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July 5, 2016 | www.AgendaWeek.com

Five Board Questions on Brexit

Companies face new risks after the U.K.’s vote to leave the European Union by Melissa J. Anderson

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he U.K.’s referendum vote to leave the European Union shocked markets and political observers who didn’t see it coming. Now, boards are being urged to address Brexit risk while also heeding it as an example of how political instability can affect big business. Global stocks plunged following the Brexit vote on June 23, with the FTSE 250 falling almost 14% in the two days following the vote and the Dow losing 900 points in the same time span. The markets appeared to have regained their losses and stabilized by the time Agenda went to press, but both S&P and Fitch downgraded the U.K.’s credit rating to AA, while Moody’s cut the U.K.’s credit rating outlook to negative. The U.K. is expected to see a recession by the beginning of 2017, and the financial contagion could spread to the U.S., according to a report published by Goldman Sachs last week. In fact, a recent survey by FTI Consulting shows that 100 global institutional investors with more than $8 trillion in assets under management believe that Western Eu-

rope is the most likely region to experience a recession if Britain leaves the EU (78%) and Eastern Europe would be the next most likely region (57%) to suffer an economic downturn after Brexit. Experts are also anticipating effects on capital investments, currency valuations, human capital, legal agreements, M&A, taxes, trade and more, especially for companies with exposure to the U.K. or EU. It will take at least two years for the details of Brexit to be worked out, so companies can expect continuing uncertainty. Directors should raise the Brexit issue at their next board meeting, experts say, to ensure their company is positioned to manage expected and unforeseen risks stemming from the U.K.’s pending EU departure. “Business likes certainty, and businesspeople always complain that political decisions are creating uncertainty. This is the most extreme example,” says Paula Stern, a former chairwoman Brexit continued on page 2

Table of Contents… 5 How American Companies Are Reacting to the Brexit Vote

10 How Traditional Boards Face Disruptive Innovation

15 Green Dot Saga Ends With New Chair, Battered CEO

7 Pay Ratio Prep Enters Home Stretch

13 Boards Should Heed Boundaries When It Comes to Compliance

16 As Xerox Readies Split, Icahn Lieutenant Joins Board

14 SEC Requires Energy Companies To Disclose Payments

16 New Spirit CEO to Give Airline a Makeover

9 Volkswagen’s U.S. Settlement Just the Beginning

RISK MANAGEMENT

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of the U.S. International Trade Commission who has served on over a dozen public company boards. Stern is currently a member of the advisory board of Zurich-based LafargeHolcim. Boards of companies with significant business or investments in the U.K. should approach Brexit in the same way they considered crisis management following the business effects of the Sept. 11, 2001, terrorist attacks or the supply chain interruption caused by the 2011 tsunami in Japan, she says. “But this was a self-imposed crisis, not an act of nature nor an act of terrorism,” she says. “This was a vote taken on a democratic basis … to go backwards, not forward, economically.” Here, governance and risk management experts share their views with Agenda on five key questions that directors and officers should address at their next board meeting to effectively oversee Brexit risk.

1. How will Brexit affect our operations? Sources have offered a laundry list of potential operational effects Brexit could have — from scuttling tax inversions to hindering talent recruitment. Companies with significant operations or investments in the U.K. should review their operations thoroughly. Whether multinationals have headquarters, factories or a major marketing center in the U.K., boards should ask whether the calculations that went into the decision to establish

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those operations still make sense, Stern says. There are other attractive locations in Europe, she suggests. “People can say, ‘Let’s muddle through and see if the politicians can mitigate this disaster,’ but business can’t wait,” she says. Boards have to oversee decisions on the most efficient place to pay taxes, the best places to invest in real estate, and other strategic concerns. The EU and U.K. are considering several different models for their future relationship, and boards should be prepared for any of them, Stern says. Finally, boards should also be sure to consider changes to trade rules, Stern adds. “There are potentially all kinds of scenarios,” she says. “The rules of the road are now negotiable.”

2. Is our board poised to address this risk? It appears that many large companies were caught off guard by the outcome of the vote. For instance, in April, the Financial Times reported that only a quarter of FTSE 250 board chairs or audit committee chairs had discussed the Brexit vote with management. In the U.S., only a handful of companies have filed 8-K disclosures alerting investors to Brexit risk exposure. “The idea that boards were not discussing the threats and opportunities relating to something so major on a global scale is alarming,” says board strategy and governance advisor Alice Korngold, author of The Handbook of Board Governance: A Comprehensive Guide for Public, Brexit continued on page 3

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RISK MANAGEMENT

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Private and Not for Profit Board Members. “How is it that the board is not asking management for scenario planning or contingency planning on something that would have such a significant effect on the company?” she asks. The answer may lie in the board’s composition, Korngold says. “With more diverse boards, the group as a whole is better informed about a variety of issues, but also you have a higher likelihood that people will raise questions because they have different backgrounds — they’re not all in the same club,” she says. “The situation really shows the red flags, the hazards, of a lack of board diversity.”

