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Challenges to the Traditional Governance Role of Boards of Directors Presented to: NACD’s Capital Area Chapter Washington, DC May 8, 2007 Presented By:

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Presentation on theme: "Challenges to the Traditional Governance Role of Boards of Directors Presented to: NACD’s Capital Area Chapter Washington, DC May 8, 2007 Presented By:"— Presentation transcript:

1 Challenges to the Traditional Governance Role of Boards of Directors Presented to: NACD’s Capital Area Chapter Washington, DC May 8, 2007 Presented By: Peter Gleason and Roger Raber National Association of Corporate Directors

2 Current Environment

3 Capital Area Chapter 5/8/07 3 The Perfect Storm? Elements Collide Declassified Boards Elimination of Poison Pills Elimination of Broker Non-Votes Electronic Proxy Materials Activist Shareholders Majority Voting Proxy Access ? New Exec. Comp. Disclosure SOX 404 Hedge Funds

4 CII/NACD Task Force Looking Back, Looking Forward: Recommendations on Majority Voting, Section 404, and Executive Compensation

5 Capital Area Chapter 5/8/07 5 Focus for Today CII/NACD Task Force II Majority Voting Executive Compensation Sarbanes - Oxley 404

6 Capital Area Chapter 5/8/07 6 “The goal of the task force is to look beyond the usual pat criticisms and defenses of current practices and make a careful assessment regarding the strengths and weaknesses of majority voting structures, Section 404, and executive compensation systems, and to suggest common ground and possible improvements.” Task Force Objective

7 Capital Area Chapter 5/8/07 7 Majority Voting – Where We Are  52% of S&P 500 companies have adopted majority voting provisions in the last two years. –Movement to bylaw vs. policy –60%/40% split on plurality plus resignation vs. true majority voting approach.  More than 150 shareholder proposals on majority voting were submitted in 2006 –94 made it to a vote –average support 48%, –39 passed.  58 proposals pending as of 5/4/07, 75 have been withdrawn

8 Capital Area Chapter 5/8/07 8  Where state law permits, bylaws should require directors to be elected by a majority of votes cast in uncontested elections.  A director who fails to receive a majority of votes cast in an uncontested election should be required to tender his or her resignation.  The Governance Committee should recommend action to the board in these cases, disclose the decision, and explain the rationale within 90 days of the certification of the election results. If a vacancy is created, the board may fill the vacancy. Task Force Views – Majority Voting

9 Capital Area Chapter 5/8/07 9  Directors should be accessible and responsive, and should communicate with shareholders (proxy, 10-K, annual reports, and meetings when requested) their thoughts on critical issues that tend to attract large “against votes” from shareholders.  Shareholders should continue to press for changes in state corporation law to make majority voting the default standard. Task Force Views – Majority Voting

10 Capital Area Chapter 5/8/07 10 SOX 404 – Where We Are  2005 – SEC and PCAOB provide clarification and guidance on 404 implementation.  May 2006 – SEC announces that the smallest public companies would have to comply with 404 in 2007  Dec – PCAOB proposes a new standard (AS 5) to replace AS 2. Provides for integrated audit of internal controls and financial statements to make audits more efficient and eliminate unnecessary procedures.  Dec SEC issues proposed guidance aimed at easing the burden on management of complying with SOX 404.

11 Capital Area Chapter 5/8/07 11 Sarbanes Oxley Section 404  60% of Audit Committees are “Very Satisfied” with their oversight of internal control over financial reporting (404) – NACD/KPMG Public Company Audit Committee Member Survey  84% expressed concern that compliance activities may “detract from substantial discussion concerning company issues” - NACD/KPMG Public Company Audit Committee Member Survey  Only 32% of American Investors polled believe that SOX has been effective in improving transparency of financial information of public companies. – 2006 WSJ Online/Harris Interactive Poll

12 Capital Area Chapter 5/8/07 12  Task force members believe Section 404 must not be weakened  Management and external auditors should work to make the process more cost efficient  Directors, management, and auditors should identify the business conditions, processes and data points used in the company’s financial reports that are “high- risk areas”. Task Force Views – SOX 404

13 Capital Area Chapter 5/8/07 13  Directors should determine if those high risk areas are subject to management override, and if so, what to do if that occurs.  Shareowners should evaluate management’s disclosures about material weaknesses that occur two years in a row.  Both parties should continue to support strong internal controls and consider how to make those controls better suited to companies of all sizes. Task Force Views – SOX 404

14 Capital Area Chapter 5/8/07 14 Executive Compensation – Where We Are  Audit Committees can breathe a sign of relief as Compensation Committees are clearly the focus this year

15 Capital Area Chapter 5/8/07 15 Executive Compensation – Where We Are Pay for Performance?  High profile CEO departures coupled with shocking severance packages: –McKinnell - $180 Million –Nardelli - $210 Million  Even the President is weighing in: –“America’s corporate boardrooms must step up to their responsibilities. You need to pay attention to the executive compensation packages that you approve.” –President George W. Bush 1/31/2007

16 Capital Area Chapter 5/8/07 16 Executive Compensation New SEC Disclosure Rules  Rules require far more information about: –Equity awards for top executives –Retirement and severance benefits –Perquisites  Changes to the Summary Compensation Table: –Total Pay –Fair Value –Other Annual Compensation  Compensation Discussion and Analysis (CD&A) replace the Board Compensation Committee Report and the Performance Graph  Director Compensation Disclosure

17 Capital Area Chapter 5/8/07 17 Task Force Views – Exec. Comp. CEO compensation should be clearly linked to performance and not excessive…  Performance targets, thresholds, and peer groups should be disclosed – if not in advance (for competitive reasons) then when performance related to the award is measured.  Performance metrics should filter out gains from market-wide or industry wide movements.  Directors should consider seeking advisory shareowner votes on the executive compensation policy and plan

18 Capital Area Chapter 5/8/07 18 Task Force Views – Exec. Comp. CEO compensation should be clearly linked to performance and not excessive  Internal pay equity should be considered in determining compensation  Directors should adopt formal ownership and retention guidelines for themselves and for management.  Boards should grant options at the same time each year

19 Capital Area Chapter 5/8/07 19 Concluding Remarks  Interesting times  Navigate carefully  Understand your role as a director  The Governance Committee will play a bigger and bigger role in the coming years.  Make sure the people serving on your boards have the skills that allow them to be engaged and effective board members.


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