Among other things, best practices for good corporate governance reflect accountability, transparency and engagement. Weak or poor governance causes shareholders to mistrust the companies they invest in, causing them to be skeptical of the outlook on the overall economy. Shareholders’ lack of trust is reflected in the stock market and the economy. Across the board, there is great emphasis on efforts to increase accountability, transparency and engagement in every boardroom.
Today’s shareholders are increasingly looking for assurance that companies are being managed responsibly. Because of past events, shareholders count on transparency to convince them that the board is measuring the company’s performance and isn’t misrepresenting the results internally or externally. Shareholders are looking for signs that board directors are rewarding good performance appropriately and not offering bonuses or other rewards for poor or subpar managerial performance. Boards that pay close attention to executive compensation demonstrate that they’re practicing strong oversight, and that they’re willing to address large or small issues of misconduct.
It’s not a matter of shareholders looking to control the board’s actions. Rather, shareholders desire to better understand the reasoning behind the board’s decisions. Outward signs of strong governance indicate that the board is promoting strong oversight.
Activist Investors Are Looking for Weak Points in Boardroom
A board’s inactions, as well as their actions, have consequences that affect shareholders and the overall economy. Activist investors are scouting out weak points in the boardroom, and they see this as an opportunity to extract latent value. It’s vital for today’s board directors to be on top of this and to know where their areas of vulnerability are.
Activist investors play a role in protecting everyday Americans, in addition to protecting their own investments. As the economy has declined in recent decades, everyday citizens have also lost much trust in the stock market. People who work in virtually every industry invest in mutual funds, pensions, IRAs, and 401(k) plans. They count on these types of investments to buy a home, fund college expenses and prepare for their retirement.
Today’s shareholders are especially concerned about executive compensation. As a result, executive compensation plans have become the focus of many shareholder engagement communications. Specifically, shareholders are looking for assurance that executive compensation plans align directly with the company’s financial performance. Shareholders are looking for assurance that managers aren’t getting bonuses or extra pay in circumstances where their performance had no bearing on positive financial results.
On a related issue, shareholders are also concerned that executive pay is too high in comparison with the pay of their median employees, in some cases. The concern lies less with the actual amount of compensation and more with whether the compensation structure ensures accountability through transparency and shareholder engagement.
Transparency around executive severance pay is also a common shareholder engagement topic as well as a subject for shareholder proposals. It’s common for boards to use severance pay as a tool for recruiting highly qualified executives. Over time, this practice has driven severance packages to an extraordinarily high level. This is a tactic that can backfire when an executive chooses to leave a company prematurely or when a newly appointed executive doesn’t perform well quite soon after their appointment.
The Securities and Exchange Commission (SEC) has voiced its concerns about corporate accountability as well. They’ve been publishing many reports that guide their expectations for corporations to be more accountable and transparent. The SEC has also been quite vocal about how shareholders can make better voting and investment decisions in the current climate.
NACD and Diligent Corporation Partner in the US to Modernize Your Boardroom
The partnership developed a digital solution called Nom Gov that is a game-changer for strengthening board governance. The application provides your board with the same data used by activist investors and proxy advisors. In addition, the app provides boards with a database of over 125,000 executive profiles that your nominating committee can use to identify potential board and executive candidates and be completely transparent about it.
Nom Gov helps to alleviate the pressures from activist investors by helping to address any shortfalls in board composition, diversity and effectiveness. The tool gives your board the necessary data and analytics they need to spot issues surrounding boardroom diversity, composition, effectiveness and risk profiles to elevate board performance. Using this tool, your board will enjoy improved quality of board discussions because it will have the benefit of up-to-date intelligence and profiles of companies of interest. Another feature of the tool is that it also shows how candidates are connected to your board. Still another benefit of Nom Gov is that it gives shareholders and regulatory bodies that are interested in disclosures descriptions of the company’s business and biographies of board directors, nominees and senior managers.
Trends Emerge in the Evolution of Governance
As various other changes have taken place in the marketplace, the principles of good governance have needed to evolve along with them. Today, there is a greater acceptance of the shareholder voice. Companies are becoming more open to having shareholder meetings before the annual proxy meeting to discuss shareholder proposals and other important matters. Nom Gov, along with other digital solutions by Diligent Corporation, is designed to support the governance principles of today and the future.
Good corporate governance is the foundation that stabilizes our capital markets and the economy while offering valuable protection for investors. Corporate boards rely heavily on data and analytics to help them fulfill their duties of proper oversight. It’s important for boards to use every tool at their disposal to demonstrate their commitment to transparency, accountability and accuracy. Past events have shown shareholders that they can’t take everything at face value and that they’re foolish to trust blindly. The right digital solutions pave the way to sharing important information, which helps to increase trust among all parties. Honest, open communication helps reveal important facts so that boards and shareholders can focus their discussions on the right information at the right time to get the best results possible.