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Frequently Asked Questions
  Get Board Ready with Veteran Corporate Director Betsy Atkins
Identification Number 1686
Clearhouse
Get Board Ready with Veteran Corporate Director Betsy Atkins
Publication Date: March 15, 2019

In observance of Women’s History Month and International Women’s Day, Governance Clearinghouse is publishing a series of articles focused on gender balance on corporate boards. The series will highlight several facets of this complex issue, including pathways to board diversity, best practices of companies that have achieved gender parity in the boardroom, and the steps aspiring women directors can take to become “board ready.”

Betsy Atkins is a three-time CEO, serial entrepreneur and corporate governance expert, having served on over 30 boards.

I wrote my upcoming book BE BOARD READY: The Secrets to Landing a Board Seat and Being a Great Director as a guide for talented women who seek to be board ready and serve as high-impact, high-value contributing board members. I’ve had a number of opportunities to speak about board service, but one recent experience in particular was the catalyst for this book. Nasdaq invited me to participate on a panel with three other talented women directors, addressing an audience of over 100 aspiring women directors about the topic of board readiness. The Q&A segment following the panel discussion, and subsequent conversations with attendees who reached out to me afterward, made it clear there is a deep thirst for information about the path to board service.

Chapter Two of BE BOARD READY, which is shared here, takes a deep dive into the process of developing a pipeline of contacts that will lead you to prospective boards. Women professionals who aspire to board service need to elevate their networks to achieve their career aspirations. Developing relationships is like investing money in the bank and should be approached with the same discipline. This chapter from my book outlines best practices for expanding and leveraging your professional networks as you grow in your career. I hope these ideas will resonate as you read this excerpt from BE BOARD READY.

Whether you are an aspiring director who wants to join a board for the first time or are already on a board and looking for insights on how to be a great director, join me to celebrate the release of my new book in New York on Tuesday, April 9 or in San Francisco on Thursday, April 11. You must RSVP to attend as space is limited and available on a first-come, first-served basis.

To learn more and RSVP >>

Read Chapter Two, Business Development >>
Publication Date*: 3/15/2019 Mailto Link Identification Number: 1686
Frequently Asked Questions
  5 Ways Governance Teams Can Step Up Their Proxy Season Game for 2019
Identification Number 1682
Clearhouse
5 Ways Governance Teams Can Step Up Their Proxy Season Game for 2019
Publication Date: February 14, 2019 

To help governance professionals understand and address the evolving concerns of shareholders, Martyn Chapman, head of strategy for Nasdaq Governance Solutions, together with Dan Romito and Ben Maiden from Corporate Secretary, recently hosted a webinar.  Among other things, our hosts shared these five ideas to help governance professionals step up their proxy season game for 2019:

1) Hold virtual or hybrid annual meetings.

 Virtual and hybrid annual general meetings (AGMs) are becoming increasingly popular, particularly in the U.S. where shareholders are often dispersed over a very large geographic area.  If your company hasn’t yet implemented virtual attendance at AGMs, it isn’t too soon to begin planning for next year. Following are some key considerations when preparing to transition to virtual annual meetings:

  • Engage a vendor that provides robust and reliable technology.  There are already many providers in this space, and a number of them partner with registrars and transfer agents. 
  • Investigate legal and regulatory requirements.  Whether an annual meeting is virtual or hybrid, meeting requirements still apply, including those that govern notice, decorum, attendance, material display, and voting, among others.   The company’s articles of incorporation and/or bylaws may need to be amended to provide for virtual annual general meetings.   Among other things, amendments should cover any failure in technology, even if it affects only one or a few shareholders.  For example, the chair may not be able to put forward a resolution to shareholders to adjourn a meeting if there is a severe technical problem during a fully virtual meeting, so the articles should provide the chair the ability under these circumstances to adjourn the meeting without a resolution.
  • Consult with major stakeholders.  Most companies will want to consult with their key shareholders to be sure they are comfortable with virtual general meetings.  Some shareholders may react adversely if there is a long-standing tradition of well attended physical meetings.  Putting forward a resolution to ratify amendments to the articles of incorporation to hold virtual AGMs is a good opportunity to discover shareholder appetite for a virtual or hybrid meeting format.  Other stakeholders to consider are service providers, registrars and transfer agents, and any vendors who would be providing technology.

2) Control your company’s ESG narrative to neutralize potential shareholder proposals.

 Environmental, Social and Governance (ESG) issues are here to stay.  Morrow Sodali’s 2018 Institutional Investor Survey states this unequivocally: “ESG issues are either fully integrated or progressing towards full integration with investment decision-making.” That survey listed the following ESG topics as top concerns of institutional investors:

  • Board skills and experience.  Investors are focused not just on the reputation of a board member but the skills that individual brings to the table.  If a board lacks a critical skill such as cyber security experience, investors will likely become concerned. 
  • Climate risk disclosure.  This issue is industry and sector dependent because some industries have a bigger impact on climate than others.  But investors are not just concerned about a company’s impact on the climate—they also want to know that companies are assessing the impact of climate change on the long-term sustainability of their core businesses and taking steps to prepare for that risk. 
  • Executive compensation.  Investors are wary of what they perceive as excess compensation or excess severance.  For context on what index funds view as “excess,” BlackRock outlined their perspective on executive pay in their 2018 stewardship guidelines.

Companies are increasingly finding that better engagement on ESG issues leads to shareholder proposals being dropped—or not filed in the first place.  Best in class engagement is proactive engagement, because by the time institutional shareholders reach out to you with an issue, they often already have made up their minds. 

3) Explain your company’s human capital management strategy.

Human capital management (HCM) has become an investment issue.  Massive amounts of data can now be accessed and analyzed across a multitude of companies, which has allowed investors to unearth correlations between human resource initiatives and investment outcomes.  Investors are keeping a closer eye on labor markets.  In BlackRock’s 2018 stewardship guidelines, they reported “In light of evolving market trends like shortages of skilled labor, uneven wage growth, and technology that is transforming the labor market, many companies and investors consider robust HCM a competitive advantage.” 

Companies need to articulate how they’ve established themselves as an employer of choice for the workers they depend upon. The company’s approach to HCM, including employee development, diversity, a commitment to equal employment opportunities, health and safety, supply chain, labor relations, and labor standards, is viewed as a factor in the continuity—and ultimately the success—of the business. 

BlackRock is a good litmus test on investor attitudes towards HCM, and they are encouraging companies to go a step beyond providing commentary and begin to bring transparency to HCM data and practices.  Investors know that companies possess data on their workforce to help investors distinguish companies that are managing HCM matters more strongly than those who are not. 

4) Help investors understand how data is protected and utilized.

2018 was a year chock full of stories in the media about data breaches and data sensitivity issues, stories that adversely impacted a wide variety of companies.  Society in general—and investors in particular—were caught off guard by the manner in how data is protected and utilized.  Yet a vast majority of companies still don’t disclose (to the degree that investors would prefer) what they actually do with their data and how that data is protected. 

Given the trajectory of big data, investors generally understand that data will continue to be utilized in new ways, but they want more disclosure and transparency (especially from a risk management perspective) around how that data will be protected and utilized, both now and in the foreseeable future.

5) Create a cyber risk management dashboard and give the board access to the CISO.

Cyber risk management covers a broader spectrum than data protection, and while investors do not expect all board members to possess deep cyber security expertise, they do want assurance that the board has incorporated cyber security oversight into the risk management process.  Corporate secretaries and other governance professionals can support the board in this effort by ensuring the board has some form of dashboard or metrics that provide a regular overview of the strategic implementation of the company’s cyber risk program.

Because cyber risk is so technical in nature and changing so rapidly, another best practice is to ensure that the board has access to the CISO (chief information security officer).  The corporate secretary can play a key role in helping to bring together board members and those responsible in the organization for the implementation of cyber risk management. For example, it can be very useful to buddy up particular board members with the CISO, especially board members who are on committees tasked with cyber security and/or risk management oversight.  Some companies schedule private management meetings between board committee chairs and the CISO to get a better grasp of the issues. 

Listen to the full webinar: Looking Ahead: How GRC Teams Can Prep for 2019>>

***

Martyn Chapman serves as Head of Strategy for Nasdaq Governance Solutions, supporting product development and commercial strategies for Nasdaq’s flagship governance offering, Nasdaq Boardvantage. He has over 15 years of governance industry experience serving boards of FTSE100 and Fortune 500 companies with a focus on innovating corporate governance practices through technology.

 Daniel Romito is Global Head of Investor Analytics at Nasdaq where he oversees Nasdaq’s Strategic Capital Intelligence team, Insight360 Analytics Platform, and ESG index consulting and manages a global roster of advisory clients. His advisory work focuses on consulting management teams across the globe on optimizing capital allocation strategies, mitigating risk within their shareholder base and identifying opportunistic investors.

 Ben Maiden is editor of Corporate Secretary, a digital and print platform providing a forum where governance experts and service providers can share their experience, insights and best practice recommendations on a wide range of critical governance issues. 


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Publication Date*: 2/14/2019 Mailto Link Identification Number: 1682
Frequently Asked Questions
  9 Pathways to Diversity Innovation and Better Strategic Risk Governance
Identification Number 1685
Clearhouse
9 Pathways to Diversity Innovation and Better Strategic Risk Governance
Publication Date: March 5, 2019

In observance of Women’s History Month and International Women’s Day, Governance Clearinghouse is publishing a series of articles focused on gender balance on corporate boards.  The series will highlight several facets of this complex issue, including pathways to board diversity, best practices of companies that have achieved gender parity in the boardroom, and the steps aspiring women directors can take to become “board ready.”   

Andrea Bonime-Blanc is the founder and CEO of GEC Risk Advisory. Dante Alighieri Disparte is the founder and CEO of Risk Cooperative.

The imperative to equip the governance bodies of companies with diverse directors has never been higher – how the U.S. gets there is up for grabs. The EU has already made up its mind that this will be achieved through quotas. Other regions and countries like Canada require explanations of why diversity is low or does not exist. In the U.S., we have the first instance of a state establishing quotas – California – and where California leads other states often follow.  

