V. CORPORATE GOVERNANCE
DEVELOPMENTS, PART ONE
Moderator:
Douglas Haas, Benesch, Friedlander, Coplan & Aronoff LLP
Presenters:
Dominic A. DiPuccio, Taft Stettinius & Hollister LLP
J. Bret Treier, Vorys, Sater, Seymour and Pease LLP
RR DO NNEL L EY SEC HO T T O PI CS I NST I T UT E | CLEVELAND, O H
1
Corporate Governance Developments
• Douglas E. Haas, Moderator and Panelist
Benesch Friedlander Coplan & Aronoff LLP
• Dominic A. DiPuccio, Panelist
Taft Stettinius & Hollister LLP
• J. Bret Treier, Panelist
Vorys, Sater, Seymour and Pease LLP
•
19th Annual RR Donnelley SEC Hot Topics Institute
Thursday, November 19, 2015
Cleveland, OH
CURRENT TRENDS
IN BOARD OVERSIGHT
RESPONSIBILITIES
2015 RR Donnelley
SEC Hot Topics Institute
November 19, 2015
3
Outline of Presentation
1. Role of the Board of Directors
2. The Changing Face of Risk
o Enterprise Risk Management
o Social Media Policy
o Cybersecurity
3. Corporate Social Responsibility
o Hybrid Entities – Social enterprises
o Sustainability
4. Stockholder Engagement
4
The Role of the Board of Directors
• The business and affairs of a Delaware
corporation are managed by or at the direction of
the corporation’s board of directors
• In fulfilling its managerial responsibilities, the board
is charged with a fiduciary duty to the corporation
and to the corporation’s stockholders (and the
corporation’s creditors in certain cases such as
insolvency)
5
Fiduciary Duties Owed by the
Board of Directors
• Duty of Care
o The duty of care requires
that directors inform
themselves of “all
material information
reasonably available to
them” prior to making a
business decision. Smith
v. Van Gorkom, 488 A.2d
858, 872 (Del. 1985).
• Duty of Loyalty
o The duty of loyalty
requires directors put the
corporation's interests
above their own personal
interests and refrain from
receiving improper
benefits as a result of
their relationship with the
corporation.
6
“Other” Fiduciary Duties
• Good Faith
o Subset of the duty of loyalty
o “To act in good faith, a director must
act at all times with an honesty of
purpose and in the best interests
and welfare of the corporation.”
Directors cannot consciously and
intentionally disregard their
responsibilities, or adopt a ‘we don’t
care about the risks’ attitude
concerning a material corporate
decision. |
In re Walt Disney Co. Derivative
Litigation, 907 A.2d 693, 754755 (Del. Ch. 2005), aff’d, 906 A.2d
27 (Del. 2006).
• Oversight
o Directors have a duty “to
assure [that] a reasonable
information and reporting
system exists.” In re Caremark
International Derivative
Litigation, 698 A.2d 959, 971
(Del. Ch. 1996).
• Disclosure and Candor
o Directors are obligated to
disclose all material information
when soliciting stockholder
action. Stroud v. Grace, 606
A.2d 75, 84 (Del. 1992).
7
The Changing Face of Risk
• The economic crisis has caused the role of the
board to become far more challenging than in
years past
• Technology has drastically changed the modern
business, and the board must be informed
8
Enterprise Risk Management
• “[A] process, effected by an entity’s board of
directors, management and other personnel,
applied in a strategy-setting and across the
enterprise, designed to identify potential events
that may affect the entity, and manage risk to be
within its risk appetite, to provide reasonable
assurance regarding the achievement of entity
objectives.” COSO (Committee on Sponsoring
Organizations of the Treadway Commission)
9
Enterprise Risk Management
Comparison to Traditional Risk Management
• Traditional Risk Management:
Protect the tangible assets
reported on a company’s
balance sheet and the related
contractual rights and
obligations
• Enterprise Risk Management:
Focus on Enhancing Business
Strategy
o Scope: Enterprise-wide
o Target: Goes beyond protection
to enhancement of assets
Source: Harold Averkamp, Accounting Coach, can be
found at accountingcoach.com
Source: Protiviti, Guide to Enterprise Risk Management, Frequently Asked Questions, (can be
found at: http://www.ucop.edu/enterprise-risk-management/_files/protiviti_faqguide.pdf)
10
Enterprise Risk Management
Set the Tone from the Top
• Who is Responsible?
o The board is uniquely positioned as it has both a
direct responsibility and the greatest leverage to
ensure risk management strategies are in place
o Emphasis is on strategy setting; ownership begins at
the top and cascades downward
o In 2009 the SEC implemented new rules requiring
disclosure of the extent of the board’s role in the risk
oversight of the company
11
Enterprise Risk Management
Fulfilling Duties of Care & Oversight
1. Structure
o Determine the structure of the oversight model
• Will the board retain primary responsibility for risk
oversight or delegate to a committee?
o Committees can provide input on specific risk types
(ex. audit risk, regulatory risk)
12
Enterprise Risk Management
Fulfilling Duties of Care & Oversight
2. Policy
o The board’s vehicle for communicating its
expectations and requirements
• A risk management statement creates a benchmark for
management’s operational decisions
o The statement should separately identify:
o Acceptable strategic risks
o Risks outside the company’s risk appetite
o Risk tolerances or thresholds (Categorized)
13
Enterprise Risk Management
Fulfilling Duties of Care & Oversight
3. Review and Assurance
o Establish assurance procedures to ensure effective
Enterprise Risk Management policy is in place
o Review for bias and groupthink
o The board must have a full understanding of the
company’s risks to ensure adequate risk oversight
14
Cybersecurity
• The risk of cybersecurity breaches (and the harm
that these breaches pose) is higher than ever…
just ask these guys:
15
Cybersecurity: The Fall Guy
• Traditionally: Low-level IT department was blamed
for cyberattacks
• New wave of belief: Cybersecurity is a risk
management issue that goes far beyond IT
operations, requiring board oversight
• The board is charged with the duty of protecting
company assets
o These assets include proprietary information, private
identifying information of customers and employees,
trade secrets, and the company’s goodwill and
reputation
16
Cybersecurity: Case Study
• January 2014 - Target announced hackers
had stolen personal information from
over 70 million customers, and the credit
card information of 40 million shoppers
o Target’s Chief Information Officer, Beth M. Jacob,
publicly paid the price, and resigned in February
o Target’s CEO and chairman of the board, Gregg
Steinhafel, resigned in May
17
Cybersecurity: Case Study
• Institutional Shareholder Service, a company that advises
stockholders on governance issues, called on Target
stockholders to vote against 7 of the 10 directors
belonging to the company’s Audit and Corporate
Responsibility Committee for failing to provide enough
risk oversight
o Though all directors were re-elected, the
incident draws into question the changing
attitude of stockholders as to who is
ultimately responsible for cybersecurity
18
Cybersecurity: Problem-Solving
• Problem: Many boards lack the technical expertise
to evaluate whether management is taking
appropriate steps to protect the company
• Proposed Solutions:
o Mandatory cyber-risk education
o Mandate boards contain a select number of members
who specialize in the IT issues that pose risks to the
company
• These members should ensure the company is prepare for a
cyber -attack and the resulting fallout
19
Cybersecurity: Problem-Solving
o At a minimum, board members should have a clear
understanding of who at the company has primary
responsibility for cybersecurity risk oversight and
ensuring the adequacy of management’s practices
20
Social Media: The Age Gap
• Senior-level decision makers in the U.S.– average
age mid-50s
o Facebook was launched in 2004, membership was
initially limited to those with a university e-mail address
o In 2009, there was an 88% growth in the age group
50-65 using social media
• Despite this growth, studies continue to show that the people
in charge do not feel they have a good understanding of the
impact social media can have on their business
• The board must close the gap between their general
familiarity with social media and the formal use of social
media in the corporate context
21
Social Media: The Board’s Role
• It is not the board’s job to institute social media
guidelines.
