U.S. UPDATE – Key Issues for Directors 2012, by Martin Lipton, Wachtell, Lipton, Rosen & Katz
Key Issues for Directors 2012
For a number of years, as the new year approached, I have prepared a one-page list of the key issues for boards of directors that are newly emerging or will be especially important in the coming year. Each year, the legal rules and aspirational best practices for corporate governance matters, as well as the demands of activist shareholders seeking to influence boards of directors, have increased. So too have the demands of the public with respect to health, safety, environmental and other socio-political issues. In The Spotlight on Boards (below), I have published a list of the roles and responsibilities that boards today are expected to fulfill. Looking forward to 2012, it is clear that in addition to satisfying these expectations, the key issues that boards will need to address include:
- Working with management to navigate the dramatic changes in the domestic and world-wide economic, social and political conditions, in order to remain competitive and successful.
- Coping with the increase in regulations and changes in the general perception of business that have followed the financial crisis. Once it was said, “The business of America is business.” Today, it could be said, “The business of America is government, and a dysfunctional government at that.”
- Dealing with populist demands, such as criticism of executive compensation and risk management, in a manner that will preempt increased regulation and avoid escalation of activist demands while at the same time furthering the best interests of the corporation.
- Organizing the business, and maintaining the collegiality, of the board so that each of the increasingly time-consuming matters that the board is expected to oversee receives the appropriate attention of the directors.
- Working with management to encourage entrepreneurship, appropriate risk taking, and investment to promote the long-term success of the company, despite the pressures for short-term performance.
- Retaining and recruiting directors who meet the requirements for experience, expertise, diversity, independence, leadership ability and character, and providing compensation for directors that fairly reflects the significantly increased time and energy that they must now spend in serving as board members.
- Developing an understanding of shareholder perspectives on the company, as well as coping with the escalating requests of union and public pension funds and other activist shareholders for meetings to discuss governance and business proposals.
- Developing an understanding of how the company and the board will function in the event of a crisis. Most crises are handled less than optimally because management and the board have not been proactive in planning to deal with crises, and because the board cedes control to outside counsel and consultants.
The Spotlight on Boards
The focus on the performance of corporate boards prompts a revisiting of what is expected from the board of directors of a major public company – not just the legal rules, but also the aspirational “best practices” that have come to have almost as much influence on board and company behavior.
Boards are expected to:
- Establish the appropriate “Tone at the Top” to actively cultivate a corporate culture that gives high priority to ethical standards, principles of fair dealing, professionalism, integrity, full compliance with legal requirements and ethically sound strategic goals.
- Choose the CEO, monitor his or her performance and have a detailed succession plan in case the CEO becomes unavailable or fails to meet performance expectations.
- Work with management to navigate the dramatic changes in economic, social and political conditions, in order to remain competitive and successful.
- Plan for and deal with crises, especially crises where the tenure of the CEO is in question, where there has been a major disaster or risk management crisis, or where hard-earned reputation is threatened by product failure or a socio-political issue.
- Determine executive compensation to achieve the delicate balance of enabling the company to recruit, retain and incentivize the most talented executives, while avoiding media and populist criticism for “excessive” compensation.
- Interview and nominate director candidates, monitor and evaluate the board’s own performance and seek continuous improvement in board performance.
- Approve the company’s annual operating plan and long-term strategy, monitor performance and provide advice to management as a strategic partner.
- Determine the company’s reasonable risk appetite (financial, safety, reputation, etc.), set state-of-the-art standards for managing risk and monitor the management of those risks within the parameters of the company’s risk appetite.
- Set state-of-the-art standards for compliance with legal and regulatory requirements, monitor compliance and respond appropriately to “red flags.”
- Take center stage whenever there is a proposed transaction that creates a seeming conflict between the best interests of stockholders and those of management, including takeovers.
- Set the standards of social responsibility of the company, including human rights, and monitor performance and compliance with those standards.
- Oversee government and community relations.
- Pay close attention to investor relations to develop an understanding of shareholder perspectives on the company, and interface with shareholders in appropriate situations.
- Work with management to encourage entrepreneurship, appropriate risk-taking, and investment to promote the company’s long-term success, despite pressures for short-term performance.
- Review corporate governance guidelines and committee charters and tailor them to promote effective board functioning.
To meet these expectations, it will be necessary for major companies (1) to have a sufficient number of directors to staff the requisite standing and special committees and to meet expectations for diversity; (2) to have directors who have knowledge of, and experience with, the company’s businesses, even though meeting this requirement may result in boards with a greater percentage of directors who are not “independent”; (3) to have directors who are able to devote sufficient time to preparing for and attending board and committee meetings; (4) to provide the directors with regular tutorials by internal and external experts as part of expanded director education; and (5) to maintain a truly collegial relationship among and between the company’s senior executives and the members of the board.