3. Are we overreacting? Meanwhile, not every company will be directly affected by the Brexit vote, warns Franklin Miller, principal at the Scowcroft Group and a director at EADS North America and the Sandia Corporation. Even companies in the U.K. and EU have yet to see how the le-

gal details of the U.K.’s exit from and future relationship with the EU will shake out. Since those details won’t become clear for at least two years, it’s important that companies don’t jump the gun and create bigger risks by making rash decisions, Miller says. “It all depends on how the divorce is negotiated, doesn’t it?” he asks. Technocrats in the EU seem to be taking a hardline approach to the breakup negotiations, while Miller hopes political leaders like Angela Merkel and Francois Hollande will offer more amenable terms to the U.K. “The technocrats are probably on a path to sink the EU, so there needs to be some political horse sense injected into the overall situation,” Miller says. Similarly, Miller is advising a wait-and-see approach for U.S. companies. “Domestic boards could make all sorts of assumptions and waste all sorts of time,” he says. “Until we learn how the playing field will lay out — whether it’s soccer or baseball — it doesn’t make a great deal of sense” to make changes now, he says.

Regional Impact of Brexit In which regions would you expect an economic downturn should the UK leave the EU?* 100% 80%

78% 57%

60% 40% 20% 0%

7% Western Europe

4%

Eastern SubLatinEurope Contiental America Asia

4%

4%

Africa

Middle East

4%

2%

North AustraliaAmerica Pacific

2%

11%

South None will East be impacted Asia

*Base (Global Institutinal Investors) n=100 with more than $8 trillion under management Source: FTI Consulting Brexit continued on page 4

July 5, 2016

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RISK MANAGEMENT

Boards should also find out what the company is doing to monitor other geopolitical risk that could affect their company, advises 4. What are the downsides and upsides? Bonime-Blanc, who was the founding global Boards should request a Brexit report from chief ethics and compliance officer for the management on how the new geopolitical situglobal media company Bertelsmann. ation affects the company’s strategic plan with “[A]nd if it hasn’t done a facts and figures, potential good job to date [of moniimpact and go-forward optoring geopolitical risk], tions, recommends Andrea “In addition to asking what is it going to do to facBonime-Blanc, CEO of GEC about risk impact, it is the tor this potentially strategic Risk Advisory and author risk into its ERM and straresponsibility of the board of The Reputation Risk Handtegic considerations?” she book. to ask management to writes. “[C]ompanies need to find opportunities to take Indeed, several sources look on the bright side as advantage of Brexit.” commented that if the Brexwell, and in addition to askAndrea Bonim-Blanc it vote could catch corpoing about risk impact, it is CEO, GEC Risk Advisory rate management off guard, the responsibility of the perhaps executives are out board to ask management of touch with similar politito find opportunities to take cal forces gathering in the advantage of Brexit from a U.S. and other countries. revenue-enhancing standpoint,” Bonime-Blanc “[Corporate directors and executives] have writes in an e-mail. to be listening and becoming more cognizant of the kind of anger that is generating some of 5. How are we monitoring government these really unfortunate political outcries and relations and geopolitical risk? outcomes,” says Stern. Doug Chia, executive director of the Con“There was a time in the U.S., particularly ference Board Governance Center, says boards after World War II, when business leaders were should press management on how they are the strong proponents of the creation of the managing government relations outside the EU and the importance of taking down trade U.S. in recent years. barriers, barriers to commerce and barriers to “There’s a big focus on government relaprosperity. They played an incredibly importions programs, but I think most U.S.-based tant leadership role, and I think corporate companies focus their resources on U.S. govAmerica should step up to that example,” she ernment relations and what goes on on Capitol says. g Hill and in certain states,” he says. Brexit continued from page 3

“Boards need to understand more about how companies are set up to stay on top of and potentially influence decisions happening in London and Brussels,” Chia says.

July 5, 2016

Melissa J. Anderson (212-542-1277 or [email protected]) covers legal, legislative and regulatory issues.

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N E W S & A N A LY S I S

How American Companies Are Reacting to the Brexit Vote Some companies are laying the groundwork for an exodus from the U.K. by Jack Buehrer

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arkets were roiled in the aftermath of the June 24 announcement that Britons had voted in favor of the so-called “Brexit” referendum, calling for the U.K. to leave the European Union. As stocks plummeted and the British pound sank to its lowest level in 31 years, companies from around the globe scrambled to react while the British government and EU officials begin considering the terms of their divorce. While reactions varied across sectors and individual industries, some companies have already begun laying the groundwork for an exodus from the U.K. Global firms like Siemens AG and Vodaphone have already decided to put expansion and investment into the U.K. on hold, Fortune reports. In the U.S., banks and financial services firms have reportedly been among the first to consider pulling out of the U.K. in the wake of the Brexit vote. Britain-based Sky News reports that Visa will likely face pressure from German and EU regulators to relocate its U.K. data center elsewhere in Europe due to an agreement reached during the takeover of Visa’s European operations by its American arm that stipulates all Visa card customer transaction data “should not leave Europe.” Meanwhile, The Times of London reports that Goldman Sachs executives are not ruling out relocating some or all of its 6,500 U.K.-based employees. “Every outcome is possible,” Richard Gnodde, who co-directs the company’s investment banking division, tells the paper. “If [financial] passporting was totally removed, we would have to adjust our footprint and where we were located.” Most companies are taking a similar, waitand-see approach. As Andrew Clarke, CFO of Minneapolis-based logistics provider C.H. Rob-