• However, the board should use its oversight function
to determine whether management is sufficiently
focusing on the risks inherent in social media in the
corporate context.
o The board should consider prompting management to
consult with lawyers or other experts to develop formal
policies at all levels in the corporation and should have
discussions with senior management as to how the
company can most effectively use social media to
communicate with their constituencies.
22
Social Media
Implications and Risks
• Board must understand and manage social media risks
associated with:
o Disclosures of non-public information by company and
management on social media
• Regulation FD – prohibits the selective disclosure of material
information to investors
o Promulgated in 2000 to ensure all investors received
prompt disclosure of material information
o Reacting to employee social media behavior and posts
o Monitoring and responding to third party negative publicity being
spread on social media
23
Social Media: Regulation FD
• In July, 2012, Netflix CEO W. Reed Hastings posted
on his personal Facebook page a message
including the information that “Netflix monthly
viewing exceeded 1 billion hours for the first time
ever in June”
o In December 2012, the SEC announced it would
recommend enforcement proceedings against Netflix
and its CEO, alleging a violation of Regulation FD
o Lesson: The company’s Regulation FD policy must
cover communications made via social media
• The board must ensure management is sufficiently focused on this risk.
24
Corporate Social Responsibility
• “In its broadest sense, corporate governance is
concerned with holding the balance between
economic and social goals and between individual
and communal goals. The governance framework is
there to encourage the efficient use of resources
and equally to require accountability for the
stewardship of those resources. The aim is to align
as nearly as possible the interest of individuals, of
corporations, and of society.”
–Sir Adrian Cadbury,
Former Chairman of Cadbury and Cadbury Schweppes
25
Corporate Social Responsibility
Delaware Public Benefit Corporations
• Corporation: The board has the fiduciary duty to
maximize stockholder value in making decisions
• Public Benefit Corporation: Permit a corporation’s
board to also take into account the social purposes
of its actions
o Aug 1, 2013: DGCL revised to allow corporations to
elect to be formed as, or convert to, a public benefit
corporation (Subchapter XC of Chapter 1, Title 8 of
the Delaware Code)
26
Corporate Social Responsibility
Delaware Public Benefit Corporations
• Typically must pursue a general public benefit and
make available to the public an annual report
measuring their performance in meeting social goals
• Conversion requires 90% stockholder approval, but
public companies may find this entirely too high a
bar
27
Corporate Social Responsibility
Sustainability
• Many corporations want to ensure they are socially
responsible, but fall short (often, way short) of the
public benefit corporation model
o The board’s fiduciary duty of maximizing stockholder
value does not need to be contradictory to a company’s
responsibility to be socially minded
o The board has the fiduciary obligation of long-term
value creation and it must safeguard company assets
o Among these assets is the “Social License to
Operate” (National Association of Corporate Directors)
28
Corporate Social Responsibility
The Board’s Role
• Discussions between the board and management are
increasingly focused on global trends (population
growth, urbanization, resource scarcity, etc.)
o These discussions tie together sustainability and
corporate strategy (a central role of the board)
29
Corporate Social Responsibility
The Board’s Role
• Recommendations for Boards
o The board should understand how the company
defines sustainability, and how this fits into the
company’s strategy
o The board should oversee sustainability activities and
external reporting
o The board should ensure they engage with
management and agree on their public disclosures
30
Corporate Social Responsibility
31
Stockholder Engagement
• The relationship between stockholders and the
board can have material consequences for both
sides
• Company executives often fail to recognize the
value of effective stockholder engagement and the
degree of influence they have in shaping their
stockholder’s perspectives
• Institutional investors are under increased pressure
to understand the corporate governance of their
investments and use their influence to minimize risk
32
Stockholder Engagement
Trendsetters
• Pfizer, Inc. – One of the first U.S. companies
to proactively engage with investors
• Prudential Financial, Inc. – The company’s
board has sent letters to stockholders and
held occasional meetings to enhance relationships. The
board credits this engagement for its 96% support to
say-on-pay in 2012
o In their 2015 Proxy Statement, Prudential revealed:
• In the last 5 years, over 12,000 comments from stockholders have
received a written response
• Stockholders were offered a $5 Starbucks gift card to transfer their
shares into brokerage accounts, to save paper and energy
33
Stockholder Engagement
Where to Begin
• Proactively reach out to your largest 15-20
institutional investors
• Offer to schedule a ½ hour call with each institutional
investor to discuss any corporate governance
concerns and executive compensation
• Ensure a lead independent director and
knowledgeable person from investor relations, human
resources, and legal are on the call and have the
authority to answer stockholder questions
o As executive compensation is often the main topic, don’t
include the CEO or the company’s compensation consultant
34
Questions?
Dominic A. DiPuccio
Jessica A. Ackermann
Partner
Taft Stettinius & Hollister LLP
Associate
Taft Stettinius & Hollister LLP
(216) 706-3830
ddipuccio@taftlaw.com
(216) 706-3862
jackermann@taftlaw.com
35
Delaware Governance Updates
Presented By:
J. Bret Treier
Vorys, Sater, Seymour and Pease LLP
330.208.1015 | jbtreier@vorys.com
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36
Overview
• Amendments to the DGCL
o Fee-Shifting Bylaws
o Forum Selection Bylaws
• Reincorporation Proposals
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37
DELAWARE GENERAL ASSEMBLY
SENATE BILL 75
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38
Delaware General Assembly
Senate Bill No. 75
• Effective August 1, 2015
• Changes apply to DE stock corporations
• Prohibits fee-shifting provisions in certificates
of incorporation and bylaws that relate to
“internal corporate claims”
• Validates forum-shifting provisions in
certificates and bylaws that limit “internal
corporate claims” to DE state and federal courts
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39
Internal Corporate Claims
•
•
•
New Section 115 of Title 8 defines internal corporate
claims as “claims, including claims in the right of the
corporation, (i) that are based upon a violation of a
duty by a current or former director or officer or
stockholder in such capacity, or (ii) as to which [the
Title 8 of the DGCL] confers jurisdiction upon the
Court of Chancery”
Synopsis adds that this applies to “claims arising
under the DGCL, including claims of breach of
fiduciary duty by … directors or officers or controlling
stockholders … or persons who aid and abet such a
breach.”
