Skadden’s Ann Beth Stebbins and guests Allie Rutherford and Adrienne Monley of PJT Camberview discuss how a company can best communicate to investors what makes its board effective – not just the mix of skills individual directors bring, but also the way the board functions and the way it draws on outside expertise when needed.
Episode Summary
What do investors think makes a board effective? Skadden M&A partner Ann Beth Stebbins kicks off the discussion with that question with her guests, Allie Rutherford and Adrienne Monley of PTJ Camberview, which advises companies on shareholder relations.
It’s a board that evolves with the trends, says Allie. It’s a board that discloses its composition in a way that conveys how the skill sets and the experiences of particular directors and directors in combination meet the business and strategy needs of the particular company.
Companies need to show investors that they have right directors and that those people are doing the right things as a team, following practices and engaging together in a way that supports value creation, says Adrienne. It is incumbent upon companies to be specific and help investors understand, perhaps through anecdotes, the human perspective about what’s happening in the boardroom — how they run meetings and bring in outside voices, for example. Being generous with those descriptions, both in written disclosures and in engagement with investors, will help promote where investor support and understanding.
In terms of directors’ skill sets, not everybody has to have every skill. It’s how all of those come together, says Allie. And boards can supplement that by bringing in outside expertise.
Investors also want a board to be doing things that improve the efficacy and the functioning of the board as a team, says Adrienne. As a result, today more board self-assessments include things like independent interviews.
Because few investors have first-hand boardroom experience, it can be helpful to have direct discussions with your top investors about the board’s functioning, says Adrienne.
Ann Beth Stebbins (00:33):
What makes a board effective? We talk a lot about the importance of board composition, but how focused are investors on boardroom practices, dynamics, and culture? Do investors want greater insight into what goes on in the boardroom?
I’m Ann Beth Stebbins, a partner in the M&A group at Skadden. I’m joined today by two fabulous guests who will be sharing their insights on board effectiveness gained from years of experience in the corporate governance arena. Allie Rutherford is a partner at PJT Camberview and advises clients on all aspects of governance and engagement. Prior to joining PJT Camberview, Allie founded and led corporate governance at the EY Center for Board Matters. Adrienne Monley is a managing director at PJT Camberview. And prior to joining PJT, Adrienne headed up Vanguard’s Investment Stewardship Group for the Americas, overseeing issuer engagement research for over 4,500 companies. I’m really looking forward to getting Allie and Adrienne’s insights on this episode of The Informed Board. Welcome Allie. Welcome Adrienne.
Allie Rutherford (01:40):
Thanks for having us.
Ann Beth Stebbins (01:41):
You spend a lot of time in boardrooms and you spend a lot of time talking to investors. What do investors think makes a board effective? Allie, you want to kick us off?
Allie Rutherford (01:52):
Sure. Happy to. When we think about investors, you have to take a step back and understand that they’re really looking at board composition outside-in. They’re not sitting in a boardroom. They don’t have a lens into the insight and dynamics of what takes place in a boardroom. Investors think about what makes a board effective. High level, investors look for a board that evolves with the trends; a board that discloses its composition in a way that conveys how the skill sets and the experiences of particular directors, and directors in combination, in a comprehensive way, meet the business and strategy needs of the particular company and the particular industry.
Ann Beth Stebbins (02:37):
Adrienne, it’s not a board for now, it’s a board for the future. How do you advise boards when they’re thinking about matching the skill set of board members with the strategies of the company?
Adrienne Monley (02:52):
This is one of the hardest things probably for boards within their own boardrooms, let alone for outsiders to judge them, which is what investors are trying to do every day. This also comes down to having not just the right people with the right skills and experiences that align with the company’s narrative publicly. (Of course, that’s all really important and you don’t want your investors to think you’ve got the wrong people in the room, as Allie articulated.)
But I think there’s also an element here of being able to show investors that you’ve both got the right people and those people are doing the right things — as a team, as a group of people who are organized and following practices and engaging together in a way that supports value creation.
And when I talk to investors and think about my prior experience, I actually think sometimes it’s those practices that can maybe give investors even more confidence about that board’s ability to oversee the future than just seeing a list of skills on paper. That’s a hard thing to do.
