The Year in governance.

• Author: Kristie, James
• Position: 2015 YEAR IN REVIEW

It was a busy 12 months for activists, regulators, and investors--and the boards that had to engage with them. A month-by-month timeline of year 2015 and the people, companies, organizations, and initiatives that generated notable corporate governance developments.

JANUARY

Activists start the year stirring the pot

'Shareholder activism is in full roar as hedge funds prowl and companies retreat," blares the New York Times in its January reporting of Nelson Peltz's newly launched campaign to replace four directors at DuPont Co. Peltz's Train Fund Management gets one of its representatives, retired H.J. Heinz Chairman William Johnson, added to PepsiCo's board. Carl Icahn seeks two seats on the board of Gannett Co., which is breaking up into two companies--one for its newspapers (including USA Today) and the other for its broadcast operations. Icahn gets a seat on the eBay Inc. board as it prepares to spin off its PayPal unit. Starboard Value pushes for a merger of office supply chains Staples Inc. and Office Depot Inc., and warns Yahoo! Inc. against making any expensive acquisitions. Other companies feeling the 'love' from activists include Jamba Juice, MeadWestvaco Corp., and MSCI Inc. What should directors do? In his Some Thoughts for Boards of Directors in 2015 annual advisory, famed lawyer Martin Lipton counsels: "Directors should develop an understanding of shareholder perspectives ... and foster long-term relationships with shareholders.... Directors should also work with management and advisors to review the company's business and strategy with a view toward minimizing vulnerability to attacks by activist hedge funds."

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Disclosure on Voting: In an interview with Reuters, Vanguard Group's Glenn Booraem, who oversees corporate governance matters, indicates the fund giant will offer greater disclosure of its voting on governance issues that come before shareholders. Reuters reports: "Like BlackRock, Vanguard will not name specific companies ... Booraem said the goal is not to pressure companies but rather to show investors how Vanguard advocates on their behalf."

Director Pay: Year over year increase in compensation for general board service is 7%, reflecting higher cash retainers and equity compensation values, according to Mercer's analysis of directors' compensation and benefits in the S&P 500. The retainer has increased from a median of $75,000 to $80,000, and among the larger companies the increase has gone from $90,000 to $100,000. Only 30% of companies in the S&P 500 are paying meeting fees; for those that are, the amount remains unchanged at a median of $2,000.

Top Global Risk: The World Economic Forum (WEF) releases its Global Risk Report. According to the report, for which Marsh & McLennan Companies contributed, the biggest threat to the stability of the world in the next 10 years comes from the risk of international conflict. Every year, the WEF report features an assessment by experts on the top global risks in terms of likelihood and potential impact over the coming 10 years.

Top Fraud Trend: EY Fraud Investigation & Dispute Services releases its "Top Fraud and Corruption Trends for 2015," which highlights a dramatic rise in cyber security risk across all industries. Bribery and corruption too will challenge boards, especially in highly regulated industries such as financial services and life sciences, as they look to develop new approaches to mitigate these risks while balancing demands for global growth.

Women on Boards: For the first time, Catalyst takes its Census of Women Board Directors global, as the call for gender equality on boards grows worldwide. The new and expanded Census focuses on women's share of board seats across three regions and 20 countries, including the United States, Canada, Europe (14 countries), and Asia-Pacific (Australia, Hong Kong, India, and Japan). Among the findings: Women hold 19.2% of S&P 500 board seats in the U.S., while in Europe women's share of board seats ranges from 18.5% in Germany to 22.8% in the U.K. to 35.5% in Norway. In other developments, search firm Spencer Stuart teams up with the WomenCorporateDirectors (WCD) organization to launch a series of initiatives aimed at boosting diversity in boardrooms, including partnering on multiple WCD chapter launches globally and on board training for new directors and for women preparing to be directors.

People Notes: G.G. Michelson dies at the age of 89. She "helped break barriers for women in her more than 40 years as an executive with R.H. Macy & Co." and was often "the only female member of numerous corporate boards," according to the New York Times.