Applies to forum selection and fee-shifting provisions
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40
Forum Selection Provisions
Section 115, “Forum Section Provisions”, provides:
“The certificate of incorporation or the bylaws may
require, consistent with applicable jurisdictional
requirements, that any or all internal corporate
claims shall be brought solely and exclusively in any
or all of the courts in this State, and no provisions
of the certificate of incorporation or the bylaws may
prohibit bringing such claims in the courts of this
State.”
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41
Forum Selection Provisions
•
•
•
•
Section 115 confirms the holding in Boilermakers
Local 154 Retirement Fund v. Chevron Corporation,
73 A.3d 934 (Del. Ch. 2013)
Section 115 does not address a forum selection
provision that includes a forum other than DE as an
additional forum for internal corporate claims
Section 115 invalidates a forum selection provision
that makes a forum other than DE the exclusive
forum for internal corporate claims
This overturns the decision in City of Providence v.
First Citizens BancShares, Inc., 99 A.3d 229 (Del. Ch.
2014)
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42
Forum Selection Provisions
•
Despite statutory validation, issues remain
o
o
o
Adoption of forum selection bylaw may still be subject
to challenge depending on facts and circumstances
surrounding adoption
Unclear whether other states will consistently enforce
forum selection provisions of DE corporations under
the “internal affairs” doctrine (i.e., will the foreign
state apply the law of the state of incorporation with
respect to internal corporate governance matters)
Unclear whether federal courts will consistently
recognize forum selection bylaws (may be questionable
considering prior lack of consistency with respect to
forum selection provisions in diversity cases)
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43
Forum Selection Provisions
Forum Provisions and Rulings in Other Jurisdictions
o
o
o
N.C. Gen. Stat. Section 55-7-50 (August 6, 2014): “A provision in
the articles of incorporation or bylaws of a corporation that
specifies a forum or venue in North Carolina as the exclusive
forum or venue for litigation relating to the internal affairs of the
corporation shall be valid and enforceable”
Brewerton v. Oplink Communications Inc., No. RG14750111
(Super. Ct. of Cal., Alameda County) (forum selection clause
designating Delaware as “sole and exclusive forum” for intracorporate claims was enforceable, notwithstanding board adoptiong
the same day as a merger agreement); Groen v. Safeway, No.
RG14716641 (Super. Ct. of Cal., Alameda County) (upholding
exclusive forum bylaw clause and dismissing CA lawsuit)
North v. McNamara, 47 F. Supp. 3d 635 (S.D. Ohio 2014)
(upholding and enforcing an exclusive forum bylaw adopted by a
board after alleged wrongdoing, and granting motion to transfer
venue to Delaware)
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44
Forum Selection Provisions
Forum Provisions and Rulings in Other Jurisdictions
o
o
o
o
Beth v. Protective Life Corp., CV-2014-902474.00 (Ala. Cir. Ct.
2014) (granting motion to dismiss based on forum selection bylaw)
Andes Indus. v. Chen Sun Lan, 2014 U.S. Dist. LEXIS 163571 (D.
Nev. 2014) (inferring that a forum selection provision adopted on a
“clear day” is not facially invalid)
Daugherty v. Ahn, No. CC-11-06211-C, slip op., p. 1 (Tex. Cnty. Dt.,
Dallas Cnty. Feb. 15, 2013) (granting motion to dismiss based on a
forum selection bylaw despite an argument that the bylaw was
adopted after wrongdoing)
In re Galena Biopharma, Inc. Derivative Litig., 83 F. Supp. 3d 1047
(D. Or. 2015) (rejecting defendants’ motion to dismiss a claim of
breach of fiduciary duty arising from board’s alleged improper
adoption of forum selection clause, because the attempted adoption
violated the company’s own certificate of incorporation, not that
such bylaws were impermissible under prior DGCL provisions)
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45
Forum Selection Provisions
Proxy advisory firms – ISS
(2015 U.S. Summary Proxy Voting Guidelines)
•
•
•
Bylaw amendments presented for shareholder approval: ISS will
evaluate the proposal based on company-stated rationale, disclosure of
past harm from out-of jurisdiction litigation, breadth of the proposed
bylaw, and governance aspects such as limitations on future
repeal/amendments
Bylaw amendments unilaterally adopted by directors: ISS will
generally vote against directors if bylaw was adopted in manner that
“materially diminishes shareholders’ rights” or adversely impacts
shareholders, considering : the board’s rationale for adoption,
disclosure of significant shareholder engagement, perceived level of
impairment of shareholder rights, board’s track record of unilateral
board actions/amendments, ownership structure, other governance
provisions, timing of adoption, and other factors deemed relevant
However, 2015 FAQ states that exclusive forum bylaws generally are
not considered materially adverse when venue is state of incorporation
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46
Forum Selection Provisions
Proxy advisory firms – Glass Lewis
(2015 U.S. Proxy Paper Guidelines)
•
•
•
Glass Lewis “believes that charter or bylaw provisions limiting a
shareholder’s choice of legal venue are not in the best interests of
shareholders.”
Glass Lewis therefore recommends against shareholder adoption of
exclusive forum bylaw proposals, unless a company provides a
“compelling argument” on shareholder benefit, provides evidence of
past “abuse of legal process” in other venues, tailors the bylaws
narrowly to the stated risks, and has a strong record of “good
corporate governance practices”
Glass Lewis will recommend against reelection of a chair of a
corporate governance committee if the board unilaterally adopted a
forum selection in the prior year or if a forum proposal is bundled
into a single shareholder proposal
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47
Forum Selection Provisions
Certain Institutional Investors Support
•
BlackRock, Inc.
o
•
The Vanguard Group, Inc.
