With rising pressure on companies and their boards to describe and justify their governance practices coming from institutional investors, who are increasingly guided by broad corporate stewardship goals, companies have been looking for ways to enhance shareholder engagement. Companies have intensified their engagement practices and are increasingly holding meetings directly with the governance experts within major institutional investors. These “governance roadshows” are focused solely on describing (and seeking support for) governance policies and practices. The use of the company’s proxy statement and its corporate website has continued to emerge as an important tool to supplement these engagement efforts as it provides a direct, efficient and effective way to communicate a company’s overall governance philosophy as well as its approach to specific governance issues.
Company proxy statements and the corporate governance sections of company websites have always been the primary source for a view of a company’s governance structures, policies and practices, but many companies only disclosed information in order to meet SEC and other disclosure requirements. Many leading companies are no longer limiting their proxy statement and website to mandatory disclosures, but are using both as a vehicle for advocacy by making their governance case and laying the foundation for higher-level discussions during the shareholder engagement process.
In this insight, we explore the practices and trends of the Top 100 Companies in this area.
Selected “Voluntary” Proxy Statement Disclosures
We analyzed the Top 100 Companies’ disclosure practices on four key governance topics, which are not required to be disclosed under SEC rules: the director self-evaluation process, management succession planning process, sustainability and environmental stewardship and political and lobbying contributions. A considerable number of Top 100 Companies are making “voluntary” disclosures in these areas.
DIRECTOR DEMOGRAPHIC DISCLOSURES
Board Diversity Information
Board diversity remains a hot corporate governance topic, as institutional investors and proxy advisory firms continue to emphasize the importance of well-balanced boards composed of directors of different genders, ethnicities, areas of expertise, ages and tenures. While companies are increasingly presenting information regarding diversity, the specific approaches to disclosure vary. Some companies present the total number or percentage of the board that is gender or ethnically diverse, while others only present this information on an “aggregated” basis (i.e., “X are female, ethnically diverse or hold multiple citizenships”).
Board Skills Information
SEC rules require companies to disclose the “specific experience, qualifications, attributes or skills that led to the conclusion that the person should serve as a director for the registrant at the time the disclosure is made, in light of the registrant’s business and structure.” As a result of this disclosure requirement, companies typically discuss director experience, qualifications, attributes and skills as part of each director’s biography. As discussed in Board Diversity and the Skills Matrix in this Survey, there is a movement toward presenting this information in a matrix format so that shareholders can have a picture of the experience, qualifications, attributes and skills of the board as a whole.
Some companies take the approach of providing a “full” skills matrix format that identifies the specific experience/ qualification/attribute/skill of each director in a table format, with totals for each experience/qualification/ attribute/skill element presented at the bottom of the table. Other companies only present the aggregate number of directors possessing each experience/qualification/attribute/skill. Some companies do not present this information in either of these formats.
Director Age and Tenure
While SEC rules require that companies disclose the age of each director as well as the year that the director was elected to the board, they do not require that companies disclose the average age or tenure of their board. While shareholders can calculate age and tenure from information available in the proxy statement, companies have increasingly been providing this information as part of their description of the profile of their board.
ADDITIONAL PROXY STATEMENT DISCLOSURES
Companies provide additional perspectives with respect to their governance practices by providing the point of view of the CEO or the board on governance and by providing a proxy statement summary and/or an overview of the highlights of their governance practices.
In addition to the above, a small number of companies included a “voluntary” report from their nominating and corporate governance committee in addition to the required reports of their audit and compensation committees. In addition, some companies also provided additional perspectives on their corporate websites through director videos.
CORPORATE WEBSITE DISCLOSURES
Core Governance Documentation
Applicable SEC rules and the listing standards of the stock exchanges require that companies post their corporate governance guidelines, code of business conduct/ethics and the charters of their audit, compensation and nominating and governance committees on their corporate websites (or publish them at least every three years in their proxy statements). In practice, nearly all of the Top 100 Companies post these documents on their corporate websites.
Many companies that had an executive committee did not post the executive committee charter on the corporate website. Of the 36 companies that disclosed they had an executive committee, only 27 companies posted the executive committee charter.
As there is no rule requiring that companies post other core corporate governance documentation to their corporate websites, there is more variability in this practice.
CORPORATE GOVERNANCE POLICIES
As the movement towards transparency in corporate governance continues, companies have been posting various governance policies on their corporate websites. There is a considerable variability in the extent to which the Top 100 Companies posted their various corporate governance policies on their corporate websites, and many do not post them at all. The Top 100 Companies have also taken different approaches as to whether a particular policy is formulated as a “stand-alone” policy or is embedded into its corporate governance guidelines. Some companies do both — in addition to having a policy set forth in their corporate governance guidelines, they also present that policy on a “stand-alone” basis. Some of the most commonly found policies on corporate websites and the location of these policies are shown to the left.
Data in the above chart and below commentary is not mutually exclusive, as some companies disclose these policies and/or responsibilities in multiple places.
Eighty-one of the Top 100 Companies have a lead independent director and 19 have an independent board chair. As shown in the above chart, all 81 companies disclose the responsibilities of the lead independent director, including 10 companies that set those duties forth in a separate governance document. Of the 19 Top 100 Companies that have an independent board chair, disclosure of such persons’ responsibilities is made in corporate governance guidelines (nine companies), proxy statement (10 companies) or by-laws (13 companies).
POTENTIAL FUTURE ACTIONS
As disclosures in proxy statements and corporate websites continue to evolve as a means to communicate a company’s governance philosophy and its approach to specific governance issues, the following items are worthy of consideration:
• Use the proxy statement to describe the board’s perspective on key governance matters, such as a description of the board’s self-evaluation process and its management succession planning process
• Use the proxy statement to describe how the company defines and addresses relevant environmental and social matters and how the company engages in political spending/lobbying, including the board’s oversight role of these matters
• Provide comprehensive director gender and ethnic diversity and other demographic disclosures on a disaggregated basis in the proxy statement
• Present director experience/ qualifications/attributes/skills information in a matrix format in the proxy statement
• Present average director age and tenure information in the proxy statement
• Include a letter from the CEO, board chair and/or lead independent director that includes a discussion of his or her perspective on the company’s governance as part of the annual meeting communications
• Include a corporate governance and executive compensation “highlights” section in the proxy statement that presents an overall picture of the company’s governance philosophy and key governance practices
And do not forget the corporate website as a vehicle for communication on governance. Consider updating the corporate website to include downloadable and printable copies of the following:
• Corporate governance guidelines
• All committee charters
• Certificate of incorporation
• Key governance policies