Category: Agenda

Boards Check the CEO-Chair ‘Body Chemistry’

Boards are formalizing the approaches they take in evaluating and assessing the performance of independent chairs and lead directors, at times even decoupling succession planning for the role from CEO transitions as governance processes and structures evolve.

Boards traditionally have looked to the director with the longest tenure who is also a former CEO to wear the mantle of independent chair or lead director, with a CEO transition serving as the fulcrum around which the governance structure might shift, depending on the circumstances. However, forward-looking boards are contemplating — typically as part of a board evaluation process or an executive development deep dive — whether the board has directors who have the skills needed to complement a potential new CEO as the chair or lead director. They are also determining if board recruitment might be needed in certain cases and whether the current relationship dynamic between the sitting CEO and current board leader is enhancing the CEO and company’s performance.

Vinod Khilnani, former CEO and chairman of CTS Corp. who now chairs the board of Materion Corporation, points out that the knowledge, experience and maturity of the person in the lead director or board chair role are equally as important as the style and soft side of the person.

…Similarily, a review of 2020 filings by public company intelligence provider MyLogIQ found that 196 S&P 500 companies currently have non-executive chairs, with an average tenure of six years in the role.

‘Next Wave’ of Talent on the Engagement Agenda

Boardrooms are abuzz about human capital. This is largely due to the Covid-19 pandemic’s impact on the workforce, SEC updates to disclosure requirements, and a growing investor consortium prodding companies to get a handle on workforce strategy and related disclosures.

Investors are asking for more details on emergency succession planning, workforce turnover and the talent pipeline as companies work through leadership changes during the crisis. Directors should be prepared to field questions about succession planning during upcoming engagement sessions.

While a number of companies put CEO succession plans on hold this year, data shows, sources say boards need to take a deep dive into the talent pipeline of the entire organization to ensure the right leaders and teams are in place to navigate through future turmoil.

…According to the public company intelligence provier, MyLogIQ, 94% of the S&P 500 disclosed responsibility for succession planning in 2020 proxies, up from 93% in 2019 and 90% in 2018.

CFO Exits Pick Up Amid Covid-19 Pandemic

Three large U.S. companies this week said goodbye to their chief financial officers, continuing a surge in CFO departures following months of relative stability.

The Wall Street Journal reports that so far this year, 83 CFOs at Fortune 500 companies have left their posts, compared with 84 last year at the same time. But it took several recent departures —  including Dhivya Suryadevara of General Motors Co., Kelly Kramer of Cisco Systems and John F. North III of Avis Budget Group — to draw even with 2019 as the early days of the coronavirus pandemic seemed to bring about a slowdown in CFO turnover.

According to the Journal, 2019 saw a total of 129 Fortune 500 CFOs leave their roles, thanks to a robust stock market, which made equity packages more appealing. The recent spike seems to be driven not by money, but by a more demanding workload amid the pandemic. With more frequent board meetings, investor calls and town hall sessions as a result of the coronavirus crisis — not to mention the stress of raising money, cutting costs and renegotiating loans — CFOs are starting to contemplate their futures.

Enforcement to ‘Hammer’ Diversity Laggards

While hundreds of California companies have moved to comply with the state’s women on boards law, the state has not penalized nor brought any enforcement against companies that have ignored aspects of it, from neglecting to file required disclosures to failing to recruit any women.

Additionally, the data that has been published by the office of the secretary of state appears to contain numerous discrepancies compared to companies’ public filings, according to a report compiled by public company intelligence provider MyLogIQ that examines the most recent data published by the state, and compares it with regulatory filings as of March 9, 2020.

