About Us  |  About Cheetah®  |  Contact Us

According to study, majority of directors believe U.S. company boards have trouble controlling CEO compensation

PwC U.S.’s Annual Corporate Directors Survey found that directors overwhelmingly believe CEO pay policies could be reformed by such measures as setting minimum stock ownership guidelines, re-evaluating compensation benchmarks and devising realistic peer group comparisons. While recent legislation to reform the financial markets did include several provisions to address executive compensation issues, these concepts were not included in what ultimately became law in the Dodd-Frank Act.

PwC research found that 58 percent of the 1,110 directors surveyed felt U.S. company boards are still having trouble effectively controlling CEO compensation. The boardroom directors surveyed said the three most important factors that should be considered by compensation committees to improve CEO pay policies are:

  • Ensuring peer group companies are realistic (83 percent);
  • Re-evaluating compensation benchmarks (82 percent); and
  • Setting minimum stock ownership guidelines and/or holding periods (65 percent).

“The corporate governance provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act focused on policies such as say on pay and clawbacks,” said Catherine Bromilow, partner in PwC’s Center for Board Governance. “Our survey uncovered other areas that may go further to address CEO pay. As compensation issues continue to be a concern, boards will be well-served by closely examining their compensation policies and how their rewards link to company performance.”

Directors on key issues. Despite a year with significant changes to corporate governance regulation, directors displayed confidence in their governance regimens. This was particularly evident in the following areas:

  • Risk management: Sixty-eight percent of directors believe their boards are currently able to monitor a risk management plan that would mitigate corporate exposures, and 73 percent do not feel their boards should have a separate risk committee.
  • Director experience mix: More than three-quarters of directors (76 percent) see no need to rethink their current mix of directors in light of the new proxy disclosures they made about director experience and skills. Further, 74 percent of respondents feel their nominating committee is very effective at creating a board with a balance of needed skills and diversity.
  • New directors and board diversity: Sixty-four percent think racial diversity is the most difficult attribute to add to boards, followed by gender diversity (53 percent). However, 86 percent of respondents rely on existing board contacts to recruit new directors, indicating that they may not be tapping new, more diverse resource pools.

“Despite increased scrutiny from shareholders and new SEC-mandated proxy disclosures about board diversity, racial and gender diversity continues to be a key recruiting challenge for boards,” said Bromilow. “As boards are held more accountable for their composition, this issue will require increased attention and possibly drawing on new recruiting sources. ”

Red flags spur action. When considering instances where they may need to increase board involvement, directors identified the following “red-flag” indicators for action:

  • The company has to restate earnings (95 percent);
  • Charges are brought or an investigation is initiated (95 percent);
  • Multiple whistle-blower incidents occur (88 percent).

Going forward, directors and their companies will need to ensure that their internal whistleblower processes are extremely robust since the whistleblower provisions of the Dodd-Frank Act have the power to undermine them, Bromilow said.

Source: PwC; www.pwc.com.