'THE DAILY CORPORATE GOVERNANCE DIGEST' (for public company boards, the C-suite and GCs)
?????Please see the items below with the related links (NOTE: access to link content may be metered, require a no-charge registration or require a paid digital subscription)?
???????(i)?practical guide for directors in exercising 'independent judgement': Last month,?the U.K.?Chartered Governance Institute?published this guide for directors, "The 12 elements of independent judgement for a UK board: A guide for directors", authored by longtime governance expert,?
Sir Andrew Likierman, Professor of Management Practice at the London Business School and its former Dean. The guide describes itself as follows:
?????????"This booklet is to help directors interpret what independent judgement means in practice with practical guidance illustrated by examples.?It may also help to assure them and others that a process has been appropriate.?The twelve elements of independent judgement include?four?on?what goes into the ‘raw material’ of choices, four on?attitudes and feelings in making those?choices?and four on?the process of choosing.....
????????"Where the 12 elements of independent judgement come from:?The origins are in a framework to identify good judgement more generally....and its application in different contexts.?It is the result of research and interviews and has been tested on practitioners. The framework comprises: the quality of what is taken in by reading, seeing and listening; the trustworthiness of people and information; the relevance of experience and knowledge; the role of feelings and beliefs in affecting choice; the way the options are presented; and the feasibility, for decisions, of delivery...."
????????Below is a?list of the "12 elements" discussed in the guide,?from the guide's summary section:
????????"The raw material:
??????????--?Giving full attention to the written and spoken material presented
??????????--?Checking, and where necessary questioning, the information provided, including?measures and assumptions used?
??????????-- Avoiding undue reliance on a single individual’s expertise or the majority view?
??????????-- Taking account of context - objectives, precedents, relevant comparisons, legal?requirements and ethical issues
?????????"Attitudes and feelings:?
???????????-- Developing an informed view based on the appropriate method of challenge?
???????????-- Freedom from undue influence by sectional interests or agendas?
???????????-- Awareness of one’s own biases, agendas and emotions as well as collective?values, such as fairness?
???????????-- Understanding risk and uncertainty and how to mitigate them
?????????"The choice:?
???????????-- An environment where diverse views are encouraged and dissent is seen as safe
???????????--?Checking for the way options have been framed, including those which might have?been excluded from consideration
???????????--?Appreciation of the implications of trade-offs in the choice, including timing,?consequences and feasibility?
???????????-- Awareness of the need for any consultation on the choice with relevant?stakeholders and other interested parties"
?????????The guide's author,?Sir Andrew Likierman,?discusses the guide in this interview with?board portal provider,?Board Intelligence, "Sir Andrew Likierman: What independent judgment truly means for boards":
?????????"Firstly, what is “independent judgment” and what prompted you to produce this guidance for directors?"
??????????"It has two parts.?Judgment is being able to form opinions and make decisions based on combining personal qualities with relevant knowledge and experience. Independent is defined by the law and the UK corporate governance code. It includes not being dependent on outside interests and avoiding excessive dependence on the knowledge of others as well as providing fresh perspectives and holding management to account. I was prompted to look at it because Section 173 of the Companies Act says all directors should exercise independent judgment. But?I didn't find a definition of judgment (the one above is mine) and there is no literature explaining what independent judgment is, or how to achieve it. I also found directors were, understandably, pretty vague on the subject. So I decided to see if I could help by creating guidance for its use in practice.
????????????"How can the chair help?
?????????????"Chairs must recognise that independent judgement through challenge is important for the entire board. They should create a safe space for discussion and dissent.?I’ve worked with wonderful chairs who bring the best out of members even if they say something irrelevant —?which we all do from time to time. I’ve also worked with awful ones who are on a power trip and love the sound of their own voice!?The late Lord Ron Dearing got chairing right. He could move a meeting along and if someone went on a tangent, politely but firmly bring the discussion back to the issue. He created an atmosphere where everyone felt free to speak. He’d also remember who knew what and would ask that person for their opinion if they didn’t volunteer it. He really did his homework. I learnt a lot from him......
???????????"Finally, what can boards do to better exercise independent judgement?
????????????"I suggest that all boards need to reflect on how well they’re exercising independent judgment. The guidance, produced in consultation with the Chartered Governance Institute and after discussions with a large number of current and former directors, identifies 12 elements. Look through them to see what needs attention.?If an individual or a board collectively finds this difficult, I suggest asking someone trusted for feedback.?It’s also a matter of weaving independent judgment into existing mechanisms, such as inductions for new board members and board reviews. Indeed that’s the object of the booklet —?to help boards incorporate independent judgment into their current ways of working."
????????(ii)?report on the rising geopolitical risk that CEOs are facing/McKinsey with suggestions for boards and management on managing geopolitical risk:?