Ann Beth Stebbins (03:51):
It’s not only who is in the room, but it’s what’s going on in the boardroom and communicating that to investors. How are you advising boards to respond to the who is in the boardroom question so that investors have comfort that the right people are on the board with the right skill set for the company’s strategy and forward-thinking objectives? Allie, do you have some thoughts on that?
Allie Rutherford (04:16):
I think there are two ways that boards are communicating effectiveness: One is through the proxy statement disclosure. The other way is direct engagement. Investors, largely the governance teams and the portfolio managers at investors, have conversations with companies around the composition of the board. A company and a board can communicate around the composition, the skill sets, the effectiveness, the practices.
And then for the proxy statement, I think about things like the evaluation process. We talked about the skill sets, not just a check the box skill set, but how the board thinks about those skill sets, why those skills make sense for the particular company, and then bringing to life the director’s experiences relative to that skill set.
One area that investors are really paying attention to these days is the outcome of the evaluation, so how a board articulates the findings of the board evaluation process and improves its effectiveness on a go-forward basis.
Ann Beth Stebbins (05:20):
The skills matrix is something that we’ve all gotten very used to over the past few years. Allie, you said investors want more than boilerplate disclosures. What should companies be doing? Adrienne have any thoughts on that one?
Adrienne Monley (05:33):
That is an important baseline practice. It’s both a requirement and a key data input that investors use to judge and make decisions about a company’s board. So I think we should continue to bring a precise lens to what’s in the skills matrix, because it is a really important starting point. The more there feels like there’s this chasm between investors and companies and a lack of understanding about what’s really happening in the boardroom, the more it is incumbent upon companies to be specific and help investors understand — maybe more anecdotes, more of a human perspective about what’s happening in the boardroom.
Some good examples I’ve heard about this: I just got off a call with a client, and this client had a great conversation with an investor who had the chance to explain how they run the [board] meeting. They are including some different people in the meeting. They’re bringing outside voices, they’re exploring topics of interest to the investor.
(06:27):
And so rather than describing that in a generic way, they actually took the opportunity to provide real anecdotes from real recent board meetings. And the feedback they got from the investor was completely glowing because, again, it’s very hard for someone on the outside to really understand what that boilerplate description really means in practice. And we jokingly say that few investors have had the chance to be in a boardroom, probably almost none, and I’m guessing a lot of directors haven’t had the chance to sit in an investor role. So the more specific, the more generous you can be with those descriptions, both in written disclosure and of course in engagement, as Allie says, that just feels really important this day and age, where investor support and investor understanding is so key for companies.
Ann Beth Stebbins (07:13):
It’s great for your large investors that you are having the one-on-one meetings. How can a board communicate what they’re doing in the proxy statement? What are some specific and practical tips that we can provide to boards?
Allie Rutherford (07:28):
I’ll start with the basics, just to back up for a minute, around the skill sets and the matrix. I think there are two things here: One is a thoughtful process around those skills and ensure there’s appropriate balance. Not everybody has to have every skill. Certainly from an investor perspective, that is not the expectation or the desire. It’s really to understand how all of those come together. The other area that I would note that [some] investors are focused on is bringing in someone with a specific skill to bridge a gap, but it’s not necessarily the answer. And you can supplement that — boards can supplement that — by bringing in outside expertise and then using the proxy statement to disclose how that builds on skill sets that may not be as deep in the boardroom and they’re not needed on an ongoing basis, but they’re needed at different times.
Ann Beth Stebbins (08:13):
Investors might say, “Why don’t you have someone with this skill on your board?” You’re getting ahead of it by including in your disclosure how you’re backfilling for not having that skill.
Allie Rutherford (08:23):
Exactly.
Ann Beth Stebbins (08:23):
And how that’s working or you’re looking for someone who has that skill set.
Allie Rutherford (08:28):
Exactly right. Thinking about how you said future-proofing the board, looking ahead. So how does the board think about that? Maybe that’s an outside expert for some period of time and maybe the board determines that’s a skill that actually would be value add. Or, maybe [the board] decides it doesn’t need that [deep expertise]. But, really thinking about the composition of the board, the skill sets, the experiences, as an evolution and alignment to the strategy.
