The National Association of Corporate Directors has made available the highlights of its 2015-2016 Public Company Governance Survey of over a thousand directors and executives.
The survey reveals that the top priorities for directors are strategic planning and oversight (29%), corporate performance and valuation (18%), corporate growth/restructuring (e.g., M&A) (11%), CEO succession (9%) and executive talent management (5%).
The survey responses with respect to dealing with activists are perhaps the most interesting: almost half (46%) of boards say they “do not have a plan in place to respond to a challenge from an activist investor,” even though over 20% “have been approached by an activist investor in the past year” (emphasis added). While the smallest companies see activist contact most often, few have a formal plan prepared to deal with them.
Year over year, board size and leadership structure did not change significantly. The average Russell 3000 board included 8.9 members in 2015, compared with an average of 9.0 members in 2014. Of the Russell 3000 boards, 32% have independent chairs, compared with 33% in 2014. With respect to board refreshment, 72% of those surveyed reported adding a new director to the board in 2015 compared with 64% in 2014. Boards added an average of 1.2 directors in the past year. With regard to board composition, according to the survey, the percentage of boards with at least one female director increased from 67% in 2011 to 79% in 2015. However, racial and ethnic diversity (boards with at least one director from a racial or ethnic minority) remained static from 2014 to 2015 (52%), but reflected an increase of four percentage points from 2011.
Board overload is becoming an increasingly common concern (see this PubCo post and this PubCo post). The survey reports that directors spent an average of 248.2 hours on board-related matters in the past year (up from nearly 191 hours in 2005), while board chairs spent an average of 292.1 hours on their board responsibilities. The annual time broke down on average as follows: attending board and committee meetings (73 hours), reviewing reports and other materials (61 hours), traveling to/from board events (38 hours), informal meetings or conversations with management (30 hours), director education (19 hours), representing the company at public events (8 hours) and other activities (20 hours).
The level of board engagement with institutional investors has remained relatively steady from 2014 (43% of boards have had meetings) to 2015 (44%). According to the survey, the topic most frequently discussed was “executive compensation philosophy and pay-plan design.” Boards responded to challenges regarding executive compensation by providingeven longer proxy statement discussions of compensation (36%), plan amendments (28%) and implementation of or changes to dividend programs and stock buybacks (18%).
Not surprisingly, when designing executive pay plans, the time horizon for defining “long-term” (as in “long-term financial performance”) was most often (68%) reported to be less than or equal to three years. Only 22% of those surveyed reported using a time horizon of five years or more.
Sidebar: As discussed in this PubCo post, some consultants have contended that the use of the three-year time horizon frequently associated with performance-based restricted stock grants may not really be long enough, especially where the performance measure is relative total shareholder return (TSR). In fact, they contend, perhaps with a touch of hyperbole, it has the “potential to be dangerous” because the “payouts to executives may reward short- to mid-term stock price volatility rather than sustained long-term TSR performance.”