Director Nominee Questionnaire

As technology has brought increased awareness of individuals and their public identities and reputations, it has also brought greater access and understanding of the interworking of organizations and the people that run them. Perceptions of corporate boards as “Oz” like institutions have dissipated, and people have come to understand that board members are people with individual characteristics and defining qualities.

The traditional homogeneity of corporate boards faces increasing criticism. A corporate board not only has an identity as a whole of being a governing/supervisory body, but now also reflects the composite of the identities of the individuals serving as board members. Members of the public who are customers, clients, and stakeholders of these organizations expect boards to be conscious of their total and individual identities and regularly evaluate and make concerted efforts for self-improvement.

Over the past decade, the pressure to increase female representation on boards has continued to mount. Approaches to effectuating this change vary. Some countries regulate the minimum percentages of female board members.

  • Norway was the first country to pass a female board member quota law requiring all public limited liability companies to have at least 40% women on the board or risk dissolution.
  • Similarly, Spain, France, Finland, and Iceland set their minimums quotas of female board members at 40%. Denmark also requires a 40% minimum, but does not attach sanctions to the requirement.
  • Italy, Belgium, the Netherlands, Malaysia, and most recently Germany all require 30% or more female representation. Sweden and the United Kingdom do not have binding minimums, but set goals to increase female participation.
  • The United States has a minimally instructive rule for gender diversity on boards through the Securities and Exchange Commission, which requires boards to disclose how they consider diversity when choosing board members.
  • European nations lead gender parity rankings with all of the aforementioned EU nations having well above 20% and some reaching 40% of board seats held by women. Growth in the United States has been significantly slower, with only about 10.7% female representation on boards of 6,920 companies according to Catalyst (a nonprofit research firm studying women in business), but with about 19.2% percent of women on the boards of S&P 500 companies.

Quotas are effective in increasing the number of women on boards according to Dan Konigsburg, Deloite Global managing director in “Deloitte’s Women in the Boardroom: A Global Perspective”; however, they are subject to criticism and raise questions regarding the qualifications of women being elected to some boards, especially those in male-dominated industries.

The idea that there are not a sufficient number of qualified women to serve on boards has been rebuked on a number of fronts. Instead, the quotas and policies behind them and thought leadership influencing this change increasing female presence on boards challenge a long-standing, unsavory status quo and open networks of highly qualified women to join the ranks of their male counterparts on boards.

Board directors increasingly are recognizing the imporatnce of diversity. PWC confronted the thoughts and perspectives regarding diversity on boards in their 2015 Annual Corporate Directors Survey.

  • In surveyed directors, over 95% viewed diversity as at least a “somewhat” important director attribute, but 70% of directors also believe there are impediments to increasing board diversity.
  • Interestingly, PWC discovered that over 67% of mega-cap company directors think diversity is “very important” to board composition, contrasted with only 31% of directors at micro-cap companies granting diversity that same ranking, which raises questions about smaller companies’ recognition of the benefit of increased diversity.
  • Further, a vast majority of directors (over 80%) believe diversity enhances board effectiveness and company performance.

Recent research shows that companies are more profitable and have higher market performance when women are on boards. An article in the Academy of Management Journal featured the results of such research combining results from 140 studies, which highlighted better prerformance based on an internal view on asset utilization and income generation and on an external view on perceptions and stock performance when women are on boards. The differing experiences, backgrounds, and communication and interaction styles of women enhance all functions of boards through more productive and effective deliberation and keener oversight from a broader viewpoint and expertise.

“The idea is that when a group is held to a higher standard of accountability, it will draw on the knowledge of everyone in that group, leading to better decision making” said Corienne Post, PhD., a professor at Lehigh University and author of the article. This negates traditionally held notions that there exists a largely unsuitable pool of diverse candidates and instead points to either a board’s inability or unwillingness to recognize a major weakness, which can be easily remedied through board evaluations. It may require thinking outside of the restrictive traditional confines of director eligibility and recruitment pools to ensure boards are properly constituted with appropriate gender representation.

The ideals of increased accountability and efficacy of boards are at the basis of the continued efforts to increase gender parity on boards. Boards are required to be cognizant of diversity matters and reputation based thereupon in order to remain competitive. Through proper board and peer evaluations, boards can assess strengths and weaknesses of the board as a whole and of each individual director to determine the number and expertise of female directors necessary to enhance their ability to properly govern and lead their organizations to higher successes.

Just as you would not stock your football starting line-up with all kickers, the notion of boards continuing to be comprised of all or an overwhelming majority of men is similarly absurd.

Are you using best practices to collect and store the information you obtain from your Directors and Officers? If you still compile your company’s information manually and collect responses on paper, by scan or emailed responses, you already realize that your systems are not optimized, but it has further reaching implications.

