The National Association of Corporate Directors has just released “Critical Issues for Board Focus in 2015.”  The issues list was developed following the NACD’s dialogues with a number of major institutional investors and roundtable discussions among investors and committee chairs of Fortune 500 companies.  The publication presents investors’ perspectives on these three important themes identified by NACD:

• “Investors are focused on “drivers” of effective board leadership;
• Investors will hold directors accountable when they believe shareholder rights have been undermined; and
• High-quality communication between boards and investors is about context, not volume.”

Effective Board Leadership: Set forth below are some of the NACD’s  board leadership issues for 2015:

“• Board composition:  Director skill sets, diversity (including backgrounds and experiences), etc.

           [Investors indicated they would like to see more proxy disclosure regarding the self-evaluation process and the intended outcomes.]

• Director tenure, and the board’s approach to succession planning (overall and with respect to committee chairs)

            [For example, where directors are nearing retirement age, how is the board approaching its own succession plan? How will the board seek to “refresh” itself? Investors are seeking a proactive approach.]

• Board structure and processes: Majority voting, annual elections, CEO/chair split, etc.

             [Many investors viewed majority voting, the right to call special meetings and declassified boards to be “governance basics.” How do the board’s governance practices compare to those of their peers?]

• Board engagement in the strategy-setting process

             [Investors supported the approach described in the Report of the NACD Blue Ribbon Commission on Strategy Development, which recommends that, in addressing matters of strategy, boards transition from a traditional “review and concur” approach to “engage[ment] with management on strategy issues on an ongoing basis, including early involvement to improve strategy development, adjustment, and monitoring.”

             NACD recommends that directors consider whether investors understand how the board provides oversight and guidance on matters of strategy and risk.]

• Oversight of risk management, including emerging and complex risks

             [How are directors keeping on top of industry risks and other threats: through direct access to a range of information or by relying solely on management reports?]

• CEO and executive team succession

• Board oversight of company-wide talent development and bench strength

• The linkage between company strategy, executive compensation philosophy and pay plan design, including performance metrics and goals for the CEO and senior executive team

               [Investors expect directors to be able to articulate the company’s strategy.  Conversations with directors about the relationship between compensation and strategy can be a gateway for investors to evaluate a director’s understanding of company strategy.]

• The link between executive compensation outcomes and company performance

• Oversight of financial matters: External audit, internal audit, financial controls, etc.

• Specific shareholder proposals (e.g., political contributions, environmental or sustainability reporting), etc.”

Shareholder Rights: Not surprisingly, some investors expressed concerns regarding “unilateral actions to change bylaws and/or their application in ways they believe adversely affect shareholder rights.”  Presumably, the references are to bylaw amendments such as exclusive-venue and fee-shifting provisions. Although investors recognized that, in some circumstances, immediate action may be necessary, investors advised that directors can enhance their credibility by engaging in discussion with investors to provide the context and rationale for the action. One investor observed that  “’[w]hen directors say, ‘We realize this was not a popular choice but we weighed the alternatives and here’s why we came to this conclusion,’ it sends a very positive signal about the board’s judgment.” Of course, some investors are not going to be open to persuasion, regardless of the board’s rationale, if they believe that shareholder rights are undermined, and may well seek to hold the board accountable.

High Quality Communication: Investors also focused on shareholder engagement.  NACD suggests that directors consider whether they understand the priorities of the major investors, and whether those investors have opportunities to provide direct feedback to the board.  With regard to engagement practices, NACD indicated that investors encouraged boards to use “one-to-many” forms of shareholder engagement, such as investor days and video interviews with board members. In addition, investors were not always satisfied with proxy discussions of the engagement process, finding that, although companies discussed their responses to feedback from shareholders, they did not always adequately explain why “the board felt that action was appropriate.” In particular, one investor observed that “’[w]e want to know that the rationale goes beyond just checking a box because ISS said so.’” Directors may want to make clear that they are acting in response to the views of shareholders, not just responding to the policies of proxy advisory firms.