, the more likely it is that they will experience repercussions for having done so.

Twelve percent of employees who report wrongdoing only once say they experienced retribution. That number increases to almost 40% of employees who attempt to report three times. The likelihood that that those individuals will be retaliated against increases by another 50% if they try to come forward two times thereafter. Eighty percent of employees who try to report wrongdoing five or more times say they experience retaliation. This pattern is true globally. In working to mitigate retaliation in an organization, employees should feel assured in being able to report wrongdoing confidentially.

Another worrisome trend is that, in the past, reporting and retaliation have tended to rise and fall in similar amounts. However, over the past three years, reporting rose by 7% while retaliation rates increased 50%. It is difficult to say why this is the case. However, one possibility is that the majority of misconduct that was observed involved senior leaders. Generally speaking, wrongdoing that occurs at higher levels of an organization tends to be more serious in nature. The more power a violator has, and the more serious the alleged misconduct, the more likely it is that employees who report will experience reprisal.

2.   Most retaliation is social in nature.

Nearly 60% of employees who say that they have experienced retribution for reporting indicate that they were snubbed or shunned in subtle gestures, excluded from social situations, or overlooked in teaming environments. Nevertheless, half of employees say that they experienced verbal abuse by their supervisor or someone else in management, and almost 40% said that they almost lost their job.

3.   It doesn't matter whether the retribution really happened.

So long as an employee perceives that he/she has experienced retribution, the damage is done. Not only will that individual be unlikely to report the retaliation, the likelihood of their going outside the organization to report to a third party (such as an enforcement agency) is greatly increased. Furthermore, that individual is 65% less likely to come forward to report any other act of misconduct, should that take place. Therefore, it is important that management actively seeks out and manages perceptions of the reporting process.

4.   Acts of retaliation have a long-lasting and wide-reaching effect.

When retribution occurs, three new problems surface. A new form of misconduct has taken place (the retaliatory act); a new victim (the reporter) has been created; and the retaliatory act seeds an environment that is cancerous to the overall culture of the organization. Once it becomes known among other employees that retaliation occurs, there is a widespread silencing effect. Fifty-three percent of employees with first-hand knowledge of misconduct do not come forward out of fear that they will experience retribution for doing so. This fear of retribution then enables misconduct to become engrained in the culture of the organization. Therefore, tolerance of retaliation can be a leading indicator of future misconduct.

5.   Retaliation can be reduced and even eliminated.

The more an organization does to implement a high-quality ethics and compliance (E&C) program, the less retaliation occurs. While it may sound contradictory to the first insight in our list, the quality of the program makes a difference. While more than half of those who report misconduct say they experienced retaliation in companies without high quality E&C programs, only four percent say they have suffered from retaliation in companies with high quality programs. The same pattern is true for the extent to which misconduct occurs in the first place. That is because the higher the quality of the program, the stronger the culture in the organization. The stronger the culture, the less retaliation occurs.

To improve the quality of E&C efforts, boards and executives should shift from a narrow view of risk and compliance to a broader focus on culture and accountability. Message matters. Individuals are more likely to come forward to report wrongdoing if they believe that their report will make a difference; and they trust that they will be protected by management if they come forward. That is not a message of compliance. Boards should insist that management establish safe "speak up cultures" that emphasize a set of core values as the highest priority and the standard for all conduct. Management should also promote the availability of resources for those who observe wrongdoing; empower individuals to come forward; and clearly communicate that all individuals who engage in retaliation will be disciplined.

When it can be identified, retaliation is very difficult to prove in such a way that management can formally respond with legal or disciplinary action. Yet it is essential for leaders to find a way to address retaliation, for the sake of individual employees and the ongoing vitality of the organization.

***

The Ethics & Compliance Initiative (ECI) is a best practice community of organizations that are committed to creating and sustaining high quality ethics & compliance programs. ECI provides independent research about workplace integrity, ethical standards, and compliance processes and practices in public and private institutions.


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.

Publication Date*: 5/29/2018 Mailto Link Identification Number: 1536
Frequently Asked Questions
  Betsy Atkins Talks to Arthur Levitt about the Current State of Boards: Part 3
Identification Number 1534
Clearhouse
Betsy Atkins Talks to Arthur Levitt about the Current State of Boards: Part 3
Publication Date: May 23, 2018

What is the role of the board in keeping companies relevant? What is a "dinosaur" board and why should you avoid one at all costs? How can boards proactively prepare for activists? Are we entering a new era for boards?

During a wide-ranging and informative interview, veteran board member and venture capitalist Betsy Atkins and Bloomberg Radio host and former SEC Chairman Arthur Levitt discuss these important topics, and more. We divided their interview into three separate articles. Parts 1 and 2 were posted previously. Part 3 is presented below.

Arthur Levitt: You say that the biggest threat to companies these days is that they aren't relevant. What can a board do to keep a company relevant?

Betsy Atkins: The board can open the aperture and look externally by bringing in outside speakers. The board can also add learning visits to their multiday annual strategy off sites, including visits to key geographic areas like Silicon Valley, China, Hangzhou and Shenzhen.

AL: What are the qualities of an effective board member?

BA: Active listening, active self-education on the company's sector and competitors, an independent frame of reference and a commitment to be an asset and add value to the company, versus just providing oversight. Oversight is merely table stakes.

AL: Should outside consultants be brought in to help source new board members?

BA: Yes, external search firms can be very helpful and their networks can be indispensable to creating a diverse slate of candidates.

AL: You would like to see a sunset clause for directors. Why, and how is this clause structured?

BA: Yes, I think it would be valuable for boards to have a sunset clause of 10-12 years for directors. I think that board members can "go native" at a certain point in time and lose objectivity and contemporary relevance. Boards need to refresh their boards regularly to meet the opportunities and challenges of the next five to seven years of the company's journey, just as they forward-hire their leadership team given the outside market velocity of change.

AL: You warn against serving on a "dinosaur" board—what is this? In general, if asked to be on a board, what questions should I ask about the company?

BA: A dinosaur board is a board where there is very little engagement, it's very formal, and management is reluctant to share the juicy strategic challenges, issues and decisions—instead they only bring topics to the board when they are fully and finally baked for ratification. Typically, these tend to be larger boards.

What I look for when vetting a board to serve on is a size of nine members or fewer and board colleagues who are very differentiated from one another with multiple diverse experiences that I can learn from. I look for a CEO who is open minded and who sees the board as an asset, not a necessary evil. I look for a company that can be a category owner or leader in a space that is going through significant change, since I personally find that more interesting.

AL: You made a list of things a board should look at annually, and one of them is to do an "activist review." What is this?

BA: An activist review is an external view of your company from the point of view of an activist. Ask yourself is there value to unlock by spinning off divisions or selling assets, how has your company compared to peers on financial metrics like bloated headquarters costs and G&A? Has your company been efficient with how they have spent their capital? Are you performing in the top quartile of your peers or not? You should have your bankers or an outside specialist firm like Spotlight Advisors (a specialist in activism) perform this review.

AL: You say that boards need to consider the "lifecycle" of their companies when making decisions. Would you explain?

BA: In the 90's, Jim Collins (who wrote the book Good to Great) pointed out that 40% of all companies cease to exist in 20 years. Today, that lifecycle has become considerably shorter—more like 50% of companies are gone within a decade. Companies should look closely at where they are in their lifecycle: Are you going to slowly melt and lose value for the shareholders? Are you an octogenarian company? Is it time to go private or sell yourselves or merge? Are you able to innovate and grow? (Sometimes you have the DNA to do that and sometimes you don't.) At Polycom where I was a director, we concluded it was the right thing to take the company private.

AL: Is there such a thing as an independent director?

BA: Yes, I believe so. Directors need to have 100% alignment as a fiduciary for the shareholders. If you make every decision as if every penny of your life savings—and every penny of everyone in your family and your village—depends upon it, then you will always have the right business judgement on behalf of the shareholders.

AL: Do most boards have adequate crisis management plans ready?

BA: Absolutely not. Boards should review crisis management plans annually. As part of their annual enterprise risk management audit process, boards should identify the top risks and have specific crisis management plans in place for each and every one. Importantly, boards should test these plans with a simulated test annually, just as they would conduct disaster recovery testing annually.

AL: Is the blockchain and its disruptions a topic that boards are concerned about now?

BA: I think the blockchain protocol is particularly relevant to specific industries, like financial services and real estate with distributed transactions. It is in the early emerging stages and companies in the affinity industries should do some research as to whether it will be relevant for their boards. For a traditional manufacturing or retail company, it may not be as relevant.

AL: How have boards changed over the years you have served?

BA: In the 1990's, board service was formal and there was a lower amount of interaction for directors. It was death by PowerPoint and formal approvals. The Enron and WorldCom meltdowns resulted in a very important but little understood catalyst of change—the executive session. Directors were then unsupervised and able to talk amongst themselves about their thoughts of the company's performance and risks, which led to the annual strategy off-site, which coupled with the internet era and technology acceleration has led to a higher level of board engagement. The new era will be one of boards looking forward to the future competitive contemporariness, as opposed to backward looking last quarter oversight.

For more information, read Betsy Atkins Talks to Arthur Levitt about the Current State of Boards: Part 1 and Part 2.

***

Betsy Atkins serves as President and Chief Executive Officer at Baja Corp, a venture capital firm. She is currently on the board of directors of Wynn Resorts, Schneider Electric, Cognizant, and a private company, Volvo Car Corporation, and served on the board of directors of The Nasdaq Stock Market LLC and as CEO and Board Chairman at Clear Standards.

