For 39 years . THE THE LEADING JOURNAL OF CORPORATE GOVERNANCE CORPORATE BOARD 1 REDEFINING THE LEAD INDEPENDENT DIRECTOR by Holly J. Gregory How are lead directors using their new powers and responsibilities? 7 BOARD EVALUATION: “FEED-FORWARD” INSTEAD OF “FEEDBACK” by Paul Winum Evaluation focuses too much on past problems, too little on future aspirations. 12 A PRIVATE EQUITY MODEL FOR PUBLIC COMPANY BOARDS by Henry D. Wolfe Top private equity-owned company boards think, act and perform differently. 17 FACING THE NEW TIDE OF SECURITIES LITIGATION by H. Stephen Grace Jr., Ph.D. and Joseph P. Monteleone Today’s lawsuits and enforcement action demand new litigation teams. 22 INFORMATION TECHNOLOGY GOVERNANCE by Bob Zukis After all the cyber and data danger warnings, how do you change your board to respond? 26 IN REVIEW Index to actions, regulations and surveys. 30 SPOKEN & WRITTEN Excerpts of articles and speeches. 31 DIRECTORS’ REGISTER Recent board elections. 32 CONVERSATIONS: HANNAH-BETH JACKSON California mandates board diversity. NOVEMBER/DECEMBER 2018 VOL. XXXIX NO. 233 THE CORPORATE BOARD THE LEADING JOURNAL OF CORPORATE GOVERNANCE Copyright: © 2018 by Vanguard Publications. STAFF All rights reserved. THE CORPORATE BOARD (ISSN 0746-8652) is published in January, March, Editor Ralph D. Ward May, July, September and November. Chairman and CEO Irving A. Lesher III Reproduction: No part of this publication may be President and COO Judith A. Scheidt reproduced or transmitted in any form or by any means, electronic or mechanical, including Circulation Ann K. Stocum photocopy, recording, or any information storage and retrieval system, without permission in writing. For information on permission to quote, EDITORIAL OFFICE reprint, or translate editorial content, contact: Vanguard Publications, Inc. The Corporate Board 4440 Hagadorn Rd. 4440 Hagadorn Rd. Okemos, Michigan 48864 Okemos, MI 48864 Email: [email protected] Phone: (517) 336-1700 Subscriptions: Available to corporations at an Fax: (517) 336-1705 annual cost of $3,200. This provides delivery of Email: [email protected] six bimonthly issues to each board member, senior executive officers, and the corporate secretary. Web site: www.corporateboard.com Periodicals postage rates have been paid at Okemos, MI and at additional mailing offices. EDITORIAL ADVISORS POSTMASTER: Send changes and all Thomas J. Goff subscription correspondence with the mailing label to: Customer Service Founding editor, THE CORPORATE BOARD; THE CORPORATE BOARD owner, Goff Consultancy; former executive vice 4440 Hagadorn Rd. president for corporate reputation and crisis Okemos, Michigan 48864 communications, Edelman Public Relations. Please Note: The opinions of the authors are their Dolores Wharton own, and do not necessarily represent the views of Founder and president, Fund for Corporate the publisher, advisors, or editorial staff. Initiatives; member of various boards. NOVEMBER/DECEMBER 2018 Vol. XXXIX No. 233 Printed on Recycled Paper Redefining The Lead Independent Director by Holly J. Gregory While the number of U.S. corporations with Large institutional investors and proxy advisors an independent board chair continues to in- generally prefer that boards select an independent crease, the lead independent director position chair and avoid giving the CEO the chair title. has become the boardroom norm at many Shareholder proposals seeking the adoption of an companies. The motivators for creating this independent chair structure remain common, and lead director boardroom leadership structure, pressures to move toward an independent chair may its status and powers continue to vary greatly never fully abate. from board to board. While many shareholders favor an independent chair, many also accept that a well-designed lead director role can provide an effective alternative. As The leadership structure of large U.S. publicly traded companies continue to develop the lead director role, companies has evolved significantly since the turn it is becoming similar to the role of an independent of the century away from the tradition of combined chair. leadership in one individual who holds both the The primary differences are in the title of “chair” CEO and board chair positions. The most prevalent versus “lead director,” and in the power to wield the public company leadership structure is now one in gavel in full board meetings versus in executive ses- which the board has leadership independent from sions of the independent directors. The lead director the CEO, through an independent chair or lead or role is becoming synonymous with leading the efforts presiding director. of the board, as distinguished from the CEO’s role Public companies are not required to have an in- in both leading