Top 10 Topics for Directors in 2015

1. Oversee strategic planning in the face of uneven economic growth and rising geopolitical tensions.

2. Oversee cybersecurity as hackers seek to infiltrate even the most sophisticated information security systems.

3. Assess the impact of advances in technology and big data on the company's business plans.

4. Cultivate shareholder relations and assess company vulnerabilities as activist investors target more companies.

5. Considerthe impact of M&A opportunities.

6. Oversee risk management as newer and more complex risks emerge.

7. Ensure appropriate board composition in light of increasing focus on diversity, director tenure and board size.

8. Explore new trends in reducing corporate health care costs.

9. Set appropriate executive compensation.

10. Ensure the company has a robust compliance program as the SEC steps up its enforcement efforts and whistleblowers earn huge bounties.

    Source: Akin Gump

    FEBRUARY

    CalSTRS updates its focus on boards

    Setting the stage for what it expects to be "an active proxy season in 2015," the California State Teachers' Retirement System (CalSTRS) adopts an updated set of Corporate Governance Principles. While the pension fund has long supported proxy access--a shareholder's right to nominate candidates on the company's proxy--the updated principles, for the first time, specify support of proposals giving a group of shareholders, owning 3% of a company's shares for at least three years, access to board nominations and to the company's proxy statement. "We firmly believe this is the most appropriate threshold for proxy access," says Anne Sheehan, CalSTRS director of corporate governance. CalSTRS is the largest educator-only pension fund in the world. (See accompanying box for a selection of CalSTRS principles on board refreshment.)

    Proxy Access: General Electric Co. amends its bylaws to implement proxy access. According to GE's Form 8-K filing, the move will permit "a shareowner, or a group of up to 20 shareowners, owning 3% or more of the Company's outstanding common stock continuously for at least three years to nominate and include in the Company's proxy materials directors constituting up to 20% of the board." Citigroup also announces that it will support a non-binding proxy access resolution. The Wall Street Journal (WSJ) notes that companies allowing proxy access "remain rarities."

    Proxy Disclosures: Stanford Graduate School of Business publishes research that finds shareholders are dissatisfied with proxy disclosures: 55% of investors believe that proxy statements are too long and 48% believe the typical proxy is difficult to read and understand. Investors claim to read only 32% of a typical proxy.

    Board Diversity: A report from the EY Center for Board Matters states: "Despite efforts to advance board diversity by institutional investors and other groups, progress toward gender parity on U.S. boards is minimal." The report discloses that the proportion of women on boards has increased only 5 percentage points in almost 10 years, from the 11% of board seats held by women at the S&P 1500 companies in 2006 to 16% in 2014.

    On the Activist Front: Bill Ademan adds one of his investment firm members to the board of Zoetis Inc., an animal health company he is trying to shake up. Advertising firm Interpublic Group reaches a settlement with hedge fund Elliott Management to revamp its board. DuPont Co. adds two new members to its board as it swats off Nelson Peltz's suggested board candidates; one of DuPont's new directors is Tyco International Chairman Edward Breen (who later in the year will become DuPont chairman and CEO in a leadership overhaul).

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    Succession Management: Korn Ferry reports that there is "an alarming rate of dissatisfaction" among senior leaders and executives with their succession management programs. Only one-third of respondents to the firm's study say they are satisfied or very satisfied with their company's succession program, and less than one-quarter (23%) say they have a solid pipeline of "ready now" candidates.

    People Notes: Cathy Engelbert is elected chief executive officer of Deloitte LLP, becoming the first female CEO of a major audit and consulting firm in the U.S. Harvey Goldschmidt dies at the age of 74. The NYT in its obit calls him "an expert on corporate law who, as a member of the Securities and Exchange Commission, was a strong advocate of making public corporations responsible to shareholders."

    Principles of board refreshment

    Drawn from the California State Teachers' Retirement System Corporate Governance Principles, updated February 2015.

    * Board Refreshment: The board should have a mechanism to evaluate and refresh itself on a regular basis to ensure there is proper board composition to meet the current and long-term business needs of the company. Regular board refreshments should provide the board with the opportunities to increase its board diversity and allow fresh perspectives on the board.

    * Board Evaluations: The board should establish and disclose the process used to evaluate the board dynamics and the performance of the directors. Periodically, the board should have an independent evaluation/assessment of its performance.

    * Board Succession Planning: The board should implement and disclose a board...