FacultyFaculty/Author Profile

Nom. and Gov. – Relentless Push for Improvement on All Fronts              


MEREDITH CROSS: Welcome back, everyone. I can confirm it is not snowing. We are now going to have our nominating and governance committee panel. And this one is appropriately named Relentless Push for Improvement on All Fronts. This has been surprising to many that this has become probably one of the harder hit committees lately.

And we have a fantastic panel to discuss the key issues that nom and gov is facing. We are lucky, very, very lucky to be led by Brian Braheny. Brian Breheny is a partner at Skadden in DC.

I worked with Brian for a long time at the SEC in Corp Fin. He was the deputy director overseeing policy when I went to work there. And I was very lucky to come in place to a terrific deputy. And he's a leader in all things corporate governance, and we're very lucky to have him here to lead the panel.

I also want to mention that Kellye Walker, the general counsel from Huntington Ingalls who was going to be joining us here today, her flights were all canceled trying to get up here in the storm. And so she's going be joining us by telephone, I understand. And I want to thank Kellye for doing that. And we're sorry you're not here, and we're going to get you to come back next year. So with that, I'll turn it over to Brian.

BRIAN BREHENY: Thanks, Meredith. Thanks for the kind introduction. Good to be here, finally. We had another stormy day here in the Northeast, so glad to see some folks in the audience. And sorry Kellye couldn't join us. I know she tried mightily to be here. But thankfully, she'll be on the phone, so we'll get the benefit of her wisdom.

As Meredith mentioned already, we're here to talk about nominating governance committee. A relentless push for improvements on all fronts. This morning, I got an email from the Financial Times, where they published an article that was entitled, Boards Bend to Nom Gov, quote, Perfect Storm. I said, this could be ideal.

And lots of reasons. The storm that we're having today, the storm we had over the first day we had the event, and of course, the storm that the folks who are on nominating governance committees and advise nominating governors committees have been thinking about this year. The article by the way-- which was in the agenda section of the Financial Times-- focused on a number of things. But in particular, the disclosures that a number of market participants have been pushing-- companies and the nominee and governance in particular-- to think about with regard to their proxy statements.

And in the article, they pick up on some early disclosures, like from the folks at Zoetis, and at United Technologies, and IBM have already published or filed their proxy statements. So you're already starting to see some reaction to the push for increased disclosure regarding diversity of board members, and in particular, what's included. We'll talk about that in a minute.

And then the other point that the article focuses on is how some of the companies are responding to the push for an increase in the diversity of board members, not just a disclosure about increasing disclosure about their process for identifying board members and increasing the diversity that's considered as part of the process, but also specifically what the results are. And in that section, they focus on board decisions, such as Coca-Cola, Goldman Sachs, and in particular, about some of the disclosures that they included in their proxy statements about where they are now and where they hope to be. So anyway, worth a read, I would suggest. We're going to get into those topics. But I thought, as I mentioned, it was perfectly on point.

I'm joined today with an outstanding group of folks to talk about these issues. First up, Amy Borrus, who's the deputy director at the Council of Institutional Investors. You may know that the CII is a not for profit, nonpartisan association of employee benefit funds, state and local entities charged with investing public assets.

Their members assets combined over $3 trillion. And CI focuses on promoting good corporate governance and strong shareholder rights. And Amy plays an instrumental role in all sorts of aspects of CII. So thank you, Amy, for joining us.

Julie Daum-- who is to Amy's right-- is the practice leader for North American Board Services at Spencer Stuart. You may know her and her colleagues for the outstanding index that they publish every year, which is incredibly helpful. I think we included this in your materials. So hopefully, you get a chance to take a look at it. This is an overview of all sort of things on US boards that they put out every year.

Julie in her job consults with corporate boards and companies of all sizes. She's conducted more than 1,000 board director assessments, and recently recruited outside directors at companies like Johnson and Johnson, and GE, and Amazon, World Bank, and the list kind of goes on and on. She is a well-noted expert in this area, so we're very much happy to have Julie with us. So thank you,

MEREDITH CROSS: I'll jump in and say that I sought her out after seeing her speak at a program, and thought she had exactly what we needed for today. So we're so excited you're here. Thank you. It was a cold email from me out of nowhere and you said yes, so thank you.

BRIAN BREHENY: Well, thank you for that. Yeah. It's great to have you.

And then last but of course, not least is Kellye Walker, who's the executive vice president and general counsel at Huntington Ingalls Industries down in Newport News, Virginia. Kellye's a senior legal executive, has been for over 20 years in all sorts of different organizations. Huntington Ingalls is America's largest military shipbuilding company and provider of services to companies and military.

And we very much appreciate her joining us. As I mentioned earlier, she was on her way, but unfortunately get stuck with the storm. So Kellye, can you hear me?

KELLYE WALKER: I can, Brian. And hopefully, you guys can hear me. Thank you so much. For allowing me to participate by phone.

BRIAN BREHENY: Absolutely. Yeah, we can. So thank you. Thank you so much.

OK, so on our agenda-- and we intend to hit hopefully all of these-- the impact of active index fund investors, board refreshment. What is the goal and how do we get there? How do we avoid over-boarding while competing for directors that have specific skills.

Addressing calls for diversity disclosure and a say in selecting directors. This is the sum of disclosures I mentioned that was covered in that article came as a result of this push by the New York City controller's office. We're going to talk about that.

