Chapter 5 Flashcards
CONTRIBUTE TO ENSURING EFFECTIVE BOARD PROCESSES AND CULTURE
T 1.1 What are 6 steps to running efficient board and committee meetings (and considerations for each)?
- Scheduling board meetings: there are no requirements (beyond the annual shareholder meeting!), but there is a requirement to disclose how many board/committee meetings there are and name any director attending less than 75% of meetings
- Preparing for board meetings: 6 weeks prior - CEO and Chair discuss agenda, then chair gets feedback from directors, sends out agenda (when?) before the meeting
- Streamlining pre-reading materials: send out at least 1 week before
- Running board meetings: bod chair…
- Holding committee meetings: note - point person for mgmt re: committee is committee chair, not CEO
- Maintaining a strong board culture: genuine curiosity (company, industry, peers), balance between directness and collegiality
T 1.2 What are 3 questions to evaluate the board’s culture?
● How would directors describe the board’s current culture? How consistent or divergent are directors’ views? What are the areas of strength/concern?
● How closely aligned is the board’s culture with that of the company?
● To what extent does the design and structure of the board’s work program reflect the importance of establishing and overseeing a healthy corporate culture? Including, e.g., board and committee agenda design, board succession planning,protocols for boardroom dialogue (e.g., re dissenting views), protocols for reporting and interactions with management, timing and execution of executive sessions, defined responsibilities for the nonexecutive chair/ committee chairs, recruiting and onboarding new directors, participation in culture-related training
T 1.3 What are 4 challenges that boards and committees face in running efficient and effective meetings?
- Increased director duties: agendas are becoming more packed, including based on pushing of regulatory oversight items; potentially useful tools: create special committees for important but time consuming issues (e.g., M&A, cyber attack); monthly optional call between CEO and directors (so all can stay current)
- Record keeping and electronic devices: …
- Presence of officers in board meetings: have them only for specific topics/reasons
- Observers in committee meetings: open doors can stifle debate - watch out…
T 1.4 What are 6 guidelines for running board meetings and strengthening board culture
- Include summaries in meeting materials so that directors can easily digest information. Give the board enough time to review
- Build spare time into meeting agendas for unexpected, urgent items. Dedicate time in each meeting to long-term strategy and risk. Use consent agendas
- Dedicate the majority of board meetings to discussions, not presentations. Label for the board what the expected result is for each item
- Use outside advisors and consultants to supplement the board’s knowledge on issues that require a particular subject-matter expertise. Set up ad hoc committees to devote extra time to significant but temporary issues the board is working on.
- Encourage directors to question one another’s views in a professional but direct manner during meetings. Use informal social events, such as board dinners, to create a more relaxed atmosphere. Continually reevaluate the board’s skill sets against the needs of the company
- Establish a document-retention policy Don’t use electronic devices during board or committee meetings for anything other than board work
T 2.1 What are 6 audit committee requirements that flow from SOX?
● Audit Committee Independence: Every member must be independent
● Auditor Oversight and Approval of Nonaudit Work: committee appoints, compensates, and retains auditors
● Authority to Engage Professionals: committee can engage independent counsel and other advisors as necessary
● Whistleblower Policy: committees is responsible for establishing procedures for handling complaints regarding accounting, internal accounting controls, and auditing matters, AND ALSO whistleblower procedures on these matters
● Required Disclosures: Reliance on any exceptions to the aforementioned requirements must be disclosed along with an assessment of the adverse effects of not following them
● Audit Committee Financial Expert: All US public companies must disclose whether or not their audit committees have at least one financial expert (and say why of not)
T 2.2 What are 3 relevant regulatory bodies/nonprofits that inform the work of the Audit Committee?
- PCAOB: created through SOX to oversee audits of public companies, role expanded through Dodd-Frank
- FASB: created in 1973 with the mission to “establish financial accounting and reporting standards” for companies that use GAAP. FASB has been authorized by the SEC to set GAAP accounting standards
- Center for Audit Quality (CAQ): issues research and voluntary guidance
T 2.3 What are the 3+2 core Audit Committee roles and responsibilities?
- Oversight for financial reporting and communications, including disclosure controls and procedures and ICFR
- Oversight of auditors (internal and external), including auditor appointment, independence (incl. rotation), ICFR, financial statement review
- Risk oversight - either narrow (financial reporting and compliance) or broader
A. Committee membership: at least 3, all financially literate, 1 must be financial expert
B. Committee chair: set tone, coordinate w BoD chair/other committees, meet w internal and external auditors. Support CFO/Finance team
T 2.4 What are 3 common Audit Committee Challenges?
- Expanding agendas
- Committee succession planning - complicated by financial literacy requirements
- Trends in big data and analytics
T 2.5 What are 10 NACD recommendations for effective audit committee oversight
- Be proactive in focusing the agenda on what’s important
- Insist on transparency among the audit committee, management, and internal/external auditors.
- Focus closely on external financial communications. 10-K, 10-Q and beyond
- Question the continuing validity of key assumptions that underlie critical accounting judgments and estimates; be up to speed on key financial reporting issues and developments
- Assess the audit committee’s role in the oversight of risk management
- Set and manage clear expectations for the external and internal auditors.
