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Board Leadership Forum - Highlights

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The Board’s Role in Driving Change

May 16, 2017, The Four Seasons, Dallas at Las Colinas, Irving, TX

Boards that Lead: What Do Investors Want to See from Directors?

Institutional and activist investors are putting extra pressure on boards. This panel examined the characteristics investors want in a board and the manner in which directors can communicate plans and progress.

  • Moderator: Jan Sharry, Partner, Haynes and Boone LLP
  • Ken Bertsch, Executive Director, Council of Institutional Investors
  • Maureen O’Brien, VP & Corporate Governance Director, Segal Marco Advisors
  • TerriJo Saarella, Corporate Governance Director, State of Wisconsin Investment Board

Key Takeaways

  • There's a culture of lifetime membership on boards, someone younger joins and expects to sit until they retire. This perception needs to change.
  • The say on pay vote is where investors voice feelings on director stock ownership and compensation. Some investors like to see directors buy stock, not just receive through compensation.
  • Simpler and easy to understand director pay structures are most desirable. Ratcheting pay with peer benchmarking is a concern.
  • ISS is influential, but the influence is overblown.

Key Quotes

"State Street announced it will vote against the nom/gov chair if the board isn't at least 30% female."

"It's much easier to offer a directorship with a tenure limit and set the expectation that the project will ultimately be complete."

"We take a longer term view but want to see management focus on managing the short. Long-termism can be a veil to cover up a management team that is clueless in the short term."

People say they support diversity, but there's resistance when it comes to implementation."

"With a small team reviewing 4,000 proxies, we need ISS and Glass Lewis, but we still have a custom policy to review companies."

Framing the Conversation: Risk and Strategy in the Boardroom

This panel weighed in on proxy advisor and investor scrutiny around pay for performance. It also shared tips to help compensation committees establish stronger governance and shareholder engagement practices to avoid a poor Say on Pay vote.

  • Moderator: Dennis McCuistion, Executive Director, Institute for Excellence in Corporate Governance, University of Texas at Dallas
  • Tony LeVecchio, Chairman, LegacyTexas Financial Group; Board Member, Uni-Pixel Inc.
  • Amjed Saffarini, Chief Executive Officer, CyberVista
  • Billie Williamson, Board Member, CSRA, Energy Future Holdings, Janus Capital Group, Pentair

Key Takeaways

  • WannaCry was a weaponized ransomware, that took a minimum 4 months to patch even by the ideal company.
  • Boards have asked for briefings on legislative risk: healthcare, tax, etc... "If the tax strategy is 'this', the impact is 'that'..." Evaluate a range of outcomes and plan to respond accordingly.
  • Is there uncertainty in the current marketplace? There are the key indicators (ROA, ROE, net interest margin) and comparisons with peers to have confidence that performance will be positive moving forward.
  • 60-second crash course on cyber: risk and strategy are correlates of each other. Understand your risk as well as your strategy and partition general risk from latent risk. There's the notion that if you're doing "something" you're fine, but that just isn't true. What risks are you willing to accept? Then you can draw a line. Everything beyond that is mitigation by bringing in cyber experts, buying insurance, etc...
  • Alignment is key to achieve the optimal outcome for shareholders. There's a lot of give and take, but in the end alignment doesn't make it easier to execute, but at least there are no side agendas.
  • Think like an activist. Look at your company the way they would, find the holes and go fix them before the activist comes in and tries to do the job.

Key Quotes

"If the board doesn't spend adequate time with management to manage risk that's a failure. The outcome needs to be a strategy and synchronization between the board and management."

"We take the strategy of being prepared for everything but don't act until we need to. Right now the required changes are unclear."

"The asymmetric geopolitical risk is real, because the response won't be against government but against industry."

"Curiosity is key, we do our research on markets, supply chain, compensation, and cyber and hire external advisors in all these areas when we need to."

"Knowing your risks enables you to step on the gas pedal and move faster with more confidence."