Proxy access, has it made a difference? I'm sure other panels today have already talked about sort of where we are and the state of proxy access. We're going to really focus on proxy access from the governance and nominating committee side of the proxy access. And then finally, sort of other key issues impacting the nom and governance committee.

First up however, we're going to ask Julie if she would to kind of take us through sort of where we are today. What are the current stats? What has been the-- just give us a lay of the land with regards to boards and diversity and board recruiting. So Julie, I'll turn this over to you.

JULIE DAUM: Thank you. So Spencer Stuart, which is the leading search firm in recruiting directors and CEOs, we've been doing this research for 30 years that Brian showed you. And so I thought I'd give you a summary of it for this here so you don't have to read all of it.

But I have been involved in writing it for 24 years, and for many of those years in the beginning, nothing ever happened. It was the same year in and year out. And in fact, now you just see a tremendous amount of change in what's going on in board composition, compensation, things like that.

But one thing that is true for US boards is there's very little turnover. And I'm going to talk a little bit later about why that is. But there really isn't very much.

So this year was a record year. The number of new directors in the S&P 500 was 397. That's the most it's been in a long time.

And it sounds at first-- well, that's a lot. But if you really did think about 397, it's probably somewhere about 8% of board seats turned over. So 48% of boards in the S&P 500 did not recruit a new director this year, and that's pretty typical.

For the first time in history-- this was quite something-- more than half of those new directors were women or minorities. And that was a significant change. 36% of the new directors were female.

But what that means is when you take-- so 36% of the new directors, but then if you look at-- as I said, because there's so little turnover, and the denominator doesn't change very much, that when the numerator changes, it doesn't have a huge impact. So this year, 22% of the S&P 500 board members are women, compared to 21% last year.

So there's progress. There's a greater percentage of new directors are women. But it has a very slow impact.

14% of the new directors this year were diverse men. So that was also up. Those numbers are less of-- are harder to get at. We don't have as long of a track record measuring that.

Sorry. So what we find is not only was there more diversity this year in the room, but that boards are looking for different kinds of directors. And so profiles look different.

So 45% of the new directors had never served on a board before. And that is up significant. So 32% in 2016, up to 45% now. That is a big number. And so all of a sudden, the board room is opening up for people who were not part of the old boy, old girls club. People who look different.

One of the reasons for that is that if you take a step back and think about what was always the ideal director was an active CEO. Now only 37% of CEOs serve on an outside board. So they used to serve on three outside boards. So that was always the candidate pool. A Board would say, well, we should get another CEO who is the CEO of a company larger than ours.

But in fact, CEOs are limiting the amount of time they spend outside of their own company. It's harder to be a CEO today, and it is harder to be a board member, and their boards are telling them they should focus at home. So only 37% of CEOs serve on boards. So what that means is that those people have to be replaced by a different candidate pool.

So in terms of female representation, 80% of the S&P 500 boards have two or more women. I think only four boards now don't have a woman on their board. 41% have three or more, which is really quite astounding. But when you look at the leadership of this-- sorry, I'm gong to go back-- I think this is interesting. Only 2% of companies have a woman serving as an independent chairman, and only 10% of companies that have a female lead or presiding director.

So women are in the room. If I go back one slide-- and then this is their leadership in chair positions, which is slowly creeping up to around 20% for the chairs, which is about what it should be since women are 22% of the board seats. So you're seeing them take over committee chairs, but you're not seeing them take the lead director role.

Just as an aside, 51% of boards have a split chairman CEO. That's the first time we've gone over half. But what that really means, if you look at some of those chairmen could be the former CEO and are not independent. 28% of the S&P 500 have independent chairmen now.

And that is a big increase, and especially because if you think about getting an independent chair, companies do not go out and tell their CEO, you're going have to step down from being chair. We're going to go out and recruit somebody to be a chairman. So the only time boards really have this discussion about do we get an independent chairman is when they bring in a new CEO.

And then you have the conversation about what do you want the leadership of that board to look like. Do you want to give that title to the CEO, or do you want to have somebody independent? So the fact that it's up to 28% is a significant increase because a lot of companies haven't turned their CEO recently. So that just gives you a sense of that.

So what we are looking for, and as you think about new directors, is changing. First of all, as I said, you saw that whole group of people who are new directors, never been on the board, meaning they have no governance experience. That's really significant.

And one of the things that we're seeing-- and I'm sure some of this is the impact of the investor community and the activists-- but 30%, almost 30% of our new board members have financial backgrounds. And it used to be that might be a CFO. And it's moving towards people who have investment backgrounds. 13% of the new board members had investment. And that really is the impact of the activist community.

MEREDITH CROSS: Julie, can I just jump in for a second and ask about the impact of bringing in people who've never been on a board, and how do boards consider those candidates? Because you don't know what you're going to get.

JULIE DAUM: Exactly.

MEREDITH CROSS: You might get some new perspective. Maybe these people actually know what young people want to buy or something like that. But how does a board deal with that?

JULIE DAUM: It's really very different because usually-- not always, but a lot of times if you have a new director like that, they are much younger. They might have a tech background, they might have a digital background, they might have a cyber background. And not only have they never been in a boardroom, on their board, there's a really good chance they don't even present to their own board.