Arthur Levitt is currently the host of Bloomberg Radio's "A Closer Look with Arthur Levitt" and serves on the board of directors at Bloomberg LP. Levitt was the 25th Chairman of the U.S. Securities and Exchange Commission, and in 1999, became the Commission's longest-serving Chairman until his resignation in 2001. He also serves as a senior advisor to Goldman Sachs & Co. and an advisory board member of the Knight Capital Group.



The views and opinions expressed herein are the views and opinions of the contributors 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.

Publication Date*: 5/23/2018 Mailto Link Identification Number: 1534
Frequently Asked Questions
  Betsy Atkins Talks to Arthur Levitt about the Current State of Boards: Part 2
Identification Number 1513
Clearhouse
Betsy Atkins Talks to Arthur Levitt about the Current State of Boards: Part 2
Publication Date: April 19, 2018

How can boards diversify to manage change? Is the CEO Pay Ratio rule going to be effective? When should the CEO and Chairman of the Board roles be separate?

During a wide-ranging and informative interview, veteran board member and venture capitalist Betsy Atkins and Bloomberg Radio host and former SEC Chairman Arthur Levitt discuss these important topics, and more. We divided their interview into three separate articles and posted Part 1 last month. Part 2 is presented below.


Arthur Levitt: What is the best case for diversity in the boardroom and what should diversity really mean? It's not just about gender, right?

Betsy Atkins: Correct, it's about cognitive diversity: how people think differently and problem solve differently. Diversity should be the diversity of backgrounds in the board room, diversity of domain experts in the company's industry, and diversity of functional experts such as financial experts for audit committee, digital experts, and geographic diversity. It should not simply be gender. I'm not a believer in affirmative action. Hire the best people who bring you diverse thought, as that brings the best business judgment for the shareholders.

AL: You write about how companies should "manage" diversity. What do you mean by that?

BA: What I mean by managing diversity is to really look into your board composition and think about how to forward hire the optimal set of differentiated and complementary perspectives required for effective oversight. The board should be an asset that the CEO and management can leverage to help stress test future plans as well as perform broad oversight for current plans. Just as management refreshes their leadership team frequently, the board should be refreshed to meet the challenges and opportunities the company will face during the next five to seven years, given the velocity of change.

AL: BlackRock recently updated its proxy voting guidelines, adding a stipulation that it expects companies to have at least two women directors on their boards. When it comes to more women on boards, are you in favor of quotas or targets?

BA: I don't like the idea of quotas. I'm certainly supportive of embracing aspirational targets, but it has to be based on qualified people—the board shouldn't lower the quality bar to achieve a quota. Fortunately, there are plenty of qualified women and minorities out there.

AL: Why is the U.S. so far behind in either quotas or targets for getting more women on boards?

BA: While the U.S. is behind, they have made incremental progress. The 2017 Spencer Stuart U.S. Board Index reported that the percentage of women serving on S&P 500 boards in 2017 increased to 22% of all directors from 17% in 2012, and that 80% of boards now include two or more women, which represents a significant increase over 61% in 2012. The U.K. has been more aggressive, and has set a target of 33% for the number of FTSE 350 board seats held by women by the year 2020.

AL: Will companies find women for their boards if they don't specifically go looking, with some kind of pressure to diversify?

BA: I expect big changes this year, because the large index funds are now pushing gender diversity, which is going to be a huge accelerant. If boards are serious about diversity, they need to mandate that for every board seat they are going to fill at least one-third to half of the candidates on the board search panel are female. But again, diversity should be broader than gender diversity.

AL: What do you think of NYC Comptroller Scott Stringer's Boardroom Accountability Project?

BA: It's hard to establish a quantitative matrix that truly identifies diversity of thought. The concept is sound, but what boards should really be looking for is diversity of experience, so the board has multiple business models to call on from their past to solve current and future business challenges. For example, if you spent your entire 35-year career in one company, you would only have that company's model of how to approach and solve problems, only that company's "cycle time" and sense of urgency in problem solving, which is probably too slow today. The goal should be to build a high performing board that is able to access the contemporary director's business judgement ability.

The matrix is a reasonable starting point for the conversation, but ultimately the matrix is a quantitative concept and the board makes a judgement that is more qualitative than quantitative.

AL: This will be the first year that the ratio of a CEO's total compensation as compared to that of a median employee must be disclosed. What do you think of this rule?

BA: This rule will prove to be more of a media event than a driver of change. It's going to be confusing and create noise without driving valuable and actionable insight. CEO pay thresholds are completely different industry to industry: there will be a profound difference in pay ratios between a company that has the bulk of its workforce in India and that of a company with an all-American workforce that is far more highly paid. Even when comparing a company with its own peer set, again, it's a challenge to find the right peers outside of a company's direct competitors.

AL: Do you think consultants are helpful to boards in setting CEO compensation?

BA: I think compensation consultants are helpful in gathering factual data.

AL: How would you advise companies to structure CEO pay to encourage long term growth?

BA: Practical reality is that companies have to pay their CEOs relatively competitively in comparison to direct competitor peers. The long-term growth part of compensation should be based on a small number of very specific quantifiable metrics such as market share, new product introduction, and geographic expansion. The metrics are long-term and measurable, versus the typical short-term annual metrics of revenue, profit and total shareholder return.

AL: Where are you on the question of whether it is ever a good idea for the CEO to also serve as Chairman of the Board?

BA: I think it's very specific to each company. Although a majority of companies still combine the two roles, it currently stands at just over the 50% mark and that statistic is falling. In a situation where a company has a first-time or new CEO, it is a better governance practice to separate the Chairman from the CEO. When the CEO has been serving for a long time, or is successful, recognized and acclaimed, it can be viewed as a major issue by an incumbent CEO if he or she doesn't get the chairmanship when the sitting Chairman exits the board.

Every board should have a strong independent lead director, with a mechanism in the by-laws for annual review enabling rotation. All boards should have a method for orderly chairman replacement to be prepared when the need arises.

AL: You believe the most important role of the board is to choose the CEO. What do you look for in a CEO?

BA: The key thing to look for in a CEO is to match the company's CEO profile to the stage of the company. For example, if your business model is perfect, and all you need to do is a little bit more revenue, a little more profit a little faster, it would point you toward an internal candidate who can continue to implement the current strategy. If your company is going to face big transformation and change in its competitive landscape, you may want to look outside for a candidate with a transformational growth skillset and experience.

AL: What is your best advice for a new CEO faced with a new board?

BA: You need to create a rhythm of being in touch with each board member at least once a quarter. You would be well served to engage the committee chairs in working with you to create an annual board calendar of important topics that the board wants to review annually. Start every board meeting with a state of the union and clearly identify one or two topics you want the boards input and engagement on each meeting. They came to contribute and participate, and you'll lose control of the meeting if you don't point them to where you want their input.

Be sure to get a thorough debriefing on every executive session and memorialize back to the board any topics for future follow up.

For more information, read Betsy Atkins Talks to Arthur Levitt about the Current State of Boards: Part 1

***

Betsy Atkins serves as President and Chief Executive Officer at Baja Corp, a venture capital firm. She is currently on the board of directors of Wynn Resorts, Schneider Electric, Cognizant, and a private company, Volvo Car Corporation, and served on the board of directors of The Nasdaq Stock Market LLC and as CEO and Board Chairman at Clear Standards.

Arthur Levitt is currently the host of Bloomberg Radio's "A Closer Look with Arthur Levitt" and serves on the board of directors at Bloomberg LP. Levitt was the 25th Chairman of the U.S. Securities and Exchange Commission, and in 1999, became the Commission's longest-serving Chairman until his resignation in 2001. He also serves as a senior advisor to Goldman Sachs & Co. and an advisory board member of the Knight Capital Group.



The views and opinions expressed herein are the views and opinions of the contributors 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.

Publication Date*: 4/19/2018 Mailto Link Identification Number: 1513
Frequently Asked Questions
  Society for Corporate Governance Complimentary Directors' Cut Newsletter
Identification Number 1514
Society for Corporate Governance Complimentary Directors' Cut Newsletter
Publication Date: April 19, 2018

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

Read the Society Alert - Directors' Cut for 2018 Q1 >>

Subscribe to the newsletter here >>
Publication Date*: 4/19/2018 Mailto Link Identification Number: 1514
Frequently Asked Questions
  Non-GAAP Measures: Questions and Insights
Identification Number 1511
Clearhouse
Non-GAAP Measures: Questions and Insights
Publication Date: April 9, 2018

Cindy Fornelli is the Executive Director of the Center for Audit Quality (CAQ).

The use of financial measures that do not conform to US Generally Accepted Accounting Principles (GAAP) has long been the subject of debate—even controversy. While it has ebbed and flowed over the years, this discussion is unlikely to disappear.

Consistent with its mission to convene and collaborate with stakeholders to advance the discussion of critical issues, the CAQ held a series of 2017 roundtable discussions regarding the presentation and use of non-GAAP measures—and the opportunities to enhance trust and confidence in this information. Each roundtable was attended by approximately 20 to 25 individuals including audit committee members, management, investors, securities lawyers, and public company auditors. Because the presentation and use of non-GAAP measures can vary from industry to industry, each roundtable focused on a specific industry: pharmaceutical, real estate, and technology.

These events each began with a set of key questions, on which participants provided no shortage of insights. We have published a full report, Non-GAAP Measures: A Roadmap for Audit Committees, on the roundtables' findings, as well as a companion video that provides additional context and real-life examples of how audit committees are thinking about non-GAAP measures.

Here, we provide some high-level key themes.

Why is GAAP so important?

No discussion of non-GAAP measures can take place without a discussion of GAAP itself. At the roundtables, participants made clear that they view the GAAP information as the "bedrock" or "starting point" for the financial information that companies present. GAAP, they said, provides a useful baseline that offers comparability from one company to the next.

