Previously published in the October 2011 issue of Lexpert Magazine.
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 very best.
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 consultation.
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 officers' insurance.
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.
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