By Gary Larkin, Research Associate, The Conference Board Governance Center
As corporate governance goes, the uncertainty of 2017 will be its own separate risk for boards and management of companies, big and small, public and private. I say that because of three things: the incoming Trump administration, the lack of a quorum on the SEC and the widespread use of cyber-terrorism.
Consider the following as we start the new year: hacking of US companies by foreign governments has increased exponentially and has now crossed over into disinformation campaigns (see 2016 US presidential election), several proposed Dodd-Frank Act rules related to executive compensation have not been finalized and there is a good chance the SEC will be down to two commissioners come the end of this month.
When you take into account the uncertainty surrounding the incoming Trump administration as it relates to corporate governance regulations, one thing that is certain is that boards have to look at the situation as its own risk.
That is a risk that can affect how companies plan for the next four years. If there is no clarity as to how the SEC will govern in 2017, companies will be at a loss for how to disclose vital investor information, such as CEO to median employee pay ratio, clawback policies, and pay versus performance. The longer the SEC goes without a quorum (at least three commissioners including a chair), the longer regulatory uncertainty will continue. As of December 22, 2016, there were three commissioners including Chair Mary Jo White. However, she has stated she will resign before President Trump takes over on January 20, 2017. Considering the slow pace of confirmations in the Senate, it’s a safe bet there won’t be a new confirmed chair by the end of January.
Also, Trump has stated that he favors repealing parts of the Dodd-Frank Act. But he has not given any specifics about which parts. In a recent client memo
, the law firm Davis Polk & Wardwell analyzes the fate of these rules. The firm bases its prognosis on the executive compensation-related rules to two variables:
The timing of the rules’ effective and compliance dates as compared to the feasibility of the potential rollback vehicles, such as the Financial CHOICE Act introduced by the House Financial Services Committee chair last year.
The views of the Trump administration, its new SEC commissioners and others about the policy goals and content of the rules, including the level of emphasis they choose to give to executive compensation as a strategic matter.
And that’s just the executive compensation rules. Remember that there are many others still in progress, such as mandatory use of universal proxy cards in proxy contests, the SEC’s disclosure effectiveness and simplification project and disclosure of non-GAAP measures.
As for cyber-terrorism, that is a risk that won’t go away for boards and management. But with the turnover in the White House, there could be some concern as to whether the progress made during the Obama administration will continue. During the past four years, Obama has made cybersecurity a priority. He directed the National Institute of Standards and Technology to come up with a framework that companies can use to counter cyber-attacks. With all the news about how Trump was tied to the Russian government during the presidential campaign, one has to wonder if the current cybersecurity plans will stay in place. If the emphasis changes, the progress made between government and the private sector in sharing cybersecurity data and best practices might be lost.
My take on mitigating the uncertainty of 2017 is that boards should continue to engage all their stakeholders, especially shareholders, on corporate governance issues. While governance-related SEC rules may be up in the air, it is best for boards to work with management to disclose what they believe their shareholders should know to make investment decisions. Since it may be months before some of the SEC uncertainties are cleared up, the job of boards is even more critical.
Later this year, The Conference Board will publish a report on the role of the board and its job description. The impetus for this report is that members have told us they are concerned about how that role is changing as more responsibilities are added to the job description. The report will be designed to provide direction to corporate directors and foster a more common understanding among market participants of how to view the job of the corporate director. As part of this report, our Governance Center will hold roundtables with stakeholders (i.e. board members, investors, management, lawyers, policy-makers, consultants).
In the meantime, I thought it would be a good idea to share with you the thoughts of some Governance Center members about what directors should expect for 2017:
Wachtell Lipton Rosen & Katz
“… the most important issue that boards confront today is to work with management to convince investors and asset managers to support investments for sustainable long-term growth and profitability and to deny support to activist hedge funds seeking short-term profits at the expense of well-conceived, long-term strategies. We urge boards of directors to approve The New Paradigm: A Roadmap for an Implicit Corporate Governance Partnership Between Corporations and Investors to Achieve Sustainable Long-Term Investment and Growth
, issued by the International Business Council of the World Economic Forum and prepared by Martin Lipton, and to authorize their corporations to endorse it, to work with management to obtain its acceptance and endorsement by the investors and asset managers who are invested in their corporations.” “A core component of this new paradigm is the idea that well-run corporations should be protected by their major shareholders from activist attacks, thereby giving these corporations the breathing room needed to make strategic investments and pursue long-term strategies. In order to qualify for this protection, a corporation must embrace principles of good governance and demonstrate that it has an engaged, thoughtful board and a management team that is diligently pursuing a credible, long-term business strategy.”
Ernst & Young Center for Board Matters
“Geopolitical developments, innovation and technology are rapidly accelerating change in the global economy and affecting how companies create competitive advantage. Boards should continue to rethink and address their organization’s strategy, risk management and whether the required talent is in place to deal with such changes.”
“Boards may need to rethink their own composition and structure to stay fit for purpose. Institutional investors continue to seek more communication and engagement around these important issues.”
In 2017, the EY Center for Board Matters expects boards to heighten their focus on the following six priorities:
Deloitte LLP Center for Corporate Governance
- Overseeing competitive strategy in a world of disruption and convergence
- Seizing opportunity while enhancing risk management
- Navigating the dynamic geopolitical and regulatory environment
- Optimizing long-term capital allocation strategies
- Embracing the talent agenda and the workforce of the future
- Strengthening board composition through strategic alignment”
“There’s so much speculation about [the] Dodd-Frank [Act],” Bob Lamm, independent senior advisor to Deloitte & Touche LLP Center for Corporate Governance, said during a recent webcast. “There are some areas where a Dodd-Frank repeal would be very impactful. If Say on Pay went away, I think a good number of companies would continue to keep those votes. It [Say on Pay] acts as a safety valve for investors. It is a good way to do something without risking a failed director election [because shareholders may tend to go after directors if there was no compensation vote].”According to the forthcoming Board Practices Report by Deloitte and the Society for Corporate Governance, the top areas where boards feel they will spend the majority of their time in 2017:
The views presented on the Governance Center Blog are not the official views of The Conference Board or the Governance Center and are not necessarily endorsed by all members, sponsors, advisors, contributors, staff members, or others associated with The Conference Board of the Governance Center.
- Risk oversight
- Boar selection, recruitment, and composition
- CEO succession
- Shareholder engagement
- Board meetings and materials
- Technology (social media) and data analytics