o
•
Generally votes “for” management proposals to adopt exclusive
forum bylaws [Form N-PX filed with the SEC on August 26, 2015]
Generally votes “for” management proposals to adopt exclusive
forum bylaws [Forms N-PX filed with the SEC on August 28, 2015]
JPMorgan Asset Management
o
Generally votes “for” management proposals to make DE exclusive
forum for DE corporations; votes on case-by-case basis on proposals
to make state of incorporation of another state exclusive forum
[Global Proxy Voting Procedures and Guidelines (April 1, 2015)]
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48
Forum Selection Provisions
Institutional Governance Advocates Oppose
•
California Public Employees’ Retirement System
o
•
California State Teachers’ Retirement System
o
•
States that “companies should not attempt to restrict the venue for
shareowner claims by adopting charter or bylaw provisions that
seek to establish an exclusive forum” [Global Governance
Principles (March 16, 2015)]
Generally votes “against” management proposals to adopt
exclusive forum bylaws [CalSTRS Proxy Vote Disclosure]
Florida State Board of Administration
o
Generally votes “against” management proposals to establish an
exclusive forum [2015 Corporate Governance & Proxy Voting
Guidelines, SBA (2015)]
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49
Forum Selection Provisions
Institutional Governance Advocates Oppose
•
Council of Institutional Investors
o
•
Companies should not attempt to restrict the venue for
shareholder claims by adopting charter or bylaw provisions that
seek to establish an exclusive forum [Corporate Governance
Policies, CII (April 1, 2015)]
AFL-CIO
o
Companies should not adopt restrictive bylaws that are intended to
deprive investors from legal remedies; forum selection bylaws
improperly restrict the venue that investors may bring lawsuits in
by circumventing the established legal process for determining
jurisdiction [Executive Council Statement, Investors Must Have
Access to the Courts to Prevent Corporate Wrongdoing (July 30,
2014)]
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50
Forum Selection Provisions
•
Governance takeaways from DE forum provisions
o
Confirm compliance of any previously adopted forum
selection bylaw provisions with new Section 115 (more
than 200 Delaware corporations amended their bylaws to add
forum provisions between 1/1/14 and 6/15/15)
o
o
o
If adopting a new forum selection provision, include
analysis of facts and circumstances to support
determination that adoption is in best interests
Consider strategic and other implications of manner of
adoption – as a proposal submitted for shareholder
approval or unilateral adoption by the board
For Ohio-based DE corporations, consider whether
exclusivity in DE, or restricted forum availability in
DE and Ohio, is in best interests of corporation
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51
Fee-Shifting Provisions
•
•
DGCL amendments invalidate fee shifting provisions
Section 102(f) was added for certificates of incorporation:
•
Section 109(b) now includes the following for bylaws:
“The certificate of incorporation may not contain any
provision that would impose liability on a stockholder for the
attorneys’ fees or expenses of the corporation or any other
party in connection with an internal corporate claim….”
“The bylaws may not contain any provision that would impose
liability on a stockholder for the attorneys’ fees or expenses of
the corporation or any other party in connection with an
internal corporate claim….”
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52
Fee-Shifting Provisions
•
Amendments invalidate the prior ruling of Delaware
Supreme Court in ATP Tour, Inc. v. Deutscher Tennis
Bund, 91 A.3d 554 (Del. 2014)
o
•
ATP Tour had held that a fee shifting bylaw adopted
by a non-stock membership corporation was facially
valid, and that enforceability of a specific provision
would depend on the facts and circumstances
surrounding adoption and manner of application
Amendments are silent regarding retroactive
application, leaving resolution up to future litigation
in context of companies seeking to enforce fee-shifting
provisions adopted before the DGCL amendments
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53
Fee-Shifting Provisions
•
•
•
•
Victory for proxy advisory firms and institutional
governance advocates
Loss of potentially effective nuisance litigation
deterrent in DE
Fee-shifting bylaws may also be disfavored by SEC,
based on discussions at Investor Advisory Committee
in October 2014, despite lack of formal
announcements
Implications in other jurisdictions and reactions are
just developing
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54
Fee-Shifting Provisions
Developments in other jurisdictions
•
Texas recently proposed a bill that aims to attract corporations by
establishing a chancery court and court of chancery appeals
designed to handle business litigation [2015 TX HB 1603]
o
o
•
Courts would have jurisdiction in “derivative actions, actions related
to qualified transactions, corporate governance, internal affairs and
securities law.” Id.
Purpose is to mimic Delaware by providing a venue where business
law issues can be efficiently adjudicated
New Jersey enacted N.J. Stat. Ann. §14A:3-6.7 effective April 1,
2013
“On termination of a derivative proceeding or a shareholder class action the
court may order the plaintiff: to pay any defendant’s expenses incurred in
defending the proceeding if the court finds the proceeding was commenced
without the exercise of reasonable diligence by the plaintiff or without
reasonable cause for an improper purpose.” (emphasis added)
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55
Fee-Shifting Provisions
Developments in other jurisdictions
•
Effective November 1, 2014, Oklahoma passed 18 Okl. St. §1126
“In any derivative action instituted by a shareholder of a domestic
or foreign corporation, the court having jurisdiction, upon final
judgment, shall require the nonprevailing party or parties to pay
the prevailing party or parties the reasonable expenses, including
attorney fees, taxable as costs, incurred as a result of such action”
(emphasis added)
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56
Fee-Shifting Provisions
Proxy advisory firms – ISS
•
•
•
•
Same policies/analysis for fee shifting bylaws as forum selection
Amendment proposals subject to shareholder approval: ISS will
evaluate each proposal based on company-stated rationale, disclosure
of past harm from out-of jurisdiction litigation, breadth of the proposed
bylaw, and governance aspects such as limitations on future
repeal/amendments
Bylaw amendments unilaterally adopted by directors: ISS will
generally vote against directors if bylaw was adopted in manner that
“materially diminishes shareholders’ rights” or adversely impacts
shareholders, considering : the board’s rationale for adoption,
disclosure of significant shareholder engagement, perceived level of
impairment of shareholder rights, board’s track record of unilateral
board actions/amendments, ownership structure, other governance
provisions, timing of adoption, and other factors deemed relevant
However, 2015 FAQ states that fee shifting bylaws generally will be
considered materially adverse
© Copyright 2015, Vorys, Sater, Seymour and Pease LLP. All Rights Reserved.
57
Fee-Shifting Provisions
Proxy advisory firms – Glass Lewis
•
•
•
Glass Lewis believes that fee shifting bylaws “will likely
have a chilling effect on even meritorious shareholder
lawsuits as shareholders would face an [sic] strong financial
disincentive not to sue a company.”
Glass Lewis therefore “strongly opposes” the adoption of
such fee-shifting bylaws
Glass Lewis will recommend voting against governance
committees if fee-shifting bylaws are adopted unilaterally
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58
Fee-Shifting Provisions
•
Governance takeaways for fee-shifting provisions
o
o
o
Obviously, remove any fee-shifting charter provisions
previously adopted by DE corporations
For non-DE corporations, evaluate carefully the
practical ability to adopt new fee-shifting provisions
based on current views of proxy advisory firms and
institutional investors
Continue to monitor developments in non-DE
jurisdictions to assess whether they will attempt to
seize opportunity to differentiate from DE
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59
REINCORPORATION
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60
Reincorporation
• Traditional reincorporation
proposals to Delaware
• Will corporations being to
reincorporate away from Delaware
after fee shifting ban?
• Proxy advisory firm policies
© Copyright 2015, Vorys, Sater, Seymour and Pease LLP. All Rights Reserved.
61
Reincorporation
Titan International Inc. (NYSE/TWI)
• June 4, 2015 annual meeting, shareholders approved
management’s proposal to reincorporate in Delaware
• Management cited traditional supporting reasons:
o
o
o
o
o
o
o
DE seen as leader in adopting, construing, and implementing
comprehensive, flexible corporate laws responsive to the legal and
business needs of corporations
DGCL is most advanced and flexible corporate statute
well-established body of case law construing the DGCL
certainty from well-established corporate governance principles
Court of Chancery’s unmatched experience, speed and sophistication
Delaware Supreme Court is highly regarded and willing to expedite
Delaware General Assembly acts annually to meet changing needs
© Copyright 2015, Vorys, Sater, Seymour and Pease LLP. All Rights Reserved.
62
Reincorporation
Will companies “sour on Delaware” or was it just “sour grapes”?
