The 2014 Board Practices Survey

Matteo Tonello is Managing Director at The Conference Board. This post relates to The 2014 Board Practices Survey being led by Dr. Tonello; Bruce Aust, Executive Vice President, Global Corporate Client Group at NASDAQ OMX; and Scott Cutler, Executive Vice President and Head of Global Listings at NYSE Euronext. Board members, general counsel, corporate secretaries and corporate governance officers, and investor relations officers of U.S. public companies are invited to participate in the survey; the survey can be completed online by clicking here.

The Conference Board, NASDAQ OMX and NYSE Euronext announced last week the renewal of their research collaboration to document the state of corporate governance practices among publicly listed corporations in the United States.

The centerpiece of the collaboration is The 2014 Board Practice Survey, which the three organizations are disseminating to their respective memberships. Findings will constitute the basis for a benchmarking tool searchable by market index, company size (measured by revenue and asset value) and industry sectors. In addition, they will be described in Director Compensation and Board Practices: 2014 Edition, scheduled to be released jointly in the fall.

The Conference Board introduced benchmarks on director compensation in 1939. In the last fifteen years, the database has been expanded to reflect the steady transformation of boards of directors, the increasing importance of their monitoring responsibilities, and the growing influence of shareholders. The collaboration with NASDAQ and NYSE was forged in 2011 to ensure even broader dissemination of the survey. Today’s survey gathers more than 150 data points on board practices, ranging from board composition to director elections and from risk oversight to CEO succession planning.

Prior editions of the Director Compensation and Board Practices were also widely cited in academic publications and used by regulators and other governance experts. The following are some of the findings from the latest edition (2013) of the study.

On director compensation

  • Directors are best compensated in the energy industry, but company size can make a huge difference. Computer services companies are the most generous with full value share awards, but equity-based compensation is widely used across industries and irrespective of company size. Stock options are not as favored as they used to be, except by the smallest companies. Increasing skepticism on the effectiveness of stock options and stock appreciation rights as long-term incentives has led to their decline, especially in the last few years. Additional cash retainer for board chairmen is seldom offered by larger companies, which are more likely to reward lead directors.
  • A corporate program financing the matching of personal charitable contributions is the most common among the director perquisites reported by companies. Directors of large company boards usually take a corporate aircraft to travel to board meetings; however, this practice is much less frequent when the company is a financial institution.

On board composition, director qualifications, and director elections

  • While many nonexecutive directors have C-suite experience, former or current CFOs are less represented than expected in the board of financial services companies. According to the director nomination policy of large companies, diversity matters as much as business skills. Yet, aside from some level of female representation, corporate boards remain remarkably uniform.
  • While larger companies continue to combine CEO and board chairman positions, three-quarters of financial institutions have appointed an independent lead. Often larger financial services companies set stricter director independence requirements than national securities exchanges.
  • Majority voting in director election is being increasingly embraced even among smaller companies, but incumbents failing to obtain the required votes are rarely expected to resign. Proxy access rights and reimbursement of solicitation expenses remain marginal practices. Most smaller companies save board search firm fees and use personal connections to recruit new director nominees.

On the oversight of executive compensation

  • While an annual say-on-pay vote appears to be the standard for most companies, almost one-third of the smallest financial institutions opt for a less frequent consultation of shareholders.
  • While designing new executive compensation policies, large financial companies set equity retention periods and go above and beyond regulatory requirements in the formulation of contractual clawback clauses. Large companies are also more likely to enforce anti-gross-up policies.
  • Compensation benchmarking disclosure also tends to be a feature of larger companies, with industry and company size the most frequently used criteria in the selection of the peer-comparison group.

On the oversight of strategy, risk, and sustainability

  • While directors of smaller companies collaborate directly with management in the business strategy setting process, larger company boards review strategy more frequently than others.
  • Frequency of risk reporting to the board and institution of chief risk office reveal the differing state of risk governance practices among industry groups.
  • Responsibility for sustainability oversight depends on company size, with larger companies elevating it to the board committee level and smaller companies delegating it to the CEO. Environmental impact and, for financial services companies, data security are among the main sustainability items in board agenda. Boards of directors at almost half of the smallest companies (as measured by annual revenue) do not review political contribution practices, while formal policies for senior business leader are seldom in place.

On CEO succession planning

  • Small companies do not have a board process for the systematic and periodic review of their CEO succession plan.
  • Formal policies on board retention of the departing CEO are uncommon, except in large companies where the CEO is formally required to also leave the board.

Other board policies

  • Formal board-shareholder engagement policies begin to emerge, and may include the requirement for director to actively participate in annual shareholder meetings as well as the adoption of a protocol detailing when and how shareholder can reach out to directors and expect a response to a material query.
  • Large financial companies are less inclined to use an over-boarding policy as it may impair their ability to attract director talent.
  • More than one-third of companies with less than $100 million in revenue do not periodically evaluate their director performance. Approximately two companies out of 10 require their board members to attend some type of continuing education programs to remain abreast of regulatory and compliance developments.
  • As the workload and challenges facing board committees increase, member rotation policies remain infrequent.

Board members, general counsel, corporate secretaries and corporate governance officers, and investor relations offices of U.S. public companies are invited to participate in The 2014 Board Practice Survey. Please complete the survey online by clicking here. Survey participants will receive a complimentary copy of the 250-page benchmarking report based on the survey, which is to be released in the fall, and two publications of their choice from The Conference Board Catalogue.

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