How the SEC’s new proxy voting rules will impact executive compensation

There are many software applications and tools now available to support compensation decisions, but what should be taken into consideration before purchasing? This 5-minute guide details what Compensation Committees, Heads of Reward and Compensation Professionals should take into account when selecting software and tools for Say-on-Pay decisions.

How the SEC’s new proxy voting rules will impact executive compensation

 

In July of 2020, the Securities and Exchange Commission (SEC), under pressure from public companies (Issuers) and their lobbyists voted to tighten regulations affecting proxy advisory firms, like Institutional Shareholder Services (ISS) and Glass Lewis & Co., who provide proxy research services and voting recommendations to investor groups large and small.  The new proxy voting rule changes were justified based on allegations, mostly made by corporate managers, that proxy advisor recommendations are error prone, rife with conflicts of interests and that proxy advisors wield outsized influence over the shareholder voting process.  In response, Advisors claim that the allegations are not only false, but that they represent an effort on the part of Issuers to reign in what is seen as troublesome shareholder activism. That is attempts by shareholders to insert environmental, social and governance initiatives into the corporate voting agenda.  The new regulations came as amendments to section 14a of the 1934 Securities Exchange Act and are the latest development in a long running controversy over the role of Proxy Advisors and the future of corporate accountability.

 

The New SEC Proxy Voting Rules

 

The SEC has stated that the new regulations are needed in order to “ensure that clients of proxy voting advice businesses receive more transparent, accurate and complete information on which to make voting decisions”. Although the new changes to the law appear to be providing public companies with a greater means of challenging the advice of Proxy Advisors.  Highlights include:

 

Redefinition of “Solicitation”

 

Rule 14a-1(l) has been amended to expand the definition of solicitation specifically to include proxy advice.  Solicitation, usually taken to mean an act of enticement or inducement, is now defined as any communication to shareholders “… reasonably calculated to result in the procurement, withholding or revocation of a proxy”.

 

Changes to Filing Exemptions

 

Rules 14a-2(b)(1) and 14a-2(b)(3) have been altered to place new requirements on solicitor exemptions.  To avoid the information and filing requirements the SEC places on solicitors, Proxy Advisors have historically relied on two exemption provisions.  To be eligible for those exemptions they must now meet new disclosure and policy requirements:

  1. Proxy Advisors must provide specified conflicts of interest disclosure in their recommendations to shareholders. And …

 

  1. They must adopt policies and procedures to ensure that voting recommendations are made available to Issuers at the same time that they are provided to shareholders, at no cost. They must also …

 

  1. Provide shareholders with a means to be made aware of any written statements from Issuers regarding the recommendations of Proxy Advisors.

 

Anti-Fraud Provisions

 

Rule 14a-9 has been modified to include examples of compliance failure.  Should Proxy Advisors fail to disclose certain material information, e.g. business methodology, information sources and conflicts of interest, their recommendation may be considered misleading under the Rule.

The new regulations are effective 60 days after publication in the Federal Register. However, the new disclosure requirements will not be in effect until December 1, 2021, making the 2022 Proxy season the first regulated under these laws.

 

Implications of New Proxy Voting Rules

 

The new SEC proxy voting rules have implications for all parties involved.

Implications for Issuers

 

The new SEC rules certainly offer public companies a greater opportunity to dispute the recommendations of proxy advisors.  However, the ultimate impact on the accuracy of proxy advisor reports and the overall effect on shareholder behavior is likely to be negligible.   Whereas shareholders will ostensibly become “better informed” by being provided greater access to counter arguments, they are not in any way guaranteed to a heed this information or to take additional time to deliberate. Not to mention they may very often simply disagree with management’s position.  Such is the nature of the franchise.   For Issuers, the opportunity to have a better window into proxy advisor methodology will be instructive and perhaps lead to more effective shareholder relations. In the end however, the realities of the investment business and evolving sensibilities on governance will guide voting behavior.  That said, significant concessions have been won and public companies can count the July decision as a victory.

 

Implications for Proxy Advisors

 

The new policy requirements on solicitor exemptions, specifically to include Issuer messaging into proxy reports will likely increase the strain on publication timelines and voting operations. Thus, it may not be unreasonable to expect complications during the 2022 proxy season as the industry adjusts to the new rules. However, the full implications for proxy advisors remain to be seen and will probably only become fully understood after the implementation.

