Annual Survey Shows Majority Voting Being Increasingly Embraced Even Among Smaller Companies, But Failing Incumbents Are Rarely Expected To Resign

NEW YORK, Feb. 20, 2013 /PRNewswire/ -- According to a report released today by The Conference Board in collaboration with NASDAQ OMX and NYSE Euronext, majority voting is increasingly being embraced as the standard for director elections even among smaller companies. However, when the company is small, incumbent board members failing to receive the required majority of votes are seldom expected to offer their resignation. In addition, the study revealed that almost half of the smallest companies (as measured by annual revenue) do not review political contribution practices, while formal policies regulating donations made by senior business leaders are rarely in place.

Director Compensation and Board Practice: 2013 Edition is based on a survey of 334 public companies jointly conducted by the three partnering organizations among their members. The Harvard Law School Forum on Corporate Governance and Financial Regulation, Stanford University's Rock Center for Corporate Governance, the National Investor Relations Institute (NIRI), the Shareholder Forum, and Compliance Week each endorsed the survey. Participants in the survey (corporate secretaries, general counsel, and investor relations officers) were asked to provide information on a wide range of corporate practices, including: board composition and leadership, director elections, anti-takeover measures, compensation policies, risk oversight, CEO succession planning, board-shareholder engagement, and practices on director performance assessment and retirement. The findings constitute the basis for a benchmarking tool with more than 150 data points searchable by company size (measurable by revenue and asset value) and 20 industrial sectors.

"Over the years, we have established an impressive database that documents evolving trends in corporate governance and board compensation. This data is quite valuable to our member companies using peer comparisons and industry benchmarks to make an informed decision on several organizational and oversight practices," said Matteo Tonello, Managing Director of Corporate Leadership at The Conference Board and an author of the report. "We are grateful to our partners on this annual project, NASDAQ OMX and NYSE Euronext, for their intellectual contribution to the study and their support in expanding the outreach of the annual survey."

"NASDAQ is committed to providing public companies with the tools to minimize risk by streamlining governance, risk and compliance activities.  With the complexity of today's corporate governance environment, we are pleased to support this valuable report to help companies fuel better business decisions," said Bruce Aust, Executive Vice President, Corporate Client Group, NASDAQ OMX.

Scott Cutler, Executive Vice President and Head of Global Listings for NYSE Euronext, stated, "NYSE Euronext is committed to supporting governance practices that reflect the highest standards of independence, oversight and transparency.  As the governance landscape continues to evolve, with shareholder engagement increasingly important, access to relevant governance and compliance-related resources is critical for public companies. We are pleased to partner with The Conference Board and NASDAQ OMX on this important annual report and believe it will be a valuable asset for companies, boards and their advisors."

The following are the major findings discussed in the report.

On director compensation:

• Directors are best compensated in the energy industry, but company size can make a huge difference. Computer services companies are the most generous with full value share awards, but equity-based compensation is widely used across industries and irrespective of company size.
• Stock options are not as favored as they used to be, except by the smallest companies increasing skepticism on the effectiveness of stock options and stock appreciation rights as long-term incentives has led to their decline, especially in the last few years.
• Additional cash retainers for board chairmen are seldom offered by larger companies, which are more likely to reward lead directors.
• A corporate program financing the matching of personal charitable contributions is the most common among the director perquisites reported by companies.
• Directors of large company boards take corporate aircrafts to board meetings, unless it is a financial institution.

On director qualifications and board service policies:

• While many non-executive directors have C-suite experience, the percentage of former or current CFOs serving on the board of financial services companies is lower than the ones for manufacturing and non-financial services.
• Larger financial services companies often set stricter director independence requirements than national securities exchanges.
• Larger companies continue to combine CEO and board chairman positions, while three-quarters of financial institutions have appointed an independent lead.
• Large financial companies are less inclined to use an over-boarding policy as it may impair their ability to attract director talent.
• As the workload and challenges facing board committees increase, member rotation policies remain infrequent.

On proxy access and director election:

• Majority voting is being increasingly embraced even among smaller companies, but incumbents failing to obtain the required votes are rarely expected to resign.
• According to the director nomination policy of large companies, diversity matters as much as business skills. Yet, aside from some level of female representation, corporate boards remain remarkably uniform.
• To limit expenses, most smaller companies avoid retaining search firm fees and use personal connections to recruit new director nominees.
• Proxy access rights and reimbursement of solicitation expenses remain marginal practices.

On anti-takeover defenses:

• Traditional takeover defenses (including poison pills and board classification) are being dismantled, while large financial companies tend to restrict action by written consent and prohibit special meetings called by shareholders.

On say-on-pay and executive compensation oversight:

• While an annual say-on-pay vote appears to be the standard for most companies, almost one-third of the smallest financial institutions opt for a less frequent consultation of shareholders.
• While designing new executive compensation policies, large financial companies set equity retention periods and go above and beyond regulatory requirements in the formulation of contractual clawback clauses.
• Large companies are more likely to enforce anti-gross-up policies.
• Compensation benchmarking disclosure also tends to be a feature of larger companies, with industry and company size the most frequently used criteria in the selection of the peer-comparison group.
• Compensation consultant fees tend to be lower than the amount for which disclosure is required.

On strategy and risk oversight:

• While directors of smaller companies collaborate directly with management in the business strategy setting process, larger company boards review strategy more frequently than others.
• Frequency of risk reporting to the board and the institution of chief risk office reveal the differing state of risk governance practices among industry groups.

On sustainability oversight:

• Responsibility for sustainability oversight depends on company size, with larger companies elevating it to the board committee level and smaller companies delegating it to the CEO.
• Environmental impact and, for financial services companies, data security are among the main sustainability items in board agenda.
• Boards of directors at almost half of the smallest companies (as measured by annual revenue) do not review political contribution practices, while formal policies for senior business leader are seldom in place.

On CEO performance review and succession planning:

• Small companies do not have a board process for the systematic and periodic review of their CEO succession plan.
• Formal policies on board retention of the departing CEO are uncommon, except in large companies where the CEO is formally required to also leave the board.

On board-shareholder engagement:

• Formal board-shareholder engagement policies begin to emerge, and may include the requirement for directors to actively participate in annual shareholder meetings as well as the adoption of a protocol detailing when and how shareholders can reach out to directors and expect a response to a material query.

On director education and performance assessment:

• Financial services companies of all size are ahead in the use of secure online technology for intra-board communication.
• More than one-third of companies with less than $100 million in revenue do not periodically evaluate their director performance.
• Approximately two companies out of 10 require their board members to attend some type of continuing education programs to remain abreast of regulatory and compliance developments.

Source:
Director Compensation and Board Practices: 2013 Edition
Report #1509, February 2013
The Conference Board /NASDAQ OMX/ NYSE Euronext

Access the report online at http://www.conference-board.org/publications/publicationdetail.cfm?publicationid=2438

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