And then, to answer your question, take that to the proxy statement disclosure. I think there’s the straightforward skills matrix — maybe it’s just an aggregate summary of the skills and those check boxes. Some companies take that further and they provide a description of what that skill is and what that means to the particular company; why the board is determined that the [skill is] important.
Some of them are going to be more specific to the company. Maybe that’s digital, maybe it’s marketing. So providing that perspective that the board has put thought into this and really articulating why it makes sense for the company. I’ll hand it over to Adrienne to provide some color on some of the ways that companies have brought to life some of those skill sets with their particular directors.
Adrienne Monley (09:29):
One of the things we’ve seen over the last couple of years is a little bit more creativity in the proxy statement. The proxy statement was not always the communication tool that it is now, right. I think a lot of people still think of it as a really critical regulatory and legal document, which it of course is. But to your point, Ann Beth, there are a lot of consumers of the proxy statement, including investors big and small, proxy advisors, the media, others, and so you really want to be thoughtful about what’s in there. Not everyone’s going to get the color commentary that comes from an engagement discussion.
Ann Beth Stebbins (10:01):
So the proxy statement is an opportunity.
Adrienne Monley (10:03):
That is why we have seen some companies get a lot more comfortable trying new things. So a couple of examples of this: both having a clear set of skills and experiences that exist on the board, descriptions of why those skills matter for this company, and then even maybe having more director-specific explanations of that skill. So this director brings this skill through this particular experience that they have in their career, and they’re able to bring that perspective to the boardroom in XYZ ways.
So I’m even finding bios being one area; being a little bit more illustrative and descriptive, again, to help investors really understand not just what skills the board has, but who has them, how they’re coming through and what the value is.
Another idea we’ve seen come through, that we partnered with a client on, was actually incorporating quotes from real directors on different practices and standout experiences they had over the course of the year on that board.
(10:58):
And that was just a way to try and bring to life, through the eyes of each director, what was happening on the board, what was exciting about it, and why they felt that that really contributed to high-quality governance. The feedback that this company got on these types of enhancements was really strong, and again, I just think is a really creative, exciting way to use a key regulatory legal disclosure as a way to both be compelling and be descriptive because of how important this category of discussion has really become with investors.
Ann Beth Stebbins (11:31):
We’ve seen in other arenas that disclosure promotes good behavior. And so if companies are seeing their peers talking about these practices, it could encourage them to have better practices in their own boardroom as well. They don’t want to be behind the curve.
Adrienne Monley (11:48):
I definitely think the bar is raising. Every year we see a lot more advanced disclosure, creativity, use of graphics, use of descriptive language. And some people are complaining that the proxy is getting very long — I think that’s true — but the truth is I still think it’s worthwhile to add some of that additional discretionary insight. Because again, for companies that have wide shareholder base, which most public companies in America do, it is really worthwhile to try and communicate a descriptive, compelling narrative to your wide investor base that helps to maintain their support over time.
Ann Beth Stebbins (12:25):
Allie, what are some of the more creative things that boards are doing to increase their touch points with management, outside investors, consultants, anything they can do to increase their effectiveness in more creative ways?
Allie Rutherford (12:40):
I’m not sure if these are new or innovative approaches — just transparency around what boards have been doing. So some examples of this: we talked about bringing in outside experts, providing some disclosure or transparency around those topics, and not necessarily who’s coming into the boardroom, but what’s discussed and any changes coming out of that. Some of the process-oriented changes, and maybe that’s the frequency or the way content is delivered, the timing of content, process improvements that the board can put in place, site visits, engagement with employees.
One of the topics that investors are quite focused on is the measure of culture, and the way that boards can have access to that is direct engagement with employees. So again, not to say that that hasn’t been happening, but providing transparency around that [activity]. Maybe that’s using the proxy statement, maybe that’s using an impact report, but just a little bit more color that give investors that bigger picture into the boardroom.
Ann Beth Stebbins (13:35):
And how are CEOs and other C-suite members reacting to this broader scope of board engagement?
