The Equilar Resource Center is a one-stop destination for professionals to learn key terms and definitions in business development, corporate governance, executive compensation and board recruiting.
Board of Directors
What Is the Summary Compensation Table (SCT) and How Does It Relate to Executive Pay?
The summary compensation table (SCT) is a table disclosed in the executive compensation portion of a company’s proxy statement. Regulated and required by the Securities and Exchange Commission (SEC), it shows the breakdown of the total compensation for each named executive officer (NEO) at the company, who are typically the five highest-paid employees at a given company. The SCT includes base salary, bonus, stock and option awards valued in full on the date they were granted, non-equity incentive plan compensation (i.e. plan-based cash bonus), pension and deferred earnings, and all other compensation, which includes the value of perquisites and benefits. Due to the in-depth disclosure of total compensation and overall executive pay, the SCT is a critical reference point for shareholders to examine when determining how to vote on a Say on Pay proposal, which is an annual non-binding shareholder vote on executive pay.
What Are Realized and Realizable Pay?
Realized pay is the total pay an executive actually receives during a full fiscal year. Realized pay comprises base salary, bonuses, any stock or options that vested only during the fiscal year, and the value of “all other compensation.” According to the Center On Executive Compensation, realized pay is the best way to gauge pay and performance. However, it is not easily calculated to compare with other companies, so it is difficult for companies and shareholders alike to assess what peer companies are paying their executives without in-depth research resources.
Realizable pay is an aggregate approach to total compensation over a period of time. It is made up of future vesting stock and options as well as base salary and bonuses. Realizable pay may be calculated using information found in a company’s proxy statement, and therefore companies are able to measure the realizable pay of peers in a more straightforward manner than realized pay, thus making it a good barometer for pay for performance. Though it is easily calculated, realizable pay may not disclose the correct pay amount because of its use of future payouts and not what is actually received.
What Is the Difference Between an Annual Incentive Plan (AIP) and a Long-Term Incentive Plan (LTIP)?
An annual incentive plan (AIP) is a short-term, yearly bonus plan designed to provide incentives to an employee of a company. Generally connected to performance measurements and granted in cash, an AIP has a target payout and usually can be increased or decreased depending on whether or not the performance conditions are met within the specific fiscal year. A long-term incentive plan (LTIP) is a multi-year incentive plan created with the dual purpose of incentivizing employee retention and to reward performance, most often awarded in equity compensation (i.e. stock or options). Similar to an AIP, LTIPs are awarded with a target value, and payouts may be higher or lower depending on how the individual performs in relation to the target goals.
What Is Pay for Performance?
Pay for performance in connection with executive compensation is the philosophy that pay should be tied to one or more performance metrics pertaining to the company. This practice provides incentives for an executive to perform at the highest levels in order to receive payment. There are many different measures used by companies to weigh an executive’s performance, though the most popular in the United States is total shareholder return.
Since the implementation of Say on Pay in 2011 as part of the Dodd-Frank act, investors have called on their portfolio companies to provide evidence of a more direct link between pay and performance, as opposed to providing compensation based solely on tenure and service. This mandatory, though non-binding, shareholder advisory vote on executive compensation has opened up dialogue between boards and shareholders on ways to better align company strategy and performance with creating shareholder value.
What Is Total Shareholder Return and How Is It Used to Determine Executive Pay?
Total shareholder return (TSR) is the total return of a stock to an investor in a specific company. It is the internal rate of return of all cash flows to an investor during the holding period of a specific investment. Essentially a measure of the company’s value, TSR is used as a key metric for performance objectives in an executive compensation. Because it is easily measured and compared to peer group companies, TSR provides the ability to gauge compensation comparatively to competitors and is seen as the best indicator of pay for performance comparisons between companies.
What Is Shareholder Engagement?
Shareholder engagement, in the context of corporate governance, is active communication between a public corporation and its investors and vice versa.