"Think about your key stakeholders and which board member you would turn to in a moment of crisis."

Activism and Shareholder Value: Key Considerations for Boards

Activist shareholders are actively targeting companies and looking for value, while boards are settling faster with activists in recent years. Panelists reviewed best practices by boards that prepare well for the contingency of activists.

  • Moderator: Jennifer Wisinski, Partner, Haynes and Boone
  • Tom Klein, Board Member, Cedar Fair
  • Neil Kurtz, Board Member, Medidata Solutions and TeamHealth

Key Takeaways

  • There’s a big difference between activism of the past vs. now, it’s often behind closed doors now and more conversational.
  • More often, activists are after value creation not governance issues.
  • Putting in a poison pill or takeover defense may not be the right thing to do politically. Be thoughtful about your response to activists.
  • Boards may benefit from the activist or private equity point of view. Think about this as a skillset. But the best idea isn't to simply react and settle to avoid a proxy fight. Believe in a strategy or not, and assess how that will play out as there may be times when an activist is right.
  • The only thing worse than having no strategic plan is having one that isn’t followed.

Key Quotes

"You need a CEO and CFO who will listen to investors’ concerns over what the company is doing wrong. What's bugging the investors?"

"Even boards with high-powered people aren't immune to group think."

"In M&A, be careful of the term 'transformative deal' because it may be a substitute for 'not accretive'."

"If you're thinking about settling quickly and agreeing to a standstill, understand that later there's an activist board member who's had access to proprietary company information, which might serve as ammunition."

Keynote – The Board's Role in Innovation

Established companies need still innovate to stay relevant long-term and compete with new players. This panel discussed ways that companies stay ahead of the curve.

  • Moderator: TK Kerstetter, Host, Inside America’s Boardrooms
  • Thomas Leppert, Board Member, View Inc.
  • Rao Mulpuri, Chief Executive Officer, View Inc.

Key Takeaways

  • For large conglomerates, innovation stems from the flow of ideas. This is more of a strategic function to identify opportunities that will move the growth needle at a large company. For smaller companies, moving the needle is a simpler exercise.

Key Quotes

"Is the money you're spending spent on things that matter? Are you moving the needle?"

"Innovation is more difficult at an aging or mature company where it's more difficult to build in. This also goes back to incentive compensation design, if it motivates short-term behavior that's bad for innovation."

“Trust and transparency between the chair and CEO is critical. You must speak up and confront issues.”

Board Evaluations and Succession Planning: Keeping the Board Cutting-Edge

Board composition and refreshment is one of the top corporate governance issues today. Panelists discussed strategies for building and maintaining a cutting-edge board of directors.

  • Moderator: David Chun, Chief Executive Officer, Equilar, Inc.
  • Jonathan Foster, Board Member, Berry Group, Lear and Masonite International
  • Ann Harlan, Board Member, Gorman-Rupp
  • Paula Loop, Leader, PwC’s Governance Insights Center

Key Takeaways

  • Bright line restrictions (mandatory retirement ages, term limits, etc...) don't achieve their objective and are potentially dangerous. It's all about performance, is a director doing a good job or a bad job because one size does not fit all.
  • Generally the chair or lead director takes charge of the evaluations, and sometimes involve the general counsel.
  • In person, conversational evaluations work best. People will open up more in conversation than in writing.
  • If boards get diversity right, there will be new board members with non-traditional backgrounds joining the boardroom conversation. For example, directors who haven't been a CEO or CFO, so the feedback process for these types of new directors is important.
  • Leadership and committee rotations are one method to alleviate concerns that the right kind of director feedback isn't being delivered.

Key Quotes

"We look at our board skills matrix and use that to inform decisions on strategy."

"It’s all about anticipating the skills you'll need on the board. You don't necessarily need to document it, but at least have the conversation."

"Things change rapidly, so we don't have a specific pipeline. But we talk about the kinds of candidates needed for the future."