Adrienne Monley (13:47):
I certainly think that between boards and CEOs, they would themselves probably acknowledge there is and there should be some healthy level of tension between those roles. Without some amount of independence and tension, you’re probably not going to get the value from that independent oversight that you want and need. There’s a reason that investors really want independence in the board and they want the board to challenge management. CEOs are maybe feeling some of that potentially investor-led pressure on boards that is forcing boards to both, yes, disclose more; but also maybe to spend their time in some other ways. Because as Allie alluded, there’s a wide number of topics that investors want boards to be focused on, whether it’s AI, people , potential strategic implications, geographies, operations, supply chain. Every single topic that is relevant to a company and that company building and creating value is under the purview of the board.
(14:52):
And I think more and more we have seen boards just feel like there is a tremendous amount on their plates. Board meetings are getting longer, board members are busier. Boards are very interested in a whole range of topics and issues. It is hard to say how materially different than is from the past, but the fact that boards are, I think, a little bit more accountable to describe these practices to the outside most certainly ensures that the practices are happening. The feedback we hear from CEOs is they’re certainly feeling that it’s happening. That probably would be good news to any of the investors listening to this podcast.
Ann Beth Stebbins (15:26):
Talk about board leadership and how important it is to have strong board leadership in addition to the CEO in the boardroom.
Allie Rutherford (15:35):
Based on my experience in sitting in boardrooms, there isn’t a perfect model for board leadership. But having independent leadership is important for some of the [reasons] that we talked through today. That board evaluation process is typically undertaken by that independent leader, whether that’s a lead independent director or an independent chair, or the chair of the non-gov committee. Someone in that role can undertake that exercise with a trusted board member and improvements can come from that process.
That’s obviously just one example of where an independent board leader is critical to the evolving function of the board.
What’s most important are the dynamics between that individual, the CEO, the other board members. And again, using what Adrienne said, that healthy tension is really critical to an effective board.
Ann Beth Stebbins (16:25):
We’ve talked about the board self-assessment process. Adrienne, what are best practices that you’ve seen in board self-assessment? When does it work best and how is the information garnered from those self-assessments most useful?
Adrienne Monley (16:42):
There are certainly practices I think investors get excited to view and hear about, and then there are practices that investors are maybe not as thrilled by anymore because they’re practices of old. Five, ten years ago I think it was very common for a self-assessment to be more, again, we’ll use the term boilerplate. A quick self-assessment, maybe a handful of questions or a grading scheme that was passed around the board room in writing. Everyone would fill out a little questionnaire, someone would tally it up, there’d be a quick discussion about it, and then they’d sort of move on. And then it would state in our proxy statement that there was an annual self-assessment. And I think what’s happened over time is that investors see that type of very short description that feels perfunctory.
Ann Beth Stebbins (17:25):
Well, it’s a process that’s perfunctory, so it’s described as perfunctory.
Adrienne Monley (17:29):
Yeah, so I think the disclosure was very accurate. That’s what was happening at some companies. Now we have board rooms full of people with really robust, dynamic experience. They are tackling and overseeing a wide range of very complex issues. And investor expectations have evolved to a point where investors want that board to be doing things that help improve the efficacy and the functioning of that board as a team, as a group of people who are trying to accomplish some very difficult aims together. As a result, today, more self-assessments include things like independent interviews and discussions maybe with one of the board leaders Allie described.
(18:07):
In addition to some kind of very thoughtful questionnaire, maybe there are more focus group type discussions where subsets of the board, including maybe committees, are reflecting on their own efficacy and the results of that work. And piecing all these different pieces together, maybe it’s not the same process every year, but every couple of years they’re really getting a very 360-degree view of themselves and their own impact. And as Allie described earlier, I totally agree with this, they’re actually implementing real improvements from that process that they can then articulate back to investors. It proves that the outcomes of the process are healthy and are reaching a place of positive intent with investors.
Allie Rutherford (18:47):
More companies are doing a comprehensive assessment every couple of years by an outside party. And in between, one run by the independent leader of the board or someone in a committee leadership role that has the ability to take in that feedback [and] that has the confidence of the board members for open sharing. And has the ability, as you said, to really put in place improvements that the board can feel enhance effectiveness.