 

Implications for Shareholders

 

The SEC’s July decision, because of the disruptions it will create by placing added requirements on proxy advisors, could potentially add costs and delays to the proxy voting process.  Should Institutional Investors wish to avoid any added expenses or complications it is unlikely proxy research will move to an in-house model.  This is due to the very large diversification of Institutional portfolios, which are prohibitively expensive to research to the level needed and in the timeframe required.  This is partly the reason why Institutional Investors outsource this work to proxy advisory firms that can take advantage of economies of scale.  Without a proxy advisor Investor groups will either abstain from voting entirely or vote in accordance with management’s recommendations, known as the Wall Street Rule—as was the case before the rise of the proxy advisor business.  The overall impact on shareholders is that voting has become more costly and more difficult.  And it may be worth considering whether this effect is the intention? As well as what this means from a governance standpoint?

 

Summary of New Proxy Voting Rules

 

The actions taken by the SEC to increase regulation of Proxy Advisors has come primarily at the prompting of corporate leadership and lobbyist firms such as the Business Roundtable (BRT) and the American Council for Capital Formation (ACCF) that have cited concerns over accuracy and excessive reliance.  In an ACCF study that was cited in the Harvard Law School Forum on Corporate Governance, researchers found that “175 asset managers managing over $5.0 trillion in assets have historically voted consistently with ISS recommendations 95% of the time” illustrating that the biggest asset managers vote with proxy advisors 100% of the time, seeming to show evidence of over reliance.  Another report cited in the same article found that numerous errors were reported by public companies.

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Contact CGLytics and learn about the governance tools available and currently used by institutional investors, activist investors and leading proxy advisor Glass Lewis for recommendations in their proxy papers.

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How to independently and efficiently benchmark executive compensation for Say-on-Pay

There are many software applications and tools now available to support compensation decisions, but what should be taken into consideration before purchasing? This 5-minute guide details what Compensation Committees, Heads of Reward and Compensation Professionals should take into account when selecting software and tools for Say-on-Pay decisions.

08.04.2020

A 5-minute guide to support Compensation Committees, Heads of Reward and Compensation Professionals when selecting software and tools for compensation decisions. Read and learn about the four considerations that should be taken into account before purchasing.

1. Look for tools that support peer group modeling functionality

2. Access the same peer groups as leading proxy advisor Glass Lewis

3. Ensure Pay-for-Performance alignment and benchmarking tools are included

4. Check the quality of data available in the software platform you choose

We live in a digital age where access to information has never been easier. No longer having to scroll through complex and endless spreadsheets and obtain an analytical degree to understand trends – insights and information is at our fingertips.

For Compensation Committees, Heads of Rewards and Benefits, and Compensation Professionals it is no different.

Ensuring executive compensation, bonuses, and incentives are in line with market standards, has never been so important.

Activist activity has increased in 2020, with traditional investors changing their position from passive to active engagement and focusing on executive pay. In a recent article by the Financial Times, it was reported that misalignment of incentives and negative say-on-pay votes at annual meetings increase the likelihood of a company suffering share price underperformance.

Software that provides flexibility for assessing compensation in comparison to peers, and supports say-on-pay resolutions, is available and increasingly implemented by companies, activist investors, and proxy advisors.

When a user begins searching for compensation software there are questions typically asked:

  • – Does it contain information on the executive pay practices of my peers and competitors?
  • – How does is support benchmarking my company’s executive compensation practices?
  • – Does it show me how my company’s compensation practices are perceived in the market?
  • – Can I find tailored insights in seconds to be sure my company’s CEO, NEO and Director pay is aligned to market standard and company performance?

 

Sustainable and justifiable decisions surrounding executive compensation has kept rewards and benefits professionals up at night, with additional key questions that should be asked:

  • – How can I access high-quality, reliable executive compensation information that I do not need to maintain?
  • – Where can I find standardized compensation information for efficient comparison and instant benchmarking?
  • – What software and tools are available in the market that other compensation professionals, activist investors, proxy advisors and compensation consultants currently use?

 

How to utilize software and tools for fast, efficient, and flexible executive compensation and rewards benchmarking.