If GAAP is the bedrock, why do companies present non-GAAP measures?

Participants were asked to share their views on what drives the presentation and use of non-GAAP measures. Several common themes emerged from the discussion.

  • Demand from investment analysts: Participants shared that requests from investment analysts are often a primary reason company management chooses to present a non-GAAP measure. Investment analysts find that non-GAAP measures help them better understand the company's underlying business performance or forecast the company's long-term value in their proprietary models.
  • Desire to tell the company's story: Participants also acknowledged, however, that company management does not present non-GAAP measures solely for investment analysts. Rather, non-GAAP measures can be a tool to help tell a company's story and provide users of the information with insight into how management evaluates company performance internally. In some cases, non-GAAP measures are also an input into how the company compensates employees for company performance.

What are top challenges related to non-GAAP measures?

Participants acknowledged that non-GAAP measures present challenges to certain stakeholders in the financial reporting supply chain.

  • Investors are challenged by the lack of consistency in the calculation of non-GAAP measures from one company to the next. Such irregularity makes it difficult for non-GAAP measures to be compared across companies—even within the same industry. It also can be a challenge for end-users to know whether the performance reported by the press is a GAAP measure or a non-GAAP measure.
  • Management representatives indicated that they spend a significant amount of time (1) discussing what information to include in or exclude from non-GAAP measures they present, and (2) making sure the information is presented fairly and disclosed transparently.
    Audit committees noted that their challenges related to non-GAAP measures tend to be an extension of management's challenges. Audit committees want to understand the reason the company is presenting the measure, and the roles and responsibilities of those involved with the information, including company personnel (e.g., finance and internal audit) and the external auditor. Further, they want to know how the company's non-GAAP measures compare with the information presented by peer companies.

To address challenges, should non-GAAP measures be standardized?

Not necessarily. Representatives from management at all of the roundtables indicated that standardization may limit their ability to tell their companies' story.

The real estate industry makes use of a supplemental standardized non-GAAP measure: funds from operations (FFO). The FFO measure, which was defined by Nareit, is in widespread use and is recognized by the Securities and Exchange Commission. That said, in addition to reporting Nareit defined FFO, companies report various forms of FFO (e.g., adjusted FFO, normalized FFO, company FFO). So even within one industry that has agreed on a standardized non-GAAP measure, there are still variations on how it is reported.

Why is dialogue so important around non-GAAP measures?

Participants emphasized the significant judgment involved in determining how to treat a one-time transaction or event in non-GAAP measures, and they agreed that company management and audit committees strive to execute good judgment when making these decisions. To that end, many companies have enhanced the rigor of their presentation and disclosure of these metrics.

There was consensus among participants that audit committees can promote rigor related to non-GAAP measures by having a dialogue with company management as well as internal and external auditors. Among other things, this dialogue can help the audit committee to set clear expectations regarding the roles and responsibilities—relative to non-GAAP measures—of each member of the financial reporting supply chain.

What is the external auditor's non-GAAP role?

In a nutshell, the external auditor's opinions on the company's financial statements and, when required, the effectiveness of the company's internal control over financial reporting (ICFR) do not cover non-GAAP measures. Professional auditing standards indicate that the auditor should read non-GAAP measures presented in documents containing the financial statements (such as annual and quarterly reports) and consider whether non-GAAP measures or the manner of their presentation is materially inconsistent with information appearing in the financial statements or a material misstatement of fact.

Though external auditors do not audit non-GAAP measures as part of the financial statement or ICFR audits, audit committees and management may consider leveraging the external auditors as a resource when evaluating non-GAAP measures.

How can the audit committee enhance its non-GAAP role?

At the roundtables, there was wide recognition of the benefits of increased audit committee oversight and involvement with non-GAAP measures. The CAQ's full roundtable report offers audit committees insights on the way forward. It is available free of charge at the CAQ website.

***

Also from the CAQ see Preparing for the Leases Accounting Standard: A Tool for Audit Committees. This tool is designed to help audit committees exercise their oversight responsibilities as companies implement the new lease accounting standard, which will begin to take effect in January 2019.

***

A securities lawyer, Cindy Fornelli has served as the Executive Director of the Center for Audit Quality since its establishment in 2007.


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.

Publication Date*: 4/9/2018 Mailto Link Identification Number: 1511
Frequently Asked Questions
  DTCC Calls for Cross Industry Cooperation in Case of Cyber Attack
Identification Number 1508
DTCC Calls for Cross Industry Cooperation in Case of Cyber Attack
Publication Date: March 28, 2018

The Depository Trust & Clearing Corporation (DTCC) recently published a white paper that makes several recommendations to strengthen financial sector resiliency from cyber-risks, including increased coordination across the industry, the development and implementation of standards to facilitate effective response and recovery and adherence to regulatory principles. Andrew Gray, Chief Risk Officer at DTCC, stated, "An attack on one or more institutions or critical infrastructures could have a contagion effect across the financial system, especially as interconnectedness continues to grow. As a result, it is critically important that firms incorporate additional redundancies to ensure that the failure of any single institution can be contained and mitigated. To successfully achieve this, we must collectively prioritize resilience and recovery efforts across market participants, infrastructure providers, technology vendors and regulators."

Read more >>

Read the DTCC white paper here >>
Publication Date*: 3/28/2018 Mailto Link Identification Number: 1508
Frequently Asked Questions
  Betsy Atkins Talks to Arthur Levitt about the Current State of Boards: Part 1
Identification Number 1506
Clearhouse
Betsy Atkins Talks to Arthur Levitt about the Current State of Boards: Part 1
Publication Date: March 27, 2018

How should boards deal with sexual harassment issues? What is the best way to protect a company from cybersecurity threats? What is it really going to take to improve diversity in the boardroom? Why does every company need a digital director and a tech committee?

During a wide-ranging and informative interview, veteran board member and venture capitalist Betsy Atkins and Bloomberg Radio host and former SEC Chairman Arthur Levitt discuss these important topics, and more. We have divided their interview into three separate articles, which we will post over the coming months. Part 1 is presented below.


Arthur Levitt: You have spent decades on multiple boards. What is the current state of boards? Are most boards still stuck in the past, or are they evolving with the times?

Betsy Atkins: Boards are evolving with the times, but not quickly enough. Velocity of change has not totally permeated the boardroom. Boards are still heavily focused on a one-year lens with a quarterly operational focus, versus a longer-term horizon of understanding the rapidly changing competitive landscape and the need of the company to stay contemporary and vibrant for the future.

AL: What will be the "big issues" for boards during 2018?

BA: There are two ways to answer that: There are the "corporate governance watchdog" issues of Institutional Shareholder Services such as board committees, refreshment, diversity, and ESG (environmental, social, and governance) issues. However, I think the bigger and more important issue for corporate boards is going to be "the business of the business." Failing to employ new technologies and new business models to keep companies competitive is a bigger threat to the well-being of a business than corporate hygiene governance issues.

Companies underperform when they don't remain vibrant and contemporary. The big issues are understanding new business models like the Ebay (Nasdaq: EBAY) marketplace and how that applies to other businesses, or the sharing economy where you see Airbnb emerge or the rise of the gig economy which has employees working "gigs" as opposed to full-time corporate jobs. Boards need to examine how to employ machine learning and AI to replicate highly-paid white collar employees in traditional industries like insurance. The biggest threat is that a company slowly melts while new interlopers capture their market share.

AL: How would you counsel boards to deal with the issue of sexual harassment both in resolving potential current issues and how to move forward? What kind of crisis plan would you recommend boards consider?

BA: Boards are responsible for oversight of tone at the top, compliance training and the escalation process; the values and code of conduct of the company are exemplified by the full leadership team. Most companies have mechanisms in place to escalate issues, including hotlines to the audit committee, the chief human resources officer, or the general counsel. When a potential issue is raised, the board needs to own it quickly, conduct a rapid first-pass review to determine if a serious problem exists, and then make a business decision whether or not to conduct a broader investigation.

One mistake many boards make is to abdicate that first-pass review to their outside law firm instead of using a firm that specializes in background checks and investigations. Outside law firms are slower, more expensive, and they typically subcontract out those internal investigations.

AL: 145 million Americans had their data breached at Equifax. Did this rattle companies about cybersecurity threats, and is this the biggest issue for boards now?

BA: Cybersecurity breach is inevitable. Boards need to understand that statistically, every company has already been breached. The relevant question to ask is "What is the board's cyber oversight practice?"

Boards should utilize standard measures like the National Institute of Standards and Technology framework of 22 computer security items. The company should conduct regular, unscheduled penetration testing, and ensure that critical intellectual property is segmented and protected. For example, if a pharmaceutical company is developing a new blockbuster drug, it's critical to shareholders that data related to the new molecule compound is segregated and has special protection. Companies should implement appropriate training so employees don't respond to phishing. Large companies should also have an independent, third-party cyber monitoring service.

Corporations also need standing tech committees, versus overloading their audit committees. Cyber is a forward-looking threat, while most audit functions are forensic and backward-looking.

However, cyberthreats are not the biggest issue for boards now. The biggest issue is that the company continuously evolves to remain contemporary, innovative, and competitive.

AL: At HD Supply, where you are on the board, the company did a review of cyberthreats. What did you find and what did management do?

BA: HD does very serious cyber oversight and brings in external cyber experts to educate the board. HD also has the chief information security officer present to the board annually and the company leans in to be sure we have proper training of our employees against phishing, which is the biggest vulnerability. With Distributed Denial of Service (DDoS) ransomware attacks gaining prevalence, we took the step to adopt a ransomware policy and we opened a bitcoin account, so we would be able to decrypt files if we had a DDoS attack.