- Make sure the CFO and the entire finance organization have what they need to succeed
- Assess the tone at the top and throughout the organization, including the effectiveness of compliance and anti-fraud programs.
- Help link change and risk management, and monitor critical alignments (controls, risks, etc.).
- Take a hard look at the audit committee’s effectiveness
T 3.1 What are the 7 rules from Dodd-Frank that impact the compensation committee?
● Bank Director and Officer Pay Clawbacks (final rule): The Federal Deposit Insurance Corporation can collect compensation from current and former executives and directors that were found to be “substantially responsible for the failed condition” of such companies.
● Say on Pay (final rule): Shareholders have an advisory vote on executive compensation packages. When approving M&A activity, shareholders also must be allowed an advisory vote on the compensation expected to be paid to executive officers who will lose their positions as a result of the merger
● Independent Compensation Committees and Consultants (final rule): Although compensation committees have been required to be independent since 2003 Dodd-Frank tightened these
independence standards. Compensation committees are also permitted to hire independent consultants.
● Pay-for-Performance Disclosure (pending rule): proposes that companies will be required to disclose the relationship between the compensation “actually paid” to executives and the company’s financial “performance” in the proxy statement.
● Pay-Ratio Disclosure (final rule): Companies must disclose in the proxy statement the ratio between the CEO’s annual compensation and the annual compensation for the median company employee (excluding the CEO).
● Executive Pay Clawbacks (pending rule): proposes that companies will be required to develop and implement a policy that requires the recovery, or clawback, of erroneously awarded incentive compensation paid within the past three years of the award if executives have been paid for reaching a financial goal that, in retrospect, was not actually achieved- even if no fraud occurred
● Employee or Director Hedging (final rule): Companies must disclose in the proxy statement whether any employee or board member of the company holds or was granted any financial instrument to hedge against a decrease in the value of the company
T 3.2 Compensation Committee - what are 9 (7+2) roles and responsibilities
- Setting executive comp philosophy and procedures: write it out, review it regularly and with the full board!
- Developing executive comp plans
- Establishing CEO objectives for evaluating the CEO
- Planning CEO succession
- Communicating with the full board
- Communicating with investors: most important - CD&A section of the proxy statement
- Communicating with management: committee must ensure that officers clearly understand their plans
- Committee membership:need to check out listing standards… independence AND expertise matter (HR, comp design, communications)
- Committee leadership: …
T 3.3 Compensation Committee - what are 4 common challenges
- Balancing incentives and risk taking
- Incorporating non-financial metrics, for example, workforce diversity, employee engagement, leadership development for the CEO’s direct reports, regulatory compliance record, customer satisfaction, and workplace safety.
- Providing human capital mgmt. oversight
- Using compensation consultants - BUT watch for potential conflicts of interest if the comp consultant (which advises the board re executives) also advises the company on other things!
T 4.1 Governance and Nominating Committee - what are its 6 key roles and responsibilities [NACD view]?
1.Board Composition and Succession Planning: look several years out, take clean sheet approach, use skill matrix
2. Recruiting and Onboarding New Directors: ideally start 3 years out (!); diversity!
3. Director Elections (regular and proxy fights): often, boards can nominate their own director candidates, and shareholders have only an advisory vote. However, shareholders can propose own slate (proxy fight!). THAT SAID most major companies now have adopted majority voting.
4. Board Evaluation: required to be annual for listed companies
5. Committee Membership: should all be independent and understand board structure and processes very well
6. Determining Governance Policies: bylaws, charters etc.
T 4.2 Governance and Nominating Committee - what are its key roles and responsibilities ACCORDING TO NYSE guidelines? [3 buckets]
● Identify individuals qualified to become board members, consistent with criteria approved by the board, and select, or recommend that the board select, the director nominees for the next annual meeting of shareholders
● Develop and recommend to the board a set of corporate governance guidelines applicable to the corporation.
● Oversee the evaluation of the board and management
T 4.3 In addition to setting the agenda and running committee meetings, the G&N chair also typically performs which 5 functions?
- planning the annual board and committee calendars (w/ committee chairs)
- setting agendas for full-board meetings w/ board chair
- supporting board chair in soliciting report-outs from committees
- planning committee chair succession and membership rotation
- If CEO is also Chair, the G&C chair usually serves lead independent director
T 4.4 Governance and Nominating Committee - what are 3 common challenges?
- Director Compensation
- Tenure-limiting mechanism
- Board diversity
T 4.5 What is the definition of the term “proxy access”?
This term refers to the right of shareholders, granted through bylaws, to nominate their own directors directly onto the company’s proxy card, which will allow all shareholders
to vote for those nominees as well as management’s nominees. Common thresholds: at least 3% stock ownership for at least three years; can nominate no more than 20 percent of the board.
T 4.6 What is the definition of the term “blank-check preferred stock authorizations”?
These are amendments to the articles of incorporation that enable the board of directors to create a new class of preferred stock without shareholder consent