Regardless of external regulatory or market pressures to move the needle on board diversity and inclusion, people see through half-hearted, check-the-box efforts.  Rather, companies and their boards, must view their closer approximation to the diversity in society as a net gain for their own resilience, decision making and competitive advantage.  More women on boards and at the head of the table or head of countries, just like more diversity of experience and backgrounds, will make for more fulsome decision making.  Diversity and inclusion should not be call-out efforts, but rather deliberate initiatives that become ingrained in the DNA of well-run companies.

Diversity improves returns – not only financial but reputational and stakeholder returns as well. Just like demographics, diversity is destiny and for boards that aim to capture this dividend, diversity and inclusion need to be incorporated into broad governance.

How do companies do this? We believe there are nine key pathways to board diversity.

1.   Establish a percentage target for diversity (gender, race, ethnicity, national origin, age) that is customized to your business needs.

Many (especially those already ensconced in board seats) abhor government regulations and mandates when it comes to board design. But when nothing changes, or change is glacial, others have come to accept that some government requirements for greater board diversity may not be so bad after all. Witness the recent California law mandating minimum gender diversity for California based companies.

What can companies do to either prevent or end new “onerous” governance laws? There is always the option to be proactive and look at your board, and look at your employee and customer base, and ask yourself the question: does our board reflect the stakeholder populations we serve? There is nothing like a voluntary corporate program to instigate positive change, reputational opportunity and value creation. Indeed, the more companies—and their boards—become a closer reflection of the diversity in society and markets, the less they will fear a reputational backlash for issues like the gender pay gap, the #MeToo movement or other “externalities”.

 2.   Broaden the talent pool with individuals skilled in the areas of risk, technology, sustainability, ethics and compliance.

Many boards do not include a broad enough pool of skillsets on the slate of possible board candidates. The vast majority of corporate board members are CEOs and CFOs, who on the one hand have clear skills in leading organizations and in financial accountability, but may lack refinement in wielding, responding to and appreciating the effects of “soft power” and intangible, unmeasurable threats – especially those that do not conform to quarterly reporting cycles. People (experienced and business-savvy of course) who hold expertise in areas other than the traditional silos of top financial and operational expertise, are seldom considered for board positions.

What about the treasure trove of highly experienced chief risk officers, chief ethics and compliance officers, heads of investor relations and corporate responsibility, audit, environmental, health and safety, chief information security or technology officers that are everywhere? Not all may be qualified to sit on a board, but undoubtedly the top 10% of these populations would make for an extraordinary addition to any board.  Broadening the diversity of skills tapped for boards is as critical as broadening the depth and breadth of diverse talent across all lines.

 3.   Reshuffle committees to represent current market realities and operating norms.

Most boards have the traditional 3-4 committees: audit, finance, nominating/governance and maybe one more; but rarely one that covers risk, sustainability, compliance and similar “intangibles” separately. Indeed, many boards’ audit committees are so oversaturated with responsibilities that anything that comes up that is seen as “extra” – whether ethics and compliance, risk, ESG, health and safety and recently cyber risk – gets thrown into the already overburdened audit committee.

We advocate that each company board look at the mission, vision and strategy of their company and decide what additional committee they might need to tackle their most important environmental, social, sustainability, ethics, technology issues, risks and opportunities. And, of course, in the process, review who on the current board is qualified and capable of being the chair or a member of such a committee. If there is no one present, maybe the time has come to search for a couple of non-traditional and diverse board members with relevant ESG and/or technology expertise?  Indeed, a novel concept to stay ahead of a growing market backlash or compliance-driven pressure to improve diversity and inclusion would be to establish a board-level committee to advance and defend these issues across the enterprise.  The UK’s laws on corporate reporting on gender pay are a good example of the growing pressure and the negative backlash faced by firms that were underperforming on the gender pay gap.  Pay parity, like diversity and inclusion, is not only the right thing to do it is a source of resilience, employee motivation and recruitment, as well as competitive advantage.

 4.   Separate risk and opportunity oversight from audit, perhaps by creating a specialized strategic risk and opportunity committee.

Very much along the lines expressed in point three above, and depending heavily on the industry, footprint and or sector involved, boards should be proactive in looking at their strategy from beyond the traditional mindset. Strategy is not just about growth, revenue and the search for profit, innovation and long term market gains. It is also about looking at strategic risk governance through the lens of the board, which includes considering risk as opportunity.

By separating strategic risk and opportunity evaluation from the audit committee, the board liberates itself from lumping risk into the audit committee’s core mission – financial auditing oversight – and allows other considerations to enter the board’s field of vision.

Strategic risk oversight is all too often a compliance-driven, check the box activity on most boards, which is why they often find themselves flat-footed and tone-deaf when “surprise” events and crises occur. By liberating important strategic issues – such as technology and digital transformation, climate change risk and opportunity, and leadership and culture as a competitive advantage – from the audit committee, companies and boards will breathe new life into their strategy formulation as they consider risk as part of opportunity creation.

 5.   Bring in third-party specialists to conduct scenario-based long-range analysis and cross-industry benchmarking.

Another step that can add to board diversity, at least to the diversity of views, is to consider introducing more innovative educational opportunities to the board.  This can be achieved through outside and inside experts that will help sensitize the board.  For example, experts can offer perspective on the potential crises that the augmented global risk landscape presents to every type of business today, such as culture shifts, cyber threats or climate change.

By dint of the kind of topic that can become a crisis, there is a diversity of experts available both inside the company and outside advisers who are not subject to “paycheck persuasion” to tell the board what they want to hear; these individuals can educate the board and perhaps become a member of the board over time.

 6.   Separate the CEO from the chair and strategic risk management oversight.

We believe this is a pro-diversity strategy by definition because many CEOs and board chairs suffer from deep diversity challenges. By having the amount of power that they do in a combined role, very little change is possible unless the person himself is in favor of improving governance diversity.  The operational benefits from this separation of powers have long been chronicled in the breakdown of decision making, risk management and the types of moral hazards that are bred when power remains unchecked.

In a recent piece we co-wrote for Risk Management Magazine, we detailed and made the case that if the boards of companies that had suffered recent serious crises and scandals had been more diverse leading up to their crisis, it would have helped prevent the crisis in the first place or enabled a more agile response and recovery. And in each of the cases mentioned, the CEO was also the Chairman of the board before and leading up to the crisis event.

 7.   Enforce term limits and cap the total number of concurrent board seats.

Again, this step is pro-diversity by definition because with more turnover and less entrenchment the opportunity for new and diverse members of a board grow substantially. 

Leading good governance advocates including some of the biggest asset managers such as Blackrock, State Street and some of the big state pension funds, have been on the record about preferring term limits for board members. Indeed, in this Harvard Law School Forum on Corporate Governance and Financial Regulation piece written by Jon Lukomnik, he reports on a study of major institutional investors responding to an ISS 2016-2017 Global Policy Survey in which:

 “Among the 120 institutional investors (one-third of whom each own or manage assets in excess of $100 billion) who responded, 68 percent pointed to a high proportion of directors with long tenure as cause for concern…Just 11 percent of the investor respondents said that tenure is not a concern.”

What this means in plain English is that boards that have tenures that are too long, or allow for repeated terms over time for the same person without limits, may not be serving the best interests of their shareholders or other key stakeholders – like customers and employees.

 8.   Create advisory committees of key outside experts to provide new perspectives.

While unusual and uncommon, such advisory committees can include less experienced but highly specialized, more diverse and helpful people who may not be ready for prime-time board seats but are promising candidates to be both listened to and mentored.

One area in which this practice can be specifically helpful is in the technology, cyber-security and digital transformation area, not to mention the clear generational shifts in populations. Most traditional board members are still current or retired CEOs and CFOs who did not grow up during the technological revolution. While it may be wise to have one or more board members with actual technology experience on your board, you might not be able to find the properly seasoned person to perform that role yet. Why not create a feeder advisory board to the corporate board that includes younger, more technologically savvy members who may one day make it to boards as well?

9.   Bring in independent, qualified directors and wean CEOs from the habit of appointing “friends and family” to the board.

The “friends and family” approach to board packing can be harmful to shareholders and other key stakeholders in the long run (and maybe even in the short run). By definition these kinds of boards are very un-diverse – mainly created by founders who are typically white men (although many can be fairly young as founders of tech start-ups).

We think that the long-term profitability and resilience of companies - and the acceptance and support of key stakeholders - is served well by the introduction of talented, meritorious board members who may not be friends and family to the founder or a powerfully entrenched CEO (who so often is also the chairman).

We also believe that the best governance solutions come from voluntary board self-evaluation with the help of the right experts to refresh your board. Boards should break out of the cycle of the self-fulfilling prophecies that most traditional board searches continue to do– with the same recycled profiles of people who are already on boards and have been vetted by the same handful of search firms. Such an approach will assure the continued un-diverse nature of many boards. Breaking that cycle will do the reverse - unearth the many non-traditional and highly qualified talents that are out there in search of board service.

***

Diversity is resilience, innovation and competitive advantage because diversity is destiny - both at the macrocosmic level of national demographics and at the microcosmic level of every company.

Andrea is the founder and CEO of GEC Risk Advisory providing strategic governance, risk, ethics and cyber advice to business, nonprofits and governments, and a board member, NACD Governance Leadership Fellow & Faculty Member. Her latest book – Gloom to Boom: How Leaders Transform Risk into Resilience and Value, will be published by Routledge in mid 2019.

Dante Alighieri Disparte is the founder and CEO of Risk Cooperative, a strategic advisory firm and insurance brokerage focused on risk, readiness and resilience. He is the co-author of the acclaimed book Global Risk Agility and Decision Making and the author of the forthcoming book, Supergovernance, to be published by Macmillan in mid 2019.

The views and opinions expressed herein are the views and opinions of the authors 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*: 3/5/2019 Mailto Link Identification Number: 1685
Frequently Asked Questions
  Good Governance: A 2019 To-Do List for Your Company's Board
Identification Number 1674
Clearhouse
Good Governance: A 2019 To-Do List for Your Company's Board
Publication Date: January 16, 2019

Each year, corporate governance changes with the times and the priorities of investors. This year's governance checklist shares updates on three issues from last year, along with a number of new challenges. In this post, veteran director Betsy Atkins encourages companies (and their boards) to kick off 2019 by focusing on the following seven priorities.