Adrienne Monley (19:16):
And Allie, this point about feedback: when I’ve heard narrative or anecdote from companies about what feels like a really effective process, it’s not even just a process that facilitates gathering feedback, but also delivering feedback about individual committees, about individual directors, in ways that all of those pieces of the board can actually maybe function and contribute better.
Ann Beth Stebbins (19:41):
Continuing with your earlier theme, Adrienne, and then communicating the feedback that came out of the assessment and how that feedback was used to implement change that made the board more effective.
Allie Rutherford (19:55):
I would just add all boards are a little different. The individuals that comprise the board make them operate and function and communicate differently. And that means when people ask that question of, “how should we do our evaluation?” you have to tailor that approach to the particular board. Nothing is going to be perfect for every board, and it’s not a one size fits all, just like the board composition question is not a one size fits all. The dynamics of the boardroom really matter in terms of how you build an effective evaluation process.
Adrienne Monley (20:28):
To that point, Allie, because all boards are unique, it’s helpful when they take the steps to convey those unique factors back to their investors. I really feel like that is a virtuous cycle that is worth investing in.
Ann Beth Stebbins (20:41):
And then they get feedback from investors if they don’t have it, right?
Adrienne Monley (20:47):
Yes, or if there’s some kind of gap in understanding, sometimes that’s feedback in and of itself that investors just want to know and learn more.
Ann Beth Stebbins (20:55):
Building on something you said earlier, most investors have never been in a boardroom and most board members have never been investors, and there’s an understanding gap. How can this be addressed and the virtuous cycle of communication be used to a board’s advantage?
Adrienne Monley (21:15):
That’s the nut we’re trying to crack, at least with our clients every day. Every company has got a different set of opportunities and challenges. Really thoughtful investor-friendly disclosure is one really important piece of the puzzle. And I think I would add to that, that it’s not just disclosure, it’s communication from and about the board more broadly, which of course includes engagement and direct discussions with your top investors whose votes and views on matters can be very outcome-determinative for a lot of companies.
Ann Beth Stebbins (21:42):
With a goal to getting to a shared understanding of what’s going on in the boardroom and ultimately the impact showing up in the bottom line.
Allie Rutherford (21:51):
Companies want to have these conversations with investors in good moments. So the idea here around the disclosure and the engagement is to build a level of understanding that the board is really thinking about its composition. It’s really aligning it to business strategy, shareholder value. When boards are assessing their effectiveness, that’s a backwards-looking assessment. They also want to understand the forward-looking composition. When investors are actually voting on directors as their representatives on the board, they’re doing that backwards-looking; they’re evaluating their performance, they’re evaluating the disclosures over the prior year. Disclosure matters in those moments, but it really matters in the more critical complex vote matters where you’re in a situation where you’re a director, you’ve got an activist that’s nominating other candidates, and you’re then in a position to look back and say, “All of that work we just did, all of that disclosure, all of that engagement, was really worth it because our investors understand how we think about the composition of our board.”
Adrienne Monley (22:55):
And the investors are coming with you on the journey as they get to know your board. They get to know that board’s practice and that pays off when the investor is making bets about the future of the company. Yes votes are often reflecting some sentiment about the board’s backward-looking practices, but they’re doing so with the hope or expectation that the people — especially in a universal proxy environment, are the right individuals to oversee the company through what it’s going to go through.
Ann Beth Stebbins (23:26):
And to lead the company into the future. So Allie and Adrienne, this has been a great discussion. Thanks so much for joining me today on The Informed Board, and I hope to catch up with you Governance Gals again in the boardroom.
Allie Rutherford (23:39):
Looking forward to it.
Voiceover (23:41):
Thank you for joining us for today’s episode of The Informed Board. If you like what you’re hearing, be sure to subscribe in your favorite podcast app so you don’t miss any future conversations. Additional information about Skadden can be found at skadden.com. The Informed Board is a podcast by Skadden, Arps, Slate, Meagher & Flom LLP and affiliates. This podcast is provided for educational and informational purposes only and is not intended and should not be construed as legal advice. This podcast is considered advertising under applicable state laws.
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