So they are new to the boardroom. It's not as if, like, a CFO sits through every board meeting. These are people who really do not know what a board does. And so the impact to the company, the positive is you have people sitting around the room who are working in today's world, and a lot of the directors are not. They do not understand all the changes. So they do understand that. They understand the management's position, but they don't understand the role of a board member.

And so they need a different kind of orientation program. And you can't just give them a document say, this is what the company is about. Here's our audit committee minutes. They really need help understanding what a board does and doesn't do, and understanding the room.

They also have no interest in staying on your board until they're 75 and hit retirement age. So we have to explain to them that they have to stay on the board for more than a couple of years because they're like, ah, that would be cool to do. So we have to, like, no, no, this is a 10-year commitment. But they just bring an entirely different perspective, much of which is really needed in the room. But they need help to be effective.


JULIE DAUM: And the reason that we have so little turnover is that in the US, we use retirement ages to get turnover. So 73% have a mandatory retirement age. 42%-- I just can't get over this-- set this at 75 or higher. And that is an incredible statistic to think that yes, we're all living longer. We are hopefully all remaining active. But the notion that everybody ages to 75 the same way or has the same interest that they did when they joined a board is really, I think, quite incredible to think about. And this is why we have no turnover because everybody stays till they hit 75.

And so the CEO is like pulling their hair out because they have a board that doesn't have experience that's relevant to today's world. And one or two of those directors are probably their best directors, but not everybody. And so this is a huge problem for us. And that's why you just don't see turnover.

Boards don't have term limits. Less than 5% of boards have a term limit. Everybody uses retirement ages. Quickly, other changes we saw this year, 85% of boards are independent. 60% now the CEO is the only executive on the board. Average age has gone up again. It's now 63.1. That's because of the retirement age going up. Average compensation didn't go up much this year, only a fraction of a percent.

BRIAN BREHENY: I think this is where I'll pick up on that.

JULIE DAUM: I was just going to say, and that's it.

BRIAN BREHENY: Well, that's a lot. So thank you for that. So maybe I can ask Amy if she can weigh in now on the stats that you just heard and we discussed, and some of the other issues that Meredith brought up and we were discussing about. Bringing new people on, getting them up to speed. Perhaps they don't have the same type of experience that other board members had in the past or currently have in the boardroom. And then also this idea of board tenure or board retirement ages. And are concerns with your membership that boards are not refreshing themselves like they should?

AMY BORRUS: Well, it's kind of a glass half full, half empty situation. Julie's slides did outline a lot of progress. But when you step back, I think for a lot of our members, the overall impression is yes, the pace is changing, but it's still glacial. We went from 21% in 2016 to 22% of board seats being held by women. And this is just the S&P 500. If you widen the lens to Russell 3000, women held just 16.5% of seats last year.

And again, if you look more broadly, there are 140 boards in the S&P 1500 that are all male. So there's still a lot of progress to be made. And that's just on gender. If you look at minority representation on boards, and coming from the Julie's excellent report, which just looks at the top 200 of the S&P 500. But minority representation has actually stalled. The percentage of African-American and Hispanic or Latino directors on S&P 200 boards is actually, on a percentage basis, slightly lower than it was a decade earlier.

So again, there's a long way to go. And just to pick up on Julie's excellent points about turnover, yes, a lot of the problem is that mandatory ages have been raised, and there's not required term limits. But to some of our members, in a perfect world that shouldn't make a difference. The concern is that turnover is low because a lot of chairs, or independent directors, are not relying on robust director evaluations or board evaluations to encourage directors who perhaps were underperforming, or whose skills are no longer a priority for that company, to step down. We're just not hearing about those conversations. Thank you for your service. Our needs have changed.

BRIAN BREHENY: I know CII issues position papers about different topics. Is this one that you've thought about taking a particular stance on? Or have you focused on--

AMY BORRUS: On board diversity? Yeah. Well, yes. I mean, CII supports diversity in a very broad sense. Diversity of skills, experience. Gender is one of those. Age. Backgrounds. We don't have any particular initiatives around diversity because so many investor groups are doing that on their own. And I think this is something we'll talk about.

You have the Boardroom Accountability Project of the New York City Comptroller pushing boards on racial and ethnic and gender diversity, in particular. The 30% Coalition to get 30% of women on boards. Midwest Diversity Coalition. This is a group of about 10 institutional investors that are focusing on seven states in the midwest and encouraging them to adopt the Rooney Rule-- those who know football will know this better than I do-- but basically want to make sure that when there is an opening, that the candidate pool includes women and people of color. And they're doing this on an engagement basis.

And you have a lot of shareholders are picking up on this, and there's a lot of Cheryl the proposals being filed this year. I think the last count, there were about 35 that were filed this year. That's a record. About 19 have been withdrawn because companies have made agreements to change their policies. And some are still pending. I think a lot of those that are still pending probably will be negotiated away.

And in the background, kind of in the air, is we've just come off of six months of allegation after allegation regarding sexual harassment. And I think that has put a white hot spotlight on all issues around gender generally, and it's staying there.

ALAN BELLER: Brian, I don't know if you're going to cover this later. If you are, just shut me up. But diversity is a huge issue. But it's also kind of the most prominent issue in this whole problem of board succession and turnover. And until you can persuade boards that there has to be a process by which the CEO of the Nom and Gov committee can have serious evaluations, and tell Mr. Smith or Ms. Jones, you have been-- true or not-- you have been--and in most cases it has been true, not all. You have been a valuable director for 10 years, or 25 years. But your time passed, two years ago or 22 years ago, and it's time for you to go.