Clearhouse
1. Keep an Eye on the Regulatory Landscape

Each year seems to bring a new watershed governance issue. 2017 was the year of the activist, with an unprecedented volume of activism and proxy actions not just across the U.S. but globally as well. 2018 was the year of #MeToo, a movement that led to the boards of numerous iconic companies scrambling to defend their corporate brands and investigate CEOs accused of sexual harassment.

I expect 2019 to be the year that regulation impacts a variety of businesses. I’m not just referring to high-profile issues, such as the data use and protection regulations being debated for internet goliaths. Sitting on the Wynn Resorts board has taught me that navigating the gaming commission and regulatory compliance is worse than trying to get top secret clearance. Almost every industry has a regulator they are dealing with, and companies that do business globally must navigate a complex regulatory landscape.

For example, a new law passed recently in India goes into effect in February and will limit online sales through Amazon and Wal-Mart. Both companies have bet billions of dollars on the upside of the online retail market in India. Combined, they represent 83% of the Indian online retail market through affiliate relationships, but that new regulation is going to cap online sales through affiliates at 25% via any one online marketplace.

Boards need a window into how upcoming legislation may impact company operations, so they can plan how to help influence and shape it. As regulatory compliance becomes more complex, it should become an annual best practice for board members to ask management to share the 1, 3, and 5-year regulatory agenda. A proactive approach is far better than winding up on the back foot when new legislation is passed.

Nasdaq does an excellent job keeping an eye on the regulatory landscape and participates actively in the debates that shape legislation that will impact its listed companies. The U.S. Securities and Exchange Commission (SEC) employs committees and roundtables to energize public policy discussions affecting public companies, including a recent roundtable on Proxy Access that covered issues about technology and proxy plumbing as well as the rules surrounding proxy advisors and how shareholders can introduce proposals. Another issue of interest that the SEC is looking to advance in 2019 includes a review of the quarterly reporting process for U.S. public companies.

Read More: It's Time to Fix the Proxy Process >>

Clearhouse
2. Review Your Board's Composition

Diversity of board composition is now a front and center topic.

Gender diversity is a must, as companies that fail to proactively address it are going to be under increased scrutiny. Starting in 2020, ISS will note “NO” on re-election of nominating and governance committee chairs if their company does not have at least one woman on their board. Many gender diversity advocacy groups are now aiming towards a near-term target of 30% of public company board members being female. If companies fail to make progress on this issue, there could be more legislation like the new board diversity law that passed in California and the mandatory women on boards bill recently introduced in New Jersey.

Diversity should also be more broadly defined as cognitive diversity, which is the diversity of thought achieved in a group with diversity of ethnicity, age, and demographical geography as well as gender. Experience as a CEO or top corporate executive is no longer a must-have credential for board service. Only 35% of the new S&P 500 directors are active or retired CEOs and other C-suite leaders, down from nearly half (47%) a decade ago. Look for new resources for board members in order to improve the diversity of thought on the board.

Another 2019 must is a digital director on the board. 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 artificial intelligence) will bring critical insights into the boardroom. There is not a business listed on Nasdaq that cannot apply technology to generate efficiencies in some way, whether to reduce the costs of supply-chain management or take friction out of the customer journey or revolutionize the industry’s business model. Look at the birth of sharing economies like Airbnb and gig-enabled businesses like Uber, Lyft, and Thumbtack.

The velocity of change and disruption has shrunk the average lifespan of companies; pretty much half disappear within a decade. The biggest risk to companies today is that they don't stay contemporary which makes cognitive diversity critical to maintaining a vibrant and sustainable business model for shareholders.

Read More: 2018 U.S. Spencer Stuart Board Index Highlights >>

Read More: ISS 2019 Proxy Voting Guidelines >>

Read More: The Digital Boardroom: Industrial Boards Are Looking for More Tech-Savvy Directors >>

Read More: Five Ways to Raise Your Board's Digital IQ >>

Clearhouse
3. Embrace Environmental, Social and Governance (ESG) Issues

A robust ESG program can open up access to large pools of capital, build a stronger brand, and promote sustainable, long-term growth. 2019 is the year boards have to proactively embrace ESG if their companies haven’t already.

ESG investments are estimated at over $20 trillion in assets under management—representing one of every four dollars under management. These tend to be stickier pools of capital that help promote sustainable, long-term growth. And, as the competition for talent increases and companies seek to be attractive to the millennial workers who already make up a third of the workforce, companies need to articulate a higher purpose. ESG is an excellent framework for explaining your company’s values and mission and purpose.

The low hanging fruit on the ESG tree is creating a baseline to bring visibility to the sustainable business practices the company has already adopted. Most companies are doing many good things in the ESG realm, but they're not measuring them or articulating them to investors. These might include environmental and sustainability reports; social employee initiatives around inclusion, gender diversity, anti-harassment, or anti-predatory practices; or better governance practices in general.

Companies also need to begin the operationalization of measuring ESG initiatives, and there are resources like MSCI and Sustainalytics to help companies identify which ESG criteria make sense for their industry.

Board members should ask their management teams to come forward with a plan to articulate the company's ESG position during 2019. If a holistic ESG program is too big to tackle in the near term, challenge management teams should come forward with a baseline and develop an ESG program to implement and publicize in 2020.

Read More: Strong ESG Practices Can Benefit Companies and Investors: Here's How >>

Read More: ESG Investing and Your Company: Is Your Board Ready? >>

Clearhouse
4. Proactively Engage Major Shareholders

There has been a sea change with regards to in-person shareholder engagement during the past several years. It used to be that CEOs held an analyst call once a quarter and followed up afterwards with a few major funds that were big shareholders. Now, index funds are disproportionately dominating the shareholder base, and they are creating in-house governance groups to monitor governance practices and issues within their portfolio companies. In a trend that began quietly but is picking up pace, index funds are requesting visibility from the board, including the chairman, lead independent director or compensation committee chair (it varies depending on the issues that the fund is sensitive to).

Boards should proactively ask their companies' governance teams if major shareholders want access to board members, and if so they need to determine which board members will engage in direct outreach (under management guidance of course), target the major shareholders they will visit, and determine what issues should be discussed.

Companies with large hedge fund ownership should proactively seek to engage these shareholders as well—don't wait for them to come to you, especially if an issue is brewing. Hedge fund activity by means of shareholders proposals continues to decline, but only because they have refined their tactics to stir public debate on their portfolio companies' business strategy and agitate for change without making a single SEC filing.

Read More: Corporate Governance Teams, Investor Relations, and the Changing Governance Landscape >>

Clearhouse
5. Quantify and Assess Tech-Readiness of the Company

Every company is a technology company in some way, and all boards should be continuously researching macro trends in technological innovation and digital enablement. These trends include robotic process automation, data analytics, artificial intelligence (AI), and machine learning. Disruptive technologies have the power to transform your business - delighting consumers, bringing efficiencies to supply chains, and lowering costs.

Hand-in-hand with keeping up with technology trends is ensuring the company is ready and able to adopt those new technologies. The ability to apply innovative technologies to the business is so significant to a company's viability that it should be of equal or greater concern to the board than cyber security. Boards need to consider developing a framework or template to assess the technology enablement of a company holistically: Are the company's software development and R&D teams continually updating their skills? Does the company's website convert sales leads? Does the company have omni-channel sales capabilities? Are ERP systems integrated? Is data analytics being deployed in decision making? Are there areas where machine learning and AI could save time and money?

Boards must routinely assess if the companies they are leading are laggards or frontrunners in technology enablement; if not, they risk becoming blindsided by technology like Blockbuster was by the streaming of video content.

Read More: 5 Ways Companies are Transforming Their Businesses with Machine Learning >>

Clearhouse
6. Develop a Social Media Crisis Management Plan

2018 taught us that we live in a real-time social media world, where a crisis is playing out in the public domain before the company has a chance to deal with it. Hours are the new days when it comes to social media crisis management. This has been true for a few years for business-to-consumer companies, but business-to-business companies are going to face this new reality too.

To make the most of those first precious hours after a crisis occurs, update the company's crisis management plan to be social media centric, with the top ten social media disasters or risks already thought through and on-the-shelf responses prepared.

The company should engage an outside social media consultant as a crisis partner. The firm should specialize in social media communication—not just offer social media as part of a larger traditional PR firm. Social media firms have a whole different network of getting the message out there and understand that crisis management requires a whole different approach.

Starbucks (Nasdaq: SBUX) is a great example of how to handle a social media crisis. When there was an allegation of racial bias leveled at Starbucks front-line staff, the whole company shut down and immediately retrained all of their employees. Starbucks' response to this crisis ultimately enhanced their company brand.

Read More: Managing Brand Risk in an Age of Social Media >>

Read More: Build Your Social Media Crisis Management Plan in 10 Steps >>

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7. Review Retirement Policies for C-Level Executives and Board Members

The model of corporate board service as a part-time gig for retired CEOs who are coaching with corporate playbooks from the '80s and '90s doesn't work anymore. The rate of change has accelerated so dramatically that a board slate of contemporary perspectives and experiences has gone beyond a competitive advantage to become a necessity of survival.

That doesn't mean companies should rush to stack their boards with millennials. Experienced executives bring wisdom and big picture perspective that is acquired through decades of experience. Contemporary perspectives are not age dependent, but rather engaged dependent. Boards need seasoned former executives who have remained deeply engaged in the business world and are dedicated life-long learners.

That said, it's important to strike the right balance between experience and ensuring the board has new and evolving skill sets critical to navigating the exponential rate of change. Mandatory retirement ages for board members, tied to board refreshment planning, are an effective way for a company to onboard the evolving skill sets and modern perspectives it will need in the boardroom in the next 3-5 years. Just be sure those policies allow for special exceptions, so exceptional talent and wisdom isn't lost due to an arbitrary age limit.

