CII’s Board Evaluation Disclosure Report

CII’s Board Evaluation Disclosure Report

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This month the CII (Council of Institutional Investors) Research and Education Fund released its report on Board Evaluation Disclosure. The report posits that there are seven indicators of strength and then provide ten examples of good disclosure by companies.

The seven indicators of strength are:

  • Three-tiered review
  • Consideration of peer review
  • Appropriate timing and format
  • Evidence of follow-through
  • Linkage to succession planning
  • Strong independent director leadership, and
  • Prudent use of third parties and technology

The report includes examples of effective disclosures from the followig companies:

  • Allstate
  • Bank of America
  • ConocoPhillips
  • Exelon
  • ICE
  • McDonald’s
  • Regions
  • Splunk
  • Unum, and
  • W.W. Grainger

https://www.ciiref.org/boardevaluationdisclosure

More on ISS’ Excessive Non-Employee Director Pay Policy

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ISS announced that it would not apply its excessive non-employee director (NED) pay policy until meetings on and after February 1, 2020. But in the U.S. Compensation Policies Frequently Asked Questions, Updated December 14, 2018, ISS indicated that adverse vote recommendations could be issued under this policy for meetings occurring on or after February 1, 2020 where ISS has identified excessive NED pay without compelling rationale in both 2019 and 2020.

This means that companies that might have excessive NED pay and wanted to addresses it so it would not be an issue in 2020, will need to address NED pay now. That’s because most companies are setting their director compensation for 2019, that will be disclosed in their 2020 proxy statements.

Therefore, if a company will have an issue under ISS’ NED pay policy in 2020, it will be extremely difficult to avoid that result. So, the way ISS is implementing this policy creates a real possibility that companies will be trapped into being amongst the top 3% NED pay in both their 2019 and 2020 proxy statements and have no real opportunity to address NED pay levels (since 2019 pay being set shortly) before ISS applies the policy in 2020.

Companies should therefore carefully review ISS’s new FAQ on NED pay and determine whether their director pay for any director would place him/her at the 90th percentile or higher for companies in their 2-digit GICS code in their index (S&P 500; combined S&P 400 and S&P 600; remainder of the Russell 3000 index; and, the Russell 3000-Extended). If so, then they should consider adding an explanation in their proxy explaining why their pay is higher for those directors and also consider better laying out the process used to set director pay, especially timing, so that shareholders and ISS can more easily see that the Company had very little opportunity to address NED pay levels for the 2020 proxy.

Summary of Larry Fink’s 2019 Letter to CEOs

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Early this week, Larry Fink, the Chairman and CEO of BlackRock, issued his annual letter to CEOs of public companies in which BlackRock is invested. If you haven’t already done so, go read Mr. Fink’s 2018 letter to CEOs before proceeding (it will help you better understand this year’s letter). I’ll wait.

Click HERE to access Mr. Fink’s 2018 Letter to CEOs

Okay. So now you know that in 2018 Mr. Fink urged CEOs to detail their strategy for long-term growth, starting with their company’s purpose. Mr. Fink also announced that BlackRock would be a bit more active in ensuring that BlackRock’s index funds looked at how the companies they held stakes in were going to ensure long-term growth. The 2018 Letter announcement marked a significant change in how index funds at BlackRock would operate. Given BlackRock’s size, this change will have an impact on both the public companies in which it holds stakes as well as other index funds.

In his 2019 Letter, Mr. Fink further refines his message and indicates that laying out a purpose alone is insufficient. Instead, companies need to articulate how they will generate profits long-term and serve all of its stakeholders effectively.

Mr. Fink’s 2019 Letter also asks that CEOs provide leadership (where they can) to help tackle and perhaps solve, social and political issues that are confronting the countries, regions, and communities in which their companies operate. One of these critical issues is retirement. Mr. Fink believes corporations need to reassert their traditional leadership role with respect to retirement that they used to hold. Mr. Fink sees helping workers navigate retirement as leading to the creation of not only a more stable and engaged workforce, but also a more economically secure population in the places a company operates.

Noting the shift in attitudes of the younger generation and the impending large trans-generational asset re-allocation, Mr. Fink argues that corporate valuations will be influenced by the shift in values between the current and younger generations, and companies should recognize that shift and start acting in a manner that will minimize the impact on their valuations.

Finally, Mr. Fink announced BlackRock’s Investment Stewardship engagement priorities for 2019:

  • governance, including a company’s approach to board diversity
  • corporate strategy and capital allocation
  • compensation that promotes long-termism
  • environmental risks and opportunities, and
  • human capital management.

Mr. Fink indicates that BlackRock will not focus on a company’s day-to-day operations, but will seek to understand a company’s strategy for achieving long-term growth. He also reiterates what his 2018 Letter said, “for engagement to be productive, they cannot occur only during proxy season when the discussion is about an up-or-down vote on proxy proposals. The best outcomes come from a robust, year-round dialogue.”

Click Here to see Mr. Fink’s 2019 Letter to CEOs

2019 Exequity Equity Usage Calculator Available!

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I am happy to announce that Exequity’s 2019 Equity Usage Calculator is now available. This calculator is updated to reflect the latest ISS burn rate benchmarks and will calculate a company’s burn rate and run rate for the past 3 years and 3-year averages.

The calculator is available on the ‘Excel Tools’ page under the ‘Reference Materials’ page.

Click HERE to download the 2019 Equity Usage Calculator