??????????(a) As discussed in this Aug. 3?Fortune CFO Daily Newsletter, "Business leaders must grapple with geopolitical risks—and expect to take a stand", global public relations firm,?Weber Shandwick, published earlier this month this report,?"Home Country as Stakeholder:?The Rising Geopolitical Risk for Business Leaders", based on a "survey?conducted online?between February 18 to April 5, 2021,?in partnership with KRC Research,?among?1,217 multinational business executives in 12 countries, all of the executives being?members of the C-suite (CEO, CFO, COO, CISO, etc.) or reporting directly to the C-suite, at large-sized multinational companies that generate a minimum of $500 million in annual revenue, and have a minimum of 500 employees."?Below are some of the interesting findings:
???????????"Are business leaders prepared for geopolitical risks?:
?????????????--?Nearly three-quarters (74%) of multinational executives agree their companies are more reactive than proactive about managing geopolitical risk.
?????????????--?Respectively, 55% and 56% say their company’s Board of Directors and senior leaders are not well prepared for geopolitical risk.
????????????"Pandemics, cyber attacks & data privacy are top-of-mind geopolitical risks?(note the reltaed table on p. 23 listing the risks identified by the executives surveyed, ranked by level of concern)
?????????????--?Nearly half (49%) of executives say their company is “very” concerned regarding disinformation about their company.
?????????????--?Relatively low on the geopolitical risk agenda are concerns that predominate in broader business and media conversations today.
???????????"National security exceeds diversity & inclusion, ESG and climate change in decision-making importance?(note the related table on p. 19 identifying the?factors that were most important to executives when making important business decisions, ranked by level of importance.)
???????????"Executives say vulnerability to geopolitical risks will grow.
????????????--?Nearly one-half of executives (47%) report that their company is more vulnerable to geopolitical risks now compared to five years ago. Four in 10 (41%) expect their company to be more vulnerable five years from now."
??????????(b) Below are excerpts from this?McKinsey?memo?posted on its website last month, "How global companies can manage geopolitical risk", based on?consutations McKinsey recently had "with top business leaders and legal, public-policy, and risk professionals at Fortune 500 companies in multiple industries":
?????????????"Companies are walking a geopolitical tightrope.?As political frictions inside and among regions heat up, the likelihood increases that they will affect a global enterprise’s operations, performance, or people.....After consulting with top business leaders and legal, public-policy, and risk professionals at Fortune 500 companies in multiple industries,?we suggest that company leaders can use a five-pronged approach to managing geopolitical risk.
?????????????"1.?Start with the board:?Many company boards already deliberate geopolitical risks to one degree or another. But the discussions often focus on a specific investment, project, or market entry or exit. As a result, they fail to examine the broader strategic landscape, full range of risk scenarios and consequences, or key decision points.?Instead, boards can dedicate regular standing time to analyzing how to respond to the
geopolitical risks that their enterprises face as part of a broader board effort to build?more resilient companies. Not engaging in such discussions in the current geopolitical context would be malpractice.
????????????????"One way to initiate a more strategic approach is by assessing the risks that matter the most to a business.?The business’s board can apply a materiality test to pinpoint what it should dedicate time to discussing......Boards can gain perspective by soliciting outside opinions on relevant topics from business and political leaders, embassies and other government agencies, and nongovermental organizations. Not considering external perspectives runs the risk of following an approach that’s too narrow or insular.?
????????????????"Providing a regular forum for a board to examine pressure points and operating realities from multiple perspectives and air diverging views doesn’t just improve decision making and establish an organization’s appetite for risk—it helps create consensus across leadership on the issues of the day.?Such a consensus can create a set of guiding principles—and, as importantly, a set of trust-based relationships and mutual understanding across the organization—that enables rapid, purposeful reaction grounded in a shared set of priorities when risk scenarios play out....."
???????(iii)?report on executive pay at the largest Canadian companies, with list of the adjustments they made in 2020 to bonus formulas/Bloomberg report on CEO pay in the U.S.?
??????????(a) Last week,?the Canadian Centre for Policy Alternatives (CCPA) released?this report?on?exceutive pay at the largest Canadian companies,?based on an anlysis of proxy circular filings of?209 publicly traded companies on the S&P/TSX composite index.?Note in particular?the table in Appendix B which catalogues all?of the?S&P/TSX companies?(in alphabetical order)?that changed their bonus formulas in 2020, in each case accompanied by the language in the company's proxy circular describing the adjustment. Below are some of the key findings of the report:
??????????????"--?Executive pay is up on average 17% in 2020?compared to 2019.?
???????????????????--?49 of Canada’s biggest companies modified their own compensation rules to boost executive bonuses during the pandemic in these ways?