Best practices in compliance- and governance-related tasks require professionals to consider many additional factors that technology can improve. Modern, cloud-based systems for D&O questionnairesprovide a number of key benefits that go beyond saving the legal team time:

  1. Security & The Private Cloud – A private cloud environment provides greater control and security for your data. Most providers for these types of services rely on a hosted cloud service like Amazon Web Services or Microsoft’s Azure. With hosted servers, are you sure who really controls your data at the end of the day? Using a private cloud ensures that your data is under your control and can be kept secure or deleted completely at your discretion. This provides heightened security, ensuring that sensitive data is retained and is not susceptible to inadvertent destruction or theft that targets mass-market systems.
  2. Time – Few things are more valuable to your Directors and Officers (or to any of us for that matter) than time. Customer feedback indicates that a properly constructed online process reduces the time it takes to complete the questionnaire by nearly 50%. This is time that you are giving back to the highest paid people in your company.  That’s no small matter. In addition, the legal and compliance teams will save dozens of hours by automating the most labor intensive parts of their processes, while also creating a series of gatekeepers to flag particular types of responses.
  3. Accuracy – Have you ever had questions left blank on a questionnaire, which then requires follow-up and perhaps additional certification? Online tools can eliminate missed questions and ensure a more accurate process by pre-screening for changes from prior years and even creating internal flags that generate alerts for the legal team whenever an unexpected answer is entered.  Using best practices helps eliminate errors.

While it is often difficult for legal departments to obtain additional legal budget for technology acquisitions, there are points in time when best practices can no longer be overlooked and technology migrations become necessary.

The D&O questionnaire has tipped over. Paper or cut and paste processes can no longer be justified now that the efficiencies and reliability of cloud-based systems so clearly outweigh the minimal cost.

Few activities within the corporate world garner more angst than the annual assessment or evaluation process. This is true at all levels: from the individual employee processes conducted by HR, all the way through to the process undertaken by the Board of Directors.

Employees are expected to write a self-critical analyses of their performances, walking the tightrope between bragging and self-confidence while also acknowledging areas for improvement (at least to the extent their managers think improvement is necessary). In most cases, annual bonuses, salary increases and retention decisions are tied to the process. Few companies get this process right— yet, nearly every company I know requires all employees and managers to participate. Although the evaluation process at the employee level is imperfect, it aims to be a substantive process. It provides a full view of the employee’s performance and skills in light of the duties of the role, and provides a basis for setting goals and benchmarks of achievement.

In the Board context, each Board member is essentially an employee of the investors.  While many directors might balk at this notion, it’s not a big stretch.  In the Boardroom, the evaluation concept is similar, but the investors don’t often get much of a report about the Board’s performance. I’ve never heard of compensation of any kind being linked to the evaluation, and it’s quite rare for there to be any outcome at all, other than checking a box that the process was completed at the required interval. In fact, in PwC’s, 2014 Annual Corporate Director Survey, they found that 63% of directors felt that the board self-evaluation process was a check-the-box exercise.

If directors are completing evaluations solely for the purpose of completing them, should we then expect thoughtful and thorough results from these evaluations?

While there are some companies where governance has a prominent seat and the evaluation process is a rigorous and serious endeavor, it is still quite rare for companies to conduct third-party anonymous evaluations. And yet, in that same PwC survey, 70% of directors said that it was challenging to be frank in the board evaluation process. Could this be because the chair of the nominating and governance committee and the general counsel are reading everyone’s evaluations?

It’s no wonder that institutional investors are asking more questions about the board evaluation process. You might ask what took them so long. But, what do they want to know? We heard recently from Raki Kumar, head of corporate governance for State Street Global Advisors and Glenn Booraem, principal & fund treasurer, Vanguard Group Inc., at a panel about Board refreshment at the ACC Annual Meeting 2015. Both stressed the importance of the evaluation process. Kumar outlined the four things she looks for in the Board evaluation process:

  1. Identify which director is responsible for the evaluation and empower that person to carry it out;
  2. It should be an annual exercise;
  3. The Board as whole as well as each committee and each individual should be evaluated; and
  4. There must be an outcome.

Booraem emphasized the outcome aspect, saying that, “having a rigorous board evaluation process with some form of outcomes, is perhaps the most important thing when considering board refreshment.” These outcomes can be as simple as more training around cyber-security or as complex as needing to remove (or simply not nominate) certain directors and look for ones with different skills. But the point is that investors want to know that your company has a rigorous process and at the end of the process they want to know your outcomes.

As more boards contemplate board refreshment and other pressures from investors, a thorough, objective evaluation process with clear outcomes may not be a golden ticket, but it will show a commitment to at least asking the questions.

Toyota and Volkswagen have been the two biggest vehicle manufacturers worldwide for the past several years. Just two years ago, Volkswagen was number one, but a look behind the numbers, shows that trouble had been looming for some time. In a recent New York Times article, Charles M. Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware, said “the governance of Volkswagen was a breeding ground for scandal. It was an accident waiting to happen.”

Despite the many other public examples of failed corporate governance practices that have wrecked companies (WorldCom, Enron, Arthur Anderson, Toshiba) and lead to massive losses (AIG, Lehman), VW tolerated, if not encouraged, a level of corporate governance deception that would draw a raised eyebrow from Bernie Madoff.

