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Source: The Wall Street Journal  | CFO Journal, March 27, 2013 posting


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CFO insight and analysis written and compiled by Deloitte

Boards Spending More Time with Shareholders: Board Survey

March 27, 2013, 12:01am

More corporate board members are engaging directly with shareholders, and industry experience is seen as the top attribute sought in new directors, according to a survey report prepared by the Society of Corporate Secretaries and Governance Professionals and the Deloitte Center for Corporate Governance.

The report, 2012 Board Practices Report: Providing Insight into the Shape of Things to Come, is based on responses of nearly 200 corporate secretaries to questions on more than a dozen board practice areas. Topics include risk oversight, board use of technology, corporate responsibility, shareholder engagement and board and committee structures.

The survey found that board and company executives at organizations of all sizes reported interaction with shareholders. The proportion of public companies with special meeting rights for shareholders increased among large- and mid-cap companies (71% of large-caps responding to the 2012 survey have such rights, compared with 61% among 2011 respondents). However, a comparison of responses received in 2012 with those in 2011 does not show that companies have lowered their thresholds for calling such meetings, despite shareholder pressure to do so.

In the 2012 survey, approximately one-third of small- and mid-cap companies (38% and 33%, respectively) reported meeting with up to 5% of their shareholders, while 44% of large-cap companies reported meeting with more than 20% of their shareholders. Individual board members have also engaged in direct contact with shareholders. Among large-cap companies, 55% reported that at least one director met individually with a shareholder, and at small-cap companies, 58% said at least one director met individually with a shareholder.

“We have seen an increase in overall engagement between management and shareholders. In some cases, shareholders inquire about meeting with board members, and as a result, interaction at that level is on the rise,” says Maureen Errity, a director, Deloitte Center for Corporate Governance, Deloitte LLP. “There’s no longer the sense that boards operate behind closed doors.”

When asked what traits they look for in new board members, 47% of overall respondents to the 2012 survey stated that industry knowledge is the most important trait, almost double most other desired skills. Among public companies, that number rose to 51%, with C-level experience as the second most desired attribute (37%) for board members, followed by international business exposure at 30%.

“What we’re seeing in practice and in recent academic research on corporate boards is that subject matter knowledge of independent directors is correlated with better performance, and some investors are showing increased focus on this aspect of board composition,” says Ken Bertsch, president and CEO of the Society of Corporate Secretaries and Governance Professionals. “Our survey suggests that U.S. boards also increasingly are taking account of industry experience in choosing new directors.”

Board and Shareholder Meetings and Audit Committee Meeting Practices

Boards are meeting more often and for a longer duration, according to the 2012 survey results. For example, 53% of financial services companies report meeting 10 or more times per year, compared with 23% of nonfinancial services companies. This represents an 11% increase by financial services companies since the 2011 study, which surveyed participants on a similar question. The 2012 survey results show an increase in large- and small-cap companies meeting more often, with a 10% increase in small-caps meeting at least 10 times during the last fiscal year. Board meetings are also longer; 42% of mid-cap, 50% of large-cap and 37% of small-cap companies report meetings of six or more hours, excluding committee meeting time.

Audit committee meeting practices have changed little. Similar to results from 2011, the majority of public companies hold up to five audit committee meetings in person (78%) and up to five meetings via conference call (79%), according to responses to the 2012 survey. With regard to audit committee holding separate meetings to review earnings releases, the most significant change is among large-cap companies; 58% report doing so, an 18% increase over 2011.

Slight Increase in Public Boards’ Focus on Strategy, but Relatively Little Time Spent on Strategy Risks

Fifty-four percent of public companies surveyed in 2012 report discussing strategy at every board meeting, compared with 52% last year. However, some may find it surprising that the number of companies discussing strategy at every meeting is not higher, given that strategy and its continual monitoring are key areas of board responsibility.

Compared with 2011, 2012 saw a 21% spike in the number of small-cap companies holding off-site strategy meetings with management, but there has been little change for mid- and large-cap companies, which have traditionally done so annually.

Boards spend some of their time specifically discussing risks associated with the company’s strategy. Among public company respondents to the 2012 survey 38% say their boards spend between 10% and a quarter of their time discussing risks associated with the company’s strategy, and 22% say they have such discussions one- fourth to one-half of the time. Few companies report a frequency greater than 50%.

Slight Gains in Board Diversity

Among public company respondents to the 2012 survey, just 18% of boards are composed of at least 26% to 50% women. That figure is slightly higher among boards of large-cap companies, at 22%. Across all public companies, 15% of respondents to the 2012 survey said they have had an increase in women directors since the previous survey was conducted in 2011.

Just 11% of the public companies surveyed have between 26% and 50% minority directors, and nearly all respondents report no increase in minority board director representation in the past year. “When it comes to board diversity, there appears to be an opportunity across public companies to consider an increase in the number of women and minority directors,” says Ms. Errity.

On the issue of director age, 95% of respondents from public companies said the youngest director on their board is more than 40 years old. Interestingly, almost none of the large-cap companies have directors under age 40, but 13% of small-caps do. “As more companies explore advancement through social media and other related ventures, there may be an increase in younger directors on boards, since this demographic is often considered more advanced in technology and social media matters,” Ms. Errity adds. In the last year reports on social media were given to boards at about half of the large-cap companies surveyed and at about one-third of the small- and mid-cap companies surveyed.

Variations in Board Classification and Majority Voting

The report also showed a greater number of shareholder proposals seeking declassification, particularly at mid- and small-cap companies. The proposals seem to be having the desired effect: the trend for mid-cap companies is toward declassification. However, the survey results still show an almost 50-50 split for small-cap companies on board classification. This is a stark contrast to the 14% of large-caps reporting a classified board structure in 2012, the same percentage as in 2011. Overall, 30% of public company boards are classified.

In another area of focus for shareholders, majority vote policies for uncontested director elections remain on the rise as a result of shareholder proposals. Of the small-cap companies represented by the respondents, one-third has majority vote policies for uncontested director elections, and at mid-cap companies, two-thirds do. Meanwhile 86% of the large-cap companies have such policies.

CEO Succession Planning and CEO/Chairman Roles and Culture

Results from the 2012 survey show that CEO succession is reviewed by the full board once a year at well over half the companies responding (61%), and another 29% review it more than once a year. However, only 17% of companies said they disclose their succession plan policies or practices.

Slightly more than half of the respondents reported a split between the CEO and chairman positions, with 52% combining the position and 48% splitting them, according to results from the 2012 survey. This is a reversal from 2011 results, in which 51% combined the roles; the change appears to be driven primarily by mid-cap companies.

Thirty-three percent of respondents report taking steps to create or enhance a culture of candid and open communication in 2012, up from 28% in 2011, while 32% say they conduct cultural surveys annually. Further, there has been an increase in companies that have management review cultural survey findings with the board.

About the 2012 Board Practices Report

Deloitte analyzed responses from nearly 200 corporate secretaries who are members of the Society of Corporate Secretaries and Governance Professionals. Respondents represent 158 public companies, categorized as large-, mid- and small-cap and financial and nonfinancial companies and 37 nonpublic entities.

Read the Full Report: 2012 Board Practices: Providing Insight into the Shape of Things to Come prepared by the Society of Corporate Secretaries and Governance Professionals and the Deloitte Center for Corporate Governance

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