Investor relations is not a new concept, and all companies have departments to share financial communications and other messaging with their shareholder base. However, in recent years, more and more companies—both executive management and the board of directors—have been actively seeking out their largest and most influential investors to discuss important matters. As a case in point, shareholder engagement policies grew more than three times from 2012 to 2016, reaching nearly two-thirds of large-cap companies.
Shareholder engagement policies range widely, and individual shareholder engagement meetings, including who attends from the company and the investment firm, vary depending on the topic being discussed. According to company filings about their shareholder engagement meetings, changes made as a result of investor input include updates to executive compensation plans, alterations to board recruiting and nomination processes and more.
What Is an AGM, and What Happens There?
AGM stands for “Annual General Meeting,” which represents the opportunity for public company shareholders to meet directly with the board of directors and executive management. In this meeting, shareholders have the chance to ask questions and raise concerns around the strategic direction of the company and how the decisions being made in the boardroom affect their investments in both the short- and long-term.
The AGM also serves as the annual election for boards of directors as well as the forum to vote on any shareholder proposals posed in the annual proxy statement.
Due to technological advancements and video conferencing capabilities, there has been some debate about companies moving to virtual-only AGMs. From advocates’ standpoint, this gives all shareholders equal voice rather than a preference to those who are able to travel for the meeting. However, many shareholders and investor advocacy groups oppose this concept because they want to reserve the right for an opportunity to face the board personally. A hybrid approach to give more open access but also retain the in-person experience may emerge as a result.
What Is a Shareholder Proposal?
Shareholder proposals are official requests from investors submitted to be voted on at the annual general meeting (AGM) or a special shareholder meeting. According to the SEC, this shareholder right is codified through rule 14a-8, allowing an investor with a “relatively small amount of securities” to submit a proposal in a company’s annual proxy statement, alongside management proposals for vote. Currently, a shareholder must own $2,000 or 1% worth of a company’s stock for one full year prior to the proposal.
Shareholder proposals vary widely, and oftentimes do not receive majority support from the larger investor base. In many cases they are meant to draw attention to emerging financial and social issues.
The Financial CHOICE Act proposed by Congress in 2017 includes a provision that would require increasing the threshold to 1% of the company for three years. While the $2,000 value was set in the 1950s, and the relative value of that ownership would be much higher today, with the market at all-time highs, 1% may be a considerable sum and yield only a few investors allowed to submit proposals. As such, this is still a matter for debate.
What Is Proxy Access?
Proxy access is the ability for shareholders to nominate their own candidates for boards of directors alongside those proposed by a company and its board. Typically, companies will have an ownership threshold that investors must meet in order to propose director candidates, which is most commonly 3% of outstanding shares for at least three years. However, this figure varies from company to company.
Proxy access came to the forefront in 2015 and 2016, as major pension funds submitted shareholder proposals to gain access to the ballot at their portfolio companies. This resulted in many companies voluntarily adopting proxy access as a show of good faith to their shareholders that they are open to input. That said, proxy access has rarely been invoked to date.
What Is Proxy Fight?
A proxy fight is a contest between company management and a shareholder or group of shareholders to win seats on the board of directors. This contest plays out in the annual proxy statement and at the annual general meeting (AGM) where all shareholders have the opportunity to vote on more than one slate of director candidates for the board.
Typically, proxy fights are the result of unsuccessful negotiations to alter board composition for one reason or another. These contests can become costly to the company and competing shareholder group, as both sides will often campaign extensively to persuade other investors to vote their side. As an example, a 2017 proxy fight was said to cost the company more than $100 million, though estimates vary.
What Is Board Intelligence?
Board intelligence applies data on C-level executives and board members to inform various strategic and tactical business operations. Board intelligence is the foundation for high-level decision-making for board of directors assessment and recruiting, and is also the centerpiece for corporate governance evaluations and business development research and outreach.
The use of board intelligence takes on multiple forms. Boards of directors themselves utilize data and technology to uncover connections and support recruiting efforts, whether that is taking advantage of past relationships to bring on new board members or using information as background references when evaluating potential new members.
