There have been a handful of activist threats to Canadian companies recently.
What these engagements have drawn focus on are defects in public company governance, including the skill sets of existing directors, the board's focus on value creation vs compliance, and the very ways boards function and operate, particularly compared to private equity boards.
What follows is a series of recommendations that could apply to any public board to: make it more focused on value creation; to strengthen real director independence, including from management; to strengthen management accountability to the board; and, perhaps most importantly, to strengthen board accountability to shareholders.
These recommendations are expected to form a journal article I am authoring, and will be incorporated into a case on Canadian Pacific I am co-authoring. I will post the journal article once it is published, but I thought I would post the recommendations below, for commentary and criticism.
The recommendations are based on, in no particular order: interviews with activist investors, private equity leaders, directors and CEOs; advisory work with regulators; assessments of leading boards; expert-witness work; academic and practitioner literature and regulations in other countries; director conferences and webinars; lectures I have delivered to the Institute of Corporate Directors and Directors College; discussions in my LinkedIn group, Board and Advisors; and a book I am writing including with Henry D. Wolfe and Frank Feather entitled Building High Performance Boards.
Several recommendations may result in significant restructuring and change in how a public company board operates, functions, is composed, engages, and focuses.
What follows is a listing of the recommendations, organized into three groupings, as follows:
I.Increase Board Engagement, Expertise and Incentives to Focus on Value Creation (proposals 1-19)
II.Increase Director Independence from Management and Management Accountability to the Board (proposals 20-30)
III.Increase Director Accountability to Shareholders (proposals 31-38)
We will now begin with grouping I.
I.Increase Board Engagement, Expertise and Incentives to Focus on Value Creation
1.Reduce the size of the Board.
2.Increase the frequency of Board meetings.
3.Limit Director overboardedness.
4.Limit Chair of the Board overboardedness.
5.Increase Director work time.
6.Increase the Board Chair's role in the value creation process.
7.Focus the majority of Board time on value creation and company performance.
8.Increase Director roles and responsibilities relative to value creation.
9.Increase Director compensation, and match incentive compensation to long-term value creation and individual performance.
10.Enable Director access to information and reporting Management.
11.Enable Director and Board access to expertise to inform value creation as needed.
12.Require active investing in the Company by Directors.
13.Select Directors who can contribute directly to value creation.
14.Revise the Board's committee structure to address value creation.
15.Hold Management to account.
16.Disclose individual Director areas of expertise directly related to value creation.
17.Increase Board engagement focused on value creation.
18.Establish and fund an independent Office of the Chairman.
19.Limit Board homogeneity and groupthink.
We will now continue with grouping II.
II.Increase Director Independence from Management and Management Accountability to the Board
20.Increase objective Director and advisory independence.
21.Limit Director interlocks.
22.Limit over-tenured Directors.
23.Limit potential Management capture and social relatedness of Directors.
24.Decrease undue Management influence on Director selection.
25.Decrease undue Management influence on Board Chair selection.
26.Increase objective independence of governance assurance providers.
27.Limit management control of board protocols.
28.Address fully perceived conflicts of interest.
29.Establish independent oversight functions reporting directly to Committees of the Board to support compliance oversight.
30.Match Management compensation with longer-term value creation, corporate performance and risk management.
We will now conclude with grouping III.
Increase Director Accountability to Shareholders
31.The Board Chair and Committee Chairs shall communicate face-to-face and visit regularly with major Shareholders.
32.Communicate the value creation plan to Shareholders.
33.Implement integrated, longer-term reporting focused on sustained value creation that includes non-financial performance and investment.
34.Implement independent and transparent Director performance reviews with Shareholder input linked to re-nomination.
35.Each Director, each year, shall receive a majority of Shareholder votes cast to continue serving as a Director.
36.Make it easier for Shareholders to propose and replace Directors.
37.Limit any undue Management influence on Board - Shareholder communication.
38.Limit Shareholder barriers to the governance process that can be reasonably seen to promote Board or Management entrenchment.
Conclusion
There have been significant changes to corporate governance in the last few years. Most notably, boards and regulators are now dealing with a defective legacy of independent directors who do not possess the relevant expertise. The scholarship has never supported independent board or separate chairs and the causal relationship to corporate performance. Regulators and most recently shareholders are now are focusing on competencies.
Second, there has been an under-emphasis on strategy and value creation by many boards, at the expense and crowding out of compliance obligations. Shareholders are now addressing this shortcoming.
Third, there is a movement towards shareholders exerting ownership rights to effect the governance of the company and select and remove directors who can address the earlier two points: competencies and skills, and fulfillment of the strategic and value creation role of the board.
Fourth, there is the real perception that directors are beholden to management.
I have addressed in the above recommendations all four defects in the current governance model for public companies: (i) directors selected primarily with a view to formal independence; (ii) not addressing fully the strategic and value creation role of the board; (iii) shareholders having greater say on directors and value creation; and (iv) making boards more independent of management, and management more accountable to boards.