management and the company for dependent board leader. Nevertheless, boards have most external matters. altered their leadership structures as attention has Boards and their advisors should follow develop- focused on the role that independent directors are ments in this area and ensure that the leadership expected to play in providing objective oversight structure they have adopted is: while holding management accountable. Appropriate for the company’s particular cir- cumstances. Effective in supporting board objectivity in Many shareholders now accept that a well- business judgments and oversight. designed lead director role can provide an Well articulated in company disclosures and effective alternative to a separate chairman. policies. Boards should review their leadership structure Independent leadership is viewed as particularly on a periodic basis to ensure that it is appropriate important with respect to board oversight and deci- for the company. Boards with a lead director should sions regarding corporate strategy, management suc- review the functions of that role on a periodic basis cession, performance and compensation, audit and against emerging practices. Additionally, boards internal controls, board composition and functions, should consider the independent board leadership and accountability to shareholders. Leadership in most S&P 500 companies is now shared between the Holly J. Gregory is a partner and co-chair of the Global CEO and a lead director selected by the independent Corporate Governance and Executive Compensation Practice directors (hereinafter, a lead director). with Sidley Austin LLP. [www.sidley.com] THE CORPORATE BOARD NOVEMBER/DECEMBER 2018 1 Holly J. Gregory structure as a component of both CEO and board a combined role, it is essential that the board have a succession planning. strong lead independent director with clearly defined Pressures for independent leadership. The authorities and responsibilities.” (The Commonsense move away from combining the chair and CEO roles Principles of Corporate Governance, Preamble has been driven by a number of forces. Changes in (2017), available at governanceprinciples.org.) listing rules and SEC disclosure requirements have “The board should be chaired by an independent focused attention on board leadership. Listing rules director. The CEO and chair roles should only be imposed in 2003 (generally associated with the combined in very limited circumstances; in these situ- Sarbanes-Oxley Act) raised expectation that inde- ations, the board … should name a lead independent pendent directors provide objectivity in overseeing director who should have approval over information management. flow to the board, meeting agendas and meeting Mandates of the Dodd-Frank Act, adopted by the schedules to ensure a structure that provides an ap- SEC in 2009, require disclosure of the board’s ratio- propriate balance between the powers of the CEO nale for combining or splitting the chair and CEO and those of the independent directors.” (Council roles. At companies where the chair and CEO roles of Institutional Investors, Corporate Governance are combined, disclosure of whether the company has Policies (Sep. 15, 2017), available at cii.org.) a lead director and the specific role the lead director Shareholder proposals. Shareholder proposals plays is required. seeking an independent chair continue to be preva- lent. Proponents appear to target companies that they perceive to have board oversight or performance is- “Every board needs a strong leader who is sues, with little regard to whether the company has independent of management. The board’s inde- adopted independent board leadership. pendent directors usually are in the best posi- According to Proxy Monitor, at Fortune 250 com- tion to evaluate whether the roles of chairman panies in 2017, proposals regarding an independent and CEO should be separate or combined.” chair were the most frequent governance-related shareholder proposal, and the third most frequent Shareholders and proxy advisors have fueled this shareholder proposal overall. change. Shareholder proposals and proxy voting poli- Although none of these proposals received major- cies generally support proposals for an independent ity support in 2017 or 2016, it is likely that they will chair unless the company maintains a strong lead continue to be submitted and the issue of independent director role. Many institutional investors also favor board leadership will continue to be debated. independent board leadership through their proxy In 2017, 43 independent chair proposals went to a voting and governance policies, including BlackRock, vote. These proposals are commonly supported by State Street, CalPERS, CalSTRS, the New York City the two primary