AL: Betsy, you advise that these days, all boards need a digital director. What is this?

BA: A digital director has broad technology experience in tech realms such as large enterprise software systems, on-premise software and cloud computing, mobile, social media, machine learning, AI and cyber. More importantly, good digital directors bring understanding of innovation methodologies like distributed agile development and new business models like online marketplaces, gig economies like TaskRabbit and Thumbtack, and shared economy ownership models like Uber and Airbnb.

Digital competency is not covered by just one tech silo, so boards need at least one, but preferably two or three, digital directors due to the velocity of change.

AL: On February 20, the SEC voted to force companies to disclose cyberattacks. The Securities and Exchange Commission's new guidance says companies should inform investors about cybersecurity risks, even if they have not yet been targeted by hackers in a cyberattack. It also stresses that companies publicly disclose breaches in a timely fashion, and instructs firms to take steps to prevent executives and others with previous knowledge of a breach from trading in its securities before the information is made public.

BA: The SEC guidance on cybersecurity disclosure is sensible. The market will reward or punish companies that do or don't disclose. We must be mindful of the impact of over-regulation, which you can see as Sarbanes Oxley has impacted the number of IPOs. Before SOX, there were an average 528 IPOs a year. Since it was enacted, an unintended consequence is that number has fallen to 135, a decline of nearly 75 percent.

AL: Where should responsibility rest for cybersecurity: with the audit committee and board, with congress or with regulators?

BA: Cybersecurity oversight should rest with the board, under the purview of a newly created tech committee—audit committees are too busy. The free market will reward or punish companies that are not careful with data patching, current cyber protection and breach mitigation. Corporations have a huge economic incentive to protect their brand with consumers and to protect their most valuable intellectual properties.

***

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

Arthur Levitt is currently the host of Bloomberg Radio's "A Closer Look with Arthur Levitt" and serves on the board of directors at Bloomberg LP. Levitt was the 25th Chairman of the U.S. Securities and Exchange Commission, and in 1999, became the Commission's longest-serving Chairman until his resignation in 2001. He also serves as a senior advisor to Goldman Sachs & Co. and an advisory board member of the Knight Capital Group.



The views and opinions expressed herein are the views and opinions of the contributors 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.

Publication Date*: 3/22/2018 Mailto Link Identification Number: 1506
Frequently Asked Questions
  Five Things Your Company Can Do Now to Prepare for GDPR
Identification Number 1499
Clearhouse
Five Things Your Company Can Do Now to Prepare for GDPR
Publication Date: March 1, 2018

Enforcement of the EU's General Data Protection Regulation (GDPR) begins in just a few months on May 25th of this year. Consistent with the EU's approach to privacy as a "fundamental human right," the regulation requires businesses established outside of the EU to protect personal data and individuals' privacy rights when offering goods and services in the EU or monitoring the behavior of EU citizens. Companies that fail to comply face steep fines (up to four-percent of total "turnover" or revenue). The business case for compliance with GDPR goes beyond fines from the EU: Poor data security can costs businesses dearly in terms of data breach mitigation costs as well as consumer confidence and trust.

Time is running out for U.S. companies transacting business in the EU to become "GDPR ready," but given that the GDPR leaves much to interpretation, the exact requirements of the law are likely to evolve over time. Michael Kallens, Associate General Counsel, Ethics and Compliance at Nasdaq, shares practical advice for companies in the midst of ensuring their privacy programs meet GDPR's and EU regulator expectations.

1. Think of May 2018 as milestone, not a deadline.

GDPR is a standards and principles-based law, rather than prescribing precise technical requirements. Formal guidance from the EU is pending on many fronts, so there is a great deal of uncertainty about what exactly the law requires, how it will be interpreted, and how it will be enforced.

As companies prepare to meet the regulation's enforcement date of May 25, it's important to remember that an entire eco-system will impact how this law is applied. This includes:

  • Enforcement and audits (which will not occur until after May 2018);
  • National laws implementing the GDPR, which can add or vary requirements in the regulation;
  • Intersection of the GDPR with other laws, such as MiFID2, ePrivacy, and employment laws;
  • General best practices and industry-specific best practices;
  • Customer requirements, especially if the company is a processor, in the B2B space or delivering services to large multi-national companies;
  • Actions by public interest groups;
  • Shareholder expectations; and
  • Events including privacy incidents, hacks, and data mishandling.
Even if a company has put in place compliance measures to meet core elements by May, it will need to adjust the program and monitor for any changes as the initial enforcement actions and cases alleging non-compliance will bring more clarity to how obligations will be applied in practice.

2. Prioritize, plan and get buy-in.

When developing the plan to become compliant with GDPR, consider all the necessary stages of rollout: outreach to build initial awareness, baselining compliance program and identifying improvements, operationalizing enhancements, and maintaining continuing compliance. A project of this magnitude requires a formal project manager in addition to subject matter experts to allocate work, manage tasks and provide rigor and accountability around the effort. The project needs to include a clear transition point where the effort will convert from a "project" to an ongoing, operational compliance program that will continue indefinitely.

Consider the following when prioritizing compliance activities and/or enhancements:

  • Tasks with long lead times or dependencies like programming or system changes;
  • Changes to core business processes (as opposed to minor adjustments or changes to contingent/ancillary processes);
  • Processes like data mapping that involve data calls, which always take a longer time to complete than estimated;
  • Regulatory impacts particular to your company's industry, including requirements needed to comply with customer commitments or continue to deliver services; and
  • Opportunities for privacy to be incorporated with other change efforts (e.g., existing projects to improve information security or data governance).
Once the plan comes together, buy-in and continued engagement from senior executives is critical to ensuring the plan will be adhered to and necessary decisions are escalated to the right level.

Companies should not try to do everything at once but rather prioritize based on needs and risk. During the awareness phase of the project, publicize the project plan, including the calendar for implementation. A good outreach and awareness effort will provide details to the departments and functions that will be involved in compliance, while simultaneously communicating how the project will be staged so the teams know when requirements relevant to them will be addressed.

3. Build out the implementation team and delegate.

Responsibility for building up to compliance with the GDPR should be distributed throughout the organization, with leads reporting to a central project team and supported by compliance – not compliance doing everything for everyone. Any enterprise of significant size will need to establish a formal project management structure using well-established governance practices for significant change management projects, including a steering committee, a project manager following project management discipline, subject matter experts, and work streams with assigned leads.

The GDPR will affect virtually every type of professional discipline supporting the organization, including HR, marketing, audit, law, and finance. Professional organizations in each of these disciplines are setting up forums and crafting best practices to support compliance. Corporate compliance should encourage project leads within these various disciplines to be engaged with their professional associations to gather best practices and remain informed. It is important to ensure that the project does not become a "legal project" or an "information security program" as success is dependent on engagement in all departments throughout the organization.

Beyond what the law requires, companies serving as data processors need to consider the legal obligations that GDPR introduces directly on the data processors as well as customer requirements and market practices of competitors. To help account for this, sales and account management teams should also be involved.

4. Document, document, document.

A core tenant of privacy compliance is to "say what you do and do what you say" regarding personal data handling. With GDPR, contemporaneous documentation of how customer data is being handled within the organization is critical. A key update to the law is maintaining a record of processing regarding each type of personal data used by the organization. Documenting processes is a tedious task, but one that requires assigned responsibility to ensure it is completely in a timely manner and consistently maintained. Companies should consider requiring key business owners to certify to the accuracy of their portions of the record of processing similar to how they certify compliance with SOX requirements.

5. Account for cultural challenges to compliance.

A company's culture can have greater impact than policies and procedures on compliance; therefore, any GDPR compliance program needs to account for the culture of the organization. Consider whether the company is a "hoarder of information," "asks forgiveness rather than permission when innovating" and other ways corporate culture may impact data privacy compliance. And as with any major change, a plan to build to compliance with the GDPR should consider ways to influence the levers of change within the organization. Any such change should look to build on the strengths of the culture to achieve compliance.



Learn more about Nasdaq BWise and how BWise can support your organization with all aspects of GDPR compliance >>

***

Michael Kallens is an Associate General Counsel in Nasdaq's Office of General Counsel and a senior member of Nasdaq's Global Ethics and Compliance Team. Michael has led industry working groups on developing best practices for corporate ethics programs and is a frequent speaker on ethics and compliance topics. In 2014, he received the Outstanding In-House Counsel Award from the Association of Corporate Counsel-National Capital Region for his work in the area of corporate ethics and compliance.

Publication Date*: 3/1/2018 Mailto Link Identification Number: 1499
Frequently Asked Questions
  5 Barriers to Gender Parity in the Boardroom
Identification Number 1493
Clearhouse
5 Barriers to Gender Parity in the Boardroom
Publication Date: February 14, 2018

Despite calls to action from a swelling number of advocacy groups and the investment community, women remain drastically underrepresented in the boardrooms of Corporate America.

A Business Journals study published last month found that men outnumbered women by a six-to-one ratio in the boardrooms of the 3,000 publicly traded companies included in the study. That ratio increases significantly for companies with market caps under $1 billion.

In honor of International Women's Day in March, Nasdaq's Governance Clearinghouse is publishing a series of articles that will explore practical solutions to closing the gender gap in public company boardrooms. To kick off this series, we've invited Coco Brown of The Athena Alliance to share her perspective on the top barriers women face when breaking through the boardroom ceiling.

We want our readers to join this important conversation: What ideas or approaches do you believe would improve gender diversity in the boardroom? Send your ideas to governancenews@nasdaq.com no later than February 28th. We will compile the most compelling ideas and publish them on International Women's Day in March.