•
•
•
Wall Street Journal article Aug 2, 2015: “Dole and Other
Companies Sour on Delaware as Corporate Haven”
Dole reincorporated in DE in 2001 as a “more balanced corporate
environment”; but former COO Michael Carter complained that
DE was “trending the other way” as Dole was facing shareholder
class action litigation in DE Chancery Court challenging the
valuation of sale of company to CEO David Murdock
Vice Chancellor J. Travis Laster ruled on Aug 20, 2015 that
Murdock and Carter provided faulty financial information in
effort to reduced Murdock’s purchase price, and held Murdock and
Carter personally liable to pay shareholders $148 million
additional consideration, nearly 20% more than paid initially
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63
Reincorporation
Proxy advisory firms – ISS
•
•
Amendment proposals subject to shareholder approval: ISS
will evaluate each proposal on case-by-case basis, “giving
consideration to both financial and corporate governance
concerns”, including: company-stated reasons, review of the
company’s governance practices and comparison of
provisions before and proposed after reincorporation, and
comparison of the corporate laws before and after
reincorporation
Recommend a vote “for” reincorporation “when the economic
factors outweigh any neutral or negative governance
changes”
© Copyright 2015, Vorys, Sater, Seymour and Pease LLP. All Rights Reserved.
64
Reincorporation
Proxy advisory firms – Glass Lewis
•
•
•
Glass Lewis generally believes that boards are “in the best
position to determine the appropriate jurisdiction of
incorporation for the company”
Glass Lewis will review the “relevant financial benefits,
generally related to improved corporate tax treatment, as
well as changes in corporate governance provisions,
especially those relating to shareholder rights,” resulting
from the proposed change
Where financial benefits are “de minimus” and there is any
decrease in shareholder rights, Glass Lewis will recommend
voting against the reincorporation proposal
© Copyright 2015, Vorys, Sater, Seymour and Pease LLP. All Rights Reserved.
65
Reincorporation
Proxy advisory firms – Glass Lewis
•
•
Glass Lewis says shareholder-based reincorporation
proposals are costly and “typically not the best route” to
further shareholder rights
To determine if a shareholder proposal enhances
shareholder rights, Glass Lewis will consider:
o
•
Board independence, anti-takeover provisions before and after,
board past responsiveness to shareholders, shareholder right
to call special meetings, other material governance issues of
concern, company performance compared to peers in the past
one and three years, how the company ranked in Glass Lewis’
pay-for-performance rankings in the last three years, and
presence of an independent board chair
Nevertheless, Glass Lewis states it will support shareholder
reincorporation proposals only under “exceptional
circumstances”
© Copyright 2015, Vorys, Sater, Seymour and Pease LLP. All Rights Reserved.
66
Reincorporation
Institutional Investors and Governance Advocates
•
California Public Employees’ Retirement System
o
States that “When considering reincorporation, corporations should
analyze shareowner protections, company economic, capital
market, macro economic, and corporate governance
considerations.” [Global Governance Principles (March 16, 2015)]
© Copyright 2015, Vorys, Sater, Seymour and Pease LLP. All Rights Reserved.
67
Reincorporation
•
Governance takeaways for reincorporation proposals
o
o
o
Despite DE’s invalidation of fee-shifting charter
provisions, it is doubtful that the tide will shift in favor
of reincorporating out of DE in the near term
Continue to monitor developments in other
jurisdictions
Ohio’s statutory anti-takeover provisions, usually
viewed unfavorably by proxy advisory firms, pose
challenges to reincorporating in Ohio from perspectives
of certain institutional or activist shareholders
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68
QUESTIONS?
J. Bret Treier
Vorys, Sater, Seymour and Pease LLP
330.208.1015 | jbtreier@vorys.com
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69
LIFE CYCLE OF THE BOARD OF
DIRECTORS: SELECTION,
EDUCATION, & EVALUATION
Douglas E. Haas, Benesch Friedlander Coplan & Aronoff LLP
19th Annual RR Donnelley SEC Hot Topics Institute
November 19, 2015
*Acknowledges assistance of Mitchell E. Gecht, Benesch
Friedlander Coplan & Aronoff LLP
www.beneschlaw.com
Overview
• Board Selection Issues
– Statutory Requirements
– Business Needs
• Board Education Issues
– Initial Education
– Continuing Education
• Board Evaluation Issues
– Evaluation Program Framework
– Individual Evaluation
71
Board Selection: Statutory Framework
• Boards of public companies are bound by standards
set forth by the NYSE or NASDAQ (whichever stock
exchange the company is listed on), and
requirements set forth by the SEC.
• Companies Covered Under the NYSE Rules
– All U.S. companies that list or have listed common equity
securities on the NYSE must comply with the NYSE Listed
Company Manual.
• Companies Covered Under the NASDAQ Rules
– All U.S. companies that are listing or have listed stock on
NASDAQ market.
72
Director Independence
• All companies listed on either the NYSE or
NASDAQ must have a majority of independent
directors (NYSE Section 303A.01, NASDAQ Rule
5605(b)(1)).
• The NYSE and NASDAQ each provide separate
definitions of an independent director.
73
Director Independence: NYSE Rules
• NYSE (Section 303A.02)
– To be an Independent Director, the board must affirmatively
determine that the director has no material relationship with the
listed company (either directly or as a partner, shareholder, or officer
of an organization that has a relationship with the company) (Section
303A.02(a)(i))
– Commentary to the Rule suggests that, when assessing the
materiality of a director’s relationship with a listed company, the
board should consider the issue from the perspective of all
interested parties.
– Material relationships can include commercial, industrial, banking,
consulting, legal, accounting, charitable, and familial relationships.
However, since the concern is independence from management, the
NYSE does not view ownership of even a significant amount of stock,
by itself, as a bar to independence.
74
Director Independence: NASDAQ Rules
• Independence (Rule 5605(a)(2))
– The NASDAQ Rules define an Independent Director through a description of
exclusions and a list of individuals not considered independent.
– The definition of Independent Directors excludes individuals having a relationship
which, in the opinion of the Company’s Board, would interfere with the exercise of
independent judgment in carrying out the responsibilities of a director.
– The Rule sets forth a list of persons not to be considered independent, among them:
• A director who is, or at any time in the past 3 years was, employed by the Company;
• A director who accepted, or who’s Family Member accepted, compensation from the Company
in excess of $120,000 during any 12 consecutive months within the 3 years preceding
independence determination, not including compensation for Board services, compensation
paid to a Family Member for non-executive Officer employment, or benefits under a taxqualified retirement plan;
• A director who’s Family Member is or was in the last 3 years employed by the Company as an
Executive Officer; or
• A director who is, or has a Family Member who is, a current partner of the Company’s outside
auditor, or was a partner or employee of the Company’s outside auditor who worked on the
Company’s audit at any time in the past 3 years.
75
Board Selection: Nominating and
Corporate Governance Committees
• Many Boards delegate responsibilities relating to the
selection of director nominees to nominating and
corporate governance committees.
• For public Boards, these committees are bound by
applicable standards set forth by the NYSE, NASDAQ and
the SEC.
