How Boards Can Help Build Trusted Companies

This is an abbreviated version of a more thorough Directorship magazine article exclusively for NACD members. If you are an officer or director of a public, private, or nonprofit organization, you can become an NACD member to view the complete article and related resources.

In June, hedge fund manager Christopher James, with just 0.02 percent of company stock, convinced Exxon Mobil institutional investors to vote in three handpicked board members who will press the company to respond more directly and with greater speed to the strategic imperative of climate change. James’ victory is an example of moving from theory to action on the principle of stakeholder capitalism. This idea represents the foundation of trust against which companies and their boards are judged.

Corporate leaders have a responsibility to craft and implement strategy—that’s their job—but the board stands for the interests of the corporation as a whole, and thus is the place where the navigation between the outside and the inside is expected to take place. Boards are the linchpin between interested parties outside the corporation (investors, regulators, the public, nongovernmental organizations, government) and the leadership inside the corporation.

The board’s guidance to Nokia during its restructuring remains an enduring example of how a board must straddle both the internal dynamics of the company while being cognizant of the demands of the external world. In 2008, Nokia shut down a plant in Bochum, Germany, laying off 2,300 employees, shortly after announcing a 67 percent increase in profits. The outrage was so great that Nokia ended up paying 80,000 euro ($95,000) per employee to close the plant. Fast forward to 2011, when Nokia was facing losses for the first time in its history. The board knew that Nokia would have to restructure because it was being out competed in smartphones and was losing share to lower-cost phones from Asia. The scope was huge, affecting 18,000 employees spread across 13 countries. But the board was committed to avoiding the mistakes of 2008. It charged senior executives with the task of coming up with a way to better manage the impending layoffs.

The result was the Nokia Bridge program, which was essentially a bet on trust: Nokia asked employees to stay on at the company—some for as many as two years—while it managed the restructuring. In exchange, Nokia promised employees a soft landing. The Bridge program gave employees a choice of paths to a new future: find a new job at Nokia, find a new job outside Nokia, get funding to start a new business, train for something new, or receive financial support to do something else entirely.

The senior leaders who created the program insisted on obtaining board approval. They explained that during the restructuring they would prioritize the interests of employees over the company’s, and they intended to be transparent about the program and its aims. The bet paid off: 60 percent of affected employees knew their next step the day they left the firm. And Nokia didn’t suffer from the departures and disengagement that usually follow a layoff announcement. In fact, employees brought in 33 percent of revenues from new products, the same proportion they’d brought in before the layoffs were announced. Eventually Nokia’s program was adapted by the Finnish government as a best practice for managing layoffs.

Embracing the goal of building a trusted company—and regaining lost trust—provides a lens through which this kind of navigation and prioritization of interests can take place. Nokia’s shareholders expected actions that would shore up the company’s shaky foundations and return it to profitability, while Nokia’s employees expected job security. Managing trust is in the familiar terrain of managing relationships. What makes it complex in companies is that the interests of groups are unique and at times can conflict; these interests need to be understood, prioritized, and balanced.

We’ve developed a four-element framework that explains why people choose to trust: competence, motives, means (or fairness), and impact. It provides a structure for understanding the actions that need to be taken to build trust.

To read the full article and dive into this framework, see the July/August 2021 issue of Directorship magazine. Check out the full and previous issues of the magazine here.

Sandra J. Sucher is a professor of management practice and Shalene Gupta is a research assistant at Harvard Business School. Before Harvard, Gupta covered tech and diversity at Fortune. They are the coauthors of The Power of Trust: How Companies Build It, Lose It, Regain It (PublicAffairs, Hachette Book Group, 2021).

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Are Universal Proxies in the Cards for 2022?

The US Securities and Exchange Commission (SEC) has been active on various fronts, including enforcement. For corporate directors, one significant development so far this year has been the revival of a previously proposed universal proxy rule, largely favored by institutional investors but opposed by many corporations. Based on the SEC’s stated plans, the revived proposal is the first of many rules to come.

Wide-Ranging Activity

Since Chair Gary Gensler was confirmed in mid-April, the SEC has posted more than 30 accounting and enforcement releases; ordered more than 40 trading suspensions; issued more than 100 litigation releases; and initiated or closed more than 100 administrative proceedings, according to the agency’s “Enforcement” web page. In addition, the SEC has made 15 whistleblower awards worth more than $100 million, reports its Office of the Whistleblower. The agency also recently approved Nasdaq’s new listing rule mandating board diversity disclosures.

