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Board Primacy

18 March 2019

Board Primacy

It should come as no surprise that board effectiveness and accountability appear at the top of the list of issues shaping relations between companies and shareholders in 2019. Corporate governance reforms and evolving shareholder attitudes have brought corporate boards under intense scrutiny in recent years. In addition to their critical role as strategic advisors to the CEO, directors now have a “day job” that includes a growing list of specific responsibilities for which shareholders and stakeholders hold them accountable.

In preparing to deal with these issues and meet shareholder expectations in 2019, companies and boards should pay attention to the following topics:

  1. Board composition – In Morrow Sodali’s 2019 institutional investor survey, respondents gave highest ratings to board members’ skills and independence as factors affecting shareholders’ decision to support the election of individual directors. Companies should make certain that their directors’ qualifications and contributions are explained in detail in the board profiles, skills matrix and other narratives describing board functions.

  2. Governance Policies and Practices – Shareholders assign the board primary responsibility for corporate governance policies and practices. Survey respondents rated governance highest in importance when making voting decisions. Our advice to companies and boards is to explain how their governance decisions are linked to their business circumstances, long-term strategy and performance goals. Contextual, performance-based explanations are particularly important to retain shareholder support when companies face opposition from proxy advisory firms.

  3. Engagement – Since proving effective in say-on-pay campaigns, engagement has become the favored route for companies to take their case directly to shareholders. Face-to-face meetings or conference calls with directors and senior executives give shareholders a look deep inside the boardroom and an opportunity to get to know the individuals who run companies. Survey respondents indicated that engagement programs help them understand the board’s role and policies relating to business strategy, capital allocation, corporate culture, tone at the top, environmental and social practices and long-term sustainability. In just a few years, shareholder engagement has become an established line of corporate communication supplementing Investor Relations programs, corporate reporting and regulatory disclosure.

  4. Shareholder Activism – After a decade of high-profile initiatives, strategic shareholder activism has achieved a new level of legitimacy. At the same time, companies have learned the important lesson that preparedness and a proactive response can increase their ability to prevent or defuse activism. “Think like an activist” has become shorthand for reducing vulnerability through a fundamentally sound, long-term approach to running the business well. In a market that sees value in activism, the goal for companies and boards is to know, understand and earn the confidence of key investors; manage risk; maintain good corporate governance; monitor trading activity and market value; and be prepared to confidently defend corporate strategy against opportunistic, short-term activists.

  5. Corporate Purpose and Sustainability – One of the most arresting developments of the past few years is the effort by leading businesses and investors to redefine the purpose of the corporation. This movement parallels efforts to reduce short-termism, recognize so-called “non-financial” risk factors and promote corporate behavior and values that will achieve “sustainability” over the long term. For boards, this trend requires increased attention to corporate culture, ethics, risk mitigation, reputation, environmental practices and social policy, as well as corporate governance and shareholder value.

Given the scope of the board’s reach and responsibilities, it is fair to say that Board Primacy is replacing Shareholder Primacy as the dominant factor shaping the character and ultimately the success of publicly traded companies.

Read more about the trends currently altering both the expectations of shareholders and the ways that companies are viewed in the marketplace.

Board Primacy
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