Companies should also review their executive retirement age policies before it becomes an issue and an exception must be made to keep valuable C-level executives as it did at Merck.

Read More: Board Refreshment: Finding the Right Balance >>

Read More: CEOs & Mandatory Retirement Age >>

***

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 Cognizant Technology Solutions Corporation (Nasdaq: CTSH), Wynn Resorts (Nasdaq: WYNN), Schneider Electric, and a private company, Volvo Car Corporation. She previously served on the board of directors of The Nasdaq Stock Market LLC and as CEO and Board Chairman at Clear Standards.
Publication Date*: 1/16/2019 Mailto Link Identification Number: 1674
Frequently Asked Questions
  Try These 5 Ideas to Foster Better Dynamics in Your Boardroom
Identification Number 1675
Clearhouse
Try These 5 Ideas to Foster Better Dynamics in Your Boardroom
Publication Date: January 23, 2019

Boardroom dynamics can make or break the effectiveness of a board. This could be why more than 600 governance professionals signed up for a recent webinar co-hosted by Martyn Chapman, head of strategy for Nasdaq Governance Solutions, and David Shaw, editor and publishing director for Directors & Boards magazine. While the webinar focused on the Seven Tactics to Engineer Better Boardroom Dynamics per a recent Governance Clearinghouse post, our hosts also brought new insights to executing these tactics, sharing these five new ideas that governance professionals can use to re-energize and refresh the dynamics in their own companies' boardrooms.

1) Design and implement a "reboarding" strategy.

An emerging practice, one the governance community may be hearing more about, is "reboarding." Reboarding is a process of re-energizing and refreshing the board without changing any of the existing players. 

Reboarding is useful for directors who have been on a board for a very long time, or for an organization that has changed its business or operational paradigm significantly during the tenure of the existing board. For example, if a corporate board has pivoted its focus to more technology-based business operations, such as expanding from traditional retail stores to online selling, it will need to change its approach. The re-boarding process can help a tenured board better understand how the business operates in its new domain, as well the new risks (such as cyber risk) that the company faces.  Re-boarding could become a useful element of continuing professional development for a board.

Whether onboarding a new director or reboarding tenured ones, it’s important to look at the particular passions, expertise and backgrounds of board members.  The program should be individually tailored to ensure each member has access to the right information and makes the right connections with appropriate members of management.

2) Encourage communication between board members and management outside of the boardroom.

Ideally, board members "keep their noses in but their fingers out" of running the business.  Boards walk a fine line between immersing themselves in company business and encroaching on the role of management, so any engagement between board members and management should be carefully supervised.  A strong Corporate Secretary has the institutional knowledge and cultural fluency to be the key person in the organization to facilitate communications between board members and management that take place outside of board meetings.

The appropriate level of engagement between the board and company management is defined by a company's corporate culture and should be shared with board members during the onboarding process. 

3) Bring the business to life with site visits.

Site visits are an excellent means of engaging board members and sparking knowledge sharing between board members and management.  Companies can host board meetings at sites that are of significant operational value to them, such as factories, storefronts, or mines.  New projects are also exciting to visit, such as a tunnel being built or a new research facility. These trips bring to life a better understanding of the business and foster a board that is more in touch with the company and its operations. 

4) Actively manage tension to minimize the likelihood that tensions escalate into conflicts.

Challenge and debate are key to a board’s effective oversight of management, stimulating new ideas and leading to robust decision-making.  When managed properly, tension and conflict form an integral part of boardroom dynamics.

There is a distinction between healthy tension and unhealthy conflict, and it is important to embrace the difference between the two. Tension, from a board perspective, is a disagreement which is uncomfortable but can be addressed by healthy debate.  Conflict arises when that tension becomes aggressive and escalates to unresolvable levels. 

There are three issues that tend to lead to tension and conflict in the boardroom:

  • people and personality matters (i.e., retention, recruitment, compensation);
  • historical disputes (issues and concerns that weren’t resolved, decisions where certain directors were not fully on board, transactions rife with conflict); and
  • decision making (fundamental disagreements over strategy or particular actions proposed by the board).

It is important to identify how tension and conflict present themselves in the boardroom. Healthy tension can present as discomfort when discussing difficult topics, during open exchanges of information, and when directors are engaged in robust debate.  Red flags that signify a conflict may be brewing are:

  • passive-aggressive behaviors, such as board members who do not engage in a discussion or are overly polite or detached when responding to difficult questions;
  • repeating a point;
  • overly interrogative or heavy-handed questioning;
  • pushing debate offline or out of the boardroom; and
  • physical actions such as slapping on tables, banging glasses or leaving the room.

Tension generally tips into conflict when discussions become emotionally charged.  There are strategies that the board chair, Corporate Secretary or CEO can take to manage tension and minimize the likelihood of tensions escalating into conflicts:

  • Explicitly acknowledge and address concerns during the board meetings.  Concerns that are ignored or not fully addressed can plant seeds for conflict later.
  • Hold face-to-face conversations between the chairman and the conflicted parties (either one-on-one or in a group). These conversations work best when the board chair targets individual members with specific issues ahead of board meetings in informal settings outside the boardroom. 
  • Remind board members of the higher purpose of what they are working toward, who they are working for, who they are representing.  The board chair plays a key role in that as well.
  • Sit opposing board members next to each other during board meetings.

5) Add an "extra" member to each board committee.

An emerging practice among company boards is to assign at least one more member to each committee than is required by listing rules. This provides a margin of compliance if a member is suddenly no longer available to serve, and also allows boards to more easily rotate one of the committee members each year.  Rotating committee memberships keeps viewpoints fresh, exposes board members to new aspects of company’s business and creates new working relationships between and among board members. 

Listen to the full webinar: 7 Steps to Better Boardroom Dynamics>>

Read the companion article: Seven Tactics to Engineer Better Boardroom Dynamics>>

***

Martyn Chapman serves as Head of Strategy for Nasdaq Governance Solutions, supporting product development and commercial strategies for Nasdaq’s flagship governance offering, Nasdaq Boardvantage. He has over 15 years of governance industry experience serving boards of FTSE100 and Fortune 500 companies with a focus on innovating corporate governance practices through technology.

David Shaw is editor and publishing director of Directors & Boards, a quarterly print and digital journal dedicated to the topics of leadership and corporate governance.
Publication Date*: 1/23/2019 Mailto Link Identification Number: 1675
Frequently Asked Questions
  7 Hallmarks of a Company That Champions Women in Leadership
Identification Number 1669
Clearhouse
7 Hallmarks of a Company That Champions Women in Leadership
Publication Date: January 2, 2019 

Nasdaq's Winning Women series seeks to share the insights of successful business women from inside the boardroom and C-suite.

For this latest installment of our series on Winning Women, Caren Merrick, veteran director and entrepreneur, interviewed Mary Davis Holt, an expert in developing women leaders and transforming corporate culture. Mary is a senior consultant at Flynn Heath Holt Leadership, a consulting firm with the stated goal of "moving women leaders forward faster." She offers practical advice on how companies can effectively shift culture to support women leaders and build a diverse leadership pipeline.

Culture trumps everything. When corporate culture doesn't match a company's shiny public face, internal initiatives such as building a gender-diverse management pipeline are likely to fail. In my work, I've observed that companies "walking the talk" of gender parity share the following characteristics:

1) The company has taken the time to audit its own culture.

Culture is elusive, made up of behaviors and beliefs that are felt beneath the surface, rather than seen. So, the first step to retooling a corporate culture is to define what it is currently.

Culture can be audited through surveys, focus groups, or one-on-one interviews, although I'm not a fan of surveys. It's difficult for HR to be objective when analyzing culture, and employees are hesitant to be too candid with internal surveys. Even when the surveys are outsourced, they lack the editorial give-and-take of focus groups and interviews, which is where truly meaningful insights bubble up.

I find the best results come when a company brings in a leadership development consulting group to interview employees first-hand about what it's like to be a woman in that organization. Interviewers delve into issues with lots of probing questions: What are the hurdles in your way? Why are women leaving? How are your benefits? Is there flexibility in the work arrangements? These interviews can be conducted in a focus group setting or one-on-one. It's important to seek input from men as well as women, and to interview a broad range of employees from mid-level up through to the top.

Along with employee perspectives, the company should gather some hard data with regards to employment of women at the company. How many women are being hired? How long do they stay in entry level roles? At what levels in the organizational hierarchy do the numbers of women begin to drop off?

Culture-shaping consultants can help distill the information from interviews and internal employment data into a "culture report card". Depending on their level of expertise, consultants can also help to develop and implement strategies to address any issues that were uncovered.

2) Senior leadership champions diversity and inclusion.

The most powerful lever of cultural change is a CEO who is walking the talk. A company can hire the most successful culture-shaping consultants in the world, but if the CEO and senior leadership team aren't articulating why change needs to happen and taking visible action to make it happen, the culture will not change.

CEOs who are actively engaged in making a difference for women in the workplace typically have some kind of personal experience that got them excited about the issue. Some are pressured by institutional investors, some have daughters entering the workplace and coming up against some tough barriers, some are sponsoring a senior woman but she's not advancing and they want to dig into it and understand why.

Whatever the motivator, when a CEO commits to making the company's culture more supportive of women, everybody else in the company sits up straight and says, "If he's doing it, I'd better do it too." One of my CEO clients told his C-suite team (consisting of 10 men), "Each of you is going to pick a senior woman you want to sponsor. I'm going to ask you every quarter to report how it's going and what progress she's made, and I want to hear what you are doing to support her." The CEO further directed that each sponsored woman should attend a senior leadership team meeting to get a sense of what goes on. That company, as a result, has one of the most successful leadership development programs we have ever facilitated.

3) The company holds itself accountable to creating a supportive culture.

Companies that are serious about supporting female employees use insights from their culture audits to establish measurable, incremental goals—and they hold management accountable to achieving them. Maybe the company wants to increase retention of women by five points, or grow the number of women in senior management by a certain time frame. Whatever the goals, they need to be publicly stated (at least internally if not externally) so employees see that management is committed to making it happen.