As far as new SEC rules go, however, the agency has proceeded with caution under both Gensler and his immediate predecessor, Allison H. Lee, who served as acting chair from January 2021 to mid-April. As of August 17, 2021, the agency under Lee and Gensler issued one interim rule on auditors used by foreign firms. Other than two filing modifications, it has not published a single final rule or proposed rule other than the universal proxy rule discussed here. What is happening instead is a great deal of preparation that is likely to result in a cluster of rules into early 2022.

Topics on the Horizon

The SEC’s current Agency Rule List discloses more than 30 rules set to be created or modified before April 2022, including potential new rules on the following topics:

climate change disclosure
corporate board diversity
cybersecurity risk governance
human capital management disclosure

clawbacks (to be written as a new rule based on a previously proposed rule, which sparked this NACD comment letter)

pay versus performance (proposed in May 2015; see this original NACD comment letter)

universal proxy (originally proposed November 2016 as a 243-page rule and reopened for comment with a 14-page release in April 2021)

Universal Proxies

At this time, the SEC is most actively focused on the universal proxy rule.

Normally, at annual shareholder meetings investors receive one ballot with the names of directors recommended for appointment by the nominating committee. A separate rule from 2004 attempted to encourage shareholder nominations by requiring nominating committees to disclose the source of nomination by category (e.g., shareholder, recruiter, board member, CEO). However, there are still times when shareholders want to propose their own slate directly to other shareholders. If an election is contested in this way (the case in about 1 percent of elections) there must be two ballots—one from the board (commonly referred to as the management slate, though this is a misnomer) and one from the dissidents.

The SEC wants to require the use of universal proxies for contested elections in public companies with certain exceptions—namely for exempt solicitations, registered investment companies, and business development companies. Although such an option has always been available to shareholders voting in-person at the annual meeting, it has not been available by proxy.

The universal proxy rule, proposed on and off since the proxy rule reforms of 1992, would dictate the use of one ballot rather than two, and thus shareholders could mix and match their votes.

This process is not easy to do under the following rules currently in place:    

The “bona fide nominee” rule, adopted in 1966, which allows for some mix-and-match capability but requires each side of a proxy contest to obtain consent before listing candidates from the other side
The so-called “short slate” rule, adopted in 1992, which provides a limited exemption from the requirement to obtain consent. A dissident can include candidates recommended by the nominating committee in addition to its own candidates, as long as the slate proposes filling less than half of board seats

Comments are still coming in on the universal proxy rule, most of them from institutional shareholders and their affiliates, such as the California Public Employees’ Retirement System, the Council of Institutional Investors, and Institutional Shareholder Services; as these links show, the letters were supportive. However, a half dozen comments representing corporations’ interests expressed concerns about reviving the proposed rule. Cautionary messages were filed by the US Chamber of Commerce and the Society for Corporate Governance. The most detailed letter (listing 20 pages of legal concerns) came from law firm Sidley Austin and was signed by several partners, including Holly Gregory. A common theme in letters opposing the rule is that, as the Chamber letter states, the rule could “increase the frequency and ease of proxy fights for dissident shareholders.”

The number of proxy contests that occur in any given year is low, ranging from a handful to a couple dozen, wrote Fried, Frank, Harris, Shriver & Jacobson in a client memo. Even so, the law firm noted, “Activists routinely threaten to conduct a proxy contest and frequently initiate the process to conduct a proxy fight, including nominating directors, engaging in investor and public relations activities, and making preliminary filings with the SEC.”

NACD has not yet responded to the reissued rule, but the NACD comment letter submitted January 3, 2017 registered opposition to universal ballots because “the ‘mix and match’ voting approach that they empower could result in a final group of directors that might not be optimal for the specific company they would be serving.” NACD added that “the election process should assemble a board of directors whose skill sets are complementary and who are capable of working together to advance corporate strategy.” As a nonprofit, NACD attempts to forge a middle ground on behalf of all directors.

The clash of views between investors and businesses poses a dilemma for the SEC, which according to its three-part mission serves constituencies and markets alike. It is not uncommon for the SEC to go back and forth between a focus on issuers and a focus on shareholders as presidential administrations change. Public company board members, both incumbent and aspiring, have a stake in the outcome of this proposed rule.

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Heavier Committee Work Calls for Coordination, Communication

With standing committees playing an increasingly vital role in helping boards carry out their oversight responsibilities, there is a premium placed on coordination and communication among committees. The overarching challenge—which we see lead directors and nominating and governance committee chairs tackling in various ways—is to help prevent critical risks from falling through the cracks and provide committees with a coordinated, holistic view of how they should oversee vital issues.