??????????????????????-?13 companies awarded large direct bonuses via cash, shares, or options;?
???????????????????????- 8 companies excluded poor financial results or otherwise adjusted away the impacts of the pandemic;?
??????????????????- 24 companies altered the weighting, percentages, scores, or categories within performance evaluations;??
??????????????????-?4 companies shifted to different financial or time-based evaluations.?
???????????????????--?Among the executives who took “salary cuts” due to COVID-19, 52% saw their total pay increase anyway because bonuses overcame any salary decrease."
??????????(b) This Aug. 4?Bloomberg?report?on CEO pay in the U.S., "Elon Musk’s Outrageous Moonshot Award Catches on Across America", includes in particular the following two tables: "Highest Paid CEOs and Executives in 2020"?and "Highest Paid Women CEOs and Executives in 2020",?in both cases showing the?total compensation broken down?into?salary, bonus, stock awards, option awards?and?perks.
???????(iv)?Semler Brossy's post-mortem on the 2021 proxy season's 'say-on-pay' vote: Leading U.S. executive compensation consultants, Semler Brossy, recently posted on its website this analysis of the 2021 proxy season's say-on-pay vote, "Are 2021 Say on Pay Changes Here to Stay?" Below are excerpts:
???????????"S&P 500 companies have received more scrutiny and lower vote results:?Proxy advisors and institutional investors came down harder on large cap S&P 500 companies than Russell 3000 companies....(T)he S&P 500’s average vote result is below 90% for the first time since 2016.?Although the [S&P 500] average vote results show a more critical shareholder base,?the S&P 500 has a lower ISS “Against” recommendation rate at 10.2%, versus an 11.0% “Against” recommendation rate for the Russell 3000.?Starting in 2019, the expectation for larger companies to provide strong disclosure and proactively engage with shareholders?on more controversial pay actions, along with the importance of pay-and-performance quantitative evaluations, steadily increased year- over-year divergence.?This multi-year trend suggests a developing shift in voter mentality that accelerated in 2021.
???????????"These shifts in average vote results point to?shareholders having a more critical outlook on compensation design and changes for large cap companies (S&P 500)?than the broader market (Russell 3000)....?Controversial pay actions such as special awards and outsized CEO pay packages garnered more media attention at the largest companies. As a result, investors and proxy advisors tended to be more in-tune and critical of deviations from preferred compensation designs at these companies.
??????????"Shareholders Have Been Highly Critical of Special Awards and Long-Term Incentive Adjustments": ....We estimate that special awards were partly responsible for 57% of Say on Pay failures thus far in 2021, compared to 36% at this time last year. The impact of these special awards was magnified by the rapid equity market recovery following the initial Covid-19 decline.....S&P 500 companies that made Covid-related adjustments to the annual plan have received 2.7% lower average vote support than those that made no adjustments, while those that adjusted the long-term incentive plan have received 9.1% lower vote support.?ISS recommendations followed a similar trend. S&P 500 companies that made Covid-related adjustments to the annual plan have been twice as likely to receive an “Against” recommendation as those that made no adjustments. Those that adjusted the long-term incentive plan have been nearly four times as likely to receive an “Against” recommendation......"
???????(v)?quote of the day: From today's?WSJ?"Markets" Newsletter?(under, "Market Facts"):
??????????"On this day in?1976, Vanguard launched First Index Investment Trust, the first retail index fund, to howls of derision.?As Fidelity Chairman Edward C. Johnson III said that day,?“The name of the game is to do the best and I can’t conceive of investment managers not even trying to do better than average.”?Today known as Vanguard 500 Index Fund, it is now the largest mutual fund in the world."
???????(vi)??press release of the day:?Johnson & Johnson?announced last Friday in?this press release?the appointment of a new CEO, with the current Chairman and CEO transitioning to the position of?Executive Chairman, as follows:
???????????"Johnson & Johnson?today announced that Mr.?Alex Gorsky, currently Chairman and Chief Executive Officer, will serve as Executive Chairman of Johnson & Johnson and transition the Chief Executive Officer role to Mr.?Joaquin Duato, currently Vice Chairman of the Company's Executive Committee,?effective?January 3, 2022. Following the transition of the Chief Executive Officer role,?Mr. Duato will also be appointed as a member of the Company's Board of Directors.....Mr. Gorsky has served as Chairman and Chief Executive Officer of Johnson & Johnson since 2012......
?????????????"Anne Mulcahy, Lead Independent Director,?said, "Our Board of Directors has engaged in thoughtful long-term succession planning, and today's announcement demonstrates the strength of that process as well as our depth of talent at the executive management level to drive the Company's continued growth and success......."
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