Chief Investment Officer
Commercial Loan Automation
BirdsEye Viewdirector's responsibilities - mid-year update
Marty Lipton of Wachtell, Lipton, Rosen & Katz is one of the foremost industry experts on director responsibilities. He shares developments in expectations of directors periodically, and his latest perspectives appeared this week.
Marty’s list of director responsibilities is comprehensive. As I reflected upon his words of wisdom, I elect to highlight what seems to me to be the more recent changes in expectations from directors. Marty’s insights, and my perspectives as appropriate, are shared below.
What’s new (my highlights):
• Recognize the heightened focus of investors on “purpose” and “culture” and an expanded notion of stakeholder interests that includes employees, customers, communities, the economy and society as a whole and work with management to develop metrics to enable the corporation to demonstrate their value;
• Be aware that ESG and sustainability have become major, mainstream governance topics that encompass a wide range of issues, such as climate change and other environmental risks, systemic financial stability, worker wages, training, retraining, healthcare and retirement, supply chain labor standards and consumer and product safety;
• Oversee corporate strategy (including purpose and culture) and the communication of that strategy to investors, keeping in mind that investors want to be assured not just about current risks and problems, but threats to long-term strategy from global, political, social, and technological developments;
• Work with management to review the corporation’s strategy, and related disclosures, in light of the annual letters to CEOs and directors, or other communications, from BlackRock, State Street, Vanguard, and other investors, describing the investors’ expectations with respect to corporate strategy and how it is communicated;
• Set the “tone at the top” to create a corporate culture that gives priority to ethical
standards, professionalism, integrity and compliance in setting and implementing both operating and strategic goals;
• Oversee and understand the corporation’s risk management, and compliance plans and efforts and how risk is taken into account in the corporation’s business decision-making; monitor risk management; respond to red flags if and when they arise;
• Choose the CEO, monitor the CEO’s and management’s performance and develop and keep current a succession plan;
• Have a lead independent director or a non-executive chair of the board who can facilitate the functioning of the board and assist management in engaging with investors;
• Together with the lead independent director or the non-executive chair, determine the agendas for board and committee meetings and work with management to ensure that appropriate information and sufficient time are available for full consideration of all matters;
• Determine the appropriate level of executive compensation and incentive structures, with awareness of the potential impact of compensation structures on business priorities and risk-taking, as well as investor and proxy advisor views on compensation;
• Develop a working partnership with the CEO and management and serve as a resource for management in charting the appropriate course for the corporation;
• Monitor and participate, as appropriate, in shareholder engagement efforts, evaluate corporate governance proposals, and work with management to anticipate possible takeover attempts and activist attacks in order to be able to address them more effectively, if they should occur;
• Meet at least annually with the team of company executives and outside advisors that will advise the corporation in the event of a takeover proposal or an activist attack;
• Be open to management inviting an activist to meet with the board to present the activist’s opinion of the strategy and management of the corporation;
• Evaluate the individual director’s, board’s and committees’ performance on a regular basis and consider the optimal board and committee composition and structure, including board refreshment, expertise and skill sets, independence and diversity, as well as the best way to communicate with investors regarding these issues;
• Review corporate governance guidelines and committee workloads and charters and tailor them to promote effective board and committee functioning;
• Be prepared to deal with crises; and
• Be prepared to take an active role in matters where the CEO may have a real or perceived conflict, including takeovers and attacks by activist hedge funds focused on the CEO.
My perspective: The days when a company’s responsibilities and shareholders’ expectations revolved exclusively around giving the shareholders a good risk-adjusted return on their investment are over. Today, additional NON-FINANCIAL expectations are now fully incorporated into investor expectations as reflected by major investors, such as Black Rock, as well as ISS and Glass, Lewis. As a director, this added a complicated dimensions to my decisions, as some of the social aspects of bank activities can negatively impact profits.
While it has been documented that diversity makes for better decisions in addition to being an important social goal, there are often short-term dings on financial performance before long-term benefits are realized. Another interesting aspect is the impact of a brand commitment to an important environmental cause on its success among target communities. Take Patagonia, for example, whose commitment to environmental causes is lauded and clear. That brand positioning has worked exceptionally well among millennials and other customer segments are who bare primary buyers of Patagonia’s products, proving yet again that you can do good and do well at the same time.
It is heartening to see the investment community embracing social responsibility, although they have not let up on their financial expectations. Directors need to effectively balance their historical success measures with evolving, new metrics to help the shareholders and companies they serve evolve toward tomorrow’s expanding criteria for corporate success.