Julie's number is great. What was it, 397 new directors? We're not at the end of proxy season yet. But let's say it gets to 500. That's one per company. It's just never going to-- age limits aren't sufficient. There was a recent bank that had a horrible set of problems. And their answer was, oh, well, six of our guys are going to hit retirement age-- they were all guys, by the way-- six of our guys are going to hit retirement age over the next five years. That will solve our refreshment problem. That's nuts.

AMY BORRUS: And it shouldn't have to come to that. You shouldn't be waiting for somebody to hit retirement age.

ALAN BELLER: Exactly. And unless boards are willing to take the bull by the horns on this issue and refresh themselves, you will have term limits.

BRIAN BREHENY: So Kellye, maybe we can invite you into the conversation on that very point because you're the one on the panel that's the counsel to the governor's committee. As the general counsel of the company, these are hard conversations to have.

What would you advise your governance committee, in light of this push for diversity, tenure, refreshment, or any other issue that you want to comment on?

KELLYE WALKER: Sure. Thanks, Brian. So one of the things is making sure that the companies are having board succession conversations regularly, and that, for those of us who focus on this on a day-to-day basis, that sounds like a very obvious thing. But I've been at a number of companies, and so some companies don't have the conversation regularly. It's only when they think they may have a need, i.e., maybe someone's retiring, that they have those conversations.

But in my current company, the governance committee has a very regular conversation at practically every governance committee meeting where these things are discussed. And it's the full scope of considerations with respect to board refreshment. So looking at the strategy of the company to make sure that we have the skills necessary to help the company, for the board to help oversee the company in executing its strategy, looking at the skills and capabilities.

And I know we'll get into board evaluations a little bit later. But that's one of the ways that you look at the skills and capabilities. We keep a-- through our share of our governance committee, who is a woman, by the way-- there is a full set of CDs and bios of people who the board has come across, has come in contact with, and may be, at some point, appropriate for the board to approach as a board candidate. But the diversity discussion is a part of this whole regular conversation.

And diversity discussion, it can get diluted, quite frankly, if we're talking diversity of thought where somebody else is thinking diversity with respect to gender or race. But this board currently that I advise does very regularly talk about both the race and the gender qualification for board members, looking for what the company needs, first and foremost, of course, from the skills and capabilities perspective, but then trying to make sure that there are candidates who possess those qualifications that are also female and/or minority.

But I think the biggest thing is just making sure that it's a regular conversation, and that people are constantly thinking about it, and that the chairman of the board, as well as the chairman of the governance committee, are focused on it. One of the comments that came up-- and I think it was Tom, maybe, that made the comment-- that's a very difficult one-- so even if you have the conversation, this comes up, you find out that a board member's qualifications or what they bring to the table are stale, if you will, to have that conversation about moving on, is a huge challenge. It's a huge challenge.

I did serve as general counsel of one company that had both age and term limits. But the others that I've served on, including the current one, do not. There's age limits but not term limits. So that is going to continue to be a challenge as we try to move the dial with respect to board refreshment, and particularly with respect to board diversity.

BRIAN BREHENY: Yeah, absolutely, Amy. Go ahead.

AMY BORRUS: You mentioned that-- we've been talking about the conversations toward the end of somebody's board tenure. But I'm hearing that some companies are trying to have conversations as part of the onboarding process just to set expectations. We're so glad you've joined us. But we don't want you to think of this as a lifetime gig. I'm paraphrasing here. But we're glad to welcome you to our board. You bring certain skills. Our needs may change, just to build in the expectation that this is for a set period of time or for a certain number of years, but not necessarily the next 25 years.

BRIAN BREHENY: And I guess I'd ask you-- and Julie, you mentioned the sort of younger folks you need to remind that you anticipate they'll stay for some period of time that's not just a year or two. Are people having those conversations?

I have to tell you, not in counseling public companies, but in my own charitable organization I've sat on the board of-- boy, when you go to tell somebody that it might be time to move on, some people take it really bad. I always tell people, you will not have to ask me twice. I'll be out the door. Every organization I've been on, it's been you've got two year terms. We'd like you to stay in for six.

And then at the end, almost every organization I've been on, when I got to the end of my six, they say you should stay for one more term. And I'm always like, no. There's more people out there. Trust me, if I got hit by a bus tomorrow, you'd find somebody else to do it. Thank you. I'm glad you would like to see me stay. But let's go find somebody else to do it.

But that's not always the case. And I'm wondering if maybe it is not the expectation. They do see, hey, I've been on this board for 25 years. And so has so and so and so and so. And why am I being asked to leave, if they don't step it up and kind of do it themselves.

JULIE DAUM: I think there's something very human about this because if you are a 40-something year old, and you say, well, I'm just going to do this for 10 years, you'll be a 50-some year old. Then you'll have opportunities to do other things. But if you are somebody who's in their 70s, when you leave that board, you leave your corporate career.

And I think that's very hard. And I think that's what drives a lot of this is just it's boards are a social unit. And so you are asking somebody to give up what may be their relevancy in the corporate world. And that's very hard. And it's much easier to do that to somebody who is younger and who has other opportunities.