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inson Worldwide Inc. tells The Wall Street Journal, the Brexit vote, “doesn’t change our strategy of wanting to grow and expand in Europe, but it does affect the manner in how you do that,” he says. “In general, I would expect you would see a pause in companies doing acquisitions in Europe and the U.K. during this period.” Here are some other first reactions from around corporate America:

Ford Motor “While we are hedged against the U.K. pound sterling in the short term, we would expect that the combination of a softer industry and a weaker sterling would have an adverse impact on our operations in the long term.” — company spokesperson

General Motors “It is important for GM’s local operations that negotiations on the U.K.’s future relationship with the EU are concluded in a timely manner. It is also important that business continues to benefit from the free movement of goods and people during this period. Communication on the development of the future relationship with the EU should also be clear and transparent. We fully support remaining part of the European Economic Area.” — company spokesperson

IBM “IBM is in favor of the U.K. remaining a member of a reformed EU. As a large, globally integrated business with a strong presence across the European Union, IBM sees significant benefits from EU economic integration. As a member of the EU, the completion of the Digital Single Market will further accelerate this Reacting continued on page 6

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Reacting continued from page 5

success for U.K. tech. Whilst this is first and foremost a personal decision for every U.K. citizen to make, IBM is of the view that the U.K. can have more influence and be more prosperous and competitive by remaining an active member of the EU.” — David Stokes, CEO, IBM U.K.

JP Morgan “In the months ahead [we] may need to make changes to our European legal entity structure and the location of some roles. While these changes are not certain, we have to be prepared to comply with new laws as we serve our clients around the world. We will always do our best to take care of our people and do the right thing during times of change.” — Jamie Dimon, CEO

a large footprint in the U.K. and across Europe, we call on the British government and its European partners to make all efforts to move forward swiftly to negotiate a new settlement. The U.K. is an intrinsic part of our European supply chain and we urge all parties to reach an agreement that quickly removes the uncertainty, allows the UK to retain full access to and from the single market and protects the interests of businesses with strong commitments and investments in the U.K.” — Mark Dorsett, U.K. country manager

General Electric

Caterpillar

“Although GE supported the U.K remaining in the EU, we respect the decision of the British people and remain firmly committed to the U.K. and Europe. GE has 22,000 employees in the U.K. and 100,000 employees in Europe overall that will continue to focus on delivering great outcomes for our customers.” — Jeffrey Immelt, CEO

“We acknowledge and respect the decision by the British people for the U.K. to leave the European Union. As a global manufacturer with

Jack Buehrer ([email protected]) is Agenda’s news analyst.

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L E G A L & R E G U L AT O RY

Pay Ratio Prep Enters Home Stretch

Compensation committees encouraged to monitor workforce pay calculations by Melissa J. Anderson

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ompensation experts are encouraging boards to have their HR teams perform dry runs of their pay ratio calculations this year and next year in preparation for the mandatory 2017 fiscal year disclosures. The CEO pay ratio rule offers some flexibility in how workforce pay is calculated, and boards should start discussing the optimal method to determine their median employee, experts say. That way directors will be well prepared to face investors and the media to discuss the ratio once the disclosures are filed in 2018 proxy statements. Boards should also make sure management is prepared to communicate with employees on what the ratio means and how their compensation lines up against the company’s overall pay philosophy, experts say. “You want plenty of time to work through the sensitivities and to work through your process of how you’re going to get the data, how you’re going to vet the data and what data is the best to use,” says Blair Jones, managing director at executive compensation consulting firm Semler Brossy. “You’ll have had two full runs by the time they actually go live in the 2018 proxy and then [the pay ratio team] will know they’ll be able to do it in the time required,” Jones says. The SEC finalized its controversial pay ratio rule in August 2015 by a vote of 3 to 2. Mandated by Dodd-Frank, the rule requires companies to disclose in their proxy statements the ratio between their company’s median employee’s compensation and their CEO’s pay. While the rule was cheered by labor leaders and income inequality activists, critics have suggested the disclosure will offer no useful information to the average investor and that, because companies differ so much in workforce

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structure even within the same industry, the information could confuse investors who plan to compare ratios between companies. Former SEC commissioner Daniel Gallagher referred to the rule as “nakedly political” at Lizanne Thomas the confirmation hearing. “It flies in the face of the materiality standard and the relevant-to-investor standard that has been such a seamless and successful component of our securities laws for 80 years,” says Lizanne Thomas, head of corporate governance at law firm Jones Day and a director on the board of Krispy Kreme Doughnuts. “I do hope it gets rescinded because it’s an utter waste of corporate resources and provides misleading information,” Thomas says.

