Previously published in the October 2011 issue of Lexpert
As boards come under the increasingly intense scrutiny of
regulators and activist shareholders, new demands on their time are
distracting them from what really matters
Staying focused on what matters isn't as
easy as it used to be. These days, directors have to be careful not
to allow the priorities and pet interests of governance enthusiasts
dominate their agenda, to the detriment of what the directors
should really be doing.
In a series of initiatives, for instance, regulators have
decided that, since boards will not do their jobs, regulators
should detail aspects of corporate governance for them. One example
is the extensive corporate governance and disclosure regime under
Canadian Securities Administrators National Policy 58- 101 that
requires compliance with the CSA's view of best practices
— and imposes significant work on directors.
A second set of board duties is "recommended" by
institutional shareholders and their advisers (who threaten to vote
against the board otherwise). They've been pursuing an agenda
that includes topics like "shareholder engagement,"
say-onpay and majority voting. Executive compensation, meanwhile,
is also high on the priority list.
Directors' Own Priorities At the other
extreme are topics that are fundamental to the work of boards. At
the top of this list, I would place "the CEO's watch
list." If the CEO reports on what is keeping him or her up at
night and the board addresses these topics and monitors their
evolution, the board will necessarily be involved with the topics
that are important to the company. I have found that boards and
meetings that are "hijacked" by this topic are often the
Another key priority is the independent functioning of the
board, hence the movement to separate the role of chairman and CEO
or to empower a lead director. There must be a focus on practices
designed to ensure that board priorities are identified, that board
approval is sought at appropriate points, that meetings are
efficient and that the board has review and nomination practices
designed to constructively enhance director performance and
strengthen and refresh the board as may be appropriate.
Boards, moreover, must ensure a culture of compliance, and so
procedures designed to encourage reporting of wrongdoing should be
implemented and monitored.
Aside from legal obligations, appropriate procedures help to
make board discussions candid and to ensure that directors are
motivated by the best interests of the corporation. Boards also
need to spend time on confidentiality procedures, balancing legal
requirements and the need to maintain secrecy with the reality of
directors' other interests and the benefits of
And finally, directors should naturally be concerned about
protecting themselves from everincreasing claims of director
liability for corporate misfortunes. So boards now participate in
discussions of contractual indemnification and directors' and
Many board priorities are shared with regulators and investors,
and many regulator and investor priorities reflect board concerns,
too. The issue is that, with so many agenda items being suggested
by interested parties, the board will be spread too thin, or it
will and adopt a check-the-box mentality, or it will focus unduly
on formal or procedural matters.
The best boards evolve procedures to address formal compliance
efficiently, and they do not permit the particular concerns of
others to overwhelm their own. They, in other words, keep their eye
on the ball.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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