And I think people think about that. They've known each other for 10 years, and they don't want anybody asking them to go. And they don't want to ask Joe to go. And young people don't get this at all. But I do think it's a very human experience. And so if it isn't built in, it's going to be really hard to do because if it's theoretical, it's really easy to say, oh, yeah, yeah, we definitely do that. That makes total sense.

And then a human being is sitting across the table from you, and it's really hard to deliver the message. So these evaluations have to become systemic. You have to do them, or you'll never have these hard conversations.

ALAN BELLER: But can I quibble a little bit? Because why is board service the one-- I mean, 60-year-old, 65-year-old, 70-year-old, not to mention 40- and 45- and 50-year-old people get told you're fired all the time. And that's a much more a life-threatening issue than Ms. Jones or Mr. Smith doesn't collect their $250,000 anymore, and they're sitting on multiples of that.

And it's not a life tragedy. Why is there something so different about board service that makes people so much more unwilling to have this conversation than the conversation they have with valued employees who have hit the end of the road?

JULIE DAUM: It's also the only job you'll ever have where you don't get evaluated. I mean, think about it. It's like you get to decide who's in the room. You get to decide how much you get paid. And you get to decide when people leave. And there's no evaluation. It's a great job.

But it isn't realistic. I mean, it isn't what any other job looks like. So you're right. It's like you're evaluated your whole life, and then you get to this point--

ALAN BELLER: I'm on a public company board. And I've actually said, in the corporate context, I'm closer to the end than the beginning. And they-- oh no, no. Come back.

BRIAN BREHENY: What about offering some sort of emeritus status? Does that help with the transition? Do you see that happening in public company boards where-- to add the social aspect of it. So you're not an official board member, but if you'd like to come to some part of the board meetings. Do you see that happening? Kellye, I don't know if you've seen that in any organizations you've been involved in

KELLYE WALKER: I have not seen the emeritus status used. It's an interesting thought. Not of the companies I've been in, but is an interesting thought. But if we go back to the discussion that Julie and Tom were just having, one of the interesting things is if someone gets fired as a CFO or a general counsel or some senior executive, there are a bunch of those-- in theory-- a bunch of those roles, and I can go get another one. Yes, it's devastating to me and my family, et cetera.

In this country, and possibly around the world, we have billed being a director as being at the pinnacle. And they are few and far between. And so if we're completely honest, there's an ego involved in being asked to step down from something like that when you've reached this pinnacle. And so many people plan for board directorship as their sunset. And so they don't want to be asked to leave something that they have planned for as a part of their career passing, if you will.

And so it is a very different thing, and interestingly so. The emeritus status might help those who still want the social aspects and don't want to be completely off the radar, as Julie talked about, being truly the end of their corporate career. That's a very interesting thought. I have not personally dealt with that.

BRIAN BREHENY: I'm going to pivot here in a minute to talk about some of these other board diversity initiatives and what we anticipate seeing in them. But before we do that, Kellye, maybe-- because it was brought up a few times here on board evaluations. I know we thought if we had time, we would talk about that. Is there anything new that you could comment on?

And maybe as part of those comments, we can pick up the point that we're having now, which is the importance of using those to potentially have very hard conversations. And if you're doing them correctly, they could potentially lead to identifying maybe those board members who have some deficiencies that either could be improved, or maybe it makes sense for that person to rotate off the board.

So I can stop there and let you comment on board evaluations, what you're seeing, and any recommendations you have for folks.

KELLYE WALKER: Was that directed specifically to me, Brian?

BRIAN BREHENY: Yeah. I'm sorry to put you on the spot, but yes.

KELLYE WALKER: OK. No problem. So I'll answer this with a compilation of what I've seen in several companies in which I've had the privilege of serving as general counsel. So all the companies where I've been have conducted evaluations annually of the board. And they have ranged from the non-executive chairman actually having conversations with each member of the board just at a high level to having organizations outside of the company come in and conduct interviews as evaluations with a set of questions, to having something online with respect to full board evaluations.

Probably the most progressive I've seen is having objective sort of online questions for each board member to answer about the board itself as a whole and the way it operates, each individual committee and its operations, and then each individual board member evaluating his or her board colleagues with a follow-up from the non-executive chairman having conversations about things to follow up on anything that someone may or may not have wanted to put in writing.

And then probably the most progressive I have seen is, in that same company that did that--and this is an iterative process. It didn't start out with all of those pieces. Over the years it kind of added dimension to the evaluation process. Then the probably most progressive part of that process was where senior management, those who interacted with the board, the elected officers, if you will, of the company, were asked to then evaluate the board members, how they thought the board ran, how they thought the board interacted with management, and that sort of thing.

So I've seen the full range of board evaluation. Sometimes the information is very helpful. Sometimes it's not, as you can imagine. But as you said, we need to make sure that there is an evaluation process, and the hope is that the information gleaned from the evaluation will be used by the chairman of the board and the chairman of the committees to improve the performance of the board or committees, and if necessary, of individual directors.

BRIAN BREHENY: And Julie, are you seeing any changes in the board evaluation process? Are your clients asking you to weigh in to kind of dovetail with some of the points were talking about?