The Athena Alliance has a unique boots-on-the-ground role in moving the needle towards gender parity in the boardroom. Because we serve on the front lines of this initiative, we have a close-up perspective of the obstacles women face as they seek seats at the table. A lack of motivation and absence of a cohesive effort on the part of corporate America are still formidable obstacles to resolving this issue, but some of the barriers women face are self-inflicted—and it's important to shed light on that side of the equation as well.

Here are the five key barriers that we believe are obstructing progress towards gender parity in the boardroom:

1. Traditional board configurations severely limit the pool of qualified female candidates.

This issue is resolving itself organically, but slowly. As the fiduciary mandate of boards has expanded to include oversight of forward-looking risks and opportunities, boards are beginning to view themselves through an investor lens to self-assess for collusion, insular thinking, and lack of relevant skillsets. A traditional board configuration of sitting and former CEOs and CFOs can leave a board with critical skill gaps.

There are relatively few female CEOs to choose from when recruiting board members, which has contributed to the perception that the female executive talent pool is shallow. However, as boards begin to cast wider nets in search of relevant, modern skillsets, they open up seats to a deep well of qualified female candidates. There are many women with tested leadership experience in disciplines that modern boards need, such as engineering, digital technology, cyber risk management, supply chain management, operations, marketing, organizational structure and people.

2. There is no champion galvanizing the majority to resolve this issue.

As boards seek to broaden their skillsets, they could potentially accelerate progress towards gender parity by creating new opportunities for women to make meaningful contributions in the boardroom. While promising, this trend alone is not enough—women must have genuine access to these opportunities at a proportional rate to men, and men have to want to bring them in.

It's very difficult to create balance from imbalance without buy-in and intentional action from the majority in power. Men occupy 80-100% of decision-making seats on the average board, and therefore are in the best position to move the needle. Yet many men do not see a problem with gender imbalance, and/or do not believe there are enough qualified women to fill board seats.

Boardrooms began to diversify rapidly in the U.K. when Lord Davies championed the cause. An iconic male business leader in the U.S., who has the clout and charisma to coalesce efforts of the investment community and advocacy groups, could build powerful momentum towards moving the needle.

3. Boards aren't accessing diverse networks in their recruitment process.

Most boards rely heavily on their own networks to fill a candidate slate, just as professionals leverage their networks to find new job opportunities for themselves or fill jobs within their own organizations. The average profile of a board director is a 63-year-old white male. 60-year-old white men are mostly surrounded by other 60-year-old white men (and younger men who remind them of themselves). Women do this too, and so do people of different ethnicities and backgrounds. The problem isn't the method—it's access to diversity.

Progress hinges on opening up and expanding isolated and insular professional networks. In the absence of an iconic male business leader who can galvanize a movement to increase diversity in the boardroom, we need to create an organic groundswell by exposing influential men to networks of board-ready women.

While there are a growing number of databases cataloguing executive "board ready" women, these are not going to move the needle appreciably. Databases are essentially a collection of digital resumes. I personally have not obtained a job through a resume since I was 23 (and I'm not sure I did even then). It's all about networks. To be useful, static databases should be brought to life through face-to-face interactions.

Zack Rosen, CEO of Pantheon, recently attended an Athena Alliance event, one of only seven men who showed up out of 100 male executives invited. Zack emailed me the next day, stating that our event was "hands-down the best event I have attended all year." Why? Because although he showed up to show solidarity with our organization, he wound up leaving with unexpectedly valuable business contacts. "I never make that number of high-impact connections at one event. All of the women I interacted with were rare talents," Zack shared.

Zack was introduced to me through one of his investors, OpenView Venture Partners. Their senior managing partner, Scott Maxwell, also saw this sort of power in the Athena Alliance community and sent three CEOs from other companies in OpenView's portfolio to Athena's Seattle launch, who were in turn equally impressed and pleasantly surprised by how easy it can be to diversify their own top tier network in meaningful ways when motivated to move beyond the usual events and circles. These grassroots "guy-talking-to-the-guys" testimonials are an authentic and very effective means of bringing talented women into powerful male networks.

4. Women aren't always visible, or aren't visible in the right ways.

Women professionals limit their visibility in two ways: spending too much time in circles of women, and failing to realize their own worth.

Working women have long relied on the support of women's conferences, women's affinity groups, and women's business groups. By gravitating to gender-specific organizations, women are guilty of exactly what we accuse men of doing—limiting our networks to people who are like us. Women should instead build networks that include and leverage powerful men.

A side effect of underrepresented groups is too few role models. When women perceive that only the Sheryl Sandbergs and Meg Whitmans are qualified for board service, they incorrectly assume that they aren't yet at the right stratosphere to make themselves visible. It always shocks me (yet it happens often) when we invite a highly-qualified woman to join Athena Alliance and discover she has no idea she is of value to a corporate board.

Women who do land on a slate of candidates need to elevate their representation of what they bring to the boardroom. When we coach Athena Alliance members for board interviews, we instruct them to take off their business operator hats and instead think holistically about their careers, experiences, and touch points to industry. We ask them to consider what they can bring from that perspective to boardroom conversations about global business risks and opportunities, emerging threats, and disruptive technology developments. If a candidate focuses too much of her interview on how she executes her day-to-day operating role, the board may underestimate her ability to function at a higher stewardship level.

5. Women aren't always qualified in the right ways.

As women take a long view of the career roles and experiences that will enhance their value to public company boards, they need to understand that boards always use open seats to think about going from "here" to "there." Boards recruit candidates who are where they are heading, not where they are or where they've been. They also seek candidates with a strong degree of currency and connection to the markets and industries their companies operate in.

Given that parameter, there are several factors that can eliminate a woman for board service:
  • She has been out of the C-suite for five or more years, so is perceived as lacking current relevance and an innovative edge.

  • She has been a consultant for more than five years (unless she is a partner at a large leading global consultancy or is broadly recognized as an authority in her discipline).

  • She has served as a top executive for only smaller cap companies that generate less than $300M in revenue.

That said, there are many women who are not on the SEC filings of public companies who should be considered qualified for board service. These women represent the top 10% of their company's leadership and have had certain professional experiences that make them valuable in the boardroom, including:

  • She has significantly scaled a company in size, serving as part of an early or founding executive team that took a company public or through a significant acquisition.

  • She is part of a senior leadership team that grew a company from a small-cap to a mid- or large-cap.

  • She holds a large domain of responsibility, serving as CxO or VP of a large function or business line within a company of significant size and stature.

  • She holds a high-demand leadership role, such as CMO, CTO, Chief Product Officer, COO, or CIO in a company of $300M in revenue or greater in size.

It also helps to have served on notable non-profit boards, as they are governed like public company boards and are a great proving ground for board leadership.

Please join this important solution-oriented conversation and share your perspective on how to close the boardroom gender gap. Send your ideas to governancenews@nasdaq.com no later than February 28th. We will compile the most compelling ideas and publish them on International Women's Day in March.

***

Coco Brown is founder and CEO of The Athena Alliance, an organization dedicated to advancing diversity in the boardroom by preparing executive women for board service and facilitating board matches. Before founding the Athena Alliance, Brown served as the president and chief operating officer of Taos, an information technology consulting and services company based in San Jose, California.


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.

Publication Date*: 2/14/2018 Mailto Link Identification Number: 1493
Frequently Asked Questions
  Planning for Proxy Season: It's Time to Consider an Interactive Proxy
Identification Number 1491
Clearhouse
Planning for Proxy Season: It's Time to Consider an Interactive Proxy
Publication Date: January 30, 2018

To help companies prepare for the 2018 proxy season, Nasdaq's Governance Clearinghouse will post a series of articles over the coming months that feature new developments in technology, upcoming regulatory changes, and tips for enhancing your company's proxy presentation and readability.

Interactive proxies range in format from static PDFs with enhanced page navigation to sophisticated, multi-media documents that enhance the reader's overall experience. While only a small percentage of Nasdaq companies had some type of an interactive proxy in 2017, including East West Bancorp, Inc. (Nasdaq: EWBC), eBay Inc. (Nasdaq: EBAY), Intel Corporation (Nasdaq: INTC), Microsoft Corporation (Nasdaq: MSFT), and Nasdaq, Inc. (Nasdaq: NDAQ), we believe more companies will consider taking this step in the upcoming proxy season. There are a number of providers that offer a range of interactive proxy design and hosting services, including EzOnlineDocuments, ISS Corporate Solutions, and Mediant, with prices ranging from $3,000 up to around $20,000 depending on the provider and services selected.

In the first post of this series, Roy Saliba, Head of Product at ISS Corporate Solutions, highlights some of the reasons your company might consider adopting an interactive format as well as the nuts and bolts of creating an interactive proxy.

The Big Four: Advantages of an Interactive Proxy

1.   Increased shareholder participation in the proxy voting process

While an interactive proxy by itself will not compel a shareholder to vote their shares, it is another step that companies can take towards getting their shareholders more interested in reviewing the information in the proxy statement.

For investors, interactive proxies effectively break up an overwhelming proxy document into a better organized website with palatable sections to help foster a better understanding of overall content and key messages. Intuitive navigation, standardized presentation of data and content, and an overall better experience in digesting complex information help to engage shareholders in the voting process.

One of the key benefits for institutional investors is the integration of the ISS Corporate Solutions interactive proxy into ISS ProxyExchange, a platform used by institutional investors when making their proxy voting decisions. In an independent survey, institutional investors responded that proxy advisors' voting platforms are the primary source used to review a company's SEC filings and proxy materials, so having links to companies' interactive proxies embedded in the voting pathway allows for greater visibility for institutional investors.

