challenges to the traditional governance role of boards of directors presented to: nacd’s capital...

Challenges to the Traditional Governance Role of Boards of Directors

Presented to: NACD’s Capital Area ChapterWashington, DCMay 8, 2007

Presented By: Peter Gleason and Roger RaberNational Association of Corporate Directors

Current Environment

3Capital Area Chapter

5/8/07

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

CII/NACD Task Force

2006-2007 Looking Back, Looking Forward:Recommendations on Majority Voting,

Section 404, and Executive Compensation


5/8/07

Focus for Today

CII/NACD Task Force II

Majority VotingExecutive

Compensation Sarbanes - Oxley 404


5/8/07

“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


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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75 have been withdrawn


5/8/07

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


5/8/07

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


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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. 2006 – 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. 2006 - SEC issues proposed guidance aimed at easing the burden on management of complying with SOX 404.


5/8/07

Sarbanes Oxley Section 404

60% of Audit Committees are “Very Satisfied” with their oversight of internal control over financial reporting (404) – NACD/KPMG 2005-2006 Public Company Audit

Committee Member Survey

84% expressed concern that compliance activities may “detract from substantial discussion concerning company issues” - NACD/KPMG 2005-2006 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


5/8/07

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


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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


5/8/07

Executive Compensation – Where We Are

Audit Committees can breathe a sign of relief as Compensation Committees are clearly the focus this year


5/8/07

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


5/8/07

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


5/8/07

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


5/8/07

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


5/8/07

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.

challenges to the traditional governance role of boards of directors presented to: nacd’s capital...

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