This is not a new challenge. Companies and their boards have long dealt with a complex and demanding business and risk environment—from technology and business model disruption to cybersecurity and data governance to investor scrutiny, regulatory and political uncertainty, and geopolitical risk. But the COVID-19 crisis and other events of the past two years have made the business and risk environment even more challenging, with an increased volume of investor and stakeholder demands regarding corporate purpose; environmental, social, and governance (ESG) issues; human capital management (HCM); diversity, equity, and inclusion (DE&I); and more.

As a result, many boards are delegating specific oversight duties to standing committees—beyond those prescribed to the audit, compensation, and governance committees by stock exchange listing requirements—for a more intensive review of issues and risks. For example, depending on the company size, industry, and other unique company considerations, we see boards delegating to various standing committees responsibility for supporting the board’s oversight of ESG, HCM, cybersecurity and data governance, legal and regulatory compliance, mergers and acquisitions, and culture.

Multiple committees may have responsibility for specific aspects of one issue. For example, elements of ESG frequently reside across the nominating and governance, compensation, and audit committees. Cybersecurity is often on the audit committee’s plate but may also fall under the purview of a technology or other committee. HCM issues, meanwhile, may span both the compensation and governance committees. Boards should expect such overlapping oversight responsibilities. But in the absence of close coordination and communication, there is a risk that the board may become balkanized, with each standing committee focused on its own oversight activities and thus failing to share important information that other committees and the entire board may need for their respective oversight.

Effective communication and coordination among committees is an ongoing challenge that can be exacerbated by several factors, including overloaded committee agendas; the absence of clear delineation of oversight responsibilities; a lack of sensitivity to (or understanding of) the information needs of each committee; a “default mentality” in which directors or committees assume that the audit committee (or another committee) has sole responsibility for specific risks; simultaneous committee meetings that prevent directors from attending the meetings of other committees as a way to stay apprised of issues potentially affecting their own committee’s oversight activities; and boilerplate committee reporting to the board.

To help promote effective information sharing and coordination among committees, boards can do the following:

Identify areas where committee oversight responsibilities may overlap and develop a process for frequent communication, sharing, and discussion of oversight activities in these areas.
Maintain overlapping committee memberships or informal cross-attendance at committee meetings when inter-committee coordination is of strategic importance and hold joint committee meetings periodically.
Hold regular meetings of standing committee chairs to discuss oversight activities.
Insist on robust committee reports to the entire board. Well-focused and appropriately detailed information can help keep all standing committees informed of matters potentially affecting their oversight responsibilities.

Patrick A. Lee is a senior advisor with the KPMG Board Leadership Center.

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Climate Governance Must Include Lobbying Oversight

One of the key themes of the 2021 proxy season was the dramatic surge in investor interest in climate lobbying. Five winning shareholder proposals asked companies to report on how their lobbying aligned with the Paris Agreement, a trend that is sure to spur even more investor action in 2022. 

Ceres recently assessed publicly available information on 96 large, US-based companies to understand how they are engaging in climate policy. What we found is that while these businesses increasingly recognize the threat of climate change and are oftentimes reducing their own greenhouse gas emissions, they seldom advocate for ambitious climate policies.

More specifically, among the assessed companies, 74 percent publicly acknowledge climate change as a material risk to their enterprises, 88 percent formally charge their boards with the responsibility to oversee climate or sustainability, and 92 percent are setting emissions reduction goals for their own operations. Essentially, they recognize the problem and commit to individual action—steps that show enormous progress.

Unfortunately, we cannot solve the climate crisis unilaterally. Since emissions anywhere contribute to climate change everywhere, collective action is necessary to ensure a level playing field where all emitters act responsibly. Companies that face climate risks should support strong policy solutions, but they often focus on the constraints rather than the benefits. 

Of the companies we assessed, only 40 percent have engaged directly with lawmakers on the importance of specific science-based climate policies (i.e., policies aiming to keep global warming within 1.5 degrees Celsius of pre-industrial temperatures). Twenty-one percent have lobbied in opposition to such policies, and these were often the same companies that were establishing targets and lobbying for climate regulation in other contexts. These misalignments raise serious issues around climate governance, which boards should address by taking the following three steps:

1. Assess the value-creation opportunities that open with climate regulation in place. Firms generally prefer free markets over increased regulation, but what would uncontrolled climate change really look like for your organization? Chances are, increased storm activity, wildfires, droughts, and populations displaced as a result of these climatic changes would negatively impact operations. Meanwhile, investment in low-carbon product development would be more challenging without government support—think of electric cars, which can benefit from public investment in charging infrastructure.

