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SEC Pushed Toward Creating New Board Composition Disclosures

 


Compliance Week | January 12, 2016




The Compliance Week article, "SEC Pushed Toward Creating New Board Composition Disclosures," features a quote from Russell Reynolds Associates' Rusty O'Kelley. He talks about board composition, succession planning and other issues. The article is excerpted below.

“The calls for disclosure are coinciding with what institutional investors are pushing for, which is an increase in board quality,” says Rusty O’Kelley, a member of the executive search firm Russell Reynolds Associates’ CEO and board services practice. “They want to know more about the board’s relationship with management, more disclosure on the composition of the board, the skills people bring, and what the succession process is.”

“Congress and the SEC have very little ability to influence board composition,” he adds. “But they can use their power to shine a spotlight on it. Setting disclosure requirements will force boards to first think about these things, particularly the CEO who is signing off on the filing.”

The goal of diversifying a board’s in-house knowledge base can be easier said than done. “You don’t want to have a sole purpose director,” O’Kelley says. “The problem with someone you select based on their IT security experience is that they also need to have a broad set of experiences so they can contribute to all of the other issues that the board is to opine on, offer guidance, and hold management responsible for.”

A particular challenge is that many directors expect to hold onto their positions until retirement age. Appoint someone in their mid-50s, and odds are good that they are going to be there until they are 74. Many companies are hesitant to have conversations about how long they expect a director to stay on. If there is an answer, it is “as they contribute.”

“But what does that really mean? How are they evaluating that? Do they have a process and a method to evaluate contributions by directors? Otherwise the assumption is that once you are appointed you are on for life unless you do something that is materially problematic,” O’Kelley says.

Assessing individual performance is another board-level bugaboo. All public company boards do director evaluations. The question is whether they are good enough, robust enough, and honest. “It is hard to upset that apple cart,” he says. “You may have people who are doing perfectly good jobs, but there is an opportunity to bring in new skill sets and you don’t want to get the board too big. Removing someone who is doing a fine job is much harder than taking someone off who is not doing well.”

O’Kelley sees a need for better succession planning for both the overall board and on the committee level. Succession planning on the audit committee is usually done well, he explains. They know the tenure of an audit chair is only going to be a few years and that they need to get somebody in place before then to ensure a good understanding of the company and committee before they take over. Such planning is typically not as robust on other board-level committees.

To read the full article, click here.

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SEC Pushed Toward Creating New Board Composition Disclosures