4) Hiring and advancement practices within the company promote parity.

Companies with supportive cultures hire and promote in an equitable way, with a level of parity for men and women. Companies need to do an honest assessment of hiring and advancement practices to ensure both genders are treated the same during those processes.

This is harder than it sounds, because unconscious biases get in the way. For example, a recent report by McKinsey reminds us that men are often promoted based on their potential for performance while women are promoted based on their actual results. Either yardstick is fine, but the company needs to pick one, so the same criteria is applied to all employees.

5) Unconscious bias is proactively routed out.

Unconscious bias is not intentional or overt but rather a very low-key hidden driver of behaviors that can operate against success and leave women with a very narrow leadership path to walk.

Here are some examples of behaviors that indicate unconscious bias:
  • Assuming high potential women with children and two-career households aren't relocatable for promotions.
  • Tolerating foul language and inappropriate storytelling in workplace settings.
  • Setting double standards for desirable leadership traits (i.e. confident and assertive women are seen as being overly aggressive and bossy while that same behavior is acceptable in the men).
Companies that take steps to address unconscious bias experience greater success in creating supportive cultures. When trying to rout unconscious bias from company culture, some organizations will put the whole organization through unconscious bias training, and some will conduct an analysis to find out where the pockets are.

Neither approach is easy to execute effectively. Discerning the unconscious biases of a population of employees can be really difficult. And oftentimes unconscious bias training fails because it's approached in a manner that becomes a turnoff to people who are taking the training, so they stop listening and nothing happens. It's critical to design the training curriculum so that it's relevant, actionable and reflective of the company's unique culture.

Unconscious bias is so tricky to identify and remediate that I often recommend companies deal with more tangible issues during the first stages of a culture shift and tackle unconscious bias later in the process.

6) The work environment is flexible.

The women I coach through my firm are much happier—and more productive—when they have some workplace flexibility, whether it's flex time, work from home, reduced hours, or paternity and maternity leave. It's not just women—men need it too.

Allowing flexibility and trusting that the company will continue to generate good productivity and strong results from employees is critical to a supportive culture. Millennials are going to demand it, so while a company may be able to avoid it right now, it won't for much longer.

7) Leadership development includes a formal sponsorship program.

Harvard Business Review published an article that reported women are over-mentored and under-sponsored. I've personally observed that to be true, to the point that I don't believe women can make it to the top of their organizations without sponsorship. Internal leadership development programs should include formalized sponsorship.

A productive sponsorship program goes beyond throwing two people together and saying, "Go have a sponsorship relationship." Upper management should not leave the matching process to happen organically, because in most cases it won't. Sponsors need to be assigned women, and they need to be supported with tools and training. Both parties need coaching to maximize the relationship. Routine check-ins with leadership coaches or upper management can help to ensure accountability. These conversations are highly customized and in-person: How's it going? What's the problem? What's an issue? What do you need? Companies should track the progress of the women being sponsored to gauge the effectiveness of the program.

One of my clients, Heidrick & Struggles (Nasdaq: HSII), has committed to retooling its corporate culture, and has adopted many of the practices I described above with great success. They're looking at their numbers and developing metrics to report progress, they've established a diversity committee, they have appointed a diversity officer. Their CEO is totally on board. And we've helped them create a leadership development program with a strong sponsorship thread. The company is matching senior leaders with high potential women, and we're giving them the training and support to make these relationships productive.

Seven months into the program, the positive effect on both the women and their sponsors and on the corporate culture has been incredible. I've seen real tangible results there in a very short time: the company has two women on the board, there are new women on the leadership team, and women are running offices and practices throughout the organization.

Read our most recent Winning Women installment featuring Candy Duncan here>>

Read the first article of our Winning Women series featuring Janet Hill here >>

***

Mary Davis Holt is a Senior Consultant at Flynn Heath Holt Leadership (FHHL), providing executive coaching on business, women, and leadership. Prior to joining FHHL, Mary held executive positions at Time Warner, Inc. with oversight that ranged from finance to IT, marketing, human resources, manufacturing, and distribution. She served as Senior Executive Vice President and Chief Operating Officer of Time Life, Inc. and as President of Time Life Books.

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 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*: 1/2/2019 Mailto Link Identification Number: 1669
Frequently Asked Questions
  Corporate Governance Teams, Investor Relations, and the Changing Governance Landscape
Identification Number 1665
Clearhouse
Corporate Governance Teams, Investor Relations, and the Changing Governance Landscape
Publication Date: December 13, 2018

Meagan Tenety, Senior Advisory Analyst, Nasdaq IR Intelligence, recently sat down with Joan Conley, SVP and Corporate Secretary of Nasdaq, as she discussed her role, Investor Relations and the changing governance landscape. She outlined trends, best practices and tools for engagement for CFOs, Corporate Secretaries and IR teams.

How has institutional interest in ESG, and in particular, governance changed over time?

Conley: Governance used to be a check-the-box category. Over time it has become one of the most influential tools that institutional investors and activists use to evaluate the strength of the Board and an organization's leadership. The ESG conversations at the likes of Vanguard and BlackRock, and Warren Buffet's letters to stockholders show that investors are increasingly concerned with governance and the environmental and social issues surrounding companies. The environmental and social side of the conversation is evolving but governance issues are clearly defined and measurable and have become a focus area for institutional investors and activists alike.

Focusing specifically on governance, what data and information do the corporate governance teams use to make decisions?

Conley: Corporate Governance teams use varying sources of data:

1. Your IR team, CFO and/or Corporate Secretary/Governance Team

2. Engagement with institutional investor governance teams

3. Harvard Law School Forum on Corporate Governance

4. Thought leaders in the governance field

5. ISS

6. Glass-Lewis

There are limited data sets for corporate governance teams. The good news is that their sources are public so you can do the investigation yourself. More importantly, your team should be getting in front of the governance teams at the largest institutions to tell your story and continually engage these professionals.

What do you communicate publically to engage corporate governance teams and proxy voters?

Conley: Publically outline your proxy guidelines over time:

• This is what you said with regards to corporate governance

• This is what we heard from investors

• This is what we did

Listen to the feedback you are getting from institutional investors both through your meetings and through their proxy votes. It is equally as important to listen to your retail investors. Analyze your stockholder meeting votes looking for year-over-year changes. Document and follow up with engagement conversation and listening tours on an annual basis to discuss your progress given their feedback. Dialogue and listening is key here!

What are the key topics that governance teams are interested in?

Conley: Corporate Governance teams use varying sources of data:

1. Board

• Composition

• Skills

• Board Refreshment

• Board Evaluation

Board Composition needs to encompass gender and ethnic diversity and unique skill sets that align with the strategy and needs of your organization to achieve your strategic plan. It is not just checking boxes but, rather, having a truly dynamic, strategic and skilled board that will help guide your organization. In order to properly communicate with governance teams, IROs and CFOs need to understand where your board is today, communicate this to governance teams, and work with leadership to design a plan to reach your board composition goals.

It is important to note that board composition is not stagnant and needs to constantly be refreshed and updated as your company strategy evolves and grows. The evolution can be strategy changes, pivots or refreshes or reaching new market cap thresholds. Stockholders, stakeholders, institutional governance investor teams and retail stockholders want to know that your board is changing and growing to meet the strategic needs of your company.

2. Leadership

• Executive Compensation

• CEO Salary Ratio

• Goals for Executive Compensation

The governance teams really care about the metrics and milestones associated with executive compensation. Get to know the governance teams so that you can make sure your executive compensation structure is not leaving you exposed.

3. Environmental and Social

The field is growing with organizations assessing your company's ESG policies. We have yet to see a leader emerge in terms of measurable and actionable guidelines on environmental and social issues like ISS and Glass Lewis provide for governance. I look to the thought leadership in Europe to guide me on forward-thinking environmental and social issues. Nasdaq Nordics ESG Reporting Guide

What is your overall strategy in terms of engagement?

Conley: Regardless of the size of your team there are simple ways to engage in activities you are already doing for your shareholder clients. Be proactive. Identify and engage with these teams as soon as possible, come prepared for the meeting and listen carefully.

1. Be Proactive: Connect with proxy teams to bring them up to speed of progress on governance issues

2. Listen, document and follow through

3. Develop a quarterly engagement plan

Can you outline for us some actionable ways a CFO, IRO or Corporate Secretary can start to engage corporate governance teams?

Conley:

• Invite the governance team/proxy voters into meetings with portfolio managers

• Send most recent earnings reports ahead of scheduled calls and invite governance teams of top institutions to your quarterly earnings calls

• Invite governance teams to your investor days

• Let governance teams know when you are in town

• If there is a key issue that is made public, let the governance teams know immediately

• Conduct a GAP analysis of the largest institutions for their proxy voting guidelines and create an action plan

• Assess the content of all of the ESG questionnaires/your institutional investor preferences and then come to an agreement within your company on the key metrics

Lastly, any final advice when engaging governance teams?

Conley: Always keep in mind that:

• They don't want to only be brought in when there is an issue

• They know which companies engage with them and which do not

• They want a relationship leading into proxy voting season

A two-way dialogue is the preference for all governance teams. They want to know that they have the latest and most up-to-date information and are being heard when they raise concerns.

Overall, your team should be proactive as possible. Add governance teams to your travel and communications schedules and begin the dialogue. Through these relationships, you will lessen your exposure to governance risk and strengthen your organization's knowledge and best practices on governance issues.

For more insights from Joan Conley, read:

Seven Tactics to Engineer Better Boardroom Dynamics >>
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*: 12/14/2018 Mailto Link Identification Number: 1665
Frequently Asked Questions
  Bridging the Confidence Gap in the Leadership Pipeline
Identification Number 1636
Clearhouse
Bridging the Confidence Gap in the Leadership Pipeline
Publication Date: September 12, 2018

Nasdaq's Winning Women series seeks to share the insights of successful business women from inside the boardroom and C-suite.