Calculating Median Workforce Pay Thomas says directors are better off following the “noses in, fingers out” method of oversight when it comes to the pay ratio. Since disclosures will have to be made on fiscal year 2017 compensation, directors should ensure their companies’ HR teams are well into their preparation for the rule, experts say. “Whether or not [issuers] like the estimate, they understand it is a metric that can create risk for the company, and they are taking it seriously,” says Nathan O’Connor, managing director and valuation services practice leader at Equity Methods, an equity compensation valuation advisor. While companies must calculate total CEO compensation by the same rules that apply to the summary compensation table, there are a number of ways the median employee pay can Pay Ratio continued on page 8

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be calculated, according to the rule. But, some of that flexibility comes at such a high bar that it may not be worthwhile, experts say. For example, the rule includes a de minimis exemption for non-U.S. employees that allows companies to exclude up to 5% of their workforce from the calculation. Using the de minimis exemption will require the disclosure of the jurisdiction from which employees were excluded and the number of employees that were excluded compared to the total number of employees in the company’s workforce. Companies may also exclude non-U.S. workers from the calculation on the basis of foreign privacy rules, but any workers excluded because of privacy issues count toward the 5% de minimis exemption. If companies do utilize this exclusion, they have to explain why they are affected by the foreign law in question and file a legal opinion justifying the choice as an exhibit to the disclosure. Since pay data can be made anonymous to skirt foreign privacy laws, experts say, many companies may find that this exemption is not worth the disclosure burden. The rule also allows companies to perform statistical sampling to gather pay data, but in practice, the value of statistical sampling is limited, said panelists speaking at the 2016 Equilar Executive Compensation Summit in June. Companies will still have to go through the cost and effort of gathering all of their workforce data before performing the statistical analysis, so most companies are finding that it doesn’t make sense to use statistical sampling, panelists remarked. A show of hands revealed that virtually no attendees were using statistical sampling in their companies’ calculations. Companies may find more flexibility in how they choose to calculate employee salary. They can choose to use base salary, base plus equity, or some other pay combination, as long as it is applied consistently and is faithfully representational of workforce pay, panelists said. Similarly, companies can determine the date at

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which they make the pay measurement, which may enable some to even out pay disparities caused by seasonal employees.

Disclosure and Communication As companies approach 2017, experts are encouraging boards to monitor the HR, legal and compliance teams charged with producing the pay ratio calculation and determine whether they are comfortable with the valuation methods they use. The lowest ratio may not be the most defensible ratio, said the Equilar panelists, and compensation committee members should ensure they have a view into their methodology. The rule allows filers to include an alternate ratio alongside the prescribed version in the proxy statement if they feel it provides a more complete explanation of the company’s pay. They can also decide whether to include a narrative description of the ratio and how it was calculated. Boards will have to consider their shareholder base and other stakeholders and determine how much information to disclose. “I think there will be a number of companies that simply say this rule is ridiculous, technically comply and give their number and move on. And I think there will be a substantial few who really try to articulate their position on compensation from top to bottom,” Thomas says. At least initially, proxy advisors are not expected to issue recommendations on the basis of the pay-ratio disclosure, except for in outlier cases. While some shareholder activists may complain about the ratio, it is not expected to have a significant effect on say-on-pay votes. Many experts are more concerned about the effect of the ratio on internal workforce relations than on external forces. “In 2018, for the very first time, people are going to have a window into what the quoteunquote average employee earns in his or her organization,” says Sharon Podstupka, principal in the New York office of executive comPay Ratio continued on page 9

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pensation consultant Pearl Meyer. Some may not like what they see. Management and the board should agree on what the key messages are around the organization’s pay philosophy when it comes to competitive benchmarking, long-term wealth creation, career advancement opportunities and governance processes that apply to how compensation works for employees at the company beyond named executive officers, she says. Employees are expecting more transparency from their employers on compensation and career development than ever before. For example, some companies, such as Gap, are now perform-

ing gender pay equity analyses and revealing that information to their employees. Similarly, shareholders at eBay approved a resolution this year requiring the company to address its gender pay gap as well. The pay-ratio rule may have the unintended consequence of ushering in more employee demands on transparency. “Pay transparency is one of those things we’re going to have to start to get used to and get better at, and what that means is thinking not just about the number, but the messages that surround the methodology,” Podstupka says. g Melissa J. Anderson (212-542-1277 or [email protected]) covers legal, legislative and regulatory issues.

