2014 Annual Corporate Directors Survey

Mary Ann Cloyd is leader of the Center for Board Governance at PricewaterhouseCoopers LLP. The following post is based on the executive summary of PwC’s Annual Corporate Directors Survey; the complete publication is available here.

Over the last several years, we’ve observed certain trends that are shaping corporate governance and which we believe will impact the board of the future. We structured our 2014 Annual Corporate Directors Survey to get directors’ views on these trends and other topics including:

Board performance takes center stage. Many boards are giving even more attention to enhancing their own performance and acting on issues identified in their self-assessments.

Board composition is scrutinized. Board composition is under pressure to evolve to meet new business challenges and stakeholder expectations. Today’s directors are more focused than ever on ensuring their boards have the right expertise and experience to be effective.

Board diversity gets attention. Stakeholders are more interested in board diversity, and boards are increasingly focused on recruiting directors with diversity of background and experience.

More pressure on board priorities and practices. Director performance continues to face scrutiny from investors, regulators, and other stakeholders, causing board practices to remain in the spotlight.

Activist shareholders get active. With over $100 billion in assets under activist management, more directors are discussing how to deal with potential activist campaigns.

The influence of emerging IT grows. Companies and directors increasingly see IT as inextricably wed to corporate strategy and the company’s business. IT is now a business issue, not just a technology issue.

Increased concerns about the Achilles’ heel of IT—cybersecurity. Cybersecurity breaches are regularly and prominently in the news. And directors are searching for answers on how to provide effective oversight in this area.

It’s still all about risk management. Risk management is a top priority for investors, and they have high expectations of boards in this regard.

Investors question company strategies. Effective oversight requires that the board receive the right information from management to effectively address key elements of strategy.

Executive compensation remains a hot topic. Boards are devoting even more time and attention to the critical issue of appropriate compensation.

Stakeholders are showing continuing interest in how proxy advisory firms operate. The interest of stakeholders in the proxy advisory industry is a key trend.

Increasing expectations about director communications. In response, boards must determine their role in stakeholder communications—and evaluate their processes and procedures governing such communications.

In the summer of 2014, 863 public company directors responded to our survey. Of those directors, 70% serve on the boards of companies with more than $1 billion in annual revenue. Participants were 86% male and 14% female—closely aligning with gender distribution averages of public company directors. The board tenure of participants was distributed relatively evenly. Participants represented nearly two-dozen industries.

Here are some of the highlights of our research:

