An Important Survey Helps Boards Level-Set on Governance Practices.
The National Association of Corporate Directors’ (“NACD”) annual Public Company Governance Survey (the “Survey”) is an important resource for corporate boards and their primary committees.
The 2019-2020 version of the Survey offers timely information on key governance practices and attributes. To be sure, at year end boards are typically flooded with well-prepared reports from a variety of estimable sources. Yet through the breadth of its data and its related analysis, the NACD Survey stands out as a particularly valuable briefing tool. This, not only for public company boards, but also for those of large private and nonprofit companies.
Important board takeaways from the Survey include:
How to Use It. Don’t view it as a statement of best practices, but rather as a reliable snapshot of developments affecting board trends, priorities and processes. Both work from a director education perspective. Indeed, surveys and similar research are a recognized means by which boards can educate themselves on their company and its industry sector. As recent Delaware court decisions have made clear, a commitment to broad based director education helps to demonstrate the good faith that is critical to fiduciary performance.
You’re Not Alone. This is no small sample size—the Survey reflects the input of more than 500 director respondents from a broad cross section of industry sectors ranging from financial to healthcare to telecommunication. The market capitalization represented by the respondents is balanced between large-cap, mid and small cap and micro-cap companies. The vast majority of respondents are independent directors. Most directors are likely to find the practices of their peers reflected in Survey results.
A Crowded Agenda. As odd as it may seem, many boards are confronting what might otherwise seem as conflicting challenges: business model disruption on the one hand, and persistent concerns with the potential for economic slowdown on the other hand. Given these divergent pressures, NACD calls upon boards to be more proactive in setting strategy and to be sufficiently flexible to alter strategic direction as circumstances warrant. Survey results suggest that the traditional five-year strategic plan may be obsolete.
Levels of Engagement. For many directors, a desire for improved board effectiveness may conflict with a sense that they are already committing sufficient time to board service. Nearly two-thirds of Survey respondents believe that greater levels of engagement on key topics will yield little improvement in board oversight. Neither do they support activities intended to streamline meeting management and decision-making processes. At a time of increasing challenges confronting the board, indications that many directors may already be “maxed out” in terms of their commitment is disconcerting.
Management-to-Board Reporting. Alarmingly, the Survey reports that only 56% of responding directors believe that the information they receive from management is sufficient to support informed decision making and oversight. As Delaware courts evolve their views on director risk oversight liability, management may need to consider new ways to provide risk updates to the board. This could include exposing the board to additional executives and to off-cycle communications between the board and senior management. It’s another “yellow flag.”
Committee Management. Survey results suggest that committee structures remain primarily grounded in traditional practice (e.g. audit, risk, technology and investment, compliance) rather than considering use of committees outside of the traditional scope (e.g. digital innovation, cybersecurity and ESG). An unwillingness to establish committees covering nontraditional areas may be a barrier to governance effectiveness, specifically as it relates to streamlining practices. More attentive use of committees can also enhance oversight of emerging areas of company operations and strategy.
Assuming Cybersecurity Risks. Given the extraordinary emphasis on cybersecurity over the last few years, it is understandable that directors may be saturated with the subject. Yet it is interesting that boards are willing to subordinate cybersecurity risks to the achievement of certain business goals, even corporate growth through digital innovation. But as the board liability exposure for cybersecurity failure continues to evolve, it remains incumbent for risk officers to keep the board updated on how much cyber-risk it is appropriate to assume.
Human Capital Oversight. An important contribution of the Survey is its emphasis on human capital oversight as an increasingly important board responsibility. The results suggest that governance’s role in monitoring corporate talent needs is maturing. However, there is a related sense of urgency for the maturation process, given that for many companies the existing talent pool does not match corporate strategy. In addition, there is less reference to gender equality issues than would have been expected. Boards will be challenged to enhance their human capital oversight duties.
Director Skills. Board refreshment practices are apparently lagging. Certain skills that support emerging company goals (e.g. entrepreneurship, cybersecurity and human capital) are often overlooked in the nomination process in favor of candidates with traditional skills (e.g. executive leadership and finance). Consistent with other similar reports, the Survey indicates a “slow but steady” increase in gender diversity, a small increase in ethnic diversity and a significant stagnancy in board tenure (i.e. low board turnover rates). It is unclear whether boards recognize legislative efforts in this area.
Compliance Oversight. Another possible yellow flag is the extent of Survey respondents (89%) reporting satisfaction with the board’s engagement with compliance programs. While this is a satisfying result given the years over which directors have been educated on their compliance responsibilities, it is surprisingly high given recent Delaware interpretations of the Caremark standard, substantially more comprehensive compliance guidance from the Department of Justice, and increased emphasis on encouraging, and protecting, whistleblowers. Concerns with complacency should be considered.
ESG Matters. A unique contribution of the Survey is its guidance on how boards are addressing social responsibility concerns, following significant 2019 attention on the subject. Almost 80% of boards are giving more serious consideration to ESG issues as they affect their company; typically in connection with human capital matters and most often through either the full board, or governance and nominating committee. Boards should monitor what is likely to be considerable continuing public discourse on ESG.
Director effectiveness, and related liability protection, are increasingly dependent upon board exposure to a broader scope of sophisticated educational resources. “Check the box” reliance on what may be (often mistakenly) perceived as “best practices” can be too limited a perspective. In this context board surveys, such as that annually prepared by NACD, can be a valuable means by which boards can “level set” current practices against peer conduct. Such surveys can also help boards better identify trends and emerging developments and identify possible changes to governance processes.