Volkswagen’s U.S. Settlement Just the Beginning

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olkswagen took a big step in its attempt to control the damage stemming from its emissions scandal this week by agreeing to pay as much as $14.7 billion in U.S. settlements. But The New York Times reports that the financial toll on the embattled German automaker will continue to rise as investigations ramp up overseas. According to the Times, Volkswagen has earmarked a total of €16.2 billion ($17.9 billion) for “costs related to” the scandal, which erupted in 2015 when the company disclosed that it had engineered its so-called “clean diesel” cars to cheat on emissions tests. But the majority of that money has now been set aside for U.S. settlements, and experts tell the Times there will be more financial fallout as the probe into the scandal widens. “This is by no means the last step,” U.S. deputy attorney general Sally Yates tells the paper. “The settlements do not address any potential criminal liability.” She adds that the U.S. is “aggressively” pursuing criminal charges

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against the company and individual executives, the Times reports. Volkswagen executives believe they will be able to handle additional fines and legal costs as they occur. “Today’s announcement is within the scope of our provisions,” VW CFO Frank Witter said in a statement after the settlement was announced. “We are in a position to manage the consequences.” Ten billion dollars of the deal reached between the company and the U.S. will go towards buying back nearly 500,000 affected cars, the Times reports. But with the automaker already having admitted to similarly engineering more than 11 million other cars around the world — including 8.5 million in Europe alone — more legal woes abroad are a real possibility. The settlement in the U.S. represents “a strong foundation for what Volkswagen needs to do for European owners,” according to Michael Hausfeld, an attorney representing owners of affected vehicles both in the U.S. and Europe. g — Jack Buehrer

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C O R P O R AT E S T R AT E GY

How Traditional Boards Face Disruptive Innovation Boards bring on experts, infuse tech-focused ideas into strategy by Lindsay Frost

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oards say they are more frequently inviting management, shareholders and new directors into discussions on how to add innovative technology to existing products to better compete in today’s tech-focused, disruptive marketplace. Experts at Stanford’s annual Directors College, held June 19 through 21, say traditional boardrooms are becoming more open and accepting of new faces seeking to transform business strategies to compete with the likes of Google, Amazon, Uber, Airbnb and other innovative companies. “Boards are more attuned to the fact that they have to be more aware of the technology dynamics. For example, the sharing economy concept is important; it’s all about efficient asset utilization,” says Dan Siciliano, faculty director at Stanford’s Rock Center for Corporate Governance. “Boards are being encouraged to spend more time on these types of strategies.” Having the right people at the table is the key to surviving in this rapidly evolving environment, as those boards who are unable to address technological change in their industry can lose business and ultimately put a damper on their company’s stock price, experts and directors say. Boards can add new members with technology backgrounds to help navigate technological change and work more closely with members of management and other advisors who can help the board digest white papers, M&A strategy and innovative product ideas. “We are all trying to chase the next shiny new technology, but the lesson is about ingenuity — taking existing assets and combining them with the shiny new technology, your niche and your operating model plus the know-how from [y]our leaders,” said Deloitte

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CEO Cathy Engelbert in a keynote speech at the conference. “People are your greatest assets.”

Importance of Strategy Development Many corporate leaders do fail to recognize technological changes poised to disrupt their industry. In recent years, companies that fell behind in innovation have faced lagging stock prices and bankruptcies. For example, as digital cameras gained popularity, reducing the need for photographic film, Eastman Kodak ran into financial difficulties and filed for bankruptcy in 2012. As on-demand entertainment services, such as Netflix, rose in popularity, Blockbuster failed to keep up with changing customer preferences and filed for bankruptcy in 2010. Polaroid and Borders Group also filed for bankruptcy due to lags in innovation. Borders and Blockbuster have since shut down completely. Meanwhile, other companies such as General Motors have addressed the need to innovate by adding bolt-on technologies to their existing products. GM’s billion-dollar acquisition of Cruise Automation in March allowed the company to integrate self-driving technology into standard GM software to keep pace with Google and other companies that have invested heavily in autonomous vehicles. “The acquisition of Cruise gave us a piece of technology that we didn’t have as a part of the businesses, bringing that capability into the extensive things we do,” said GM CEO and General Dynamics board member Mary Barra in a keynote speech at the conference. “We are able to integrate Cruise’s software with ours. We see a real value in this enrichment.” Barra said GM also sees ride-sharing as a Innovation continued on page 11

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new customer focus, and its $500 million investment in Lyft was an important strategic decision. The board began its hands-on work with these acquisitions and other strategic technology moves back in 2014 by discussing new initiatives and long-term goals, according to Barra. “We have a wonderful board. They challenge and ask a lot of questions, which I think has helped further our strategy and execution,” Barra said. “We looked at strategy and realized that speed is important. The board wanted to set us up with a sense of urgency and wanted to accelerate our process to meet accelerated technology.” Similarly, Engelbert’s board supported her in updating Deloitte’s workforce to hire millennials who could help improve audit and risk consulting technology to be more data-focused. Deloitte’s current workforce is 60% millennial, and she expects this number to grow to 80% by 2020. “The choices being made with finite capital as a board member are really important to think about. Talent innovation is key,” Engelbert said. “Only five years ago [Deloitte] wasn’t hiring data scientists and we didn’t have a digital marketing capability, and now we do.” In fact, data-driven technology has changed