• These governing agencies refer to nominating and
corporate governance committees differently, as follows:
– Nominating/Corporate Governance Committee (NYSE)
– Nominations Committee (NASDAQ)
– Nominating Committee (SEC)
76
Board Selection: Nominating and
Corporate Governance Committees - NYSE
• Nominating/Corporate Governance Committee
– Listed companies must have a nominating/corporate
governance committee comprised entirely of
independent directors (NYSE Listed Company Manual
Section 303A.04(a)).
77
Board Selection: Nominating and
Corporate Governance Committees - NYSE
• Nominating/Corporate Governance Committee Charter (Section 303A.04(b))
– Every such nominating/corporate governance committee must have a written
charter setting forth:
• The purpose and responsibilities of the committee, including:
–
–
–
–
Identification of potential directors for nomination, consistent with Board-approved standards;
Nomination or recommendation to the full Board for nomination of potential director candidates ;
Development of the company’s corporate governance guidelines for the Board’s approval; and
Oversight of board and management evaluation.
• A framework for annual performance self-evaluation
– The NYSE also suggests that every such charter include:
•
•
•
•
Appointment and removal of all committee members;
Reporting to the board of directors;
The individual qualifications of all committee members; and
The committee’s authority to engage a search firm to identify and recruit potential committee
members.
– The company must post a copy of its nominating/corporate governance committee
charter on its website, and it must disclose it in its annual proxy statement.
78
Board Selection: Nominations
Committees - NASDAQ
• Nominations Committee
– Unlike the NYSE Rules, the NASDAQ Rules do not require a
separate nominations committee
• Independent Director Oversight of Director
Nominations
– Director nominees must be selected, or recommended for
the Board’s selection, either by:
• A majority of the independent directors (in a vote of only
independent directors); or
• A nominations committee comprised solely of independent
directors
79
Board Selection: Nominations
Committees – NASDAQ
• Nominations Committee Charter (Rule 5605(e)(2))
– Each listed company must certify that it has adopted a formal written charter or
board resolution, as applicable, addressing the nominations process and such
related matters as may be required under the federal securities laws.
– Compared to the requirements surrounding the committee charter as set forth in
the NYSE Listed Company Manual, the NASDAQ’s articulated rules are far less
specific.
80
Board Selection: Nominating Committees
– SEC
•
•
Unlike the NYSE and NASDAQ rules that focus on the construction of a committee,
the SEC rules and regulations specific to nominating committees address the
disclosure of publicly listed companies’ corporate governance practices.
The SEC requires publicly listed companies to disclose certain information with
respect director nomination in their Form 10-K filings or proxy statement, as
applicable. Such disclosures include, but are not limited to:
–
–
–
–
–
–
81
Whether the company has a nominating committee – if so, include the identity of each member, and if not, then
include an explanation as to why the board believes it is not necessary;
A list of members of the nominating committee, if any, that are not independent;
Whether the nominating committee has a charter, and if it does, whether the charter is available on the company’s
website – noting that if the charter is not available on the company’s website, it must attach a copy to its proxy
statement at least once every 3 years;
The minimum qualifications for a director candidate and any other specific qualities or skills required of all
candidates;
The company’s process for identifying and evaluating director nominees, including nominees recommended by
stockholders; and
Whether the company considers diversity as a factor in identifying candidates for director (noting that although the
SEC does not provide a definition of diversity, it can include race, gender, experience, education, geographic
location, and points of view). (Regulation S-K, Item 407(a))
Board Selection: Nominating Committees
– SEC
• Further SEC Disclosure Requirements
– A listed company must also disclose in its Form 10-K or a
Form 10-Q any material changes to its procedures for
stockholders to submit director candidates for
consideration by the nominating committee.
• Note that the adoption of stockholder nomination procedures
when the company had previously disclosed the absence of such
a procedure is considered a material change.
– A listed company must also provide disclosures relating to
the Board generally, including the independence of each
director.
82
Board Selection: Other Committees
• In addition to nominating and corporate
governance committees, public company board
selection is impacted (directly and indirectly) by
several other committees, and the regulations
they fall under, most notably the following:
– Compensation committees; and
– Audit committees.
83
Board Selection: Compensation
Committees - NYSE
• Independence
– Each NYSE listed company must have a compensation
committee comprised entirely of independent directors
(Section 303A.05).
– Independence requires compliance with the standard
requirements in Section 303A.02(a)(i), but also those
specific to the Compensation Committee in Section
303A.02(a)(ii), as follows:
• The board must consider all factors specifically relevant to the
director’s relationship to management which are material to the
director’s ability to be independent in connection with duties of
the committee, including the source of the director’s
compensation and whether the director is affiliated with the
listed company.
84
Board Selection: Compensation
Committees - NASDAQ
• Independence
– A compensation committee is required for all listed
companies, composed of at least two members (Rule
5605(d)(2)).
– Each member of the compensation committee must be
independent, as defined in Rule 5605(a)(2)), and also
considering the factors regarding the director’s
relationship to management material to his or her ability
to be independent, including the source of the director’s
compensation and whether the director is affiliated with
the listed company (Rule 5605(d)(2)(A)).
85
Board Selection: Compensation
Committees - SEC
• The SEC rules and regulations generally relate to the
disclosure of information rather than requiring
specific corporate governance standards.
• Listed companies must disclose certain information
specific to compensation committees in a Form 10-K
or proxy statement, including (but not limited to):
– The existence of such committee and member identities;
– In the absence of such committee, a reason why it is not
necessary; and
– A list of independent committee members.
86
Board Selection: Audit Committees - NYSE
• Compliance with SEC Rules
– The company must have an audit committee that
complies with the requirements of Rule 10A-3 under the
Exchange Act (Section 303A.06).
• Membership
– The audit committee must be comprised of at least 3
members (Section 303A.07), each of whom must be
financially literate.
• Independence
– Each committee member must be independent under the
SEC standards.
87
Board Selection: Audit Committees NASDAQ
• Membership
– The audit committee must be comprised of at least three members (Rule
5605(c)(2)(A)).
– Each committee member must be able to read and understand fundamental
financial statements.
– At least one committee member must be “financially sophisticated,” meaning that
member has past employment experience in finance or accounting, professional
certification in accounting, or any other comparable experience or background.
• Independence
– Each committee member must meet the SEC’s independence requirements, in
addition to the NASDAQ independence standards set forth in Rule 5605(c)(2)(B).
• Related Party Transactions
– The committee must review all related party transactions for potential conflicts of
interest and oversee all related party transactions on a consistent basis (Rule
5630(a)).
88
Board Selection: Audit Committees - SEC
• Independence
– Each audit committee member must be an independent
director of the company (Rule 10A-3(b)(1)(i)), and must not:
• Directly or indirectly accept consulting or advisory fees or other
compensation from the company, not including director or committee
fees; and
• Be an affiliate of the company or any of its subsidiaries.
• Audit Committee Financial Expert-only disclosure required
– The company must disclose the existence and independence of
a Financial Expert, who is defined as:
• A person who understands GAAP and financial statements; can evaluate
the application of GAAP to accounting for estimates, accruals, and
reserves; has experience preparing, auditing, and analyzing financial
statements; understands internal control over financial reporting; and
understands audit committee functions.
