A Big Week For Corporate Board Governance In America


A special thanks to attorney Douglas Park for co-authoring this with me.

Last week wasn’t a normal week for corporate board governance in America.   While the HP news and the SEC ruling on social technology are unrelated on their face, there is an incredible opportunity to combine these developments and advance the U.S. corporate governance agenda. 

HP As A Board Best Practice Leader

Here’s what happened.   HP, the poster child for ineffective corporate governance for quite some time, is now a best practice leader as two of their Directors voluntarily resigned after receiving lackluster investor support for reelection.   They were also the longest-serving Directors on HP’s board.  HP’s Chairman also stepped down, though he remains on the board. 

The SEC Goes Social

In a separate matter, the SEC started the big week when it decided to  formally recognize social technology as a legitimate medium for corporate disclosure.

The world, and business along with it, has dramatically changed over the last decade because of the arrival of new disruptive social technologies.  These tools are having an enormous impact on customers, employees, investors, supply chain partners, business models, economics, politics, social policy, leadership, management, communication, collaboration, innovation, and so on. 

Board Evolution

However, boards have been pretty much static during all of this change.  Spencer Stuart’s 2012 U.S. Board Index reported that only 291 new independent directors were added to S&P 500 boards in 2012, the lowest number since 2001.   They also reported that the average tenure of S&P 500 directors is 8.6 years, and 22% of sitting directors have more than 11 years of tenure.

Companies should be highly concerned that their boards are not keeping pace with the world around them.  Do boards and their members have the skills and experience to adequately perform their duties given these many developments and changes? In this light, more board turnover could be an emerging best practice for effective corporate governance in the U.S. Finally, did HP just go from worst to first as a corporate governance best practice leader this week?   

The SEC Forces The Social Issue

That brings us back to the SEC developments.  In June 2012, Netflix CEO Reed Hastings’ posted on his personal Facebook page that Netflix had exceeded one billion page views.   Hastings’ public post on his Facebook page forced the SEC to decide whether Hastings’ use of social technology violated Regulation Fair Disclosure (Reg FD).  Reg FD is designed to ensure the “broad and non-exclusionary distribution to the public” of material information, so that no one has a trading advantage.  The SEC decided not to pursue an enforcement action against Hastings.

Reg FD is a passive regulation that puts the burden of meeting the standard on the issuer, without providing specific guidance as to what constitutes adequate public  disclosure.  Companies typically file an 8-K Form with the SEC , post something on their website, and/or issue a press release to fulfill the requirement.  The SEC has now said that social media is an acceptable notification channel, as long as companies inform the public of which channel they will be using, e.g., Facebook, Twitter or something else.  Boards will have to figure out what this means and how to use these platforms effectively for this purpose.

But wait—there’s more.  For the first time, this SEC decision formally puts social onto the boardroom agenda,  The SEC’s decision will force boards to more thoroughly consider the implications of social technology for investor relations.  The social channel is the first medium where investor engagement can efficiently take place around these disclosures—all other notification channels are one way broadcasts.  Will companies look at disclosure on social media as an opportunity to engage with markets, investors and customers?   Will the reach and real time velocity of this medium actually create more information asymmetry if it is monitored and exploited more rapidly than the traditional disclosure channels?          

Despite the SEC’s decision not to pursue an enforcement action against Hastings, there unfortunately is also some bad news regarding social technology.  Spencer’s 2013 What Directors Think research concludes: “If directors know anything about social media, it is that they do not know enough.”   Boards don’t currently have adequate social technology skills and knowledge to fully consider the impact of social technology on their companies.

Improving Board Relevancy In A Social World

How does the emerging HP best practice of voluntary board turnover, the SEC ruling, and social technology connect?  By increasing board turnover, boards can start to bring more relevant skills into the boardroom.  Board governance needs to be a value-creating endeavor as well as a value-preserving one.   Value related activities won’t happen unless there are relevant skills and experiences in the boardroom conversation, such as social technology skills.  Time will tell if HP’s days as a corporate governance whipping post are over, but they’ve just raised the bar for everyone with a best practice for board turnover and the SEC has just forced the social conversation onto the boardroom agenda.  We see the making of perfect bedfellows.   

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