In the second of our series on Winning Women, Caren Merrick, veteran director and entrepreneur, spoke with fellow veteran board member Candace "Candy" Duncan about the important role confidence plays in getting women to the next rung of the corporate ladder. As a former Managing Partner at KPMG who has gone on to serve on several high-profile public company boards, including FTD Companies, Inc. (Nasdaq: FTD), Discover Financial Services, and Teleflex Incorporated, she has unique insights on how to help build confidence in corporate America's pipeline of emerging female leaders.

During her conversation with Caren, Candy shared key insights gleaned from decades of experience as a corporate leader and mentor.

Gender parity is a business issue, not a "woman's issue." The statistics tell a very vivid story; consider for example the Credit Suisse report that revealed that the top 50% of companies with female CEOs experienced returns on equity that are on average 19% higher. Boards are becoming aware that they will have a more powerful team sitting around the table, and hopefully a more positive impact on the bottom line, as they bring more diversity to the boardroom. Technical skills and professional experience continue to be paramount, but boards also need global, regional, ethnic and gender-based perspectives to ensure companies stay relevant.

There is no lack of women qualified to lead, but I have noticed during my career that women sometimes lack the confidence to step up onto the next rung of their careers. "Confidence is the stuff that forms thoughts into action." That quote is from The Confidence Code, a book about self-assurance written by Katty Kay and Claire Shipman. It's been my experience that action begets confidence—and many women wait too long to seize opportunities that will help them grow professionally.

Those of us who have made it to the C-suite and the boardroom can have a real impact on the confidence factor. While this isn't exclusively a female issue, it is more prevalent in females than in males. Here are three ways we can help nurture a pipeline of women who are confident and action-oriented leaders.

#1   Encourage talented women in your company's pipeline to pursue challenging roles.

Women in the management pipeline need to be given opportunities to take risks, to make mistakes, to fail—which also gives them opportunities to gain confidence. I noticed a number of times during my career that when a male and female candidate were each asked to apply for a promotion that required multiple skillsets, the woman saw that opportunity very differently. She looked at the list of ten skillsets and said, "You know, I'm only really good at eight of these. Give me another six months, give me another year, I'll get the other two mastered." The male looked at the same list and said, "Great, I'm really good at four! No problem, I'll learn the other six on the job."

Oftentimes the female candidate who hesitates just needs a bit of a push. Obviously, someone thought she was ready, or she wouldn't be considered for the position. More than once during my own career at KPMG, I was asked to take on a role and my immediate response was, "I'm not sure I'm ready for that." I was lucky, because the individuals in those instances said, "Think about it, I'll call you back tomorrow." And in in the meantime, they called my immediate supervisor and said, "Get her straight. She needs to do this." Not everybody has that kind of support in their companies.

Managers should be aware of this "readiness=perfection" mindset and how it can make good candidates hesitate to take on challenging roles, so they are prepared to give them a nudge in the right direction.

#2   Sponsor and mentor high potential women.

Sponsors and mentors are important career catalysts for emerging leaders. I personally had different sponsors and mentors along the course of my career, and I've been a mentor and sponsor myself. These aren't necessarily lifelong relationships, as people need different kinds of coaching and sponsorship throughout their careers.

If you've never served as a mentor, consider it. These relationships are so beneficial to companies because they are a two-way street: My mentees have given me insights into team dynamics issues, industry specific knowledge and ways to use emerging technologies. When I was an audit partner, I'd often sit next to the most junior person in the audit room and tell them to teach me two things by the end of the day. It was amazing how my technology skills soared as they taught me shortcuts and ways to leverage new software platforms.

Sponsors and mentors serve different purposes. A sponsor is often a level or two higher than a mentor. A sponsor's role is to push female leaders to their next challenge. As a sponsor, you make pivotal comments when that woman is not in the room, sharing that she is ready for the next responsibility, the next opportunity. You know her well enough to say, "I think Candy would do a great job at this. She's already done A, B, and C, so D, E, F, and G will follow naturally." And you likely do some coaching and help her make connections to get ready for that next position.

A mentor, on the other hand, is closer on the management ladder to their mentees; likely they mentor direct reports or other professionals who work elsewhere in the company or industry at the same level as their direct reports. As a mentor, you talk your mentees through different issues as they grow and stretch into new responsibilities and challenges. You help them navigate those growth opportunities. You are probably one of the first to know when she makes mistake and one of the first to know when she does something really good. You have the ability to coach, guide and provide constant feedback on a real-time basis.

How did I find these people? Sometimes the relationships happened organically, sometimes they came to me for help and sometimes I was supervising individuals who I thought had the potential to go far. I felt responsible for helping them become even better than I was, because the company as a whole wins when we have a really strong team.

#3   Keep a mental list of female colleagues to recommend for board seats.

Women on boards are in an excellent position to help other women be recruited for board service. Women board members are often approached to join additional boards, at times by companies that may not be a good fit for any number of reasons: we may be over-boarded, or the timing isn't right, or there is too much overlap between multiple company board and committee meeting calendars. When these situations come up, it's important to be prepared to put someone else's name forward, someone who is ready for board service but perhaps not yet on the radar.

Twice I've been approached to join new boards at a time when I was already serving on three others. Both times I declined, but quickly made introductions to alternative female candidates who were very talented and had similar audit practice backgrounds and experiences to my own. Both women were ultimately voted onto those boards.

We all know women who are very similar to ourselves. Women executives have deep networks of female colleagues through the workplace, through professional associations, and through our involvement with women's leadership and advocacy groups like Catalyst, National Association of Corporate Directors, Paradigm for Parity, Committee of 200, and Women Corporate Directors. If you don't belong to one of these groups, look into joining one. Women at the top can—and should—facilitate the process of scoping for talent outside of the normal viewing lens and make introductions to the decision-makers who choose board members.

Now is such an exciting time to be a young professional woman in corporate America. Never before has the younger generation had so many skillsets and competencies that older executives and board members need to stay relevant. The emergence of new technologies within critical domains, such as cyber security, risk management and social media, has opened up unprecedented opportunities for talented young professionals (women included) to move up in the corporate ranks quickly, and move into the boardroom as well.

If I could give rising female professionals who aspire to the C-suite and the boardroom one key piece of advice, it would be this: Don't be afraid to speak up, your voice needs to be heard. If more and more women speak up, we are going to find ourselves in a very different place than we were 40 years ago.

Read the first of our Winning Women series featuring Janet Hill here >> 

***

Candace Duncan serves on the board of directors of Discover Financial Services, Teleflex Incorporated and FTD Companies (Nasdaq: FTD). Candy served on the KPMG LLP board of directors from 2009 to 2013, where she chaired the board's nominating committee and partnership and employer of choice committee. She retired from KPMG in November 2013 where she was Managing Partner of the Washington, DC Metropolitan Area since 2009. She is also a member of the National Association of Corporate Directors, International Women's Forum, C200, and Women Corporate Directors.

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 Gladstone Companies (Nasdaq: GAIN, GLAD, GOOD, LAND) and the Metropolitan Washington Airports Authority. 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*: 9/12/2018 Mailto Link Identification Number: 1636
Frequently Asked Questions
  Four Essential Elements for Optimizing Your Board's Meeting Agenda
Identification Number 1629
Clearhouse
Four Essential Elements for Optimizing Your Board's Meeting Agenda
Publication Date: August 13, 2018

As board portal tools streamline—or in some cases completely eliminate—administrative tasks on the board's meeting agenda, valuable meeting time is recaptured for the board to focus on core fiduciary duties. A well-structured meeting agenda leverages that additional time to maximize productivity in the boardroom.

In this post designed to help Chief Governance Officers build a better governance framework, Joan Conley, Nasdaq Senior Vice President and Corporate Secretary, shares the four essential elements of an effective board agenda.

Each company's optimal board agenda is dependent upon a variety of factors, including how often the board meets, how long the board meets, and how prepared board members typically are. At Nasdaq, we find that these variables can be transcended by making executive and chairman sessions standard protocol for each meeting. We also utilize an extended agenda for every board and committee meeting.

Board meeting agendas at Nasdaq are of course built within the company's secure board portal, where they are accessible to the board (and committee) chairs and archived as part of the corporate record. Nasdaq's playbook for creating an effective board agenda includes the following essential elements.

1. Executive sessions. Nasdaq board members have a standing invitation to hold executive sessions before and/or after the general board meeting. These brief sessions (typically 30 minutes or less) are attended by independent directors only, without the CEO or a corporate governance officer in attendance.

Executive sessions provide an opportunity for board members to discuss internal issues that may have cropped up since the previous meeting, or recent developments impacting corporations on a national or global level. If the consensus is that certain areas of concern or particular interest merit deeper discussion, the directors then share those with the CEO during the chairman session or general session.

2. Chairman sessions. These sessions may be longer than executive sessions, lasting up to 60 minutes. Chairman sessions at Nasdaq are attended by all directors (including the CEO) and by the Corporate Secretary.

During the chairman session, each committee chair reports on matters discussed and issues of importance to the committee. The CEO highlights key areas of focus for the board meeting, and then asks directors to candidly share any current concerns. The CEO is debriefed on topics of interest raised during the executive session so he or she can offer perspective on which items are relevant to the company and should be added to the general session agenda. Committee meeting reports, which are highly confidential, are an important component of the chairman session.

3. Regular session. This general board session includes the participants of the chairman sessions, as well as any executive staff or department heads called upon provide reports and/or updates. The board reviews the corporate strategy, receives updates on strategic initiatives, reviews quarterly or annual financials, and discusses new and emerging issues.

The goal of optimizing the board meeting agenda is to ensure directors receive all pertinent information required to carry out their fiduciary duties, that they have a voice in the decision-making process, and they make the highest and best use of meeting time. The order and length of each session within a board meeting agenda will differ from company to company and even meeting to meeting, depending upon the scheduling needs of the board and topics to discuss.

4. Extended agenda. An "extended agenda" is a highly effective tool that keeps board discussions focused and ensures directors are fully engaged.

The extended agenda is the basic meeting agenda with a script and attendance list embedded into it. This tool is used by the chair as he or she presides over meetings. The script outlines what should take place, the order of meeting sessions, and who should be there. It references specific page numbers of board materials and slide decks, and includes the standard template language required to process through the meeting agenda, including opening remarks, motions, action items, invitations for additional questions, and dismissal of staff between committee reports. The extended agenda is finalized during meeting prep sessions with the board chairman, the CEO, and each committee chairman.

