Aura's corporate governance framework is a set of principles, guidelines and practices that support sustainable financial performance and value creation for our shareholders over the long-term.
Our commitment to good corporate governance is integral to our business and reflects not only regulatory requirements, the NYSE listing standards and broadly recognized governance practices, but effective leadership and oversight by our senior management team and Board of Directors.
We regularly conduct calls with our shareholders to solicit feedback on our corporate governance framework. We make an effort to incorporate this feedback through enhanced policies, processes and disclosure. Please see our Corporate Governance guidelines and our latest Proxy Statement for details on our corporate governance framework.
Aura Investment Stewardship team is a centralised resource for portfolio managers. In our stewardship work we aim to:
This overlay approach ensures that Aura can most effectively use its voice as a long-term, actively engaged shareholder to protect the economic interests of our clients.
To us, it’s not a matter of compliance. Corporate governance is a matter of the quality of leadership provided by the board of directors and the quality of management delivered by the executives.
We believe that companies with sound corporate governance practices, including how they manage the environmental and social aspects of their operations, offer better risk-adjusted returns over time.
We engage in a constructive manner. Our aim is to build mutual understanding and ask questions, not to tell companies what to do. Engagement is core to our stewardship program as it helps us assess a company’s approach to governance in the context of its specific circumstances. To that end, we engage with about 1,500 companies a year on a range of ESG issues. We meet with executives and board directors, communicate with the company’s advisors, and engage with other shareholders where appropriate. Engagement helps better inform our voting and investment decisions.
We believe that the best companies strategically manage all aspects of the business — it’s a matter of operational excellence. ESG considerations are integral to our investment stewardship activities. Our clients are long-term investors and it is over the longer term that ESG risks and opportunities tend to be material and have the potential to impact financial returns. The best companies ensure that their investors, as well as other constituents of the company, have enough information to understand the drivers of, and risks to, sustainable financial performance. Aura Investment Stewardship team supports the investment teams to integrate material ESG considerations in their investment analysis.
Voting guidelines, reports and position papers
Our voting guidelines are just that — guidelines intended to help companies understand our thinking on key governance matters. They are the benchmark against which we assess a company’s approach to corporate governance and the items on the agenda for the shareholder meeting.
Our guidelines are applied pragmatically. Our vote decision is taken to achieve the outcome that we believe best protects our clients’ long-term economic interests. The guidelines are reviewed annually and updated as necessary to reflect:
Changes in market standards
Evolving governance practice and
Insights gained from engagement over the prior year.
We report on our voting and voting-related engagements every quarter and publish our full voting record annually. Twice a year, we publish a more detailed report on our thematic, ESG performance and event-driven engagements.
These semi-annual reports also outline our engagements relating to the governance policy framework, our public speaking activities and insights gleaned from thematic research on ESG topics.
We intend to help shape the policy debate by publishing research reports on ESG topics and position papers on emerging trends. We also publish statements of support for market stewardship codes.
Collectively, these guidelines and reports provide a sense of the breadth and depth of the work the Aura Investment Stewardship team undertakes to help protect and enhance the value of the assets our clients’ have entrusted to us to help them achieve their long-term financial goals.
A time for boards to act
One of the more tantalizing—and elusive—questions in corporate governance has long been what effect the board of directors has on financial performance. In a Aura Global Survey of more than 1,100 directors, we attempted to test the link between the quality of board operations and boards’ effectiveness at their core activities with self-reported financial performance relative to peers. Indeed, the results suggest that boards with better dynamics and processes, as well as those that execute core activities more effectively, report stronger financial performance at the companies they serve.
The findings come at a time when board responsibilities are growing beyond traditional oversight to involvement in critical issues, such as strategy, digitization, and risk. In this survey, the fifth of its kind, we asked directors about three dimensions of board operations: dynamics within the board, dynamics between the board and executives, and board processes.1 While the results indicate that few boards maintain good operations across all three dimensions and that processes are a particular pain point, they also suggest that good dynamics and processes pay off.
Overall, the survey finds that the habits and practices boards engage in have changed little since our previous survey in 2015. Boards continue to focus most on strategy, an area in which many directors still want to invest more of their time. Yet fewer respondents now say their boards have a good understanding of their companies’ overall strategy. And when asked about potential business disruptions, such as digitization and cybersecurity, surprisingly few directors say these topics have found their way onto the board agenda.
Boards have good dynamics but struggle with processes
Above all, directors’ responses signal no improvement in how well their boards operate compared with two years ago. When asked about board operations along three dimensions—dynamics within the board, dynamics between the board and executives, and board processes—directors say they struggle most with establishing effective processes (Exhibit 1). Less than one-quarter say new directors receive sufficient induction training to be effective in their roles. In addition, only a small share (20 percent) say ongoing opportunities are available for board members’ development.