JULIE DAUM: You know, the stats don't change. Year in and year out, about 1/3 of boards do individual director evaluations. And almost never do we see somebody leaving a board before retirement age. Occasionally you'll hear about it. And that generally is if somebody is young, because if you're looking at a 50-year-old and saying, well, this person could be here for 25 years, you know you've got to do something. If you're looking at a 68-year-old, you're saying, you know, it's not that much longer.

So we haven't really seen them become an integral part of the conversation, which I think is the big problem. And I think that's why you see institutional investors pushing-- you would know, so sorry-- but pushing some of these issues is because boards are not taking responsibility for having turnover in their rooms.

So we don't see it. I can't believe we're not going to see it, but I've been saying that for a couple of years.

AMY BORRUS: This is why a lot of investors have been asking for greater disclosure about board evaluations. Not tell us what people said about each other on the board. But provide some disclosure about the process your board uses to evaluate itself or to evaluate directors. This is quite common overseas in Europe, European companies, and I think some Canadian companies, too.

We're starting to see more disclosure. But it's pretty boilerplate. Yes, our board does an evaluation every year. But investors would like some more comfort. They think if boards had to disclose more about what they actually do, they might do a more thoughtful job of evaluating themselves. At least that's the theory.

BRIAN BREHENY: And as you know, the listing standards that apply are very generic when they require companies to a board evaluation. It doesn't tell you whether it needs to be in writing, or conversations, or the report, or steps that need to be taken to address it. So I've worked with a bunch of different companies. And as Kellye mentioned, they run the gamut. Some do very detailed. And that's partly because either the governance chair wants to do that, or the person who's advising the governance has got passion behind it and see some benefits. Or it's somebody who thinks I'm going to kind of do what I think is the bare minimum, and I'll be able to check that box.

And maybe that's because that latter group feels like they don't have issues to address, so therefore it's not necessary. But I've also seen the board evaluation process being used incredibly effective by a governance person who weighed in with the questions beforehand, and had them drafted in a very particular way so that we could get feedback. And I went did calls with all the board folks and I asked lots of questions.

And at the end of it, although I wasn't necessarily privy to what her absolute end goal was, I did kind of put the pieces together afterwards and realized that she had every intention of not renominating somebody. And she didn't. And that partly was because she built a record. I think she had a record beforehand, but this kind of just dovetailed.

So it is a way that takes some time and effort. But it is a way to kind of, I think, to help in this area.

JULIE DAUM: That's when we see it is when there's somebody they want to move off, and they want to be able to build a consensus, to be able to say to that person, the board feels versus I feel as the chairman or as whatever. So that's when I see it. So talk about a few other--

KELLYE WALKER: I'm sorry. May I just make a comment on that?


KELLYE WALKER: First, Alan, I owe you an apology. I've been calling you Tom, so please accept my apology.

ALAN BELLER: Not a problem.

KELLYE WALKER: On the evaluation, there's a place between doing an evaluation and asking somebody to step down. And one of the things we may not be privy to, though I as a counselor to board and to the governance committee, do strongly suggest, is that if there is something that has come up in the evaluations where someone needs a refreshment, there are a number of programs, a number of opportunities where the companies can support a board member in continuing education, if you will, that might help him or her perform better.

Now if everything that they brought to the board is completely stale because they haven't been in corporate America for 20 years, that's a very different issue. But there are ways that, short of asking somebody to step off a board, a board can be refreshed, if you will.

BRIAN BREHENY: Great. OK. Well, thank you. So other initiatives we're seeing after the proxy access. And these stats, by the way, are based on the 2017 proxies and not 2018, which we're starting to get some better results on, but not fully.

So looking back last year in the corporate governance space, submitting a show of proposal to request that we have an independent board chair was the second highest area of focus with over 50 proposals. Although most of those did not pass, the average approval was about 30%. It is a hot topic. You saw earlier in Julie's stats that the percentage of companies with an independent chair was up 29%. So that's an area that was still to be focused on.

We got a number of companies last year, close to 40 proposals, on asking for reports or some sort of step to increase the board diversity. And that, by the way, was up from 28 proposals last year. Just to kind of give you example, Facebook got a proposal that they were able to get excluded from the proxy under other grounds. But the title was True Diversity Board Policy.

And what the resolution was a request of the board to adopt a policy to disclose--so it was a disclosure policy-- the following, and included a description of specific minimum qualifications that the board's nominating committee believes must be met by a nominee to the board of directors, and disclosure of each nominee's gender, race, skills, ideology, diversity, and experience that's presented in a matrix. We're going to talk about some more.

AMY BORRUS: Ideology, too. Interesting.

BRIAN BREHENY: Apple also got a proposal which they were able to exclude. There they were looking for the board to adopt an accelerated recruitment policy that required Apple to increase the diversity of senior management and its board of directors, two bodies that presently fail to adequately represent diversity and inclusion. And then they said in parentheses, particularly Hispanic, African-American, Native American, and other people of color. Again, that proposal wasn't voted on.

But we're seeing, and we have already seen this year as well, that this is an area that continues to get a lot of focus. Many of these proposals are either negotiated or withdrawn, or withdrawn based on negotiations. Or as I mentioned, they didn't get to a shareholder vote. Two of the nine proposals that went to a vote, however, received the majority's support. In that situation, the companies had no female members on the company's board. But on average, these proposals, the other ones that got voted on, got about a 20% approval process, which is up about six points.

Did you have something you want to add?