The extended agenda facilitates better board meetings by allowing meeting chairs to participate in discussions without the distraction of keeping Roberts Rules of Order top of mind. Nasdaq's extended agenda is a tool our board chairs find so useful, they often carry it over to other corporate boards on which they serve. It has a tangible benefit to the chief governance officer as well, serving as a robust outline for drafting the board meeting minutes.

For more insights from Joan Conley, read:

Seven Tactics to Engineer Better Boardroom Dynamics >>

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*: 8/13/2018 Mailto Link Identification Number: 1629
Frequently Asked Questions
  Get a Handle on Critical Audit Matters
Identification Number 1627
Clearhouse
Get a Handle on Critical Audit Matters
Publication Date: July 30, 2018

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

Last year, following approval by the Securities and Exchange Commission, the Public Company Accounting Oversight Board (PCAOB) adopted a new auditing standard that significantly changes the auditor's report—with equally significant implications for investors, audit committees and others. The new standard is now moving through an implementation period.

The identification and communication of critical audit matters (CAMs) is the most significant change required by the new standard. If you feel like you don't fully have a handle on CAMs yet, you're not alone. Here are some FAQs to help.

What is a CAM?

The CAMs requirement adopted by the PCAOB is intended to make the auditor's report more informative and relevant to investors and other users of financial statements. According to the new standard, a CAM is "any matter arising from the audit of the financial statements that was communicated or required to be communicated to the audit committee" and that:

  • relates to accounts or disclosures that are material to the financial statements, and;
  • involved especially challenging, subjective, or complex auditor judgment.

How will auditors determine whether a matter is a CAM?

The determination of whether a matter is a CAM is principles based, and the new standard does not specify that any matter would always be a CAM. The new standard specifies that an auditor, in determining whether a matter involved especially challenging, subjective, or complex auditor judgment, should take into account, alone or in combination, certain nonexclusive factors (as specified in the new standard), such as the auditor's assessment of the risks of material misstatement, including significant risks.

What impact will CAMs have on the communication between the auditor and audit committee?

The source of CAMs are those matters communicated or required to be communicated to the audit committee. PCAOB auditing standards already require a wide range of topics to be discussed and communicated with the audit committee, which in most cases means most, and that it is likely that all of the matters that will be CAMs are already being discussed with the audit committee. However, not every topic that is discussed with the audit committee will rise to the level of a CAM. The PCAOB Board believes there should not be a chilling effect or reduced communications to the audit committee because the requirements for such communications are not changing.

Could a significant deficiency in internal control be a CAM?

The determination that there is a significant deficiency in internal control over financial reporting cannot be a CAM because such determination in and of itself is not related to an account or disclosure. However, a significant deficiency could be among the principal considerations that led the auditor to determine a matter is a CAM. For example, if a significant deficiency was among the principal considerations in determining that revenue recognition was a CAM, then the auditor could describe the relevant control-related issues over revenue recognition in the broader context of the CAM without using the term "significant deficiency."

Will CAMs only relate to the current audit period?

The PCAOB requires the communication of CAMs identified in the current audit period. While most companies' financial statements are presented on a comparative basis, requiring auditors to communicate CAMs for the current period, rather than for all periods presented, will provide relevant information about the most recent audit and is intended to reflect a cost-sensitive approach to auditor reporting. In addition, investors and other financial statement users will be able to look at prior years' filings to analyze CAMs over time; however, the standard permits the auditor to choose to include CAMs for prior periods.

Will the auditor be the original source of information about the company in the auditor's CAM communication?

The new standard includes a note explaining that the auditor is not expected to provide information about the company that has not been made publicly available by the company, unless such information is necessary to describe the principal considerations that led the auditor to determine that a matter is a CAM or how the matter was addressed in the audit. The SEC has stated that they believe that situations where auditors would be required to provide information about the company that management has not already made public would be exceptions, arising only in limited circumstances, and not a pervasive occurrence.

What impact are CAMs expected to have on financial reporting?

Increased attention on CAMs could result in an incremental focus on aspects of management's related disclosures. This could result in discussion between and among management, the audit committee, and the auditor on how CAMs are described, and that may have an impact on management's consideration of the information to disclose in the financial statements related to that particular matter. Early dialogue among auditors, management, and the audit committee will be important.

These questions and much more are covered in a new publication from the Center for Audit Quality (CAQ), Critical Audit Matters: Key Concepts and FAQs for Audit Committees, Investors, and Other Users of Financial Statements. I invite you to read that report and to find more resources on auditor reporting at the CAQ website.

***

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*: 7/30/2018 Mailto Link Identification Number: 1627
Frequently Asked Questions
  It's Never Been a Better Time to Open Up the Boardroom: Here's Why
Identification Number 1625
Clearhouse
It's Never Been a Better Time to Open Up the Boardroom: Here's Why
Publication Date: July 24, 2018

Coco Brown is founder and CEO of The Athena Alliance, a non-profit organization dedicated to building the modern boardroom and advancing women in the top ranks of leadership. Alison Davis is co-founder of Fifth Era and an Investor, Board Director and Author.

Time to Open Up The Boardroom

Companies today are surrounded by an unprecedented level of transformation. They're operating in the age of disruptive innovation that we call the Fifth Era - Cloud Computing, IoT, Artificial Intelligence, Robotics, Genetic Editing, Blockchain and much more. Furthermore, they're doing it all in a connected digital global marketplace, where customers expect more, share more and talk more—where public opinion spreads like wildfire. This is the hard reality of doing business in the twenty-first century: it's fast-moving, inherently high-tech, and operates in an unforgiving, digital world.

To overcome these modern challenges, businesses must rely on their boards, the highest level of leadership within an organization, to help the CEO steward long-term competitive advantage and relevance. However, despite these technological advances and radically new ways of doing business, most boards today look like they did decades ago, mostly CEOs and CFOs near or having reached retirement.

As a result, much of the board agenda today is focused on topics that were the same focus of the last few decades - operations, compliance, and risk management as well as too often narrowly defined economic value creation goals established within the context of yesterday's products and businesses - rather than the topics that will drive tomorrow's success. Many boards spend little of their time focused on new and emerging external competitive threats, longer term strategy and building innovation capabilities to succeed in this new era. Irrespective of gender, these backgrounds and areas of focus are too narrow to address the key challenges and opportunities that can quickly undermine or boost a business, including innovation and strategy as it relates to technology, employees, customers and community.

It's time to re-think and open up the boardroom. That means widening the aperture to include career experiences beyond CEO and CFO, and widening the age range to incorporate greater exposure to modern business models and innovation. A board with diverse capabilities and more relevant committees is essential to the strategy and innovation discussions that must be had around the board table in the twenty-first century.

Diverse boards are good for business.

By now we know that diverse boards are a competitive advantage. Harnessing the capabilities, experience and perspectives from across a broad range of leaders solidifies a company's place in the world. Yet, many conversations about boardroom diversity tend to overly focus on women, fixating on a supposed pipeline challenge. The hypothesis is simple: there just aren't enough women CEOs and women financial experts out there to fill board seats.

If the board is to be focused on today's operations, financials, compliance and risks, then perhaps this narrower criteria for participation at the board level might be appropriate. Appointing people that have proven themselves is the board model of the past. But we are not just talking about making smart decisions about today's business models and products and services. Companies must also consider this rapidly changing world of new innovations and possibilities and the new and emerging needs and expectations of the customer, the community, and the environment.

Companies need to define their purpose for existing in the first place, and how they offer meaning to human lives—beyond making a profit. They need a diverse board to achieve this broader view.

In his annual letter to CEOs, Larry Fink, chairman and CEO of BlackRock, called on leaders to define their purpose, and to engage their boards in doing so. He stated: "We also will continue to emphasize the importance of a diverse board. Boards with a diverse mix of genders, ethnicities, career experiences, and ways of thinking have, as a result, a more diverse and aware mindset. They are less likely to succumb to groupthink or miss new threats to a company's business model. And they are better able to identify opportunities that promote long-term growth."

CEOs don't last. Boards do.

While the median tenure for a CEO is just five years, board tenures can far exceed that. Board directors may serve for five years, or as long as 10 or 20 years. Indeed, a company's board leadership is more likely to withstand the highs and lows of a company's trajectory, while CEOs will come and go at a much more rapid pace.

At the same time, boards often state that their "responsibility is to the shareholder," yet boards often support CEOs focused on driving or maximizing short term returns, often to a degree that is unsustainable and can hurt the business longer term. Because many shareholders come and go at a rapid pace (a shareholder holds a stock for an average of just four months in the U.S.), the conversation with the long-term shareholder becomes lost. These shareholders, for example pension funds investing for their ultimate clients' retirement accounts, or parents investing for children's college education, are seeking solid long-term returns. They don't want returns that come with a heavy social and societal cost that will hurt them and future generations. Such shareholders are relying on the board of directors, even more than the CEO, to oversee the long term success and sustainability of the returns.

And so, boards, not just CEOs, must be thinking about a company's future and purpose and meaning for the community.

It's time to widen the aperture.

What if companies today approached board diversity with the aim of crafting a board that is capable of confronting complex threats and embracing (and creating) new and innovative opportunities? Getting more women into board seats is a start. But boards should also evaluate younger board candidates. By looking to roles beyond the CEO and CFO, boards will ensure they are thinking about capabilities and skill sets, not just titles. This may include adding board directors with experience in such areas as talent management, culture transformation, customer experience, digital marketing and more.

When one does open the aperture to these other roles, the gender diversity issue we are trying so hard to address becomes less challenging: women hold 55% of chief human resource officer roles, 35% of chief customer officer roles, and 32% of chief marketing officer roles. Even in the technology realm, women are better represented than they are in CEO or CFO roles (19% of CIOs are women, versus 6% of CEOs and 11% of CFOs).