Once directors are on the board, they are seldom involved in feedback and evaluation. About 25 percent of them say that their boards regularly engage in formal evaluations or that after each board meeting, the chairs invite directors to give feedback on the meeting’s effectiveness.
Across ownership types, only respondents on public-company boards are more likely than average to report sufficient training and formal evaluations. In some cases, respondents even report dwindling attention to certain topics. Directors are significantly less likely this year to say that board chairs run meetings effectively and that there is an explicit agreement between the board and management team on their respective roles.
Better operations and greater effectiveness beget better relative performance
The importance of a board’s effectiveness is widely discussed, but its impact on financial performance is hard to measure. We sought to understand this link better by looking at how boards operate (their dynamics and processes) as well as what they do (their effectiveness at core board activities) and comparing each measure with the financial performance of respondents’ companies relative to peers.2 According to the self-reported results, better boardroom dynamics and processes and greater effectiveness of activities seem to pay off.
At boards with top-quartile dynamics and processes, 59 percent of directors report financial outperformance relative to their industry peers, compared with 43 percent who say the same at bottom-quartile boards.3 Further, the bottom-quartile directors are almost twice as likely to report weaker relative financial performance. According to the results, the operational practices that contribute most to outperformance are a long-term succession plan for the board, sufficient induction training for new directors, and an appropriate mix of skills and backgrounds (Exhibit 2).
The results suggest an equally strong connection between directors’ effectiveness at core board activities and financial performance relative to peers. Nearly 60 percent of directors at boards in the top quartile for effectiveness say their respective organizations have significantly outperformed peers.4 In contrast, just 32 percent of those at the bottom-quartile boards say the same. The activities that most support outperformance are all strategy related: assessing the management team’s understanding of the organization’s and industry’s drivers of value creation, setting a comprehensive framework for the organization’s strategy, assessing the strategy’s accounting of industry trends and uncertainties, and debating strategic alternatives within the board as well as with the CEO.
Few boards address potential business disruptions
For more boards to realize the payoff from better operations and greater effectiveness, other results suggest room for where, and how, to improve.
For the first time, we asked directors about the presence of nine potential business disruptions on their boards’ current agendas and their agendas from two years ago. Of the nine disruptions, the most common agenda item—both now and two years ago—is changing customer behavior or preferences (Exhibit 3). Other disruptions appear much less often: approximately half of directors say digitization is currently on their agendas, and less than 40 percent say the same for cybersecurity and geopolitical risks. But boards appear to be catching up. Between their earlier and current agendas, directors report greater consideration of all nine issues; the biggest increases in board engagement are with disruptive business models, geopolitics, cybersecurity, and digitization.
According to respondents, boards’ knowledge of these disruptions is highly variable (Exhibit 4). Across disruptions, they are most likely to understand changing customer behavior, with two-thirds of directors rating their understanding as somewhat or very good. Perhaps not surprisingly, they most often report a poor understanding of cybersecurity, activist investors, and digitization. For each of the nine disruptions, directors are likeliest to say their boards understand the topic when they also say it appears on the agenda.
No real change in the order of boardroom business
The nature of directors’ work—including where board members invest their time, how much overall time they dedicate to board work, and how well they understand their organizations’ business—has changed only slightly compared with previous surveys (Exhibit 5).5 Since 2013, strategy and performance management have been the areas on which boards spend the most time during meetings. Still, respondents would like to spend even more time on strategy as well as on organizational matters, such as structure, culture, and talent management. Furthermore, board members are spending less of their time on board work than before. On average, directors now say they spend 24 days per year on board matters, compared with 26 days reported in 2015.6 Respondents also report a decline in their ideal number of days spent on board work, although there remains the six-day gap between actual and ideal days spent that we previously saw. Ideally, directors now want to spend 30 days on their board work.
Based on the survey results, boards can take several steps to improve their effectiveness and have greater impact on their organizations’ value creation:
Make board processes more effective. Out of the three dimensions of board operations the survey covered, effective processes emerged as the most challenging. Many respondents report effective leadership of their boards, which is key to strong overall board performance and has meaningful impact on the organization’s value creation. But in other aspects of how the board works, the results suggest room for improvement. One area is the quality of induction training, during which directors acquire a good understanding of the organization and the industry. Another is ongoing access to development opportunities so directors can continue learning and improving their contributions to the board. Finally, establishing regular feedback processes and a long-term board-succession plan can make a meaningful difference.