Boards can engage management to embed climate risks within the larger enterprise risk management (ERM) system. This embedding process should consider the latest climate science, including projections of the physical and transition risks of climate change that could affect a company’s operations and value chain. An assessment of the current regulatory environment and how that environment is projected to change in the coming years is similarly crucial. A helpful reference while conducting these assessments is the 2018 guidance on how to integrate environmental, social, and governance (ESG) issues into the traditional ERM process from the World Business Council for Sustainable Development and the Committee of Sponsoring Organizations of the Treadway Commission. 

2. Systematize decision-making on climate change across the company. Boards with an explicit mandate to oversee both climate change and public policy are best positioned to consider these issues and the overlap between them regularly and robustly. If your company does not yet formalize this responsibility within the board, it’s time to consider embedding that language in the appropriate board committee charter.

Stakeholders, including investors and regulatory bodies such as the US Securities and Exchange Commission, are increasingly holding boards accountable for perceived greenwashing. Professing to have strong climate policies while supporting lobbyist efforts to the contrary potentially opens boards and their companies to criticism and consequences.

3. Regularly conduct an audit of the company’s climate positions to ensure consistency. A growing number of investors are calling on companies to conduct internal audits, which the board should oversee, into the extent to which lobbying efforts are aligned with science-based climate policy. These audits should cover both direct lobbying with policymakers and indirect lobbying conducted on a company’s behalf by the trade associations to which it belongs. 

Boards should oversee these internal audits at regular intervals as the scope and context of climate impacts evolve, and they should systematize concrete steps and timelines to address any misalignment that the audits reveal. Amid investors’ growing interest in companies’ lobbying efforts, it is also strongly recommended that companies disclose the results of those audits as well as the steps companies plan to take to tackle any misalignment they find. 

Ultimately, this helps satisfy investors and other stakeholders and mitigate the company’s own climate-related risk exposures.

Margaret Fleming is a governance associate and Melissa Paschall is manager of governance with the Ceres Accelerator for Sustainable Capital Markets.

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Meet Your New Boss

This is an abbreviated version of a more thorough Directorship magazine article exclusively for NACD members. If you are an officer or director of a public, private, or nonprofit organization, you can become an NACD member to view the complete article and related resources.

A sea change in the relationship between investors and the companies they put money into was initiated at a Drexel University corporate governance event more than a decade ago when Vanguard CEO F. William McNabb III suggested that boards engage with investors. Since then, the symbiosis between shareholders and stakeholders has firmly taken root amid growing concerns about how companies manage and how boards oversee environmental, social, and governance (ESG) issues.

As the board’s role has grown more complex, management consultant Ram Charan has spent much of the last six decades traveling the globe to advise CEOs and boards on leadership and governance. Charan translates some of his collected wisdom into books; he has authored or coauthored more than two dozen volumes on subjects ranging from leadership to talent development.

During the pandemic, Charan, dubbed a “CEO whisperer,” stayed put for a few months in Hawaii, where his walks on the beach ultimately culminated in an idea for another book, this one to be cowritten with Dennis Carey, the vice chair at Korn Ferry with vast experience placing executives in C-suites and on boards. Carey and Charan have collaborated on two previous books.

Charan suggested a third perspective—that of the investor—and reached out to McNabb, who in 2018 stepped down as chair of Vanguard, one of the world’s largest institutional investors. Since then, McNabb has become an active independent director. He currently sits on the public company boards of UnitedHealth Group, IBM Corp., and Axiom Law, and also chairs EY’s independent audit committee.

These three extraordinarily different and ambitious men collaborated on the newly published book Talent, Strategy, Risk: How Investors and Boards Are Redefining TSR (Harvard Business Review). The slim volume is written specifically for investors and directors of private, public, and family-owned companies, and the title concept is substantially more than mere wordplay. It provides clear-eyed advice on how boards, management teams, and the investment community can more effectively navigate their sometimes conflicted roles.

In the introduction, McNabb exhorts companies—led by their boards—to focus their attention on the new TSR: “From the perspective of permanent capital and long-term value creation, we think the best way to create total shareholder return is by focusing on talent, strategy, and risk—the new TSR.”

In an interview with Directorship editor Judy Warner in mid-June, Charan and Carey (McNabb was not available) talked about their collaboration to provide directors a deeper look into their big idea.

To read the interview, see the July/August 2021 issue of Directorship magazine. Check out the full and previous issues of the magazine here.

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