Corporate boards have become increasingly well acquainted with
uncertainty as activist shareholders, aggressive regulators and
shifting investor priorities have brought new levels of scrutiny
and pressure on directors and executives.
But in 2017, boards will face a new level of ambiguity in the wake
of an election outcome that could bring sweeping change in
Washington, D.C. That was in full evidence at Foley & Lardner
LLP's 15th annual National Directors Institute (NDI) Executive
Exchange corporate governance conference.
How a Trump administration, working with a Republican-controlled
Congress, might impact corporate governance remains far from clear.
But the executives and board directors who gathered in Chicago on
November 10 – just two days after the election – heard
that no matter what emanates from Washington, boards will be
impacted by a host of ongoing currents in the coming year.
The following are some of the key themes that emerged from the
day:
Proxy Access: In Wake of a Record Year, More on the Way
2016 saw a "tidal wave" of proxy access proposals, Patrick McGurn, Executive Director of Institutional Shareholder Services, said in his keynote address. In 2014, less than 1 percent of S&P 500 companies had access bylaws on their books. Today, more than 40 percent have adopted proxy-access provisions and McGurn expects that trend to continue. In particular, he predicted that line-item veto proposals, in which shareholders seek the ability to propose referendums on specific policies such as executive compensation, would dominate 2017's proxy season.
Settlement Fever Continues, But Activists Aren't Winning
The widespread shift in companies' responses to activist
investors was on full display at NDI. McGurn noted that most
activist actions in 2016 have resulted in settlements where the
activist takes a board seat. "We're getting more
sophisticated about counting votes and predicting what proxy
outcomes will be," said Rick Grubaugh, Senior Vice President
at D.F. King and Co., during a panel on shareholder activism. So
management is often best served by offering a board seat, and then
working to find mutually agreeable solutions once the activist is
inside the tent. The consensus among the inside counsel, investors
and advisors in the room was that engagement, often meaning a
settlement, represents the best method for defusing an activist
attack.
And yet, even as boards seek to avoid conflict, the data shows that
when activist actions do go to a proxy battle, the activists only
win half of the time. And the bigger the company, the lower the
activist batting average. For companies with market caps of $100
million or more, activists lost more than half of their proxy votes
in 2015 and 2016.
Cybersecurity: Programs Mature, Threats Increase
In the span of a few years, an issue that used to be confined to
the IT department has become a critical item on nearly every
board's agenda. At an NDI panel on cyber issues, the
overarching conclusion was that boards need to treat cybersecurity
as an enterprise risk, not an IT risk.
That means, according to the panelists:
- Using and trusting outside security providers and advisors.
- Understanding that no organization is immune; it's a matter of when a breach will occur, not if.
- Training: 70 percent of breaches start from the inside, so employee awareness is vital.
- Calculating risk, developing a plan and running tests to understand the likelihood, frequency and severity of attacks.
ESG Rising
Support for environmental, social and governance proposals
soared in 2016, and there's no reason to believe it will
subside in the coming year. In particular, McGurn said, proposals
on gender pay disparity have received frequent majority
support.
And while a Trump Administration is expected to roll back many of
President Obama's climate change efforts, companies may not be
relieved of pressure on that front. In 2016, 54 climate-risk
proposals appeared on proxy ballots, up from 34 the previous
year.
Investors have also shown broad support for say-on-pay measures,
and for board diversity efforts.
The Trump Transition
While the surprising election results were clearly on the minds
of everyone at NDI, attendees and panelists alike largely agreed
that it was too early to know what implications those results might
have for companies or boards.
But at a panel dedicated to the election, Dennis Cardoza and Scott
Klug, co-chairs of Foley's Federal Public Affairs Practice and
both former U.S. Congressmen, discussed a wide range of potential
changes, including broad deregulation, a new stance on trade policy
and the potential for drastically higher infrastructure
spending.
They also noted that in the past six years, gridlock in Washington
has led many organizations to vastly scale back their lobbying
efforts. But now, with the G.O.P. in control of both houses and a
president promising sweeping change, it will become vital to have
representation in the capitol.
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