Boards, executive management and investors alike use board intelligence to evaluate corporate governance. Investors, in particular, turn to board intelligence to evaluate board composition at their portfolio companies—experience, approval ratings, diversity, etc.—in relation to company performance. By analyzing their portfolio companies’ boards and executive management side-by-side, and applying that information to those companies’ peers, investors use data and analytics to inform their voting decisions.
Finally, sales leaders rely on board intelligence to determine the most straightforward pathway to the top of an organization. In order to reach the right individuals and win new business, data analysis allows them to quickly and accurately identify board members and executive management they know or have worked with through other connections in order to streamline their outreach efforts.
Learn more about Equilar BoardEdge and how constituents across corporate America apply board intelligence.
What Is Relationship Capital?
Relationship capital represents the total value of an individual’s professional connections. In the context of board intelligence, relationship capital identifies the other executive management and board directors with whom an individual has been professionally connected over the course of his or her career. By analyzing and understanding their own relationship capital as well as correlations between others’, individuals and companies are able to develop better strategies to achieve targeted business outcomes.
Analysis of relationship capital applies in a variety of scenarios relative to the boardroom. Board members and executives may utilize data that clearly outlines their professional connections to aid in recruiting and references, a key component for talent development and management at the highest levels of corporate society.
Meanwhile, investors may use connections data to draw conclusions about a company’s strategic initiatives and recognize patterns in decision-making processes across their portfolio. And sales and marketing leadership looking for a window into the boardroom evaluate relationship capital to find the right people to target at a given prospect or client company and get their feet in the door to win business.
What Is an Executive Briefing and Executive Briefing Center?
An executive briefing is a confluence of high-level, key decision makers at a prospect or client company with lead members of the host company’s product, sales and/or executive leadership teams.
Many large corporations host executives briefing centers and employ individuals in house to coordinate executive briefings. These executive briefings connect their leadership and product teams to high-profile professionals such as other top-level executives and board members in their fields. Highly popular in the technology industry and other consumer product-centric verticals, these physical locations allow for direct engagement and open dialogue with key decision makers.
In order to coordinate and conduct executive briefings, companies utilize data and analysis to connect with the right people at their client and prospect companies. Furthermore, in advance of such meetings, involved parties will compile briefing books specific to their guests. For this purpose, board intelligence and relationship capital data proves useful to discover connections and colleagues in order to administer the most impactful meetings.
A BoardMapTM is a resource cultivated by the Equilar BoardEdge database that shows how corporations and corporate boards are connected to one another. Companies will often use such a connections map to identify how much experience a board has and how particular directors are connected to other public companies.
Every publicly traded company has a connections map and there are two key components for each company’s map. First, designated points on the map highlight the names of every board member and their respective titles at the company. Second, each point indicating a board member’s information is linked to the logos of companies in which that particular director may also be sitting on the board. The map is a visual display of how companies are linked to together through mutual directors.
The BoardMap is used by many organizations for strategic business opportunities. For example, a sales team may utilize a connections map by leveraging its relationship with a director at their company for a warm introduction to a prospect at a company in which that director also serves on the board.
What Is Executive and Board Data?
Executive and board data is a compilation of key demographic and experiential information on C-level executives and board members at public companies, and can be found in companies’ SEC filings. This data includes information such as current company or board, tenure, previous boards served, connections to other board members, executives and companies, gender, race, age, and education. In addition, this data includes compensation and other financial information related to these individuals’ performance as disclosed in public filings.
Companies leverage this data for various purposes. HR, legal and other departments use the information for benchmarking pay, corporate performance and recruiting. The data may often be used by a board of directors when searching for a new director who meets certain experiential or demographic criteria. Many companies may also leverage this data to identify a credible referral source. For example, a professional at a company may reach out to one of its board members—who previously worked with an executive at another company with whom that professional is seeking a business partnership—for a warm introduction.
What Is a Board of Directors?
A board of directors (BOD) is a group of corporate professionals who serve as representatives for shareholders of a particular company and ensure that the decisions and policies of that company are appropriately aligned with shareholder interests. A BOD is required for public companies; however, many private companies may also have one.