Nelson Peltz

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Credit: Josh Edelson for Stanford Law School

the face of the audit, Engelbert said, and it’s important that audit committees keep up. Audit committees are charged with oversight of rapid changes in financial regulation, cyber security, and other tech-driven risks. Engelbert said audit committees are working more closely with their auditors who are deeply rooted in these changes at companies. Audit committees should be “very focused” on the delivery of the audit since there is “so much” innovation going on. At Deloitte, that includes a cloud-based platform meant to help internal auditors through data visualization, risk-sensing and analytic techniques called the Deloitte Analytics Platform (DAP), she added.

Innovative Teams Management needs to feel comfortable enough to share vulnerabilities with the board in order to open up conversations about technological disruption, says Silicon Valley local Karen Francis, board director at AutoNation and the Hanover Insurance Group. Board directors can build more trusting management relationships and gain valuable insights into their company’s stance on technology by working more closely with individual members of management. For example, Siciliano highlights eBay’s “board buddy” program in which individual executives spend time with a specific board member on a regular basis discussing strategy. Directors should also invest more time to get familiar with disruption in their own industry as well as others. “Boards need to admit that outside expertise is vital to understand and perhaps even execute [these tech strategies],” Francis says. “Boards should add a ‘disruptive technologies’ overview to the annual board calendar and bring in outside experts for insight. Too often the topic gets pushed aside in order to deal with the endless, but necessary, topics of day-to-day management and oversight, all squeezed into an annual board schedule with full agendas.” Innovation continued on page 12

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board had more technology expertise, given the relatively low level of board turnover each Similarly, activist shareholders can also be a year “it will take time to fully meet … skill set helpful tool, said Nelson Peltz, founding partaspirations for most boards,” Francis says. ner of Trian Fund Management, speaking at “Ten board members can only have so many the conference. According to Peltz, shareholdexperiences, and putting together the perfect ers can help boards adjust strategy to not only Rubik’s cube given the evolving needs of commeet innovation demands but also to keep up panies is quite a challenge,” Francis says. with a fast-paced M&A enNew technologies are vironment focused on new leading to rapidly changtechnologies. ing product offerings, and “Boards should add a In fact, a Deloitte survey, industry and customer ex‘disruptive technologies’ published last week, shows pectations are also evolvoverview to the annual that out of 357 M&A execuing. While shareholders tives surveyed, 57% expect and activists are hammering board calendar.” the number of deals aimed boards to diversify, market Karen Francis at acquiring innovation, forces may drive the need Director, Auto Nation which includes early stage, for director skill set changes entrepreneurial and new faster than proxy ballots, business models, to subconference attendees and stantially increase over the next two years. A speakers said. Boards will need to adapt to these majority (60%) of respondents say shareholder disruptive and innovative technology changes. activism has some impact on this deal activity. “You can find companies in every industry “Many companies are playing from a playbeginning to acknowledge the tsunami of disbook that was written 20, 30 and 40 years ago, ruption headed for shore. Knowing what to do but we all know the world is changing dramatiand having the talent to implement [changes] cally,” Peltz said. “If we are lucky, we get someare the real challenge,” Francis says. “Partnerone [the board or CEO] who is listening and ships, strategic alliances and acquisitions are willing to take on new ideas, and that’s when key to succeed in this fast-moving race.” g we really start to see these companies evolve. The attitude of ‘you can’t teach an old dog new Lindsay Frost (212-542-1228 or lfrost@ tricks’ is just not accurate anymore.” AgendaWeek.com) covers shareholder and auWhile many directors say they wish their diting issues. Innovation continued from page 11

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O P I N I O N & A N A LY S I S

Boards Should Heed Boundaries When It Comes to Compliance Directors should oversee and leave the managing to management by Samuel Cooper and Joy Dowdle Samuel Cooper and Joy Dowdle are partners in the litigation department at law firm Paul Hastings.

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egulatory guidance and the plethora of public pronouncements from enforcement authorities exhort directors to set the tone at the top and actively engage in corporate affairs, particularly in the area of corporate compliance, but directors need to be careful how involved they become. Too often — and frequently at the encouragement of their legal and business advisors — directors meet these challenges by expanding their roles and enmeshing themselves in the day-to-day operations of the company’s compliance and investigatory efforts. After all, an engaged board is generally viewed as a positive for a company — particularly in its compliance efforts and ability to seek leniency from regulators should unfortunate events occur. This trend is not, however, without consequence. Delaware law — generally viewed as the leading voice on corporate law and governance — establishes a corporate structure designed to give management the freedom to direct corporate affairs under the informed and independent eye of company directors. Directors oversee; officers manage. In support of this structure, Delaware law carefully cabins director oversight responsibility and the situations in which an actual breach of that responsibility may occur. Thus, a director’s responsibility of oversight is not an independent duty under Delaware law; rather, it is an element of a director’s duty of loyalty. This construction is an important one because, broadly speaking, the duty of loyalty is compromised only by deliberate malfeasance. In the oversight context, that means directors face liability for oversight fail-