89
Board Selection: Business Needs
• In addition to statutory requirements, companies’
board composition efforts should satisfy the business
and strategic needs of the company.
• Accordingly, board selection must be uniquely tied to
the strengths, weaknesses, and individual needs of
each company.
• With this in mind, key areas of concern for strategic
board composition include:
– Expertise;
– Diversity; and
– Size.
90
Board Selection: Expertise
• Based on recent surveys, directors continue to most value financial,
industry, and operational expertise (PwC’s 2014 Annual Corporate
Directors Survey).
• Expertise in risk management and technology/digital media was also
highly valued by the same surveyed directors (Id.).
• However, the dynamics of each company dictate the importance of
certain areas of expertise (i.e. international business experience in
advance of a particular international geographic expansion, capital
raising experience in advance of an equity offering, or marketing
expertise to a specific target audience in advance of a focused media
campaign).
• Companies often use charts to outline key areas of expertise that they
value or need, and to measure which current directors maintain such
expertise. As the company continues to evolve, its board construction
should mirror such evolution.
91
Board Selection: Expertise
Director A
Senior Leadership Experience
(CEO/President)
Business Development M&A
Experience
Financial Expertise (CFO)
Investor Relations Experience
Public Board Experience
Diversity
Independence
Innovation
Industry Experience
Operational/Manufacturing Expertise
Global Expertise
IT/Technical Expertise
Brand Marketing Expertise
Government Expertise
Governance/Legal Expertise
92
Director B
Board of Directors Skills Matrix
Director C
Director D
Director E
Director F
Director G
Director H
Director I
Board Selection: Diversity
• In addition to the search for an optimal mix of
expertise among directors, companies have
recently begun to focus on the advantages of a
diversified board, particularly with respect to
gender.
• According to a recent survey, 60% of investors
reportedly considered overall diversity while
evaluating a board (ISS 2014-2015 Policy Survey
Summary of Results (Sept. 2014)).
93
Board Selection: Diversity
• Board diversity can increase a board’s strength and drive economic
improvement. Studies have recently shown that companies with a
board containing at least 3 women experienced stronger financial
performance, increased returns on equity, and higher shareholder
return (Credit Suisse Research Institute, “Gender Diversity and Corporate
Performance” (Aug. 2012)).
• Increased gender equality in public boards is evidenced by a recent
study, showing that in 2014 almost 30% of new board nominees for S&P
500 companies were female; in 2008, the same statistic was only 15%
(ISS, Gender Diversity on Boards: A Review of Global Trends (Sept. 25,
2014)).
• Women currently comprise only 18.7 % of directors on S&P 500 boards
(Tom Huddleston Jr., “Boardroom Breakthrough: Gender Diversity is
Flourishing Among Board Nominees,” Fortune (Sept. 25, 2014)).
94
Board Selection: Diversity
• New research from the Harvard Business Review (HBR) provides strong
evidence that diversity creates innovation and drives market growth (S.
Hewlett, M. Marshall, and L. Sherbin, “How Diversity Can Drive Innovation”
Harvard Business Review (Dec. 2013)).
• The HBR study focused on two types of diversity: inherent and acquired.
– Inherent diversity involves traits individuals are born with, such as gender, ethnicity,
and sexual orientation.
– Acquired diversity involves traits an individual gains from life experiences.
• The HBR study titled companies with leaders possessing at least 3 inherent and
3 acquired diversity traits as having “two-dimensional diversity.”
• Research shows that companies with 2-D diversity out-innovate and generally
out-perform others. However, 78% of respondents to the study reportedly
work at companies without 2-D diversity in its leadership.
• The study indicated that, in the absence of diverse leadership, women are 20%
less likely than straight white men to gain endorsement of their ideas, people of
color are 24% less likely, and LGBTs are 21% less likely.
95
Board Selection: Diversity
• The HBR study found that when at least one team
member shares common traits with the end user of a
provided product or service, the entire team better
understands the end user – where a team member
shares a client’s ethnicity, the team is 152% more
likely than another team to understand that client.
• The HBR study also found that leaders who grant
equal speaking time to diverse voices are almost
twice as likely as others to discover insights driving
increased value – further, employees in such a
culture are 3.5 times more likely to contribute their
maximum potential for innovation.
96
Board Selection: Size
• The size of boards in relation to the size of the company are
typically positively correlated.
• High-tech companies often have smaller boards than
companies in other industries.
• Based on publicly available survey data, as of 2014, average
board sizes for the following company ranges are as follows:
–
–
–
–
–
–
–
97
S&P 100:
Silicon Valley 150:
Technology 200:
S&P 500:
S&P MidCap 400:
S&P SmallCap 600:
S&P 1500:
12 directors
8 directors
8-9 directors
11 directors
9 directors
8 directors
9 directors
Board Selection: Size
• Recent studies suggest that smaller boards, in some cases, have experienced
certain improvements in performance.
• With fewer directors on a board, individual directors are more likely to take on
greater responsibility for tasks, and relationships are more cohesive.
• A recent study focused on companies with market capitalization of at least $10
billion found that companies with smaller boards consistently outperformed
competitors with larger boards (Joann S. Lublin, “Smaller Boards Get Bigger
Returns,” The Wall Street Journal (Aug. 26, 2014)).
– The study noted that Apple has only 8 directors and Netflix has only 7 (Id.).
• In spite of apparent advantages to a smaller, more nimble board, a larger board
affords a company more opportunities to increase diversity of knowledge,
expertise, background, and experience.
• Companies must weigh the strengths of a larger or smaller board size in
connection with their particular business needs. Moreover, as the company
continues to grow, it should periodically re-evaluate the appropriate size of its
board.
98
Board Education
• Board Selection is only the first step to creating a
successful Board. Strong boards rely on robust
initial education programs and continuing
education closely tied to the company’s evolution
over time.
99
Initial Board Education
• Companies should maintain on-boarding procedures for new directors, through
which directors identify strengths, weaknesses, and gaps in substantive areas of
requisite material.
• Certain regulated substantive subjects are key to all public Boards, for all
businesses, including :
– Ownership Disclosure Obligations;
– Insider Trading Restrictions;
– Fiduciary Duties
• The Duty of Care (Business Judgment Rule);
• The Duty of Loyalty;
–
–
–
–
–
–
100
Regulation Fair Disclosure (Regulation FD);
The Foreign Corrupt Practices Act (U.S.);
Bribery Act (U.K.);
Anti-Unfair Competition Law of (China);
Whistleblower Procedures; and
Relevant Financial Issues.
Board Education Programs
• In recent years, due to increases in business risks and enhanced pressure on
directors, formalized board education programs have become more prevalent.
• These programs begin well before a new director attends his or her first board
meeting.
• In addition to key substantive issues applicable to risk and challenges faced by
all boards, formalized programs provide a deep working knowledge of the
company, including:
–
–
–
–
–
–
Shareholders and shareholder activism;
Existing directors;
Key employees;
Key financing and accounting issues;
Competitive industry landscape; and
Forward-looking operational strategies.