Finally, consider this: many of the most valuable companies in the world didn't exist 20 years ago. And some businesses that have managed to survive are under scrutiny for reasons one would not have expected ten or 20 years ago. They struggle with issues related to employees, customers, culture, and ethics -- issues not focused on nearly enough in today's boardrooms. If these companies want to be around in another 20 years, they must re-evaluate their board competencies and committees.

It's never been a better time to open up the boardroom.

***

Coco Brown is the founder and CEO of The Athena Alliance. She leads a network of more than 1500 C-Level women, VCs, and CEOs from over 200 companies including Microsoft, Autodesk, Intuit, OpenView Venture Partners, Accenture, Deloitte, and PwC. In just two years, Athena has secured almost 200 board interviews for women, with over fifty boards working with Athena today. Coco has extensive experience in serving as an advisor to c-suite executives and their teams, guiding strategy and execution. Prior to The Athena Alliance, Coco served as President, COO and Board Director of Taos, a prominent in IT Services business serving hundreds of F1000 companies such as Apple, Cisco, eBay, Facebook, and Silicon Valley Bank.


Alison Davis is co-founder of Fifth Era. She is an experienced corporate executive, public company board director, an active investor in growth companies and a best-selling author (Her most recent book "Corporate Innovation in the Fifth Era" profiles the innovation approaches of Amazon.com, Alphabet/Google, Apple, Facebook and Microsoft). She was CFO and Head of Strategy at BGI (Blackrock), Managing Partner at Belvedere Capital, and a strategy consultant at McKinsey and A.T. Kearney. Alison has degrees from Cambridge (MA/BA) and Stanford (MBA). She was born in Sheffield, UK and now lives in the San Francisco Bay Area with her husband, Matthew C. Le Merle, and their five children.


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*: 7/24/2018 Mailto Link Identification Number: 1625
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
  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
  Janet Hill Shares Leadership Lessons from 20 Years in the Boardroom
Identification Number 1524
Clearhouse
Janet Hill Shares Leadership Lessons from 20 Years in the Boardroom
Publication Date: May 10, 2018

Nasdaq's Winning Women series seeks to share the insights of successful business women from inside the boardroom and C-suite.

In the first of our series on Winning Women, Caren Merrick, Nasdaq company director and entrepreneur, spoke with fellow veteran board member and expert on corporate diversity and inclusion Janet Hill. During the interview, Janet shared key insights gleaned from more than two decades of board service on high-profile public company and foundation boards, such as The Carlyle Group (Nasdaq: CG), Esquire Financial Holdings, Inc. (Nasdaq: ESQ), The Wendy's Company (Nasdaq: WEN), and the Kennedy Center for the Performing Arts.

Admit what you don't know.

Dave Thomas, the CEO of Wendy's, was successful in growing his company because he recognized early on what he didn't know. Dave was something of a mentor for me, from the time I joined the Wendy's board in 1993 until his passing in 2002. He started the company with one restaurant and by the time I joined the Wendy's board he had 2,000. Today, Wendy's has nearly 8,000 stores. I'll never forget him mentioning, in a rather offhand way, that when he went from one store to two stores he knew he needed help to manage his business. I admired that; I see it as a show of strength when someone admits they need help or don't know something. Dave was a great leader who surrounded himself with smart people who could help manage the aspects of the business he didn't know.

Boards need to diversify by adding youth and talent deeper into the C-suite.

Technology is evolving geometrically, at warp speed. And every company in the country is concerned about cybersecurity.

You can't have a boardroom full of 60 and 70-year old men and expect they will be as technologically proficient as someone who is 35 or 40. The obvious answer is to bring younger members onto boards, although corporate America has resisted this idea.

Anybody in their 20's or younger was born with a digital gene. Hand a brand-new iPhone to a 10-year-old (like my husband did with our granddaughter) and watch her set it up in minutes and then train the adults around her how to use it.

Of course, we can't put 10-year-olds on the board. But a 35-year-old is on the cusp of the digital age and many have enough significant work experience to be an asset on a board. I don't see this as an experiment: younger members would not just be there to provide a digital edge for the board. Like everyone else, they would be expected to serve on the audit committee, the comp committee, and to have a good understanding of operations.

Another prejudice that hampers boardroom composition is stacking the board with current or former CEOs. Boards have to think beyond the CEOs and COOs in the C-Suite and consider female executives who are in other positions in the C-Suite. For example, bringing on a chief information officer or a senior vice president of information technology, or chief marketing officer. They're not the CEO, but frankly they know more about IT and other topics than the CEO of their company.

Engage men to develop a solution to gender imbalance.

There aren't enough men engaged in the process of bringing women on boards, and I don't believe we should let them off the hook. But we can do a better job of leveraging their existing networks, instead of asking them to work outside of them when recruiting women and minorities.

Male executives traditionally use informal settings to search for new board members: their friends, their country clubs, their golf games, their bankers, their tennis partners. One of the reasons that many white men ultimately suggest white male candidates is because the networks they are reaching out to haven't suggested women or minorities. But that doesn't mean those networks don't know diverse candidates. Men just need to change the question they are asking when they tap their networks.

In my work consulting with companies to improve their diversity and inclusion, I would suggest to CEOs and boards that they go back to their sources and say, "You gave me the best board member when you suggested John Doe. Now, I want you to suggest to me a minority or a woman because you did such a bang-up job on that last referral." And usually, when they went back to their golf buddy or banker or former colleague with that request, they got a good recommendation for a woman or minority.

"Three women on the board" is not a magic threshold for inclusive boardroom dynamics.

I know that Harvard Business Review published study on gender imbalance in the boardroom that concluded there was a clear shift in dynamics when boards have three or more women, but I do not agree with them in this case. I have served on 12 corporate boards; on many of them I was the only woman. On the Board of Dean Foods, I'm one of two women, although I've been on that board since 1999 and during that period there were some years in which I was the only woman. I'm one of two women on the Carlyle Board. I served on the Board of Tambrands when it had 12 board members and six of us were women.

The number of women on the board has never made a difference in how I'm treated—whether I'm the only woman, or one of two, or one of three or more. I've never felt isolated or that my voice was not heard. I don't think a critical mass of three is a magic sweet spot.

And for the record, being "listened to" does not mean that every time I say something in the boardroom, the company follows my direction. Every collaborative and collegial board is going to have disagreements. In fact, the board is advantaged by having different opinions and different approaches on how to achieve success for the company.

That said, I do believe boards need far more women. There are enough women in the pipeline ready and able to serve.

Front line employees are a valuable resource for board members.

Board members should have (or make) the opportunity to meet employees who are on the front lines of customer service. When I served on the board of Sprint, we had a number of call centers around the country. People working in call centers had the first line of contact with our customers. I made a point to visit Sprint call centers wherever I was traveling and meet those folks.

I would usually ask them two questions. One icebreaker question: "What is your favorite football team?" I was a Cowboy fan, so I could tease them about their team if it wasn't the Cowboys. The other question was "What are the most common questions you get from customers?" I found a lot of useful information to take back to the Sprint board by talking to front line employees who had direct contact with Sprint customers.

New board members should ask questions: the answers can be illuminating to the entire board.

Board members can add value from day one, even if they don't yet know all the nuances of the business or the industry, just by asking questions to educate themselves.

I learned this when I joined the board of a tech operation back in 1999 and I was thrown into the audit committee, although I'm not a typical audit committee member. I felt lost at the end of the first audit committee meeting, so I asked the CFO to annotate the financials to help me better understand what kind of accounting principles were used to put together the balance sheet.

With the exception of cash, almost every item on the balance sheet turned out to be an estimate based on certain principles of accounting. When the CFO presented that annotated balance sheet at the second audit committee meeting, the other committee members were shocked to see certain items on the balance sheet were estimates and not a firm fact figure. These were experienced financial professionals; many were former CFOs and one member was the CEO of his own company.

Ultimately, we spent a great deal of time in my second audit committee meeting going over that balance sheet. It turned out to be extremely illustrative for the entire audit committee. And this happened because I was not afraid to say (in front of the rest of the board), "I need an annotated balance sheet in order to better understand how you prepare the materials for this meeting".

Extend the benefit of the doubt to people you don't know.

When I left a very segregated New Orleans in 1965 to attend college at Wellesley I had never met anyone white until I walked on the campus. When I called home expressing doubt that Wellesley was the right place for me, my mother gave me very important and prescient advice: "Extend the benefit of the doubt to people you don't know." Her advice changed my life (I stayed at Wellesley) and as it turns out the advice endures. It certainly can be used in the context of on boarding new directors in the boardroom, especially if an all-male, all-white board is welcoming their first minority or female director. Both sides should extend the benefit of the doubt.

In terms of recruiting new members, we can give the benefit of the doubt by not using the word "qualified" as a qualifier when vetting women and minority candidates. Let's stop saying "We could use a few qualified women on this board." I personally never use this word. No one ever says, "We could use a few qualified white males." There's an assumption that if the candidate is a white male he's qualified.

As chair of the governance committee on the Dean Foods board, it's an insult to me to suggest that I would damage the company by bringing an unqualified person, including an unqualified white male, onto the board. Every time I say women, it goes without saying I mean women who are qualified.


***

Janet Hill has served as Principal at Hill Family Advisors since 2008, where she oversees her family's assets and investments. She is currently a director of The Carlyle Group (Nasdaq: CG), Dean Foods, Inc., Echo360, Inc., Esquire Financial Holdings, Inc. (Nasdaq: ESQ) , and Green4U Technologies, Inc. Ms. Hill previously served on the boards of Houghton Mifflin Company; Sprint Nextel Corporation; Tambrands, Inc.; and The Wendy's Company, Inc. (Nasdaq: WEN). She also serves on the Board of Trustees at Duke University, the John F. Kennedy Center for the Performing Arts, the Knight Commission on Intercollegiate Athletics, and the Wolf Trap Foundation.

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 Gladstone Companies (Nasdaq: GAIN, GLAD, GOOD, LAND) and the Metropolitan Washington Airports Authority. 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*: 5/10/2018 Mailto Link Identification Number: 1524
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
  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
  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
  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 >>

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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
  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
  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