What do you get when you combine 50 world-calibre governance researcher and practitioner authors, from eight countries, writing on the latest trends, regulations and emerging best practices in corporate governance? The Handbook of Board Governance, a new 39-chapter collection, edited by Richard Leblanc, associate professor, law, governance and ethics, and director of the Master of Financial Accountability Program, at York University. Elsewhere, we’ve excerpted an important chapter from the book, which can be read here: “Is your board MIA on HR?. To accompany that excerpt, we asked Leblanc, who is also a Listed contributing editor, to discuss the project and some key issues in governance today.
Listed: What did you set out to achieve with this book?
Richard Leblanc: Many corporate governance books are written by two groups of people—academics who lack practical experience or by directors after a career of being a director. What I wanted was to have a variety of authors that have professional experience, some of which have never written before, and then have academics that have some practical experience. I couldn’t have possibly written this book as is. On other hand, as editor I was able to shape it. I also didn’t guarantee an author a chapter until I saw the work and I was happy with the quality of their chapters. So I just took the best.
Listed: The introduction stresses that this book has a “board” perspective. Can you explain?
Richard Leblanc: I instructed all the authors not to write from a management or an outside perspective, but from a board perspective—as though they’re on the board or they’re advising the board or reporting to the board. To go to the top floor of the house, if you will. So I’ve captured management, advisers and directors reporting to, sitting on or advising a board. But it’s from the board and committee perspective, not a management perspective.
Listed: Practices, regulations and trends in governance are evolving so quickly. How do you see that and how have you addressed it?
Richard Leblanc: The velocity of change and the depth of change really have accelerated since the financial crisis, which happened in ’08-’09 but the regulations were not actually happening until 2012-’13-’14-’15-’16, and will probably go on for another three or four years. So the regulators and the activists are really accelerating the pace and the depth of change. And boards need to keep up. It’s coming in waves. The wave we’re dealing with now is cybersecurity, reputation risk, social media. The wave that’s coming is climate change and non-financial reporting.
I wanted to have waves within the book as well. And also to create the platform for a second edition within the next year or two, so that as some of these waves become digested, we’ve got a next edition coming that can address practices that have emerged that have become best practices in various areas.
Listed: How are boards keeping up? This must be a big concern?
Richard Leblanc: It’s absolutely huge, because directors have never experienced these things before. The average director did not grow up with—grow up, meaning manage—the power of a cell phone or the power of social media or greenhouse gas emissions. So education now for directors has become essential, not a luxury. If they’re not continuous learners they’re going to be left behind.
Listed: Is it the same at smaller companies and on private boards?
Richard Leblanc: There’s less pressure on private boards because they don’t have the compliance obligations that come when you take outside money from investors. But if you look at the chapters by Adam Quinton and Adam Epstein, they talk about how even start-up boards now are getting pressure from creditors and investors, and even family and friends. Quinton says if you’re raising money for a company and friends and family haven’t asked you about your board, then certainly angel investors will not only ask you but, depending on the quantum of the money, they’re going to ask you for a board seat. The point is that with start-up boards, private boards and not-for-profit boards, the osmosis is now much more rapid from publicly traded companies.
Listed: Earlier you also mentioned activists driving change. What do they represent in this context?
Richard Leblanc: What activists have done is they’ve caused boards to focus on performance and strategy much more than regulation has. Regulation is largely compliance whereas activism is largely performance and strategy. So most boards now are always thinking, are we a target? And how do we prevent ourselves from being a target? I’d actually put activists under a general shareholder rubric, where the focus is from investors on protecting their investments and also selecting directors, proxy access. That has had a huge effect on boardrooms.
Listed: There’s a section in the book on performance and compensation, which you call an “unresolved” problem. Why unresolved?
Richard Leblanc: It’s not that executives are overpaid, it’s that there is a lack of alignment between pay and performance. That means it’s unresolved. The authors on that, Charles Elson and Craig Ferrere, said the problem is benchmarking. We select peers for compensation comparison purposes that result in a structural increase every year that’s unrelated to performance. That’s huge.
In the other pay chapters, I wanted the authors to say what is causing this and what are their recommendations. They look at the concept of TSR (total shareholder return), which is what the SEC supports; and with a lot of that, there’s no line of sight and it’s subject to exogenous shocks. So the selection of the metric itself by regulators is causing some of the disconnect. There’s also the focus on short-term pay as opposed to long-term pay. And what about the non-financial aspects of performance? Seventy-five percent of the value of a company is non-financial, so why aren’t we taking that into account? Why isn’t employee engagement a key metric, or sustainability or diversity? The marrying of these factors with pay will be crucial as the related metrics start to mature.