"We do things differently; we do maintain a specific pipeline of candidates. Candidly, diversity is a priority as well. Periodically we do reach out to potential candidates and maintaining this process consistently enables us to challenge ourselves."

"Institutional investors are generally positive on skills matrices, but wary of the ones where too many directors have all the boxes checked. Staying true to a matrix ensures a robust process."

To Acquire or Not: The Board's Role in M&A

Mergers and acquisitions introduce a series of benefits and challenges in the boardroom. This panel discussed the considerations that directors factor into decisions around corporate transactions.

  • Moderator: Catherine Bromilow, Partner, PwC’s Governance Insights Center
  • Gina France, Board Member, CBIZ, Huntington Bancshares and Cedar Fair
  • Maribess Miller, Board Member, Triumph Bancorp and ZixCorp.
  • Margaret Whelan, Board Member, TopBuild

Key Takeaways

  • Acquisition can be part of corporate strategy, where potential acquisitions are essentially viewed as inventory off the books.
  • The synergies that are won or lost in M&A transactions occur in the first 90 days, so have processes and stay disciplined even before the deal is approved.
  • Align incentive compensation with organizational goals so that earn outs are tied to retention even if key employees may explore leaving the company.

Key Quotes

“Our companies keep a running list of companies we're interested in. And when it comes to divestiture, the board gets involved very early.”

“Start small; don't pick something that is going to bring the house down. Go into something you know and don't pick an adjacency or industry in which you're unfamiliar.”

“Migrating data can be an enormous integration issue. Ask for the latest outside penetration tests. Cyber security is becoming more of a concern and a risk.”

Director Pay: Balancing Ownership with Objectivity

Director compensation has shifted away from meeting fees and towards equity, meanwhile companies have encountered litigation around director pay. Panelists examined the issues boards should consider when designing their own pay.

  • Moderator: Matthew Goforth, Research Manager, Equilar, Inc.
  • Jan Koors, Managing Director, Pearl Meyer
  • Karen Bogart, Board Member, Mohawk Industries and Michelman

Key Takeaways

  • Boards are shifting pay to equity and aligning pay levels with the middle of their peer groups.
  • Boards have added limits on director pay in equity incentive plans in response to shareholder litigation, but plaintiff suits remain a potential liability.
  • Holding requirements may serve as an incentive to encourage director turnover when the time is right.

Key Quotes

“Getting the peer group right and aligning director pay with the median will go a long way with the shareholder view of board compensation.”

“Consider adding limits on non-employee director pay delineated in dollars for total compensation and equity grants.”

Maximizing Shareholder Support: The Keys to Effective Engagement

The percentage of companies that disclose shareholder engagement programs more than tripled over the last five years. This panel discussed effective engagement strategies that boards use to align company strategy and investor thinking.

  • Moderator: Ron Schneider, Director, Governance Services, Donnelley Financial Solutions
  • Kern McPherson, Senior Director of North American Research, Glass, Lewis & Co.
  • Alan Crain,, former Senior Vice President, Chief Legal & Governance Officer, Baker Hughes
  • Michael Brittian,, Partner, Meridian Compensation Partners
  • Ingrid Keiser,, General Counsel, Secretary and EVP of People Strategy, ClubCorp Holdings

Key Takeaways

  • Don't be defensive in the engagement process and avoid "they don't get us" style thinking.
  • Shareholder engagement is not new, but more companies are disclosing it and taking credit for their engagement efforts.

Key Quotes

"The gain from off-season engagement with proxy advisors is avoidance of fire drills during the heart of proxy season."

"Figuring out who votes our stock is important. Is it on the governance side or the portfolio manager side? If you don't engage with investors on the investment side (CEO, IR) or the governance side you will be dealing with an activist down the road. Some investors will even seek out activists in a situation like that."

"Investors want to know, is the board up to speed on markets and strategy and can they articulate the strategy?"

"More and more at proxy advisors it's about the trajectory of the pay plan and how the board is disclosing that trajectory and the rationale for doing so."

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