 

Greater scrutiny calls for companies and their boards to be one step ahead

Transparency encourages market confidence. With the current pandemic causing havoc on stock prices and resulting in employee layoffs, salary and bonuses paid to executives has again been pushed to the front and center.

Compensation policies and reporting are continuing to come under scrutiny from investors, shareholders, employees and the media. Boards must have clear and transparent compensation processes in place that allow for investors to see a fair comparison has been made of executive payouts and promised rewards, against peers and taking into account the broader market context.

How peer companies are adapting their executive compensation practices and adopting new measures needs to be clearly understood for socially responsible decisions about executive pay – continuing to be highlighted again by the events and happenings of 2020.

Decisions made need to be based on fact, not fiction, with easy to understand explanations for investors to digest. Granted, no one wants to become a media headline or attract attention from activist investors.

 

How can Compensation Committees, Heads of Reward and Compensation Professionals model different scenarios with software tools, and benchmark against their companies’ peers?

 

1. Look for tools that support peer group modeling functionality

 

Generating your own peer groups allows for benchmarking and comparison on a like for like basis. Companies that have very few similar peers in their region, index and sector might need to look further afield to design an appropriate group to justify the competitiveness of pay plans. Modeling against different peers can significantly change the scenario and perception of pay. Using CGLytics platform, fit-for-purpose peer groups can be created in seconds with access to 5,900+ globally listed companies, for instant comparison of compensation practices.

2. Access the same peer groups as leading proxy advisor Glass Lewis

 

Do you know how your compensation is viewed by activist investors and proxy advisors? As Glass Lewis and large activist investors are already using data and software provided by CGLytics, Compensation Committees should be doing the same. This allows Compensation Committees and Heads of Reward to proactively plan for, and justify, any compensation decisions that may attract unwanted attention.

Glass Lewis CEO and Executive Compensation analysis (used in their proxy papers globally) is found in the CGLytics platform ready for companies use.

As stated in the recent webinar by Glass Lewis’ SVP & Global Head, Research & Engagement, Aaron Bertinetti:

“All the data that we now use, whether it’s compensation data, peer data, or other types of governance data that we may need…we exclusively source from CGLytics. Not just within the United States but globally. The only other firm outside of Glass Lewis that has access to our methodology is CGLytics.”

Using the same data set, peer modeling and analytical tools as Glass Lewis, and leading institutional investors, for reviewing public company CEO compensation and Say on Pay proposals, results in Compensation Committees being market intelligent and one step ahead. This fosters better dialogue with stakeholders and data-based decisions justified with relevant and real-time information.

Learn how Glass Lewis Europe improved their executive compensation analysis with governance data from CGLytics

3. Ensure Pay-for-Performance alignment and benchmarking tools are included

 

Compensation Committees and HR Professionals are empowered by modeling scenarios against different KPIs and measurements using software tools. With the recent volatility in market performance, justifying indictors used to design compensation plans mitigates risk. Boards need to be equipped with in-depth analysis of their company’s pay practice and compare against their peers to preempt say on pay risk.

As mentioned by Ronald Kliphuis, Global Head of Rewards at Randstad (a large market leading global HR company):

“In the past only consultants had access to the information that CGLytics provides. We can now play with data and information and make fair comparisons. We understand the potential risks and vulnerabilities a lot better.”

Learn more about Randstad’s Head of Rewards making data-based decisions going into the AGM

Powerful pay-for-performance benchmarking tools allow for efficient comparison and automated output of CEO and executive compensation against competitors and peers.

4. Check the quality of data available in the software platform you choose

 

Where the data is sourced from and how often it is updated should be a concern when deciding on insights to trust for effective engagement. In addition to how many years of compensation data is recorded in the software platform. A wealth of global and structured data for meaningful comparison of executive compensation practices across industries and borders, should be a large consideration of tools purchased to support compensation decisions.

Compensation Committees, Head of Rewards and Benefits, and other HR Professionals can ensure reliability when using CGLytics software with executive compensation data sourced from millions of publicly listed company filings, proxy materials and social networks, which undergoes rigorous checks by a dedicated team of equity market research analysts 24/7. More than 10 years of historical compensation data is standardized for efficient comparison of 5,900+ companies’ pay and rewards across different regions, industries, and sectors.

Downloadable data and insights in an array of formats (such as excel) allow compensation professionals to model and easily transport charts directly into their board decks and presentations, for the ultimate time and cost savings.