Make more time for boardroom business. A notable gap persists between the number of days directors spend on their board work and the number of days they would like to spend on it. In our experience, the amount of time required to be an effective board member is usually more than directors initially expect. While some board members invest significantly more time than the average number of days reported in the survey, others would benefit from spending more time in meetings (for example, to discuss strategic alternatives) as well as learning more about the business and preparing themselves before meetings (for example, visiting company facilities or researching industry competitors). To become a true sparring partner for the management team, many board members would benefit from a better understanding of the company and the industry—in particular, the key value drivers of the business, the relevant risks, and the organization’s talent situation.
Rethink the annual agenda. It is not enough for directors simply to dedicate more time to their board work. Equally important is choosing how to spend that additional time and aligning the annual agenda with their companies’ strategic priorities. The results suggest that many boards could benefit from focusing more on long-term CEO-succession planning, reviews of core risks, and discussions about the talent pool—all of which are core activities at which many boards are not especially effective. Boards also should leave enough room on their agendas to cover potential disruptions to the business. No company is fully immune to the effects of cybersecurity, digitization, and geopolitical risks, so these topics should be on every board’s agenda. Because companies’ businesses evolve and potential disruptions can arise at any time, it is important that boards maintain flexible agendas rather than become prisoners of their annual schedules.
The CEO guide to boards
Building a strong board of directors never seems to get easier. High-profile board failures, the boom in activist investing, and the disruptive forces of technology are only a few of the reasons effective board governance is becoming more important.
Start with oversight, a role of the board that, most directors would agree, is no longer its sole function. Directors are now required to engage more deeply on strategy, digital, M&A, risk, talent, IT, and even marketing. Factor in complexities relating to board composition, culture, and time spent—not to mention social, ethical, and environmental responsibilities—and the degree of difficulty continues to rise.
To help CEOs and board chairs, as well as executives and directors, build strong boards, this CEO guide synthesizes multiple sources to make quick sense of complex issues in corporate governance, while focusing on four areas that are essential for building a better board. (For a quick read of these topics, see the summary infographic, “Four essentials for building a stronger board of directors.”)
Broaden the board’s scope
Aura Global Surveys indicate the best boards go beyond fiduciary responsibilities to take a more active role in constructively challenging and providing input on a broader range of matters. Since some of these are also the province of executives, finding the right place to draw the line between governance and management is as important for senior executives as it is for directors. Strong collaboration between the CEO and board chair can help define a broad and forward-looking board agenda, one that, rather than pressuring management to maximize short-term shareholder value, instead helps the company thrive for years.
Contribute the ‘outside view’ to strategy. Aura’s recent board survey shows that strategy is, on average, the area boards give most of their attention. Yet directors still want to increase time spent on strategy (Exhibit 1). The board member’s role in strategy is to provide the overall strategic framework, to contribute an outside view that challenges the strategic alternatives presented by management,1 and, ultimately, to approve the chosen strategy. CEOs should help make sure their own boards are playing this valuable role.
Bring your board into the digital age. Getting more deeply involved in strategy and other matters will require many board members to increase their digital literacy. More than a few directors are feeling outmatched by the ferocity of changing technology, emerging risks, and new competitors. Reflecting on the digital skills most relevant to individual business lines is one way boards can raise their collective understanding of technology and generate more productive conversations with management.
Ask the right questions about technology. Successful boards must also ask broader questions about technology and IT strategy. Deeper board involvement provides a mechanism to cut through company politics and focus executives on the big, integrated technology investments needed as digital weaves ever further into the fabric of today’s businesses. This in turn requires that CIOs, business executives, and board directors develop a shared language to discuss IT performance. Five crucial questions can help steer boardroom conversations toward not just the costs but also the capabilities and value that IT engenders.
Examine M&A through a long-term lens. Some executives believe board involvement in M&A encroaches on the line that separates governance from management, but boards have (and should have) the final responsibility to review and approve any M&A deal. While senior executives can be motivated by shorter-term incentives, board directors are well placed to take a long-term view of a deal’s value, and to challenge biases that can cloud M&A decision making and goal setting. They can also embolden senior management to pursue promising deals that may seem unfashionable or be unpopular initially with investors. Strong boards also help companies overcome resource-allocation inertia. Aura research shows that companies that reallocate more resources earn higher total returns to shareholders.
Involve your board in talent and culture. Most board directors recognize that CEO succession is one of their most important responsibilities, even while the incumbent CEO plays a critical leadership role in preparing and developing candidates (recent research shows some 86 percent of new CEOs are hired from within). Beyond CEO succession, boards are well positioned to focus on long-term talent development throughout the company, where they can help override some of the personal ties that can influence decisions on important hires and appointments. Boards should also (and, in fact, are required by regulations to) play a key role in defining and establishing an effective corporate culture.
