CFA Institute’s board checklist aims to improve governance

Jul 03, 2014
<p>Condensed version of board leadership report offers best practices in executive pay, risk oversight and 4 other areas&nbsp;</p>

At a time when boards are under mounting pressure from activist investors concerning short- and long-term business strategies, the CFA Institute has released a checklist that aims to help directors better align their companies’  strategies with good governance that can support sustainable success and improve engagement with shareholders.

Its latest effort to encourage a longer term approach to major issues that companies face, the Visionary Boards Checklist condenses the short chapters of the CFA Institute’s 2012 report Visionary board leadership: Stewardship for the long term in six areas:

  • Quarterly earnings practices
  • Shareholder communications
  • Strategic direction
  • Risk oversight
  • Executive compensation
  • Culture

That report was the product of a gathering of issuers, investors, board members and other concerned parties to tackle the problem of short-term thinking within companies. Each of the six areas contains six to 11 suggestions for best practices that boards may adopt to better fulfill their roles. Under quarterly earnings practices, for example, there is a recommendation that directors listen to earnings calls and review competing firms’ communications with investors.      

‘That’s a good way to understand how the message is being communicated out and if it’s the  same thing that’s being discussed in the boardroom,’ says Matt Orsagh, the Institute’s director of capital markets policy. ‘Are the analysts or fund managers on the call getting that message? Are the questions [senior management is] getting ones that they’ve anticipated? And doing that for other companies in the industry to educate themselves as well.’

That suggestion, Orsagh says, came from one of the directors who participated in the group the Institute convened a few years ago who said he did it and was surprised more directors didn’t.

Under shareowner communications, one recommendation is that the board work with the company to broaden communication opportunities with investors to be able to discuss emerging issues with them.

The aim should be to develop long-term relationships with top shareholders who often may have different agendas. ‘Create a relationship with them over time so it’s less likely there’s going to be a disagreement that gets to the point where they would put forth a shareowner resolution,’ Orsagh says.

While that could still happen, having a long-term relationship would likely allow differences to be worked out during a phone call, he says. In addition, those shareholders could offer counsel or serve as a sounding board for how any response the board is considering when dealing with demands from a smaller shareholder, he adds.

The area of strategic direction included a suggestion to communicate to investors the board’s role in the strategy-setting process. ‘It’s something that we’ve heard more from investors and it’s something we got the impression from investors and boards that boards are doing. But investors don’t know how that’s done and they want to know what’s being done so they can verify it,’ says Orsagh.

For example, directors should be ready to show that the terms and rewards of the executive compensation plan jives with the company’s business strategy. To assist with this, the CFA Institute released a CD&A template a few years ago to address complaints from many investors that this section of the proxy statement had become a ‘data dump’ instead of a means for effective communication with investors.

One suggestion under board and company culture is that directors ‘walk the floor’ of the company and interact with employees to best understand the culture. This came from one group participant who had been a director at a company with large retail stores where this was a requirement for board members, Orsagh explains.   

Another participant had been a director at a smaller company who decided on her own to visit company operations to better understand the company culture.

'That’s not always practical, but where it is, I think it’s a good practice,’ says Orsagh. ‘If you’re director at Lowe’s or Home Depot you can very easily pick a couple of stores, walk around and see what you see, as well as if you’re a director at GE, go to a couple of their factories. At a smaller company or a software company, that’s not going to be practical.’

To be true visionaries, Orsagh also urges directors to read the CFA Institute Standards of Practice Handbook and share it with others within their companies.

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