Ferdinand Peich, the VW Chairman until this past April, exerted such control over the Board of Directors that he forced the appointment of his former nanny (now his 4th wife) to the Board of Directors. Her only prior experience was teaching kindergarten. With two children of my own, I deeply respect the role of teachers, but this appointment doesn’t pass the proverbial corporate smell test.

And then we have the new economy’s automotive darlings, Tesla and its CEO Elon Musk. The Tesla Board of Directors has adopted a fairly detailed set of Corporate Governance Guidelines. In its annual proxy statement, it details the criteria for board nominees, which they say, “must reflect a Board that is comprised of directors who (1) are predominantly independent, (2) are of high integrity, (3) have broad, business-related knowledge experience at the policy-making level in business or technology, including their understanding of Tesla’s business in particular, (4) have qualifications that will increase overall Board effectiveness and (5) meet other requirements as may be required by applicable rules, such as financial literacy or financial expertise with respect to audit committee members.”

Tesla also completes an annual evaluation of its board and each of its members, and according to the proxy, these evaluations are considered by the Nominating & Governance Committee as part of their annual recommendation for board nominees. Based on the observable factors related to board governance, Tesla has modern, efficient, and effective governance structure, which stands in stark contrast to that of VW. The Tesla Model S has been described as a vehicle built around an iPad – where software is a driving force for ongoing innovation long after the consumer drives it off the lot. Like its governance practices, Volkswagen’s approach to software is painfully archaic.

Comparing the two company’s public disclosures is like test driving the Model S followed by a 1974 Volkswagen Thing. While driving the Thing might make some nostalgic, it won’t be a comfortable ride and even Lloyds of London would balk at the idea of a warranty. As vehicle consumers have done with their choice in cars, it’s time for investors to demand more from companies. Interestingly, the German institutional investors seemed more in tune with the failings at VW than their US and foreign counterparts. At the time the VW emissions scandal was discovered in September, just 2% of the company was owned by German institutions—while more than 26% was held by foreign institutions.

It is time that all institutional investors require more rigorous corporate governance, not government regulation. This should include disclosures as to why each board member was selected and metrics for board performance. Institutions should require more robust minimum requirements, before they invest, and insist on continued adherence or withhold their support from company board nominees and other proposals the company puts before shareholders. The investing public cannot rely on ISS as the sole gatekeeper. We need global institutional rigor to insist on sound governance practices.

GREENSBORO, N.C. and SEATTLE, Oct. 13, 2015 – The Center for Board Excellence (CBE), the leading provider of compliance and governance solutions, today announced that it has appointed Phil Neiswenderto the role of president and Kaley Childs to vice president, client services & business development. Neiswender will also remain as a member of CBE’s board of directors, which he joined in 2013.

“Phil has been an integral part of shaping CBE’s strategy and innovative products since day one,” said Byron Loflin, chief executive officer of CBE. “Having served as general counsel and corporate secretary to public and private companies, Phil brings a wealth of legal and business understanding that is invaluable to our customers. Kaley and Phil are both committed to the CBE vision and know the challenges facing governance leaders today.  They each have the skills and experience we need to take CBE to the next level.”

Prior to CBE, Phil held roles as chief legal officer and executive vice president for operations & corporate development at UIEvolution, Inc., chief operating officer at Garagiste, Inc., and general counsel, vice president of legal at BSQUARE Corporation.  He also held both legal and business roles at Getty Images, Inc. and was an attorney at Graham & James, LLP and Riddell Williams, PS, in Seattle. Phil also currently advises several early-stage startups and is on the board of Vinzar, LLC. Phil obtained his J.D. degree from the University of Virginia and his B.A. from the University of Washington. He is a member of the Washington bar.

“CBE brings together two things that I am very passionate about: technology and business excellence,” said Neiswender. “Having advised CBE as a board member for several years, I now have the privilege to work with this amazing team on a daily basis. The company is on a fantastic trajectory right now, and I am very excited to be a part of this next chapter.”

As vice president, client services and business development, Kaley will use her experience and talent to further develop our products and customer channels.

Prior to joining CBE, Ms. Childs served as general counsel at Clarolux LLC and practiced law at two firms in New York. Ms. Childs is currently the chair of the board of trustees of the Northside Charter High School in Brooklyn, N.Y., and president of YP Civitan of Greensboro, N.C. Ms. Childs received her B.A. degree cum laude in political science from Samford University and her J.D. from Pace University School of Law. Ms. Childs is admitted to practice law in the state of New York.

Founded in 2010 by attorneys and technologists, The Center for Board Excellence has built an innovative governance platform for board assessment, directors’ & officers’ questionnaires and other compliance processes. CBE streamlines laborious, costly and previously paper-based processes in order to allow directors and governance professionals to focus on what they do best: provide strategic advisement and guidance on matters that critically impact a company’s performance. For more information, please visit the company’s website at www.boardevaluations.com.

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