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ures principally where there is a known failure to act to address compliance concerns. In short, the legal duty is limited, and the standard for finding a breach of it is high. Directors, and companies, should keep these legal concepts in mind as they evaluate the scope of the directors’ role in a company’s compliance and investigatory activities. A director who voluntarily assumes additional responsibilities may be viewed as having expanded the scope of his or her duties, creating liabilities beyond those imposed by law. Having taken on these more extensive obligations, the director may then face liability for failure to effectively execute these voluntarily assumed duties — the director equivalent of you break it, you buy it. As important, directors also risk becoming something they are not: namely, managers of the enterprise. Management is called management for a reason and will almost always have a deeper understanding of events, issues and corporate activities than will directors. Practically speaking, and consistent with director and officer obligations outlined in guidance such as the Federal Sentencing Guidelines, it is appropriate for directors to question management to understand the company’s risk profile. Importantly, directors should confirm that management understands those risks and maintains policies, procedures, and controls to effectively manage them. Often this requires probing into the particular resources, compliance structure and procedures utilized to ensure that the compliance process deployed by management is reasonable, appropriate and actually in place. Directors are not, however, responsible for the execution and implementation of those policies and should especially resist the notion that their job includes day-to-day implementaBoundaries continued on page 14

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O P I N I O N & A N A LY S I S

Boundaries continued from page 13

tion or ensuring particular outcomes. In the investigation context, similar rules apply. When management itself is implicated in a potential concern, directors likely need to take a leading role in the resulting investigation to ensure the matter is handled impartially. That situation, however, is the exception. Otherwise, leave the managing to management. Directors should resist interjecting themselves into the investigation by, for example, becoming involved in the review of documents or interview memoranda. Otherwise, a director

may open the door to discovery traditionally foreclosed in fiduciary litigation and face difficult questions, fueled by hindsight, of why more efforts were not undertaken or more materials reviewed in furtherance of the director’s expanded oversight role. A director focused on engaged oversight — one who is informed and prepared, understands the company’s risks and ensures the efforts of management are appropriate in view of industry standards and regulatory guidance — remains within the confines of director fiduciary obligations and will more easily deflect personal and corporate liability. g


SEC Requires Energy Companies to Disclose Payments

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egulators will require energy multinationals to report payments made to governments in exchange for rights to extract oil, gas and minerals, the Securities and Exchange Commission announced last week. The rule, stemming from the Dodd-Frank financial law, was revised from an earlier version that in 2013 was thrown out by a federal judge. The Wall Street Journal reports that the latest version of the rule addresses the so-called “resource curse,” which allows the governments of resource-rich countries — rather than lowerincome citizens — to benefit financially from U.S. extraction interests. As many as 755 companies will be required to comply with the law starting in 2018, according to the SEC. “I am pleased that the [SEC] has completed these final rules, which will provide enhanced transparency to further the statutory goal,” SEC chair Mary Jo White said in a statement.

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Industry groups have lobbied the SEC for various exemptions, including one that would waive the requirement for companies operating in countries that “forbid the disclosure of such payments” to government officials, according to the Journal. The SEC stopped short of writing that request into the rule but did specify that companies could apply for exemptions, which would be considered on a case-by-case basis. Despite its second chance to make the rule’s detractors happy, the agency still managed to get on the wrong side of industry groups like the American Petroleum Institute, which argues that the rules will “fundamentally harm American jobs” as they put U.S. companies at a disadvantage to countries whose firms are not bound by similar requirements. Europe and Canada have similar disclosure rules on the books, the Journal reports. g — Jack Buehrer

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Green Dot Saga Ends With New Chair, Battered CEO

Harvest Capital Strategies wins two board seats and plenty of influence by Jack Buehrer

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vigorous activist campaign to remove Green Dot Corp. founder, chairman and CEO Steven Streit ultimately failed. But it was close. So close, in fact, that the activist, Harvest Capital Strategies, still managed to snag two board seats and also succeeded in getting the prepaid credit card company to split its CEO and chair roles. But while Streit will still stay on as CEO and remain on the board, The Wall Street Journal reports that his power has been neutralized and he’s on a pretty short leash. On June 27, Green Dot named William Jacobs its new board chairman after the company agreed in May to split the CEO and chairman roles during a proxy battle with Harvest Capital, whose 9.3% stake makes it the company’s largest shareholder. Proxy advisory firm Glass Lewis & Co. had urged Green Dot to agree to the split but did not support Harvest’s desire to replace Streit as CEO, Bloomberg reported at the time. “Importantly, Glass Lewis acknowledged its support for ‘the bulk’ of our plan, which we continue to believe must start with addressing the toxic ‘tone at the top,’” Harvest Capital managing director Jeff Osher said in a statement. But despite Glass Lewis’s measured support of Streit, Harvest Capital’s campaign against the embattled CEO nearly worked. According to a May 27 SEC filing, Streit won reelection to the board with a total of 43.8% of total shares voted, the Journal reports. He received just 452,879 — or about 1% — more shares than the closest activist nominee, meaning the outcome could have been decided by even a small holder’s vote.

