Corporate Governance in a Trump Presidency
By Keith Kefgen, Managing Director & CEO at AETHOS Consulting Group
Like it or not, corporate governance is about to change in a big way. President-elect Donald Trump has already been talking tough about "dismantling" the Dodd-Frank Act. Many of the Dodd-Frank policies were put in place to curb banks from causing another financial crisis, but others like "Say on Pay" make little sense. While the U.S. Congress and Trump battle it out in 2017, there are a number of trends and actions in corporate governance that public boards should be thinking about in the New Year:
- Succession plan. One of the primary responsibilities of a board is to ensure that a thoughtful and comprehensive succession plan is in place. According to a recent survey by Robert Half, nearly one-third of respondents did not have a formal plan. Every reason I have heard for not having one is simply an excuse. Best practice companies do this routinely throughout their organization. Leadership, "Stop the nonsense and start doing your job."
- Board diversity. We live in a diverse world and boards should reflect that diversity of thought, gender, color and creed. Having completed several board searches recently, I have seen plenty of highly qualified, diverse candidates, albeit they might be first-timers. Don't use that as an excuse for keeping the status quo. First-time board members can be some of the most engaged and active members.
- Influence of ISS. Institutional Shareholder Services Inc. (ISS) has become too big, influential and political. Most investors think ISS is a non-profit — not so. Their own "conflicts of interest" have gotten so significant, I believe they have lost their objectivity. Their original mission might have been noble, but that is in the past.
- Board refreshment. Boards should be thinking about cycling old members off their boards and recruiting new talent. Like any other leadership position, directors can get stale. Term limits might make sense in this regard.
- Data security. Boards are increasingly becoming involved in data and cyber security. Today, many Fortune 500 companies have a "cyber committee" on the board. Data breaches at Amazon, Yahoo and Verizon are costing millions of dollars and untold havoc on internet commerce. I believe it will start costing executives and directors their jobs.
- Shareholder activism. This is one of the most influential trends in board governance. Proxy access proposals are beginning to receive shareholder approval. More importantly, activist investors are using this as a strategy for gaining board seats, and in some cases, control of companies. Understanding and dealing with activist investors is a reality of board responsibility. Doing right by all shareholders, and not just for a few vocal or hostile investors, will be crucial.
- Innovation/R&D. Regardless of the industry, innovation or research and development (R&D) must be on the minds of board members. Encouraging management to invest time and money into future technologies, innovations and new ways of thinking are now the board's new mandate. Forget what Senator Elizabeth Warren and others are demanding; this should be a standard part of long-term business planning.
- Transparency. A rule of thumb for board directors: If it is not a trade secret, let shareholders in on it. Transparency is the bedrock of any good relationship. After all, shareholders are owners and deserve an open door policy.
- Talent is king. Don't forget that talent drives the free market system. Like all other supply and demand issues, you must pay a premium for scarce resources, and talent is one of them. If you want top 10% talent, you have to pay for it. Having governments dictate what is "appropriate" when it comes to executive pay is silliness.
- Say on Pay. This is a goner in the Trump presidency. It is a massive waste of time and resources and is based on optics and guilt. A thoughtful and thorough approach to executive pay is the answer, not a "non-binding" vote that has little impact on reality.
- Performance reviews. Like management, board directors should go through a performance review process. These reviews should be available to shareholders upon request. More transparency in director performance would go a long way to shutting up activists with an axe to grind.
- Trust. In the end, every good relationship grows and prospers with trust. Board directors need to keep this in mind during their stewardship as a director. Make it a point to develop trust with the constituencies that govern the business. Directors may have disagreements but trust and respect should never be breached.
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