  • Consistent with the last several years, financial, industry, and operational expertise are seen as the most important director attributes. This year, financial expertise tops the list (described as very important by 93% of directors). Industry, operational, and risk management expertise follow in importance.
  • Directors are more sensitive about low support for board nominees. Fifty-six percent of directors now say that negative voting in the 11-25% range would cause them to be concerned about re-nomination, compared to less than half last year. The percentage of directors who say that only negative shareholder voting in excess of 40% would cause them to rethink re-nomination decreased five percentage points.
  • Thirty-six percent of directors say someone on their board should be replaced—a jump from 31% only two years ago. Less tenured directors are the most likely to believe someone on their board should be replaced—nine percentage points more so than those serving ten or more years. Diminished performance due to aging, lack of expertise, and not being prepared for meetings are the top reasons for dissatisfaction with peers.
  • The percentage of directors who see impediments to replacing an underperforming director grew to 53% from 48% last year. A higher proportion of directors said the biggest reason was that board leadership was uncomfortable addressing the issue. Directors also cited a lack of director assessments and ineffective board assessment processes as impediments to addressing director underperformance.
  • Male and female directors have differing views about the importance of gender and racial diversity on their boards. Female directors are far more likely to consider board diversity important, with over 60% of them describing gender diversity as very important, compared to only one-third of males. Similarly, over 40% of female directors describe racial diversity as very important versus only one-quarter of their male counterparts.
  • The evolution of gender diversity on boards continues. Almost one-third of male participants in PwC’s survey have been on their board for more than ten years, compared to only 10% of females. In the Fortune 50, female directors tend to be younger, with an average age of 60—compared to 63 for males. Further, 24% of all new S&P 500 directors named in the last two years have been women, while female composition of boards is currently 18%. Given the facts that current female board members are younger and less tenured than their male counterparts and that a higher percentage of new directors are women, it is reasonable to project that the board of the future will include a higher proportion of women than is seen today.
  • Directors want to spend more time on strategy: 62% want at least some additional boardroom time and focus, and almost one in five want much more time and focus. They also want to give more attention to the IT issues that are closely linked to strategy; 65% of directors want at least some increased focus on cybersecurity and 47% want more attention on IT strategy.
  • Topping the list of director concerns regarding proposed and recent regulatory and shareholder initiatives are the CEO/median employee pay ratio disclosure and shareholder proposals for proxy access: (65% and 46% of directors are at least somewhat concerned with these topics, respectively). Mega-cap company directors are three and a half times more likely than small-cap company directors to express substantial concern with shareholder proposals for proxy access.
  • Directors strongly prefer internal CEO candidates, but only 27% have much confidence in their company’s CEO talent pipeline: And nearly one in five believe their company’s CEO talent pipeline is not adequate.
  • The vast majority of directors favorably view board and committee self-evaluations: 91% believe their self-evaluation processes are at least somewhat effective. However, a majority of directors have a difficult time speaking their minds—70% say it is at least somewhat difficult to be frank in their self-evaluations and nearly one-in-five think it’s very difficult. Further, almost two-thirds of directors believe self-evaluations are at least somewhat a “check the box” exercise.
  • More than seven-in-ten directors describe their board leadership as very effective in gaining and maintaining the respect of other directors and obtaining board consensus. However, less than one-third say their leadership is very effective in anticipating emerging trends.
  • Nearly one-in-three directors say their board has interacted with an activist shareholder (and held extensive board discussions about activism) during the last twelve months: An additional 14% of boards have not had activist interactions but have extensively discussed this topic. Mega-cap company boards are twice as likely to have interacted with activists as small-cap company boards.
  • Forty-one percent of directors say they are now at least moderately engaged in overseeing the company’s monitoring of social media for adverse publicity—compared to 31% in 2012. There was also an 11 percentage point increase in directors who are at least somewhat engaged in overseeing employee social media training and policies. Similarly, almost half of directors are now at least somewhat engaged in overseeing employee use of mobile technologies—double that of two years ago.
  • Forty-two percent of directors are at least somewhat concerned about the impact of the new Department of Homeland Security/NIST cybersecurity framework, but many directors may not yet be aware of the protocols or their potential impact.
  • Directors acknowledge that big data and cloud technologies are two areas that could use more of their attention; with over a quarter saying they are not sufficiently engaged. Only 53% of directors say their company’s IT strategy and IT risk mitigation approach “at least moderately” take sufficient advantage of big data.
  • Nearly half of directors have not discussed their company’s crisis response plan in the event of a security breach, and more than two-thirds have not discussed their company’s cybersecurity insurance coverage.
  • There was a noteworthy year-over-year improvement in directors’ views about their company’s IT strategy and IT risk mitigation approach. Forty-five percent now believe their company’s approach very much contributes to, and is aligned with, setting overall company strategy, while 26% of directors very much believe it provides the board with adequate information for effective oversight (compared to 37% and 22%, respectively, in 2013). About two-thirds of directors believe their company’s approach is supported by a sufficient understanding of IT at the board level (compared to 64% in 2013).
  • Female directors are more skeptical about whether their company’s IT strategy and IT risk mitigation approach is supported by a sufficient understanding of IT at the board level (only 13% say “very much” compared to 22% of male directors). Female directors are also more skeptical about whether their company’s approach provides the board with adequate information for effective oversight (15% say “very much” compared to 28% of male directors).
  • The use of external IT advisors to assist boards is on the rise, with 38% of directors now saying their boards use external IT consultants—compared to 26% in 2012.
  • Over 90% of directors are at least somewhat satisfied with the information they get to fulfill their strategic oversight responsibilities. However, in some areas there is room for improvement. More than one-quarter of directors are either dissatisfied with or do not receive information on competitor strategy and customer satisfaction research.
  • Directors are less comfortable with their understanding of the company’s risk appetite; 51% say they understand the company’s risk appetite “very well”—over ten percentage points less than two years ago.
  • Over 70% of directors say they made changes to their approach to fraud risk over the last 12 months. The most common actions were holding board discussions of “tone at the top,” increasing the amount of time spent on board discussions of risks embedded in compensation plans and having board members interact with members of management below the executive level. Over the last three years, there has been a significant increase in the percentage of directors who say they have had interactions with members of management below the executive level: 50% said so this year—compared to 31% in 2012.
  • Over the last three years, directors have become more comfortable with the allocation of specific responsibility for overseeing major risks between the board and its committees. In 2014, 84% said there was a clear allocation of responsibility, up from 80% in 2013 and 63% in 2012.
  • While a number of organizations have identified issues like sustainability and climate change as societal imperatives, about three-quarters of directors say they have not had substantial discussions about human rights, climate change, carbon emissions, and resource scarcity.
  • Compensation consultants continue to have the strongest influence on director decisions about executive compensation. Forty-eight percent of directors describe them as very influential—up 12 percentage points from 2013. Proxy advisory firms also saw their influence increase, albeit modestly, as 51% of directors describe them as at least moderately influential—compared to 49% last year. CEO pressure has declined as an influence; only 39% of directors describe it as moderately or very influential—compared to 45% last year.
  • Eighty-four percent of directors at least somewhat agree that “say-on-pay” voting caused their board to look at compensation disclosures in a different way, and 83% say it increased the influence of proxy advisory firms. Nearly three-quarters at least somewhat agree that “say-on-pay” increased shareholder dialogue—but 66% don’t believe it effected a “right-sizing” of CEO compensation.
  • More than eight-in-ten directors believe proxy advisory firms use a “one-size-fits-all” approach to governance and that their business model creates potential conflicts of interest. A similar percentage say proxy advisory firm policies don’t align with company needs or investors’ best interests.
  • Director communications with stakeholders increased across all constituencies. Particularly noteworthy is that 30% of directors say they enhanced communications with the company’s employees—the largest year-over-year increase of any individual group. Also, a greater percentage of directors are communicating with institutional investors—66% now say they do so compared to 62% last year.
  • Despite increased director-stakeholder communications, directors still have many concerns. Ninety-four percent are at least “somewhat concerned” about the potential for mixed messages, and nearly nine in ten are concerned about the “agendas” of some investors. Directors also continue to be worried about violating Reg FD (Regulation Fair Disclosure)—89% are at least “somewhat concerned.”
  • More than half of directors have not held discussions about company protocols and practices in preparation for director-shareholder interactions. This is particularly interesting considering recent efforts to address engagement protocols by groups like the Shareholder-Director Exchange (SDX).
  • Almost half of directors have not discussed company protocols and practices regarding the process by which shareholders can request direct dialogue with the board, the particular director(s) who would participate in such a dialogue, and the permissible topics for discussion.

The complete publication is available here.

 

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