The Agile Board: Preparing for Compliance Amid Uncertainty
Any director will tell you that a growing percentage of their board’s time is spent on ensuring regulatory compliance. The specific issues they will focus on, however, are likely to change under the new Trump administration, and while boards can make educated guesses about what will change, no one knows for sure. As a result, boards have to hedge their bets and prepare for the most likely scenarios if they are to be agile enough to shift gears when necessary to effectively deal with regulatory changes.
Executive compensation will continue to be a hot-button issue. Eye-popping compensation packages for CEOs make headlines, often putting companies on the defensive, and boards have to balance the potential for negative publicity with the very real need to attract and retain top leadership talent.
Much of boards’ added regulatory compliance work with regard to executive compensation is linked to requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was signed into law in 2010. While President Trump made the burdens of Dodd-Frank a centerpiece of his campaign, only specific provisions of the mammoth law are expected to be repealed.
In the absence of certainty, don’t wait on preparing to comply with the CEO pay disclosure rule, a provision of Dodd-Frank. Boards and CEOs generally don’t like it, but, based on this year’s data, boards must comply starting next year. Do the prep work now, or you will likely be scrambling to catch up. Investigate what data will be needed and how best to determine median employee pay for comparison purposes. These are complex calculations that require judgment calls; the compensation committee needs to remain on top of it, with the entire board kept informed.
The say-on-pay provision of Dodd-Frank—which requires companies to hold shareholder advisory votes on executive compensation, along with votes on how often to conduct such say-on-pay votes—is here to stay. It is not only mandated by law, but shareholders have stated loud and clear that they now expect to have this input, so it will likely not be rolled back.
In the current stock market, which produces healthy shareholder returns, sayon-pay votes are of less concern to boards. But given continued broad pushback on CEO pay—from citizens, the media, and potentially from Wall Street should the stock market decline—boards have to be ready to push back themselves. That means crafting a narrative that underscores and connects two key concepts: how the right leadership is crucial to executing a successful strategy, and what the board believes is required to compete with other companies for a limited number of CEO candidates with the skills and experience required. On the other hand, directors can’t have a tin ear and must be particularly sensitive to excessive pay packages, eliminating perks that are not needed and that send the wrong signals.
Boards should bear in mind that they should focus not only on complying with regulations but also on the perceptions of the investment community. Boards can be in strict compliance but not share a winning narrative with current and prospective shareholders who are crucial to a company’s future. In fact, boards need to consider the full range of stakeholders and tailor messaging to address the issues of critical concern of each group. Imagine, for example, the potential internal repercussions from employees below the median compensation number when the compensation for the median employee is determined.
Executing a communications plan that takes all stakeholders and other factors into account is increasingly important. This is an ongoing responsibility where key messages and the duty for delivering them need to be overseen by the board. Anticipating regulatory change and being prepared to comply is only one half of a success story. Without the buy-in of stakeholders—those who invest and those who get the work done—that compliance effort will be a Pyrrhic victory.
Originally appeared in NACD's Directorship magazine March/April 2017 issue.