 

CGLytics offers the broadest and deepest global compensation data set in the market for reviewing corporate executive compensation plans, assessing Say on Pay vote proposals and performing benchmarking analysis.

Contact CGLytics and learn about the governance tools available and currently used by institutional investors, activist investors and leading proxy advisor Glass Lewis for recommendations in their proxy papers.

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CNBC Report: More activist investors to focus on corporate governance and executive pay

This week CGLytics CEO discussed the increase in activist investor activity with CNBC Street Signs. New research from CGLytics reveals that activist investors are broadening their focus.

07.20.2020

CGLytics CEO, Aniel Mahabier, discusses the increase in activist investor activity with CNBC Street Signs. New research from CGLytics reveals the growth in the number of activist campaigns and how activist investors are broadening their focus.

Increase in activism

The CGLytics report Activist Investors Broaden their Focus analyzes the number of activist campaigns carried out over the previous four years and deep dives into the increasing areas that are attracting activism.

During the interview with CNBC, Aniel notes that shareholders are beginning to focus on areas such as diversity and performance. And, even though there has been an overall increase in the number of activist campaigns this year, not all of them have been successful.

The changes we are seeing during the pandemic, are that activists are focused on improving corporate performance. Having the right board composition and board diversity are the areas activists have been focusing on. Culture is another area where we have seen activists putting more focus on to improve corporate performance. – Aniel Mahabier, CEO of CGLytics

Regional shift in activism

The research report notes that now activist investors are finding a lot of opportunity in APAC, but not so much in continental Europe. The question is, do we expect this trend to change, and if so, when?

Social, cultural, and economic factors play a big role, along with the European market being highly regulated. This doesn’t provide a lot of opportunity for activists to play a role. I expect to see a marginal change taking place over time. – Aniel Mahabier, CEO of CGLytics

Executive pay

On this topic of executive pay, CNBC recalls that there has been a lot of focus from activists. Shareholder have objected to senior salaries in the past, even so companies have continued to pay out. During the pandemic, these senior salaries have been cut, and in some cases, granted in stock options. What are activists going to do with compensation?

A focus area of activists is to make sure executive pay is in line with the company performance. The median of CEO pay has risen, regardless of companies’ CEOs and Directors taking a pay cut. This is on both the S&P 500 and FTSE 100. We expect to see more focus on CEO pay in the upcoming proxy season. When it comes time for the AGMs in 2021, reflecting the 2020 performance year. – Aniel Mahabier, CEO of CGLytics

Source: CNBC Street Signs Europe

Board diversity

CNBC mentions about the motivation to change the makeup of boards, and that the representation of women on boards on the FTSE, is abysmal (still remaining below 30%). Will boards be motivated to improve diversity, due to the pandemic and the Black Lives Matter campaign?

The activist landscape is changing. We used to have the traditional activists playing a big role. Now you have passive institutional investment managers changing their style and becoming more active.

If you look at the BlackRocks and the Vanguards of the world, they are focusing on boards being composed with the right mix. Diversity plays a big role. Not only from a gender perspective, or a race perspective, but making sure you have the right skill set in place, the right tenure, and the right age diversity. It’s a number of things that make a board very effective, and I expect diversity to continue to be a focus going forward. – Aniel Mahabier, CEO of CGLytics

Companies need to be prepared for activist investors and engage with shareholders on a more timely basis. Proactive engagement between investors and companies will prevent activist campaigns going forward. Companies need the right information and tools to ensure their corporate governance risks are reduced and any deficiencies are quickly resolved.

Contact CGLytics and learn about the governance tools available and currently used by institutional investors, activist investors and leading proxy advisor Glass Lewis for recommendations in their proxy papers.

 

CGLytics provides access to 5,900 globally listed company profiles and their governance practices, including their CEO Pay for Performance, board composition, diversity, expertise, and skills.

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SRD II and the implications on executive pay and corporate governance

Aniel Mahabier considers the ramifications of the extensive disclosure obligations required as part of the second iteration of the Shareholder Rights Directive and argues that knowledge is key to ensuring accountability.

SRD II and the implications on executive pay and corporate governance

SRD II feature article by Governance.co.uk

Aniel Mahabier considers the ramifications of the extensive disclosure obligations required as part of the second iteration of the Shareholder Rights Directive and argues that knowledge is key to ensuring accountability.