AMY BORRUS: Yeah, I did to want to jump in on one thing on diversity. I think that one point I wanted to make is for investors, the lens is widening beyond just the board. There's growing interest in pushing, I think-- I'm just jumping on what you said-- on reports on gender pay equity. Demands for that are increasing, or expectation of reports.

And also you're starting to see-- just recently we've had a major asset manager, State Street, teaming up with California State Teachers, a big pension fund, to ask boards in which they're invested to disclose gender data on senior management and across the ranks.

So it's not just about board diversity anymore. There is a growing interest in pushing for greater diversity of employment in general, particularly senior executives.

BRIAN BREHENY: So I don't want to spend too much time on these. But BlackRock has included this as one of their engagement priorities for 2017-2018. State Street, which Amy already mentioned, last year voted against the re-election of board members of 400 companies that didn't have any female representation on the board. Vanguard announced that it also expects appropriate diversity on their board. CalPers sent letters to companies.

And then finally, we've met this a few times, but the City Comptroller of New York has their Boardroom Accountability Project 2.0, where they've sent over 150 letters to companies asking that they include additional disclosures in their proxy statements about the directors' diversity. And they've asked that it be included in a specific matrix.

So anyway, there is a lot going on there. So I want to ask the panelists, what do you do in response to all of this? And Amy brought up another point, which is not just board diversity, but what else is going on within the company that needs to be talked about. Amy was quoted in an article in The Wall Street Journal a couple of weeks ago about the importance of boards being involved with dealing with potential sexual discrimination in companies.

Last night, if you made it all the way through 60 Minutes and you didn't get completely freaked out about this airline that looks like it might just fall out of the sky someday. There was not one but two episodes on that airline. They're not having a good day today.

The last segment was on the CEO of Salesforce, and how he was shocked by a report from internal HR folks that they didn't have gender pay equity at the company. And if you follow the story, that the head of Human Resources said, if we're going to really figure this out, we're going to have to do an audit. And he said, we'll do an audit. And she said, no no, I'm not going to do the audit unless you commit to rectifying it. And he said, well, of course I'll do that. And she said, well, this could cost you some money. And he said, well, we're going to do it.

And it turns out it did. It cost them close to $3 million. And then apparently they did it again and found out that they had more issues. They acquired a lot of companies. So it's something that he has committed, now very publicly on 60 Minutes, that they're going to continue to do it. And he's surprised that more CEOs aren't interested in it.

So to Amy's point, we're not just talking about board diversity. We're also talking about other issues that are going on at the company. And there have been a number of shareholder proposals about gender disparity. I'm sure you heard from others today about those, and we're not going to get into that.

But of course, somebody at the board, the entire board, or some committee of the board, is responsible for managing and focusing on the company risks. And we've seen a number of very important CEOs and other executives, including one just last week, who had to step off of his board, where he was an incredible force in that company, because of allegations against him, or so reported allegations against him.

And so this is a risk for somebody on the committee. I think it oftentimes falls, or can fall, to the Nominating and Governance committee. So anyway, I wanted to tee all of that up. And I'm not sure who wants to jump in first. But maybe Amy?


BRIAN BREHENY: Because you're the one that was quoted in The Wall Street Journal.

AMY BORRUS: OK. Well, yes. From Weinstein to Wynn Resorts, it's just this series of allegations or revelations have shown just how damaging sexual harassment or instances of sexual misconduct can be to a company. And it's not just about reputation. It can also affect operations. And it's toxic, casts a toxic fall for morale.

And it's part of, I think, a larger discussion that investors and boards are having, or companies are having, about corporate culture. The National Association of Corporate Directors last year had a blue ribbon panel on this and put out a report.

And it seems that, in general, according to one survey done last year, boards haven't really, until recently, haven't really spent a lot of time focusing on sexual misconduct as a risk. And I'm sure any board worth its salt is probably doing that now and should be.

But because we sensed at CII that maybe some boards were struggling with how to do this, we did a report on How Corporate Boards Can Combat Sexual Harassment. It's on our website. It's free. And it's not a list of must do, check a box things. It's really potential steps for boards to take as they consider how to respond. And there's also a series of questions for investors to pose to boards about how they're dealing with this risk. But it's very real, and one would hope that this is a discussion that the full board is having. Culture doesn't slot into any one committee. And it's really for the full board.

BRIAN BREHENY: Kellye, is this a topic that you think in-house lawyers are focusing on, should be focused on? And if so, are there tips that you would give to anybody else who's thinking about it?

KELLYE WALKER: Sure. So yes. Yes. In-house lawyers absolutely should be focused on it. And whether it's with the senior management, with the board, with investors, we really try to incorporate a proactive approach. And so as the MeToo movement came up, of course, we started taking a look and making sure that through our compliance programs, that we were addressing things and asking the right questions such that if there were any issues, that they would come forward.

We also did have a briefing with our board on the kinds of things that we look at, what our policies are, what actions we as management have taken, again, to help the board be thoughtful and give them confidence that we're doing what we should do, and so in their role of overseeing, that they have some confidence in that.

But then, too, one of the biggest issues with respect to this kind of matter, like a MeToo movement issue or other significant risk issues that can also cause significant reputational problems, is really transparency between management and the board. And that relationship, whether someone who sits in my position, in addition to the CEO or otherwise, really there should be the kind of comfortable tension but transparency, so that that conversation can happen such that you reduce the likelihood of negative surprises.

