Boards of directors face more scrutiny, regulation and threats from activist investors than ever before. In response, boards are working harder. The bottom line is there’s more work to do. Fortunately, boards have committees.
Committees are where directors dive deep into issues, do the research and analytics and bring their findings back to the full board for discussion and decision.
Today, the rubber meets the road in board committees.
After the collapse of Enron and WorldCom, the 2002 Sarbanes-Oxley Act increased the responsibility for board oversight of accounting and audit, the details of which fell largely to the audit committee, where workloads increased dramatically.
Washington’s response to the global financial crisis of 2008 was the 2,300-page Dodd-Frank Act in 2010. Among its 400 new rules and mandates was the requirement for boards to ask shareholders to approve executive pay packages in an advisory vote. “Say-on-pay” brought more attention to a board’s responsibility for awarding compensation as well as its ability to effectively communicate the company’s compensation philosophy and practices to win a favorable vote.
While less than 2 percent of companies fail to achieve shareholder approval, the new rules imposed more work on the compensation committee. The length of the compensation discussion and analysis (CD&A), which grew 17 percent over five years, is just one metric of committee time and attention.
Dodd-Frank also required bank holding companies to add a risk committee, which some non-banks embraced. Greater transparency in director qualifications has given activists a window into the boardroom. Eager to exploit every vulnerability, activists have zeroed in on board composition and “refreshment.”
It sounds so quaint—committee work. For most directors, it’s a key part of the job.
“From my experience, the real work of boards has always been in the committees,” said Cynthia Jamison, chairman of the board of Tractor Supply, where she had previously been lead director. She is also a director of Office Depot, where she serves on audit, compensation and corporate governance committees; and Darden Restaurants Inc., where she chairs the audit committee and serves on the compensation committee. At Big Lots Inc., she serves on the audit committee.
Jamison chaired the audit committee at Tractor Supply as the requirements of Sarbanes-Oxley were being implemented, putting a spotlight on audit. Then say-on-pay brought laser attention to the compensation committee and its members. Now it seems the heat is on the corporate governance and nomination committees as shareholders focus on diversity.
“The activists are going after board composition, and committees that are not as attentive as they need to be,” said Jamison. “They want to see board diversity not just in race and gender but in terms of different skill sets, different points of view, appropriate backgrounds and expertise to bring real oversight to their role as shareholder representatives holding management accountable.”
Committee work also helps directors get a better feel for relevant concerns outside the boardroom. “Committee members are talking to experts and advisers. Whether it’s compensation consultants or audit partners or director education, you’re interacting with the people who see across boardrooms,” said Jamison. “It’s another way to become more educated.”
Some board members relish the chance to dig in, create analysis and offer larger solutions to the full board. “I want to be on the committees where I can add value,” said veteran digital entrepreneur Mark Tebbe. “It’s a real chance to learn about some aspect of the company at a deep level.”
Committees often require additional time equal to board meetings. “You do a lot of work between full board meetings,” said Tebbe. “And when you have the responsibility to bring the committee’s work on a specific issue to the full board, you sweat the details.”
At the same time, members or chairs of committees may become part of the company’s shareholder outreach programs. Those who have been most successful have been trained and are “camera-ready” to meet with shareholders to appropriately discuss governance, not management issues. In the process, the directors who meet with shareholders gain a better understanding of their issues and bring that insight back to the full board.
M. Shan Atkins, a public company director for 15 years, views audit and compensation as the “meatier” board committees. “Audit and compensation committees are dealing with very technical issues and take time,” said Atkins. “In terms of my experience, the governance committee has traditionally been lighter, but as proxy advisers have more influence, governance is dealing with issues of board composition and refreshment. Governance committees at some boards also address issues of sustainability and corporate social responsibility.”
Not to be overlooked are the special committees, which are established on an ad hoc basis to bring focus to an assigned task, usually a single issue that is not ongoing in nature.
“I’ve served on several special committees, including takeover defense, shareholder rights plans and several CEO search committees.” Atkins is currently on the board of True Value hardware and SunOpta; she chairs the audit committee for both boards. She’s on the boards of Spartan Nash as well as Darden Restaurants, where she’s a member of the audit and finance and real estate committees.
While Sarbanes-Oxley was implemented to reduce company fraud, Blythe McGarvie believes boards should keep a spotlight on audit committees. Even though the incidence of fraud was reduced after Sarbanes-Oxley was implemented, she observed that the number of fraud cases have started to tick up over the past four years. “Audit remains a hot spot where boards should continue to focus,” she said.
McGarvie serves on the boards of Accenture, Sonoco, L.K.Q. and Viacom. In addition, she recently became chair of the nomination and governance committee at Wawa Inc., a closely held company where she has been a director for 17 years.
“Culture is so important at Wawa. Culture impacts everything, including customers and especially employees who own 42 percent of the company through the E.S.O.P. [Employee Stock Ownership Plan]. I know a lot about governance, and I’m happy to take over that responsibility.”
She also noted that in the face of managing risk, Accenture’s high-performance board culture has developed a best practice to ensure that no risk falls through the cracks.
“Once a year we bring together three committees—finance, compensation and audit—to ensure that we know what part of risk each committee owns,” said McGarvie.
Boards evolve. From a focus on audit, compensation and even governance committees where board refreshment remains a hot topic for activists, the real game changer is proxy access, the chance for eligible shareholders (and activists) to nominate directors.
“Proxy access reached a tipping point,” said governance expert Peggy Foran. “More than half the institutional investors say they want it.”
As chief governance officer, vice president and secretary at Prudential Financial, Foran has had regular conversations with the board on governance issues for the past six years. They trust her for giving them a view of the world outside the boardroom. “I could be wrong, I told them, but proxy access is coming.”
As a result of discussion and board deliberations, the Prudential Financial board chose to be proactive: The board approved and adopted proxy access amendments to the company’s bylaws, enabling eligible shareholders to have their own director nominees named in the company’s proxy statement.
Proactive boards remain vigilant, knowing that there is more work to do.