Download the article that considers :

– The drivers behind the new regime

– The aim of putting transparency first

– The problem of executive pay

– How boards can proactively address issues before they become problematic

 

Aniel Mahabier

Aniel Mahabier,
CEO and founder of CGLytics

DOWNLOAD THE REPORT

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SRD II and the ramifications for disclosure obligations

With the proxy season fast approaching SRD II is top of mind. Learn about the implications SRD II will have on disclosure of executive pay and corporate goverannce.

With the next proxy season fast approaching the Shareholder Rights Directive (SRD) is top of mind. Extensive disclosure obligations are part of the second iteration and reliable information is key to ensuring requirements are met.

 

This article is part of the featured news report by governance.co.uk on SRD II. Click here to download the full article.

With the EU directive requiring transposition into domestic law in all Member States by September 2020, companies have a limited window to comply with the new requirements and ensure they have aligned their company’s structure in a way that encourages shareholder engagement long term.

The directive’s main aims involve long-term thinking and practices, transparency and increased engagement. However don’t think that this doesn’t also have implications for institutional investors, asset managers and proxy advisors. 

The new regime involves institutional investors and asset managers having to disclose their engagement  policies, and intermediaries to make sure they facilitate the transmition of information to shareholders in a transparent manner. This includes publicly disclosing what they charge for these services.

In short, the SRD II is aimed at reducing short-termism and excessive risk taking by EU companies, plus increasing transparency all-round.

The problem of pay

With executive pay being heavily scrutinized over the past few years, it comes as no surprise that SRD II calls for change to pay disclosures. Creating a better link between pay and performance of company directors, and bringing an end to short-term targets as a measure of success. With this aim brings requirements of providing greater detail and information to support pay policies, including what metrics are being used to measure executive performance. Decisions will have to be rationalized and justified in detail, and without data and facts showing exactly why these decisions were made, companies put themselves at risk of non-compliance.

For companies and investors to meet the requirements of SRD II and as they become effective in the 2020 proxy season (and for intermediaries to be fully compliant) there is no doubt that they need access to accurate and reliable data. CGLytics is already helping many companies, investors and intermediaries get up to speed with meeting obligations, including providing Glass Lewis with data for their Proxy Papers, and you can be fully prepared too.

If you would like to know more about the impact SRD II will have on your company or firm, click here to download the full article

Or reach out to us at CGLytics and receive a free explanation and assessment on how it’s likely to affect you. Click here

Aniel Mahabier SRD II quote

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How can innovations in information technologies support the role of the board of directors?

How far should we go in terms of sophisticated algorithms in order to complement the usual dashboards? What type of data processing tools boards need while avoiding a big data overload? How can a board leverage data and AI for effective oversight and to make better governance decisions?

6 November 2019  14.00 – 15.00 Brussels time     

Companies have to monitor their environment according to defined objectives and integrate the collected data into real strategic and operational information. Business intelligence is there to support not only the management but also board members in making better decisions. In a more demanding environment, board members have to understand the drivers of value creation and develop the right metrics to articulate value. Actionable and real-time insights are therefore becoming even more critical for board members. How far should we go in terms of sophisticated algorithms in order to complement the usual dashboards? What type of data processing tools boards need while avoiding a big data overload? How can a board leverage data and AI for effective oversight and to make better governance decisions?

Our speakers will provide their input to the debate:

  • Aniel Mahabier, CEO at CGLytics;
  • Deepak Krishnamurthy,  Executive Vice President and Chief Strategy and Transformation Officer at SAP;
  • Michael Hilb, Entrepreneur, Board Member and Professor;
  • Rytis Ambrazevičius, Baltic Institute of Corporate Governance, President;

 

The webinar will be moderated by Suzanne Liljegren, ecoDa Communication Adviser.

Download the invitation here

ecoDa and CGLytics webinar

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Equity Incentive Schemes: Examining the rationale behind shareholder rejection

Two historical examples of organizations that have had their stock option plans rejected by shareholders include Red Lion Hotels and HomeAway. How could they have reduced the likelihood of rejected plans? Read to find out

The approval for equity-based incentive plans, or amendments to current plans, is a critical part of many organizations strategies to acquire and retain premium talent. Opposition or even rejection by shareholders can derail these efforts.