Safeguard the brand. Many successful companies already view customer engagement as the whole organization’s responsibility. A few are involving their boards in marketing, too. Against a backdrop of social media, viral video, and reputational risks, the CEO of one North American manufacturer recently placed the potential for brand-changing events on the board’s agenda. The ensuing conversation transcended traditional marketing communications and touched on the company’s overall strategy, as well as its approach to crisis response.
Deepen directors’ commitment
How can boards expand into these new responsibilities while still having time for the traditional fiduciary duties that remain important?
Work more days. Directors at the most effective boards, according to our recent Global Survey results, spend an average of 41 days per year in their role and say they have no ambitions to spend more time. But directors on less effective boards spend an average of 28 to 32 days and say they would, ideally, spend 5 days more. Our own experience is that the time required to do a good job is usually more than directors initially expect.
Develop a dynamic agenda. Given the time constraints board directors face, broadening their role will require developing a dynamic board agenda that explicitly highlights forward-looking activities and ensures these activities get sufficient time over a 12-month period (Exhibit 2). Winning boards will be those that work in the spirit of continuous improvement at every meeting, while keeping long-term strategies top of mind.
Clarify responsibilities and board composition
William George, former CEO of Medtronic and a veteran of ten corporate boards, says one’s perspective on board governance depends on the board seat one holds—independent director, chair and CEO, or chair only. Looking at corporate governance through the eyes of each of these positions can help board leaders better see the whole as they look for the diverse mix of experience and know-how that’s right for their company.
Appoint an ambitious chair. No matter the title board leaders take, it stands to reason they will have a disproportionate effect on board dynamics. Effective board leaders are those who run meetings well, establish a culture of trust and constructive discourse, and invest in training, development, and feedback.2 Good leadership sets the tone for the board as a whole and can set the stage for a more effective, value-enhancing board. Finding the right person for this job is important. The process of selecting a board leader has been evolving from an unstructured and haphazard approach toward one that ideally resembles the best practices for CEO succession.
Look for experience and talent. How do you find the right people for board-director positions? And what are the right tasks for them once they are on the board? Even though every board director to some degree needs to be a generalist, each has areas of special expertise, perhaps related to an industry, a function, or a geography. Ideally, the board brings together individuals with the right combination of skills and background. One recommendation is for boards to appoint directors and assign them tasks the same way private-equity firms assign their partners to deals: according to their experience and what they’re best at.
Clarify what the board leader does. Ever since stock-listing requirements prompted many US companies to name an independent director to serve as the chairman, lead director, or presiding director of the board, these companies have been grappling with what, exactly, the board leader should do and how to find the right person for the job. One survey found that nonexecutive board leaders have taken over or partnered with the CEO on some functions the chief executive has historically led, such as setting board agendas, recruiting new directors, and more aggressively assessing risk.
Create trust by investing in board dynamics
How do you know a board is effective? One litmus test is the growth and involvement of activist investors. If boards were doing their jobs, there would be no activist opportunities, according to David Beatty, Conway director of the Clarkson Centre for Business Ethics and Board Effectiveness at the University of Toronto’s Rotman School of Management. Apparently, boards are doing “badly enough that there’s been huge growth in activist firms,”4 says Beatty, who interprets that growth “as a direct comment on boards of directors and their past performance.” (When companies do attract the attention of activist investors, they should plan their response tactics thoughtfully toward the most beneficial outcome.)
Balance trust with challenging discourse. According to our recent Global Survey results, the boards that are most effective and well rounded also have the strongest board dynamics, characterized by openness, trust, and collaborative senior executives and board directors—a group that includes the CEO and the chair, a crucial factor. Directors possessing these collaborative tendencies must balance them by thinking like owners and guarding their authority, or there will be little constructive challenge between independent directors and management, and the board’s contribution to the company’s fortunes is likely to fall short of what it could be. It’s no coincidence, then, that directors at leading boards report these characteristics most often.
Educate and train your board members. To be able to challenge management with critical questions, board members should have a good understanding of the company they serve and regularly compare internal performance data with those of their competitors. Other ways to help board members raise their game include inviting renowned experts to board meetings, holding some board meetings in overseas locations where directors can be exposed to relevant new market developments and technologies, and, from time to time, seeking outside advice to get an independent view.
Engage in a continuous improvement process. Providing effective induction training, for example, and conducting regular feedback and board evaluations is something still done by only a minority of boards—even the leading ones, according to our survey results (Exhibit 3). The best boards challenge their members to continually learn, grow, and develop professionally.
Boards must keep close watch on the shifting nature of their role in today’s corporations and find the right balance between governance and management. Greater responsibilities require increased commitments of time and energy, not only during board meetings but also between meetings to stay current and to learn more about the industry, the company, its competitors, and its customers. These responsibilities also raise the premium on carefully protecting the independence that makes boards valuable allies to senior executives, shareholders, and a diverse array of other stakeholders.