Sources say the discrepancies illustrate some of the challenges in collecting data, and regulating and enforcing issues related to board composition. For instance, wellness and supplements seller Youngevity International was identified by California secretary of state Alex Padilla’s office as having complied with the law by having a woman on the board, Michelle Wallach. Wallach had been a board member since 2011 and served as chief operating officer of the company. She is also the wife of Youngevity chairman Stephan Wallach. However, in order to comply with Nasdaq listing rules requiring that the board comprise a majority of independent directors, Wallach and another director resigned on Feb. 13, 2020. Although she remains listed on the company’s website as a board member, she is no longer a director and the company has no women on its board.

‘Significant Movement’ in Adding Women to Boards

As states other than California contemplate board quota laws and federal regulators consider legislation concerning mandated board-level diversity disclosure, the women on boards law in California so far has led to an influx of new directors with backgrounds in finance and technology who also hold C-suite roles.

According to a new report from data intelligence provider MyLogIQ, which compared the California secretary of state’s March 2020 Women on Boards status report to public company filings, among the 330 California companies that filed 2019 disclosures with the state, 308 have at least one female board member and only 22 companies didn’t have women directors as of March. (See companion story, “Enforcement to ‘Hammer’ Diversity Laggards,” in this issue.)

Among the boards that have moved forward in recruiting women, the recruiting has added value, sources say. Some new female board members have also gone on to serve as committee chairs and lead directors.

When Is the Right Time to Switch Comp Consultants?

There are several reasons for boards to move on from a compensation consulting firm, and as the mandate facing comp committees increases in magnitude and scope, some comp consultants may not be the right fit any longer.

According to data from public company intelligence provider MyLogIQ, 299 Russell 3000 companies switched comp consulting firms between 2019 and 2020, with 34 companies switching to Pearl Meyer and another 33 hiring Meridian Compensation. Other firms that were newly hired by companies include Radford Aon, Pay Governance and Compensia. Currently, Frederic W. Cook & Co. (F.W. Cook) has the largest portion of Russell 3000 clients as of July 7, advising 15% of companies in the index, according to MyLogIQ data. Pearl Meyer is the comp consulting firm for 11% of the Russell 3000 while Meridian Compensation advises 11%.

Typically, contemplating a change in comp firms comes when there is a board refreshment and new committee members or a new chair or when the principal consultant for the company leaves the consulting firm, sources say. Nora Denzel, chair of the compensation and leadership resources committee at Advanced Micro Devices and compensation committee member at NortonLifeLock, writes in an e-mail that some boards have guidelines to rotate their compensation committees to get a “fresh set of eyes and another perspective on things,” which may drive a consultant change.

Hard Pass From Boards on Pay Increases

As the time of year approaches when many board committees conduct reviews of director compensation, boards are pressing pause on annual increases to cash and equity retainers, and only making small surgical changes to compensation programs if it appears necessary due to leadership transitions.

George Paulin, chairman and CEO of Frederic W. Cook & Co., says he’s conducted at least 10 board compensation reviews for companies in the Fortune 200 in roughly the past month, and generally, “boards are very hesitant to increase their pay.”

“My prognostication on this is that pay will be flat,” says Paulin. “I don’t think there’s going to be much of a year-over-year increase.”

Even in regular times, directors don’t want to be criticized for increasing their pay when company performance has lagged, or in years in which executives don’t get raises or have failed to reach bonus targets. In response, many boards have adopted language in committee charters mandating that the committee tasked with overseeing board compensation conduct an annual review of pay with an independent consultant.

SEC Tracking Covid-19 Disclosures on Human Capital

Boards should expect pressure from investors and regulators to disclose more information on workforce health and safety measures in light of the Covid-19 pandemic, experts say.

Major investors say the current disclosures aren’t detailed enough, and a large group is pressuring the SEC to ramp up disclosure requirements on the effectiveness of companies’ human capital–related measures. The commission appears to be hearing some of those demands as SEC officials say disclosures related to human capital are being integrated into rulemaking.

This comes on the heels of an SEC roundtable with prominent investors, who called for more transparency on remote working costs, protective equipment for employees and specific forward-looking guidance on liquidity plans.