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Osher said that the narrow victory is a warning to Streit that he is on notice. “To be an effective CEO, you must have significant support,” he told the Journal on May 31. “My hope is that the board will do the right thing relative to what can unmistakably only be called a clear mandate from the shareholders.” Harvest Capital had been hoping to replace Streit with Dan Henry, the former CEO of NetSpend, a rival prepaid card company. As of yet, the Green Dot board has not indicated that it has plans to remove Streit, but Jacobs’ appointment as chairman can’t be seen as a vote of confidence. Jacobs has a long career in the payment services and credit card industries, having served as chairman of Global Payments Inc. since June 2014, as well as lead independent chair since 2002. Jacobs also spent 10 years with MasterCard as its international chief operating officer of financial security. According to the Journal, Harvest Capital’s fight is similar to a proxy battle last year that saw DuPont barely stave off activist Trian Fund Management, which was looking to replace the board and CEO Ellen Kullman. Though shareholders failed to elect any of Trian’s board nominees and Kullman kept her job, the vote was extremely close. By year’s end, Kullman was removed. g Jack Buehrer ([email protected]) is Agenda’s news analyst.

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NEWS ROUNDUP

As Xerox Readies Split, Icahn Lieutenant Joins Board Carl Icahn’s top lieutenant has been named to the board of Xerox Corp. ahead of the company’s plans to split into two separate entities. Jonathan Christodoro, managing director of Icahn Enterprises, is known to often assume director roles at companies his boss targets, having secured board seats at Herbalife, Lyft and PayPal Holdings, The Wall Street Journal reports. Icahn received three board seats at Xerox in January after revealing a large stake in the company, whose separation he urged after increasing his stake to 9.8%. He’s currently Xerox’s largest shareholder. For Xerox, the announcement that Christodoro will join the board caps a busy several weeks that began on May 20 when it was announced that CEO Ursula Burns would not be leading either the legacy printer operation or the new business process unit — called Conduent Inc. — that will be created out of the separation. Burns, who is the first black woman ever to lead a Fortune 500 Company, has spent her entire career at Xerox and will remain as chairman of the printer business. Just more than a month after it was announced that Burns would step down, the company revealed that Jeff Jacobson, currently head of Xerox’s technology unit, would be taking over as CEO of the legacy operation. Meanwhile, Ashok Vemuri, who was tapped in June to lead Conduent, joined Xerox on July 1 and will help with the separation. Xerox’s printer and copying business posted $11 billion in revenues in 2015, while its business services arm had about $7 billion. The company has suffered as its core corporate customers began cutting printing costs and, in recent years, had tried to turn itself around by shifting its focus from hardware to software and services, Reuters reports. The split is expected to be finalized by the end of 2016 and will save the company $2.4 billion over three years, Xerox says.

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New Spirit CEO to Give Airline a Makeover Just six months after the board of Spirit Airlines moved to replace longtime CEO Ben Baldanza, his replacement, industry veteran Robert Fornaro, is looking to revamp the discount airline’s image, The New York Times reports. The first order of business, he says, is to start toning down some of the “tawdry” marketing the company has become known for. Fornaro, who is also on the board, says it’s time for the company to grow up and ditch the frat-boy humor and innuendo in its advertising and PR campaigns — so-called “shock marketing,” which Baldanza championed. The campaigns, the Times notes, were known for their “raunchy” tone and were created to attract media attention. “Those days are gone,” Fornaro tells the paper. “You’re still going to see a lot of quirky, edgy, advertising, but I don’t see any benefit of poking the customer in the eye.” In addition to classing up the marketing, Fornaro has his sights set on reducing the number of customer complaints that the discount airline faces, especially among first-time fliers. Spirit is a low-fare carrier, and many passengers, most of whom book their tickets through thirdparty travel-booking websites, are unaware of the additional fees common to discount airlines. Those fees, like paying to check luggage or receive a seat assignment, are rarely disclosed on third-party booking sites. Once customers realize they’re on the hook for more money, they often complain, which critics say mattered little to Baldanza. Fornaro says the plan he’s outlined for the board and fellow executives includes greater outreach to first-time fliers and third-party customers. “[Spirit has] a big problem: many people try Spirit because they’re attracted to the low fare, but then they don’t come back,” Julie Yates, an airline analyst at Credit Suisse, tells the Times. “Bob is softening the overall approach to be more friendly. Over time, that should help them retain more customers.” g — Jack Buehrer

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