2.   Insight into how investors and shareholders digest proxy content

Interactive proxy platforms embed analytics that can be leveraged to identify the sections of the proxy that are most often viewed, offering valuable insight into the key issues that shareholders are interested in or concerned about. This data enables companies to place greater emphasis on those areas in subsequent proxies and/or leverage those topics during shareholder engagement.

The ISS Corporate Solutions (ICS) interactive proxy solution currently allows companies access to a variety of analytics including:
  • geographical location of visitors
  • new versus returning users
  • type of device used (mobile/tablet/personal computer)
  • length of time visitors accessed the site
  • the specific pages viewed
  • the number of different pages viewed

3.   Increased shareholder engagement

The ICS interactive proxies were initially designed and developed in coordination with a group of institutional investors who were looking for an easier way to review proxy statements, particularly during peak proxy season. This group wanted a standardized format of searchable content to simplify the process of finding key information (versus scrolling through cumbersome PDFs or a single webpage on the SEC site). A key initial request was to streamline the overall navigation flow of the site so that readers could easily and intuitively locate content in the same manner for a large number of portfolio companies.

Retail and institutional investors alike have expressed a preference to reading proxy statements online (versus print), yet even those proxies available online in PDF format are designed for print and have not been optimized for an online experience. An interactive proxy offers companies an opportunity to tell their story in a modern and clean way on a digital platform that has been optimized to be scalable, mobile-friendly and interactive.

An interactive proxy is a strong statement by a company that it is focused on delivering the corporate governance story in the best possible way. Many companies come to think of their enhanced proxies as important Investor Relations and Public Relations assets.

4.   Integration of corporate branding

Interactive proxies allow companies to tell their governance stories using the most sophisticated technologies available today by transforming compliance documents into engaging and well-designed digital assets. The proxy statement is a key communications tool with a captive audience, but that opportunity is squandered if the information in it cannot easily be accessed or digested.

More and more companies are discovering the value of leveraging proxies to highlight key messages of their corporate governance stories. Brands are a powerful visual element of a corporation's identity, and the ability to integrate corporate colors and logos into an interactive proxy transforms it from only a compliance document into a communications asset as well.

Nuts and Bolts: Understanding the Process for Creating an Interactive Proxy

At ISS Corporate Solutions, we typically break up the process into two phases: customizing our proxy template platform for the client and populating it with their proxy content.

During the initial phase, we build out the template for a client company and customize it to match their corporate brand and identify with colors, logos, etc. This phase of the process typically takes about a week, and runs in parallel with the client creating the content of their print proxy. The second phase of populating the customized template with the actual proxy content typically takes between three to five business days, depending on how heavily stylized the print proxy is. This phase usually starts when the finalized proxy statement is sent to the printer.

ISS Corporate Solutions' interactive proxies are hosted on a separate site, so there are no specific requirements for a company's own website. However, we strongly encourage companies to add easily identifiable links to their interactive proxies on their IR sites, as companies that promote the interactive proxy on their investor relations pages and overall corporate websites see higher web traffic and increased engagement.

As companies see an increasing number of their peers adopting interactive proxies, and they become more widely used in the institutional community, we'll see continued growth in this space.

***

ISS Corporate Solutions (ICS) is a wholly owned subsidiary of Institutional Shareholder Services Inc. (ISS). ISS Corporate Solutions provides expertise in executive compensation, governance ratings, capital structure, sustainability, voting trends, and corporate governance research.

Publication Date*: 1/30/2018 Mailto Link Identification Number: 1491
Frequently Asked Questions
  10 Questions Your Company's Board Should Answer in 2018
Identification Number 1486
Clearhouse
10 Questions Your Company's Board Should Answer in 2018
Publication Date: January 16, 2018

Betsy Atkins encourages companies to kick off 2018 by proactively addressing the corporate governance hot-button issues of 2018—before their investors do.

Shareholders and institutional investors are holding companies accountable to an increasingly complex slate of stewardship principles.  How can a company prepare for the corporate governance challenges in the year ahead? We asked Betsy Atkins, veteran of 23 public company boards, how companies should begin to answer that question.  Betsy's answer: focus on the answers to these 10 questions.


Clearhouse
1. Is our company vulnerable to an activist attack or takeover?

How do you get an impartial, inside-out view of how an activist sees your company? Engage an investment bank that your company does business with to scan for weaknesses that attract activist attention. Large investment banks have practices on activist readiness and a vested interest in ensuring your company is defended.

Read More: The Rise of the Investor-Centric Activism Defense Strategy >>

Clearhouse
2. Is the board's committee structure optimized to leverage digital transformation?

All companies are tech companies today. Ensure your company remains contemporary and embraces digital transformation by adding a tech committee to the board. Focus this committee on the future. To ensure business model vibrancy, boards need to stay on top of tech trends and new business models, and actively consider integration of them into their companies' strategies.

If adding a tech committee to your board (as many companies are doing) isn't feasible, assign that focus to an underutilized committee. Your governance committee can review workloads across committees to determine the board's best approach for identifying and monitoring emerging opportunities and risks.

Read More from Betsy Atkins: Five Ways to Digitize Your Board >>

Clearhouse
3. Do we have a plan to accelerate board refreshment and diversity?

Costly corporate scandals continue to be linked to passive and/or weak boards with little to no diversity, which means investors and regulators will continue to beat the board refreshment drum loudly in 2018. During the 2017 proxy season, State Street Global Advisors voted against the reelection of directors at 400 companies when those companies failed to take adequate steps to add women to their boards.

From a boardroom perspective, the definition of "diversity" has eclipsed gender to also encompass age, race, global perspective, evolving skillsets, and most importantly diversity of thought.

Companies are wise to get ahead of this issue before it becomes a proxy battle or a regulatory mandate. Investors and regulators alike are pursuing campaigns to increase transparency and accountability around diversity in the boardroom. The Boardroom Accountability Project 2.0 initiative, jointly sponsored by NYC Comptroller Stringer and New York City Pension Funds, is a perfect example.

Read More about the Boardroom Accountability Project 2.0 >>

Clearhouse
4. Are we taking ESG issues into account?

ESG issues, historically thought of as a special interest for a minority subset of activist shareholders, are going mainstream. Advocacy for ESG agenda topics began in the EU and has now transitioned to passive investment firms here in the U.S. This is no longer a "gadfly" issue and while ESG reporting will impact some industries more than others, in 2018 companies should expect it to be a standard proxy concern for major shareholder groups.

Read More from the CFA Institute: 2017 ESG Survey Results >>

Clearhouse
5. Are we prepared to handle a real-time crisis?

A solid crisis preparedness plan is key to mitigating the impact of internal issues or external events when (or preferably before) they escalate to crisis level, especially in the age of social media where a hiccup can become a firestorm. Yet there are numerous recent examples of companies that did not execute crisis management well, and experienced catastrophic damage to their corporate brands as a result.

Start by analyzing your company's top ten enterprise risks, and ensure there is a detailed action plan in place for each of them. It's also important to set up relationships now with reputable and experienced public relations and social media firms to handle communications in the event of a crisis.

Read More: 8 Crisis Management Mistakes to Avoid >>

Clearhouse
6. Do we have a cyber security plan and data breach policy in place?

Adopting cyber security plans and data breach policies continues to be a top priority in 2018. Boards should confirm that corporate oversight of cyber risk and data security is robust, and includes the following:

  • regular external penetration testing as part of ERM and compliance;
  • a plan for dealing with a ransomware attack, including establishing a validated Bitcoin account;
  • anti-phishing training for employees;
  • established relationships with forensic cyber experts, law enforcement, and a third-party cyber mitigation company;
  • an annual review of cyber insurance policies; and
  • a data breach policy with crisis plan in place.

Read More from Betsy Atkins: Ransomware Defense for Boards >>

Clearhouse
7. Do we have a robust slate of future leaders?

Given that average CEO tenure in corporate America is below five years, proactive succession planning and a deep leadership bench have never been more important. Long-term CEO succession planning and leadership development should also ensure development, retention, and replacement of senior officers within a company.

Identify future leaders early and create personalized development plans to fill out the gaps in each person on your company's leadership bench. Assess internal succession candidates via regular interaction during board meetings and strategy presentations, individual meetings between directors and potential internal candidates, and internal and external feedback from a variety of sources—including meetings with stockholders.

Read More from Forbes: Succession Planning Needs To Be Your No. 1 Priority >>

Clearhouse
8. Are we ready for individual director scorecards?

ISS will begin rating individual board members, and while there will not be a director score, per se, the report will highlight a director's shareholder vote support and the Total Shareholder Return of the company since the director started serving on the board. This information could result in a "negative halo," impacting other boards that a director serves on in a negative way so make sure to have your Investor Relations narrative ready.


Clearhouse
9. Have we confirmed the company's culture is free of sexually predatory practices?

2017 was a watershed year for exposing the toxicity of sexual harassment in the workplace. As 2018 begins, there is zero tolerance for toxic corporate cultures that create inhospitable working environments. Nothing less than a company's overall corporate brand is at stake. Investors want to know that companies and boards are taking a proactive approach in addressing this issue, so now is the time to reconfirm there are no sexually predatory practices rooted in your company's culture. Protect your company's brand equity by ensuring that the "tone at the top" does not tolerate sexually predatory practices or gender and racial bias, and that HR conducts proper compliance training.

Read More from NAVEX Global: High-Profile Sexual Harassment Claims Show a Toxic Culture Can be a Product Defect >>

Clearhouse
10. Do we know how our CEO's pay compares to that of the company's median employee?

Know your pay ratios heading into proxy season! CEO pay has been reported for a long time, but beginning this year companies will need to comply with the SEC's pay ratio disclosure requirement. If the gap between your company's CEO and median employee pay is extreme, this may become a high visibility issue for investors and/or activists.