• As part of these programs, some companies have instituted “buddy” systems in
which new directors are matched with senior directors responsible for longterm development (Creating an Effective Board Education Program, Deloitte
Views & Analysis (Sept. 2, 2015)).
101
Board Education Programs
• Formal board education programs should adapt to the
particular needs of the organization and of the directors
themselves.
• Program delivery often occurs in the following forms:
– In-house: Senior directors or executive officers of the Company may
teach sessions on topics specific to the organization or it’s industry.
– Outside principal advisors: outside legal counsel, accountants, and
bankers are asked to present on various topics of relevance.
– Personalized 3rd-Party: A 3rd party is hired to provide programming
specifically tailored to the needs of the board.
– Public conventions and conferences: A 3rd party provides
programming applicable to a host of organizations, at times to a host
of industries.
• Topics often included are succession planning, financial accounting issues,
legal liability issues, indemnification, and recent trends, among others.
102
Board Education Programs
• Companies providing continuing education programs
individually tailored to the customer have grown in popularity.
• Some companies specialize in tailored programs delivered at
company retreats or multiple day sessions.
• Other companies offer multiple day sessions focused on current
trends and risks applicable to specific industries or geographies.
• Many public companies have built into their formal board
education programs the requirement for all directors to report
any training program they attend. This serves two purposes:
– Tracks individual director education; and
– Allows the Company to share productive educational programming
with other directors, and to incorporate into the existing formal
training program.
103
Board Education Programs
• For public boards, continuing education programs
are referred to in stock exchange rules.
– The NYSE Corporate Governance Rules require listed
companies to disclose their policy on continuing
education and director orientation.
– Although the NASDAQ Rules do not contain the same
requirement, they encourage listed companies to
perform a comprehensive orientation and continuing
education for all directors.
104
Education and a Proactive Board
• Successful companies take strategic action
proactively in advance of perceived risk.
• The same is true with respect to a successful
board education program.
• A July 2014 case study of Nike by the Harvard
Business Review provides an example of this.
105
Nike: A Proactive Board Strategy
• In 1987, Nike chairman and then-CEO Phil Knight recruited Jill Ker Conway to
the company’s board.
• Conway was known for her expertise on women’s issues and her understanding
of the student perspective, crucial skills to a company whose name at the time
was synonymous with “slave wages, forced overtime, and arbitrary abuse.”
– Conway was a former professor at the University of Toronto, visiting professor at the
Massachusetts Institute of Technology, and first female president of Smith College.
• In 2001, Conway created a board-level corporate responsibility committee to
institutionalize the company’s commitment to responsible performance,
coupled with a proactive education program of the same subject to the board.
• The committee focused on existing labor issues threatening Nike’s reputation,
and also other topics that the board anticipated would create future challenges.
• Recent surveys suggest that only 10% of U.S. public company boards have a
committee dedicated solely to corporate responsibility or sustainability.
106
Nike: A Proactive Board Strategy
• At the 1996 Nike annual shareholders’ meeting, Knight and
Conway were faced with a group of labor activists known
for protesting labor conditions in the Asian contract
factories where the company regularly operated.
• Through proactive education, Conway was prepared to
successfully alleviate a confrontation between the activists
and the board during the meeting.
• Months earlier, the board anticipated problems at the
annual meeting in connection with labor issues in the
contract factories. The board took proactive action to
educate certain directors on the issue, including numerous
visits to the company’s contract factories in Southeast Asia.
107
Board Evaluation
• “The primary reason to undertake any
governance assessment is to improve and
develop, not to judge or evaluate…” (Amanda
Biggs, “Board Assessment – Why and How to
Review the Board of Directors?” Leading Boards
(Sept. 9, 2013)).
108
Board Evaluation: Regulatory Framework
• The NYSE requires all listed companies to adopt
corporate governance guidelines addressing
performance evaluation (NYSE Section 303A.09).
– However, the NYSE provides no guidance as to how listed
companies must complete performance evaluations.
• NASDAQ has no such requirement of its listed
companies to conduct board evaluations, although
many NASDAQ-listed companies have nonetheless
adopted evaluation procedures as a matter of sound
corporate governance and best practice.
109
Board Evaluation
• Similar to the importance of board composition and education already
discussed, board evaluation has recently become a key tool towards
facilitating improved board performance.
• However, according to the PwC 204 Annual Corporate Directors Survey,
70% of director respondents reported that they find it a challenge to be
frank in evaluating the board, and 63% reportedly found the process
akin to a “check the box” exercise.
• To combat this perception, board evaluation procedures should be
thoughtfully designed, they should be tailored to the company’s unique
concerns, and they should be regularly adjusted over time.
• If thoughtfully designed, a strong evaluation program can both gain
valuable information needed to make key improvements and remind
directors how important group dynamics and efficient operational
processes are to fulfillment of the board’s responsibilities.
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Board Evaluation: Basic Framework
• A board evaluation program should cover the following key
assessment areas:
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Composition and Leadership;
Focus (agenda) and information;
Refreshment Mechanisms;
Culture; and
Governance Structures and Practices.
• Although board evaluation checklists are readily available, just
as board selection and education programs must be individually
tailored to the needs of the organization, the same is true for a
framework of evaluation.
• Frameworks of board evaluation should also be developed for
board committees.
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Individual Director Evaluation
• A 2014 Compliance and Ethics Program
conducted by NYSE Governance Services and
SCCE polled 249 CCO’s across geographies and
industries in the U.S.
• Although 72% of respondents reported that their
company conducted annual board reviews, only
48% reported that it evaluated directors
individually.
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Individual Director Evaluation
• Individual director evaluation can include additional parameters
of insight than the more common evaluation of the board (or
committee) in its entirety, including:
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Individual contribution to the collective strategic thinking;
Leadership and commitment;
Participation in meetings;
Communication and interpersonal skills;
Individual ethical concerns; and
And relationship with other directors, key managers, and other
parties within the organization (Deloitte, Performance Evaluation of
Boards and Directors (March, 2014)).
• However, many companies fear that individual director
evaluations can lead to finger pointing and disruptions to the
culture of the board, and to the organization at large.
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Conducting the Board Evaluation
• In developing and conducting a board evaluation program,
companies should consider the following key steps:
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Delegate authority;
Define the objective;
Determine the scope;
Identify the participants;
Select the mechanism and tools of review;
Consider the culture;
Analyze the results in real time; and
Take corrective action based on such analysis (Holly J. Gregory,
“Rethinking Board Evaluation (March 2015)).
Interrelationship among Selection,
Education and Evaluation
• The result of any effective board evaluation
program should be corrective action, which often
includes changes to board selection and board
education.
• Each company should regularly consider each of
these three areas in real time, reflecting on the
Company’s unique evolution in strategy,
organizational structure, and culture.
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Questions?
For more information, please contact:
Douglas E. Haas - (216) 363-2602 or dhaas@beneschlaw.com
Mitchell E. Gecht - (216) 363-4631 or mgecht@beneschlaw.com
www.beneschlaw.com