The past decade has seen a sea change in Board room operations, driven by statute (Sarbanes-Oxley and Dodd-Frank, of course), SEC regulation, stock exchange rules and rapidly evolving best practices (ISS, activist stockholders, etc.). As a result, Boards are now far more sophisticated and business-like than in the old days.
A frequently overlooked consequence of this shift is that Board-related expenses have increased and diversified.
- Companies now draw members from much wider geographic areas, which increases travel related expenses.
- Companies often rotate the location of Board meetings, which further complicates the costs.
- Directors are more active and proactive in representing the company outside of the Board room.
- Directors are increasingly tech savvy and are using more efficient, and expensive, ways to access Board information.(e.g., laptops, tablets, smart phones)
- Training is more extensive, with many directors selecting and attending their own programs rather than, or in addition to, company-hosted presentations.
- Many directors serve on multiple Boards, each of which may have different, and inconsistent, cultures and practices.
One aspect of Board operation that has not kept up is reimbursement of director expenses. Yet, because no rule specifically requires the adoption of an expense reimbursement policy, most companies have not done so. Many companies continue their old method of ad hoc reimbursement, following a “this is how it’s always worked” mentality, or rely on the directors to govern themselves according to their own individual standards of conduct.
The good news is that truly egregious director expense misconduct is rare, and this is not likely to be the most important governance issue your company faces. Nevertheless, for the reasons described below, it is in everyone’s best interest to bring a reasonable level of consistency and control to the process.
- Directors want to know what the rules are. No one wants to operate in a vacuum when it comes to requesting reimbursement or making decisions about what to spend.
- Your Chairman does not want to get bogged down in these types of decisions, nor does he or she want to have an awkward conversation with a director who deviated from the “norm.”
- A policy provides protection against spiraling costs by setting objective standards and focusing everyone on cost-effective measures (in-house programming, bulk technology purchases, corporate travel rates, etc.).
- It is a good opportunity to ensure Board behavior is aligned with company-wide standards of efficiency and cost containment—the “tone at the top” concept.
- It will simplify reimbursement logistics for your directors, who may not know whom to ask or when or how.
- Your auditors (internal and external) want to know that proper controls are in place to ensure that accounts are being handled correctly.
Does the policy have to be long and detailed?
Fortunately, the answer is no. Frankly, it does not need to be a “policy” at all. Guidelines and outlines can work just as well. The point is to have something in place that provides clarity and consistency.
What is needed is a brief description of:
- who is covered (all directors, outside only);
- the expenses to be covered (“reasonably incident to” or specific categories, or both);
- which expenses are expected to be incurred directly by the company, rather than the director;
- the submission process (preapproval above certain amounts, form of documentation, to whom); and
- the reimbursement process (how soon, by whom, in what form).
You can certainly feel free to go into more detail regarding the company’s reimbursement philosophies, defined terms, sub-categories and common exclusions, much as you might for employee policies, but most companies are not that granular.
What’s the best way to implement a reimbursement policy?
The best way is whatever is easiest and least intrusive since, after all, this is not the Board’s highest priority. It should be thought of as an administrative, rather than governance, matter; although it really functions as both. Most companies do not include it as part of their Corporate Governance Guidelines, and there is really no need to do so.
Because of the internal control and financial aspects, you may choose to treat the policy as an audit committee task. A typical scenario might be as follows:
- The legal department prepares a draft in a style and scope consistent with the company’s other policies.
- The finance department adds details regarding process and documentation so that it works appropriately from an internal control perspective (but without layering on excessive complexity).
- The Chairman and Lead Independent Director might be consulted informally to be sure they have no concerns and are in a position to champion the policy to the full Board.
- The audit committee reviews and revises the policy at a regular meeting and recommends it to the full Board.
- The Board adopts the policy at a regular meeting (presumably with little fanfare).
- The policy is added to the Board’s regular materials for easy future reference.
If handled correctly, the adoption of a new director expense reimbursement policy should be a non-event since it should, in most cases, merely memorialize what is already widely followed practice. The primary purpose is to minimize future confusion or misunderstanding, rather than change current behaviors, assuming that a problem does not already exist.