The core responsibility of the BOD is to act as a governing body of the organization. The BOD must strategically set rules and objectives that are in accordance with corporate governance laws, but also place the organization in position to function at its highest potential. The BOD is also responsible for allocating financial resources and approving annual budgets. When an individual director retires or is relieved from board duties, the BOD will nominate and elect a new board member.
Board meetings are held on a regularly cadence, typically once every fiscal quarter. During board meetings, the BOD will develop company-wide goals and provide guidance strategies to move the company in the direction to reach those goals. The chairman of the board, who is elected by other board members, will lead and officiate all board meetings.
What Is Board Succession Planning?
Board succession planning is a process that allows companies to find a successor to an individual director, who will either retire or whose service will no longer be required on the board of directors (BOD) in the near future, prior to that director leaving. When a board member unexpectedly retires, this places a burden on the functions of a board, and having a succession plan in place allows companies to avoid any inconvenience that accompanies the sudden departure of a board member.
An effective board succession plan is one that takes into consideration the various factors of the current board. This includes the age and current tenure of each board member and any mandatory retirement ages implemented by the board. Understanding the situation of each board member allows companies to anticipate when an individual director may be on his or her way out.
The board will typically have a set of candidates in mind who meet various board experiential requirements as well as possess a skill set that compliments the direction the board is looking to take the organization. If executed effectively, the board will track all potential candidates so that individuals can either be removed from or added to the succession planning materials based on new roles or recent resignations. Although outside of the director election process many companies do not have a formal succession plan, putting one in place allows for more efficient board refreshment and a smooth transition for the new board member.
What Is the Chairman of the Board?
The chairman of the board is an individual director on a board of directors (BOD) who is nominated and elected by other directors to serve as the head and officiant of all board meetings and activities. The chief executive officer (CEO) of a company may also serve as the chairman of the board, but in this situation a lead independent director is typically appointed by the board.
The chairman of the board typically sets the board’s agenda, puts votes into motion, enforces boardroom rules and acts as a liaison between the board and company executives. While the power and authority of the chairman of the board may vary at each individual organization, the chairman of the board is often recognized as the most influential member of the board.
What Is a Lead Independent Director?
A lead independent director is a member of a corporate board who is tasked with providing leadership and holding other independent directors accountable for their productivity, as well as working closely with the CEO or chairman of the board. This position is typically nominated and elected by other independent members of the board. Independent directors are individual board members who are not employed by the company or a part of its founding family.
The lead independent director role is often created at companies where the CEO and chairman of the board are occupied by the same individual in order to avoid potential conflicts of interest by providing board leadership in situations where the CEO may need to take a secondary role on sensitive matters, such as compensation. In recent years, the position has risen in prevalence and continues to do so.
While the chairman of the board continues to be the leading member of the board, the lead independent director may have the most impactful role at the company as one of the position’s core responsibilities is ensuring efficient operation of the board. Although the duties of the lead director vary at each company, other key responsibilities include handling regulatory and governance compliance, as well as evaluating the overall performance of the company and its employees at all levels.
What Is the Public Company Director Election Process?
A public company board will hold a director election when a board seat becomes vacated. A director may resign, be removed from or otherwise vacate a board for a number of different reasons, including retirement, poor performance, low shareholder approval, unexpected resignation or death.
The board of directors (BOD) will generate and select a pool of candidates who meet desired experiential and demographic criteria. Once a qualified candidate is identified, the board or nominating committee will nominate and vote on the newest member of its board. The shareholders of a company will typically approve the election of new board members at their annual meeting. Many boards enact a plurality guideline for elections, which means that directors who receive the most votes will be elected to the available seats on the board.
Over the last few years, companies have begun to implement a board succession plan to mitigate any conflicts that arise from an unexpected director departure. Many companies have also adopted mandatory director retirement ages and term limits in efforts to anticipate any future changes to the board. However, those mechanisms remain controversial as they are perceived as overly prescriptive and do not take into account individuals that may be able to serve boards outside these parameters.