In this article we look at two historical examples of organizations that have had their equity incentive plans rejected and explore the reasons behind and impact of shareholder opposition.

When Red Lion Hotels was punished for lack of clear strategy

In 2019, Red Lion Hotels Corporation’s (NYSE: RLH) shareholders delivered a blow to the company by voting overwhelmingly (70% opposed) against the proposed amendment to the 2015 stock incentive plan.

Shareholders were troubled by, what they perceived, as the board’s continued inability to fulfil its obligations and the absence of a clear strategy (Vindico Capital LLC – letter to the board). Flat performance of the stock over time and significant underperformance against the market and industry peers were particular points of concern for shareholders.

When HomeAway was sent packing

In 2015, HomeAway (NASDAQ: AWAY) had their amended equity incentive plan rejected. Investors felt equity awards continued to be granted despite diminishing returns for investors over time. While the Market Capitalization of HomeAway had remained relatively steady over two years, the rest of the index saw significant gains. Total Shareholder Return was perceived as minimal in this context and the equity awards were seen to be rewarding poor performance. Ultimately HomeAway was acquired shortly afterwards and incorporated into one of the largest travel industry players, Expedia.

Trends in the opposition

When shareholders are considering the impact of diluting their holdings, they require that any potential value lost by the equity incentive plan is offset by the value the business gains by meeting the qualifying KPIs. Whether this is Market Capitalization, Total Shareholder Return, EBITDA or free cashflow, there has to be a compelling strategic rationale for the award of equity. Further, the remuneration committee must ensure that the organization behaves is a prudent manner, even after the plan is agreed to.

Test your equity compensation plans with Glass Lewis’ Equity Compensation Model

Reduce the likelihood of shareholder rejection on your stock option plans and proposals with Glass Lewis’ new  Equity Compensation Model (ECM) application. Now available exclusively via CGLytics. Providing unprecedented transparency to the U.S. market in one powerful online application, both companies and investors can use the same 11 key criteria as the leading proxy advisor to assess equity incentive plans.

Click here to experience Glass Lewis’ new application.

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Pay for Performance: The Largest Institutional Investors’ View

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How to design your peer group for compensation benchmarking

How to design your peer group for compensation benchmarking   Given the scrutiny on executive compensation in recent years, it is critical to make sure that your company’s executive pay reflects its performance and aligns with the market. Therefore, it is essential for companies to have an appropriate peer group for performance benchmarking, compensation program … Continue reading "How to design your peer group for compensation benchmarking"

Interlocking Directorates: Looking for signs of collusion, conflict of interest and overboarding

Conflicts of interest, collusion and the overboarding of directors have been known to grab the attention of the biggest media outlets. As many companies are unfortunately aware. How can this be avoided right from the start?

Conflicts of interest, collusion and the overboarding of directors on publicly listed companies have been known to grab the attention of the biggest media outlets. As many companies are unfortunately aware, this unwanted attention raises questions, creates risk to a company’s reputation, gains attention from activist investors, and can ultimately affect the value of company shares. However, there is a way that all of this can be avoided right from the start.

Interlocking directorates are nothing new. It occurs when two firms share a common director, and the tie or connections that he/she creates is also referred to as a board interlock.

Although lawful and not illegal, it does raise questions about the independence of decisions made in the boardroom and can be seen by the U.S. Federal Trade Commission (FTC) as an anti-competitive practice prompting an investigation.

As stated by the FTC it is their responsibility to, “take(s) action to stop and prevent unfair business practices that are likely to reduce competition and lead to higher prices, reduced quality or levels of service, or less innovation”.

WHEN INTERLOCKS BECOME A CONCERN

An example of where interlocks became a concern for the FTC was during 2009. During this year Apple’s director Arthur Levinson abruptly resigned his seat on Google board following pressure from regulators. Following the announcement FTC’s chairman praised Google and Levinson “for their willingness to resolve our concerns without the need for litigation”.

That same year also saw Google’s Eric Schmidt resign from Apple’s board, three years after accepting a seat.

Eric Schmidt
Eric Schmidt resigns from Apple’s board in 2009

It’s important to mention that prior to these resignations, the FTC had been looking into whether interlocking directorates between Google and Apple raised competitive issues. These competitive issues may have violated U.S. antitrust laws.