On the MeToo issue with respect to shareholders, we haven't had those conversations. But around the board diversity, we have. And I imagine in this next cycle, we will. We've been proactive with our top institutional shareholders really to make sure that they clearly understand who we are, what we do, how we operate, how management and the board operate. And this is management talking to the institutional shareholders, understanding what's on their mind.

And that's when we had, the last couple of years, for example, conversations with large institutionals about their thoughts on diversity. So understanding the institutional shareholder's thoughts, making sure that we're incorporating things that are meaningful to them. And then being able to communicate with them what it is that we're doing as a company in a proactive way is also helpful.

So I do imagine that after this proxy season is over and we start to have that round of discussions with our large institutional shareholders, that this particular issue, the MeToo issue, will come up. But absolutely, folks who sit in my position need to be focused on this, and focused on it very clearly, both with their CEOs as well as with the board.

BRIAN BREHENY: And Julie, is this making recruiting new board members even more difficult with these types of risks? Are they coming up in conversations?

JULIE DAUM: I don't think so. I think it's really something the board is dealing with. But I think as you're going into a situation, I don't think it's something you think about. I mean, you try to do your due diligence to make sure that you're joining a board that doesn't have issues, which is actually very hard to do. But I think people assume that they're joining somewhere where that won't be an issue.

ALAN BELLER: Brian, what Julie just said, it's for another day. Maybe we should do this next year, how do you do due diligence before you get on a board.

JULIE DAUM: Very hard.

ALAN BELLER: Really intriguing question. MeToo is obviously a hugely important movement. But I think partly preceding it and very much as a result of it, there is, I think, lower tolerance for misconduct across a broader spectrum of human behavior than just sexual harassment. And I think that's a trend that's with us to stay. Management, employees, and directors are going to be held to a higher standard of personal conduct across the board.

KELLYE WALKER: I think you're absolutely right. And one of the things that we will-- particularly those in my position, and as we advise the board, that we'll have to watch as these issues arise and are rightly handled, we'll also have to watch claims for retaliation, or whistle blowing, that sort of thing. That's part of the swing of the pendulum, if you will, that we will also have to keep our eyes on as people are really focused on this, as we all should be, making sure that the pendulum is swinging too far the other way and giving rise to a lot of retaliation claims, which again, can get to the point of rising to the level of the board as well.

BRIAN BREHENY: Good point. So with the three minutes that we have left, I thought I'd ask the $64,000 question I know you all want to know the answer to, which is proxy access, has it made a difference? And I'm going to ask Amy, who is our representative of investors, who I'm not necessarily sure I've heard of investors pushing for it, although I'm sure some of them have. Has it made a difference? And CII was, I think, in the forefront of pushing for universal ballot, which I don't think is on the current agenda of the chair. It might be in that category of--

AMY BORRUS: Back burner?

BRIAN BREHENY: I'm leaving it to the next person who comes behind me. At least that's the way I'd characterize it. So has it made a difference?

AMY BORRUS: I think it has made a difference generally in that just the fact that it's out there. And I believe it's 65% of S&P 500 boards now have proxy access bylaws of some sort on their books. I think the fact that it's there, one hopes, makes boards think more carefully about who serves, who they're tapping to serve. But it hasn't been used, and I don't see any prospect of it being used this year. I don't see a poster child of bad corporate behavior out there strong enough that would justify using it.

I think we all do have to remember that proxy access was always envisioned as a last resort measure for really unresponsive boards. And for all of the reasons-- all the things we've been talking about today, and the fact that there is proxy access on the books at a number of companies-- boards have gotten more responsive to their shareholders. So maybe it won't have to be used.

Now universal proxy, you're right. This is something that we think, at CII, that it's something we pushed for. And the SEC did propose a rule for universal proxies for contested elections in 2016. And in our perspective, we think this just simply fixes a flaw in the rules that deny those who vote by proxy, the same voting options when it comes to voting on director candidates as if they were voting in person.

It's a fairness issue. It's why should you be able to vote for whatever combination you want of directors if you go in person to an annual meeting, versus if you vote by proxy, which the vast majority are shareholders, that's the way they vote, is by proxy. But the business community has-- I think there's some changing attitudes, but generally has pushed back on it out of concern that it would increase proxy contests, and also maybe give challengers an advantage.

We don't think there's compelling evidence for that. A Harvard study did not find any evidence that it would increase proxy contest. And frankly, in the past, it's been sought by both companies and dissidents without success because the way we have now, you have to agree to it. But we're hoping that at some point, universal proxy will be a reality, and that we can persuade Chair Clayton to move it up on his agenda.

BRIAN BREHENY: All right. Well, with that, thank you to all panelists. And I'll turn it back to Tom and Meredith.

MEREDITH CROSS: Tom? Thank you very much, Brian.

BRIAN BREHENY: Inside joke you missed, Meredith.

MEREDITH CROSS: Thank you very much, Brian, and the rest of the panel, and to Kellye on the phone. We appreciate it tremendously for the great panel. And we're going to move straight into the next panel, which is our ESG panel.

ALAN BELLER: Kellye, thank you so much for joining us.

KELLYE WALKER: Thank you very much for having me and allowing me to participate by phone. Thanks




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