Be prepared for the difficult tasks of communicating your CEO pay ratio to both internal and external audiences as well as handling the repercussions that may result from the entire company knowing the median employee's pay.

Read More from Davis Polk: Pay Ratio Disclosure Rule: The SEC's Latest Guidance Should Ease Compliance Costs for Companies >>

Read More from Willis Towers Watson: The Do's and Don'ts of CEO Pay Ratio Communications >>

***

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


Revitalize Banner
Publication Date*: 1/16/2018 Mailto Link Identification Number: 1486
Frequently Asked Questions
  Ransomware Payment: Legality, Logistics, and Proof of Life
Identification Number 1483
Clearhouse
Ransomware Payment: Legality, Logistics, and Proof of Life
Part Three: Notification, Remediation, and Insurance
Publication Date: January 8, 2018 

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

Government measures to mitigate ransomware crimes are still somewhat theoretical and may be insufficient to stem the dramatic growth of ransomware, leaving companies to manage on their own the increasing risk of the current ransomware crime wave. Even under a best-case scenario, where a victim has maintained archives and can keep the business alive, ransomware victim companies will incur significant remedial costs, business disruptions and exhaustive management drag. However, with the right preparation and response, victim companies can lead recovery efforts with confidence and remediate ransomware attacks effectively.

In Part Three, John Reed Stark outlines basic steps companies should take as preemptive measures to avoid falling prey to ransomware, provides an overview of thresholds for notification requirements to regulators including the SEC and FINRA, and discusses the intricacies of insurance compensation.

Ransomware Payment: Legality, Logistics, and Proof of Life is a three-part series of articles that provides guidance on the legal issues, logistical considerations and financial implications when managing ransomware threats:

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

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

Part Three covers the remaining range of key ransomware essentials including: notification requirements, ransomware remediation, and ransomware cyber insurance. Part Three also provides some final thoughts on the entire ransomware imbroglio together with some recommendations for the future.

Read Part Three of Ransomware Payment: Legality, Logistics, and Proof of Life >>

Also popular from John Reed Stark on the Governance Clearinghouse:
Top Cybersecurity Concerns for Every Board of Directors >>
Cyber Defense in the Boardroom >>

***

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.

Publication Date*: 1/8/2018 Mailto Link Identification Number: 1483
Frequently Asked Questions
  U.S. Capital Markets and the Road Ahead
Identification Number 1477
Clearhouse
U.S. Capital Markets and the Road Ahead
Publication Date: December 14, 2017

We asked Tal Cohen, Senior Vice President of Nasdaq North American Equities, about the road ahead for U.S. capital markets. In this Q&A, Tal also shares his perspective about the current regulatory environment, the future of speed bumped markets, and explains why Nasdaq remains focused on its Revitalize Blueprint.

Q: What is the current regulatory environment under SEC Chairman Clayton?

A: Chairman Clayton has brought a renewed focused to IPOs in the primary market, in particular stemming the decline in the number of small and emerging growth public companies. He's been very consistent every time he's spoken that the SEC is focused on enhancing the attractiveness of the public markets for IPOs, and on ensuring Mr. and Mrs. 401K are not shut out of investments in emerging growth companies. Given that he was previously an IPO and M&A attorney, he's has both the background and the context to influence that debate.

Q: What are some of the initiatives Nasdaq is working to advance with the SEC?

A: Nasdaq is pursuing the proposals outlined in our Revitalize Blueprint, to enhance capital formation opportunities in the primary equity markets. In our blueprint, we are recommending that small and mid-cap companies be permitted to benefit from the choice to consolidate liquidity through the revocation of Unlisted Trading Privileges. We are also advocating for intelligent tick sizes, which we believe is a more tailored and effective approach for resolving sub-optimal tick sizes than the existing pilot.

On the product side, Nasdaq is focused on improving the trading experience on our markets by advocating for more stock splits, developing policies that support the growing ETF market, and rolling out enhancements to our closing cross. We are also filing a proposal with the SEC to introduce a midpoint extended life order (M-ELO) in our market that will help institutional investors buy or sell large orders or orders of significant size, and provide some level of protection when they do that.

Q: Do you think the SEC is rethinking speed bumped markets?

A: We think it's interesting that the commissioner who initially voted against IEX and the initial speedbump is now also clearly showing his views on a derivation of it that was recently proposed. We believe there is an opportunity to reengage the SEC on this issue, to make the case that speed bumps are a slippery slope. It's difficult for the industry to understand the implications of that, both from a public policy perspective and from a trading perspective.

We've asked the SEC to reexamine this topic on a broader basis than just CHX, to question whether the market has really benefitted from the speed bump during the past year. We also want the SEC to consider where this might lead over the next several years if speed bumps are allowed to continue to evolve and become part of the fabric of the market.

Nasdaq looked into the opportunity to take one of our exchange medallions and launch a speedbump market. But after some discussion, we decided there was a more elegant solution that we could put in place—one that didn't have the unintended consequences of a speed bump and that didn't have our customers incur additional costs to connect and take market data from a new, fourth exchange. And the manifestation of that solution is M-ELO.

M-ELO is our "day one" response to the speedbump market, one that provides protection for investors and minimizes the impact of market-moving events that can erode execution quality. We believe we'll be able to enhance and evolve M-ELO to meet a variety of different needs of institutional investors in the marketplace—needs that we don't capitalize on today.

Q: Are there other market structure developments on the horizon that will impact listed companies?

A: The access fee pilot could have some impact on listed companies. An overarching point we make to the SEC, and the industry, is that we need to involve the issuer in secondary market pilots and discussions. We often think about the issuer after the fact. Instead, we need to solicit issuer feedback on these market structure changes upfront, as they could have a material impact on how issuer stocks trade and how investors feel about building positions or unwinding positions in those companies.

The access fee pilot is an excellent example. Lowering the incentive to provide liquidity could do one of two things: lead to wider spreads or more off-exchange activity. Is that in the best interest of the issuer? Is that something at the end of the day the issuer finds of value? An alternative might be to marginally lower the explicit cost of trading for an intermediary, but increase the cost of investing in a company for a buy side institutional investor. This would be more meaningful to the issuer, who's looking at their stock and wondering why on day one it had a one or two cent spread, but post the access fee pilot it's become a three to four cent spread. And they are wondering why their investor base now looks different and feels differently about their company.

As they design these pilot programs, the SEC should be mindful of allowing companies to opt out of a program, if they experience a degradation in stock trade performance or an adverse impact on their stock price. The SEC did not create that outlet when they initially designed the tick size pilot, which was a point of contention for issuers.

Q: Speaking of the Tick Size Pilot…have we seen any benefits from it?

A: Issuers have not seen an increase in liquidity, an increase in research coverage or any indication that this is helping the IPO market. Using those three things as the criteria on which we judge it, we have not identified a benefit for issuers.

From a trading perspective, the results have been mixed, and most of what we projected and forecasted is happening. There are wider spreads and, in some stocks, it's more costly to build a position to trade or execute. On the flipside, we have seen a greater persistency of the quote so the quote is more stable, and there's more size or quantity to be done at the inside. But that has come at a price, because both implicit and explicit costs seemed to have gone up for brokers.

Q: There are currently 13 exchanges and dozens of other trading venues a security can trade on. Is this too many?

A: It's not a question of whether there are too many exchanges—it's a question of whether the market as a whole is working for small and mid-cap issuers the way it does for large cap issuers and large ETFs. Multiple exchanges work for some of the market, but not all of the market.

Nasdaq's Revitalize Blueprint offers more tailored, nuanced solutions to dealing with competition and fragmentation within the public markets.

Q: Has there been feedback on Revitalize from issuers or the trading community that's made Nasdaq reconsider parts of the initial blueprint?

A: Nasdaq included 25 separate proposals within the Revitalize Blueprint, and we knew some of them would be hotly debated on both sides of the fence. The proposals in the blueprint were meant to engage capital markets stakeholders in a robust dialogue and then move discussions forward to solutions. Issuers and investors have come to us and said Revitalize shows thought leadership, and is an aspirational blueprint to help vet what the real issues are and then build consensus—particularly on the issues that are passionately debated by both sides.

Revitalize was structured that way by design, and as a result of the feedback so far, we now have a better sense of the issues we'll be able to get support for—and build consensus on—pretty quickly (like proxy reform) and the issues that will require deeper discussions (like shareholder activism, short-sale disclosure, and dual-class stock issuances).

Q: What is the next step in implementing Revitalize?

A: I think the next step for Nasdaq is to choose a handful of the 25 proposals within that blueprint to put forward, and then work with the industry, the SEC and the government on resolving those issues. We know that these issues are top of mind for the SEC.

This is not just a U.S. issue, or about one exchange versus another exchange in the U.S. The Revitalize Blueprint is about the health and vitality of the U.S. capital markets and their global competitiveness. It's about job creation. It's about wealth creation. It's about making the public markets once again attractive to issuers, and how that will, in turn, benefit Main Street investors at the end of the day.