The only safe way for companies to avoid situations of interlocking directorates that prompt investigation is by having oversight of every board members’ seats on other companies. By gaining this oversight companies can instantly see any risks or red flags, which are likely already on the radar of investors with governance issues coming under greater scrutiny of late.

This is also hugely important when a company makes new appointments to their board, or an existing director takes on additional responsibilities. Without oversight, companies might be opening themselves up to governance risk and wider liability.

 

CGLytics online solution provides instant information about a company’s board composition, director skills and expertise, as well as interlocking directorates for corporations, investors and advisors.

 

Interlocking directorates are common. It is not new. Most directors will have other board positions across one or more industry, however with highly confidential information that they are privy to, it is vital to identify potential conflicts of interest.

That being said, interlocking directorates can be indicators of the following:

– Collusion: Two or more members of the board holding appointments on another board and using this connection to influence the decision-making away from the best interests of either company.

– Conflict of interest: Directors with specific industry experience will often sit on boards that could be in competition. This can lead to questions from investors on if these board members are performing their duties in the best interests of the company.

– Overboarding: Directors must have the adequate time to devote to their duties of providing oversight for a company. US Proxy Advisory standards state that a director is considered to be overboarded when he/she is a non-executive director and sits on more than five boards, or he/she is an executive director and sits on more than three boards.

– Chairmen of the board are expected to spend double the amount of time as a NED and are considered overboarded with one chair and three other NED roles.

By identifying whether a board member is also on the board of a potential competitor (sometimes inevitably in niche markets where experience is necessary), or if two or more members of the board sit on the same board of another company, is vital for the nomination and governance committees to be aware and ensure that they have the correct policies and procedures in place, as regulators, investors and activists are constantly monitoring.

THINK LIKE AN ACTIVIST

Activist investor campaigns are continuing to show a year-on-year increase with more focus being placed on the composition of the board and the board members existing commitments. Leading investors are voting against the re-appointment of directors who are perceived to be overboarded. In addition, never before has there been as much scrutiny on the skills that a director brings to the board.

Activist investors are using CGLytics’ data and analytics for assessing the board effectiveness of listed companies worldwide.

 

With deep insights into how boards are composed in the CGLytics platform, and a skills matrix applied consistently across all companies in its universe, activist investors easily benchmark a board and assess if its compliant with regulatory and stewardship codes, hence see if there is any reputational risk.

Companies can access these very same insights in the CGLytics platform.

Corporate issuers, their boards and stakeholders can see exactly how they are perceived by activist investors. CGLytics is helping to promote good governance through transparency to the market. View director interlocks, see how board composition compares to competitors and raise concerns of any red flags. Identify any potential skills gaps and be proactive in succession planning, with access to a database of 125,000+ executive profiles draw from 5,500+ publicly listed companies across 40 indexes and 24 countries.

Curious to see how companies are viewed through the eyes of an activist investors? Click here

 

RESOURCES

https://www.ftc.gov/enforcement/anticompetitive-practices

https://www.reuters.com/article/us-google/arthur-levinson-quits-google-board-appeasing-ftc-idUSTRE59B2R120091012

https://techcrunch.com/2009/08/03/google-ceo-eric-schmidt-resigns-from-apple-board-surprised/

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Growing Expectations of Director Responsibilities and Evolving Attitudes Towards Overboarding

CGLytics takes a look at how the role of the board is changing, and how directors are having to rapidly become experts in a range of topics in which they have little to no previous experience.

Overboarding has been recognised as a potential governance issue for some time, with questions over the ability of directors to discharge their duties effectively if they are over-committed to more responsibilities than they have the capacity to manage. As scrutiny increases, this issue has become a greater focus for investors as directors face an ever-increasing set of new responsibilities for which they are expected to provide oversight.

Historically, the responsibilities of board members included participation in regularly scheduled management strategy reviews, often followed by robust debate of such strategy, reviewing of financial statements, assessments of enterprise and industry-specific risks, facing the companies at which they serve, as well as legal compliance issues. However, new threats from a variety of vectors are requiring directors to rapidly become experts in a range of topics in which they have little to no previous experience. Among these new areas of potential risk that boards are increasingly expected to address, we find the most pertinent topics to be:

  1. cybersecurity risks,
  2. the impact of disruptive technologies,
  3. board members’ increasing role in investor relations,
  4. competitive intelligence, and
  5. international business experience.

