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Top 5 Concerns of Corporate Directors

Top 5 Concerns of Corporate Directors

Here are the top 5 concerns expressed by Canadian corporate Directors, as synthesized from research conducted by the Clarkson Centre.

Strategic Planning/Risk Management

A Board’s role in strategic planning is key to the long term success of a corporation. Many Canadian Directors believe that their Boards do not allocate enough time to strategy in Board meetings to ensure effective strategic planning. In addition, many Boards do not have the skills and expertise to fully understand the business/industry and drive strategy. Agenda management, Board composition and effective information sharing between Boards and management are fundamental to a Board’s ability to provide effective oversight on strategic planning.1

Board Independence

In order for shareholders’ interests to be optimally represented by the Board of Directors, individual Directors must be able to act independently from the interests of management, and independently from the other Directors on the Board. Material relationships with management increase the potential risk that a Director will put executive interests before those of the shareholder. Optimizing Board independence helps to mitigate the effects of conflicts of interests between management and the Board and better aligns the Board’s decisions with shareholder interests.2

Top Executive Compensation

Boards of Directors are solely responsible for the compensation of the CEO. In order to best align the interests of management and shareholders, compensation must be linked to the company’s financial performance. Board expertise in the area of executive compensation is crucial to establishing top executive compensation, particularly in setting meaningful performance metrics that incentivize to strive for strong performance in the short, medium, and long terms. With increased scrutiny by markets and investors since 2008, many Boards are struggling to design pay packages that can attract and retain top management, while ensuring ongoing confidence among the investing public.3

Top Executive Succession Planning

Many Directors insist that the hiring and firing of the CEO is a Board’s most important responsibility. Boards often do not have formal, ongoing plans in place for the succession of the CEO, either in normal or in unexpected circumstances. Sometimes Boards feel a lack of urgency because their current CEO is highly effective. In other cases, Boards find it culturally awkward to broach the subject of a CEO’s departure. Regardless of the cause, however, Directors are experiencing increasing internal and external pressures to formalize the CEO succession process.4

Board Renewal/Diversity

A formal Board renewal process provides Boards with an effective tool for Boards to understand whether and when turnover is needed, as well as whether or not the current balance of skills on the Board is appropriate for the organization’s strategic reality. The primary goal of Board renewal is to maintain an effective and passionate Board. Formal processes for Board renewal are a powerful tool to enable the achievement of this goal. Boards are facing increased scrutiny from shareholders and other stakeholders to increase gender and ethnic diversity. Directors have expressed that increased Board diversity can increase the effectiveness of Board decisions. However, Boards struggle to increase gender and ethnic diversity while seeking the best available candidate to fill the Board seat.5

Sources:
1. Clarkson Centre – PricewaterhouseCoopers 2009 Directors Survey in collaboration with the Institute of Corporate Directors and Tracking the Relationship Between Credit Union Governance and Performance
2. Split CEO/Chair Roles: The Gateway to Good Governance?, Majority Voting in Canada: 2006-2011 and Board Shareholder Confidence Index
3.Pay for Performance Observations 2011 and Before & After Say on Pay in Canada: 2009 – 2011
4. Clarkson Centre SME Toolkit #3: Executive Succession Planning and
Beyond the CEO: The Role of the Board in Ensuring Organizations have the Talent to Thrive
5. Clarkson Centre – PricewaterhouseCoopers 2009 Directors Survey in collaboration with the Institute of Corporate Directors,
Tracking the Relationship Between Credit Union Governance and Performance
Majority Voting in Canada: 2006-2011


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