Read more about Revitalize here >>

***

Tal Cohen joined Nasdaq in April 2016 as the Senior Vice President of North American Equities. Prior to joining Nasdaq, he was the Chief Executive Officer of Chi‐X Global Holdings, LLC. Tal currently serves as a Director on the Investment Industry Regulatory Organization of Canada (IIROC) Board and as a Director on the Canadian Depository for Securities (CDS) Board.
Publication Date*: 12/14/2017 Mailto Link Identification Number: 1477
Frequently Asked Questions
  Five Ways to Raise Your Board's Digital IQ
Identification Number 1455
Clearhouse
Five Ways to Raise Your Board's Digital IQ
Publication Date: November 20, 2017 

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


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

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

1. Conduct a technology IQ assessment.

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

2. Embark on a technology learning tour.

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

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

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

3. Invite subject matter experts into the boardroom.

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

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

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

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

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

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

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

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

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

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

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

***

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

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

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

Publication Date*: 11/20/2017 Mailto Link Identification Number: 1455
Frequently Asked Questions
  Digital Transformation Catalyzes Diversity in Nasdaq Company Boardrooms
Identification Number 1454
Clearhouse
Digital Transformation Catalyzes Diversity in Nasdaq Company Boardrooms
Publication Date: November 16, 2017 

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

***

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

Publication Date*: 11/16/2017 Mailto Link Identification Number: 1454
Frequently Asked Questions
  Ransomware Payment: Legality, Logistics, and Proof of Life
Identification Number 1450
Clearhouse
Ransomware Payment: Legality, Logistics, and Proof of Life
Part Two: Investigation and Response
Publication Date: November 6, 2017 

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

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

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

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

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

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

***

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

Publication Date*: 11/6/2017 Mailto Link Identification Number: 1450
Frequently Asked Questions
  Effective Boards and the Need for Emotional Intelligence
Identification Number 1447
Clearhouse
Effective Boards and the Need for Emotional Intelligence
Publication Date: October 31, 2017

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

***

Caren Merrick is the CEO of Caren Merrick & Co. Previously, she was founder and CEO of Pocket Mentor, a mobile application and digital publishing company that provides leadership development and career advancement. Caren currently serves on the boards of the Metropolitan Washington Airports Authority, WashingtonFirst Bankshares, Inc. (Nasdaq: WFBI), and The Gladstone Companies (Nasdaq: GAIN, GLAD, GOOD, LAND). She is also a co-founder and former Executive Vice President of webMethods, Inc., a business-to-business enterprise software solution, which went public on Nasdaq before being acquired.
Publication Date*: 10/31/2017 Mailto Link Identification Number: 1447
Frequently Asked Questions
  Seven Tactics to Engineer Better Boardroom Dynamics
Identification Number 1442
Clearhouse
Seven Tactics to Engineer Better Boardroom Dynamics
Publication Date: October 24, 2017 

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


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

1. Acclimate new directors to board culture.

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

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

2. Review boardroom etiquette with new directors.

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

3. Avoid over-processing new board members.

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

4. Facilitate communication between corporate management and board members.

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

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

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

5. Engage all directors.

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

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

6. Rotate committee memberships.

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

7. Leverage seating arrangements.

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

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

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

***

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

Publication Date*: 10/24/2017 Mailto Link Identification Number: 1442
Frequently Asked Questions
  The Rise of the Investor-Centric Activism Defense Strategy by Peter Michelsen and Derek Zaba of CamberView Partners
Identification Number 1439
Clearhouse
The Rise of the Investor-Centric Activism Defense Strategy by Peter Michelsen and Derek Zaba of CamberView Partners
Publication Date: October 17, 2017

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

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

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

Where it Began – Tactics, Tactics, Tactics

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

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

The Activist-Centric Defense Strategy

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

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

Evolution of the Investor Landscape

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

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

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

The Investor-Centric Defense

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

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

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

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

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

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

Takeaways for Issuers

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

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

***

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

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

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

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

 
 

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

Publication Date*: 10/16/2017 Mailto Link Identification Number: 1439
Frequently Asked Questions
  Tone from the Top: Influence Boards Don't Know They Have by Dr. Phillip Shero
Identification Number 1435
Clearhouse
Tone from the Top: Influence Boards Don't Know They Have by Dr. Phillip Shero
Publication Date: October 3, 2017 

Dr. Phillip Shero is the President of MasterMinds Leadership and works with CEOs and Board Chairs to build bridges of trust and accountability.

In a recent conversation, the Corporate Secretary of a Fortune 500 company proudly explained to me their culture of accountability and intentional investment in leadership at all levels.

"That sounds amazing," I said. "Tell me, what is the board's role in creating and sustaining that culture?"

He said, "There's not much the board can do about that. Culture is the CEO's job."

Therein lies the problem.

We have done such a good job emphasizing management's responsibility to drive culture that directors don't see the levers of culture available to them. If we want to succeed at creating the right "tone at the top," boards must recognize and embrace their levers of influence.


No Accidental Success

Consistent success over time is not an accident. It is purposeful. If the culture was truly exceptional at his company, I could not believe that the board was not involved.

I asked further questions and pointed to examples the Corporate Secretary had already given me to help him see the board's role in their success. His eyes went wide and he said, "Yes! I guess we did play a part." He was then able to cite several practical situations where the board set a tone for accountability and leadership development. Even in situations where the board was not directly involved, he was able to see how the members knew of and supported management's efforts to develop leadership and accountability.

One of his examples was an annual board meeting where the achievements of two dozen high potential employees were celebrated. He affirmed that the directors knew who these up-and-coming leaders were and were proud of their development.

His story is a clear case of unconscious competence: until that conversation, he did not realize what his board was doing right or how powerfully it supported their company's culture and tradition of leadership development.

Where are the Levers of Culture for Directors?

The Corporate Secretary was right in this: the two functions of management and governance have different arenas of responsibility. Directors do not have the same proximity to employees or opportunity to influence culture daily that the CEO and executive team have.

However, directors do have three levers to intentionally influence the culture of their organizations. These are the levers of Leadership, Alignment, and Perspective.

1) The Leadership Lever: Hiring the right CEO and building a relationship of genuine trust.

Boards select a CEO for many reasons—not least of which is his/her ability to drive profit. However, we know that not all profit is equally good. An executive can slash jobs and create profit instantly, but the effects on morale and culture will diminish those returns over time.

David Katz writes in Harvard Law School's Forum on Corporate Governance that cultural fit is one of two key elements in the CEO selection process. I believe his criterion can be strengthened further—a CEO candidate must have demonstrated ability to create and sustain healthy cultures, not just fit the culture that already exists.

Selecting the right CEO is a massive culture lever for directors, but it can only be moved about every 5 years. Therefore, directors must give attention to relationship quality.

The CEO selection lever has a dial to the side, which measures the trust, transparency, and relationship quality between the Board and CEO. Directors can influence organizational culture by turning up that dial to increase trust and transparency in the boardroom. One of the best ways I know to begin creating more trust between directors and the CEO is by getting to know each other outside of board meetings. Any process that creates the ability to share and recognize each other's strengths and weaknesses will strengthen the foundations for trust.

2) The Alignment Lever: Modeling the culture and rewarding a single standard.

It may come as a surprise to think of the culture of the boardroom as a reflection and lever of influence on the culture of the organization. Edgar Schein described culture as a combination of shared beliefs, values, and actions (or artifacts). All three are present in a board meeting: shared beliefs (what is true and/or real), shared values (what is important), and shared actions (what we do).

The cultural artifacts of the boardroom include how people are greeted, what makes it onto the agenda, how much time is given to different topics, what relationships are cultivated, whether interrupting speech is tolerated, and whether healthy conflict is possible or encouraged.

Along with modeling the desired culture in the boardroom, directors can leverage their interactions with the CEO to influence culture through relentless pursuit of alignment.

One way to pursue alignment is by rewarding a single standard. Note this example of a double standard: the board desires a culture where Millennial workers are developed and retained, but the CEO is rewarded for cutting lower-level jobs to achieve projections.

Directors can measure their current alignment through use of strategy-focused board surveys, facilitated by a third party. Many board surveys are heavily weighted toward compliance with standards and regulations, which tell little about internal alignment. However, a survey weighted toward strategic issues can reveal misalignment between governance and management early enough to make corrections.

3) The Perspective Lever: Asking the right questions and cultivating multiple perspectives.

As humans, directors and chairs must overcome the built-in social pressures that suppress hard questions. I continue to read about and hear from directors who do not ask questions out of concern that they would look uninformed or out of step.

In recent years, directors have been encouraged to ask more questions about more types of risk, including cybersecurity. Boards know they are responsible for risk. Yet, there is a disconnect when it comes to asking relevant and probing questions about culture, often until it blows up on the news. When bad news breaks, defective cultures are usually blamed on CEOs, with boards taking little responsibility. Consider recent news related to companies with broken cultures that resulted in a variety of toxic practices, including customer abuse, sexism, gender bias, and massive sales fraud. In each case, the assumption is that the CEO is at fault for bad culture. The board bears little or no responsibility.

A report issued by one company cited management's failure to correct an oppressive sales culture. The board did acknowledge some responsibility, but the report couched it as a structural issue—i.e. the board failed to fix a flawed, decentralized structure. Even with that admission, board members complained that they were not made aware of complaints and cultural problems. Perhaps so, but did they ask the right questions?

In addition to asking deeper questions about culture, directors can move the lever of culture by cultivating multiple perspectives. The board should ensure that it hears from various sources. If an internal study is commissioned, let the person who led the study present the report to the board personally. If an external consultant assesses the culture, the board should hear their findings in person. When it comes time to conduct evaluations, invite a third party to facilitate the survey and interpret the results.

The need to cultivate multiple perspectives is not an indictment of the CEO's or chair's lack of objectivity. Nor does it indicate lack of trust. Instead, hearing from multiple voices allows the directors and CEO to listen together, reflect together, ask questions together, and eliminate bias together. Important cultural indicators emerge from this shared listening, which can be easily overlooked when the same few sources always provide and interpret information.

Directors need to ask themselves the hard, honest questions about their attention to cultural health, and they need to brace themselves for the answers. What voices have been invited to speak in the boardroom outside of the top management team, audit firm, and legal advisors? What insights and new perspectives did they gain from hearing them? How deeply did they dig to understand the information that was shared?

Shifting "Tone at the Top" by Moving the