The ensemble of these new responsibilities requires corporate boards to assess the skills set requisite for its own composition in order to remain competitive in an increasingly fierce global environment. The expectations of this type of board accountability, known as “supergovernance”, assumes that board members are capable of peering around every corner in order to counter all possible threats to their company.

Balancing Act 

While investor-specific policies towards the maximum number of public boards on which a director should serve are not new, increasing responsibilities for board members are leading investors to re-evaluate their previous thresholds of overboarding. Most prominently, Vanguard, the world’s second largest asset manager, has recently publicly disclosed that its voting policy stipulates to vote against an executive director (defined as a Named Executive Officer who serves on the board at which they hold the role of executive) at any outside board at which they serve. Moreover, their updated overboarding voting policy also states that they will vote against any non-executive director who sits on more than four boards in total at all boards on which they serve.

Blackrock has taken a similar position in its 2019 U.S. voting policy, allowing non-CEO directors to hold a maximum of four directorships in total at public companies. However, Blackrock will still allow a public company CEO to serve on a total of two public boards, and currently makes no distinction in the U.S. between executive directors (other than the CEO) and non-executive directors in the total number of boards on which they may serve.

Taking Vanguard’s holdings of 4,861 companies across the U.S., Europe, Canada, Japan and Australia, the CGLytics research team performance an exercise utilizing CGLytics’ data and analytics platform to assess the potential impact of this new overboarding policy on Vanguard’s proxy voting activities. We find that, globally, the implementation of Vanguard’s new guidelines would potentially lead to fairly high levels of opposition, upwards of 23%, for NEO director nominees, who sit on boards outside of the company at which they currently serve as an executive.

Source: CGLytics Data and Analytics

An examination of the current composition of Vanguard’s top 25 holdings also reveals that the implementation of their new guidelines will have an even sharper increase in potential votes against NEOs due to overboarding than during the hypothetical exercise across the full universe of Vanguard’s holdings.

Source: CGLytics Data and Analytics

Not Such a Hard Line

While such an approach may appear rather restrictive for corporate directors and many institutional investors alike, some investors mitigate the perceived severity of this approach by indicating that they will evaluate director appointees who fall outside their overboarding thresholds on a case-by-case basis. Moreover, the language included in their voting policies also makes certain exceptions should the director nominee indicate that she/he will step down from one of the outside boards on which he/she serves within a certain period after their election. Investor engagement also provides corporate directors some leeway, as the issuer-investor dialogue may allow one-off exceptions from opposition to a potentially overboarded director’s election based on the outcome of the engagement.

Finally, the question is raised as to whether these lowered thresholds might benefit corporate board members? Long gone are the days when the expectations for the role of corporate director would be to approve management’s agenda for the company, with cursory corporate oversight capacity. Due to the increasing pressure that board members face in their oversight duties, reducing the number of acceptable directorships from the investor community might provide some breathing room for directors to fully engage in their responsibilities as director. This extra breathing room could potentially allow them to better educate themselves about emerging threats facing the companies on which they serve.

Conversely, the increasing expectations and responsibilities placed on corporate boards often spring directly from the investor community itself. The growing momentum within the investor community implies and often explicitly expects directors to be fully educated on enterprise and material industry risks, as well fully focused on their responsibilities as board members in order to maximize the value of their investments.

As the balancing act between these two perspectives plays out, the issue of potential overboarding for any individual director may prove not to be black or white, but a distinction between various levels of grey. In order to help investors, corporate boards, and executive alike to distinguish between these various shades, CGLytics offers an extensive database with smart analytical tools, to easily screen for potentially overboarded directors. Being able to instantly view the board composition, and that of peers, provides insights into areas of governance practices that may pose a potential risk. In addition, CGLytics’ provides skills matrices to highlight skills and expertise strengths and shortages, director interlocks and smart relationship mapping tools to leverage networking opportunities: all in the one system.

Learn how boards use CGLytics to identify and mitigate governance red flags

Get access to the same insights as investors and proxy advisors with CGLytics’ boardroom intelligence capabilities. With easy to use comparison tools and standardised data, instantly perform a governance health check against regulatory norms and market standards.

Corporate Governance Risk Report

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