NACD Directorship Certification Study Guide Executive Summary

NACD DirectorshipCertificationStudy GuideSecond EditionExecutive Summary

CHAPTER 1OVERSEE CORPORATE STRATEGYAS A FIDUCIARYTopic 1Topic 3Directors’ Fiduciary Duties A corporate directorStrategy Oversight The board has a significant rolemust uphold the fiduciary duties of care and loyalty,in overseeing corporate strategy, including partici-approaching decisions in an informed, rational, andpation in the strategydevelopment process, engagingprudent manner, and disclosing conflicts of inter-in strategy discussions with management, assessingest. This can provide protection under the Businessstrategic alternatives to the current or selected strat-Judgment rule. To make informed decisions, direc-egy, incorporating strategy into the board agenda,tors must have good information. In his 1996 Care-setting performance objectives related to strategy,mark decision, Chancellor William T. Allen of theand communicating strategy changes to sharehold-Delaware Chancery Court stated that directors musters and stakeholders.Directors’ Fiduciary Duties“attempt in good faith to assure that a corporateinformation and reporting system, which the boardconcludes is adequate, exists,” and found that theStrategy OversightTopic 4M&A OversightCaremark board had met that standard.M&A Oversight Directors work with managementTopic 2acquisitions (M&A), including acquisitions thatCorporate Governance Requirementsto create a strategy that may include mergers andincrease company size, divestitures that reduceCorporate Governance Requirements The role of thecompany size, and/or mergers that combine com-board is primarily defined by state law, with addi-panies of similar size. In any merger or acquisitiontional requirements for public companies underthere are several phases, beginning with strategyfederal law and stock exchange listing rules. A pri-and ending with post-merger review. Courts setvate company board may have an all-insider boardstandards for director conduct in M&A, ranging fromthat guides management as a group. By contrast, athe prudence required under the Business Judgementpublic company board has a majority of indepen-rule to “entire fairness,” a requirement for fair pricedent outsiders on the board, who serve not only inand fair process (for transactions that involve a con-an advisory role but also in a monitoring role. Antrolling owner).effective board will define the role of managementvs. the role of the board, and will make effective useof committees.NACD DIRECTORSHIP CERTIFICATION STUDY GUIDE SECOND EDITION: EXECUTIVE SUMMARY2

CHAPTER 2PROVIDE RISK OVERSIGHTTopic 2.1Topic 3The board’s role in risk oversight has broadenedDirectors should be familiar with existing cyberse-beyond traditional business and compliance riskscurity and data privacy laws and regulations as wellto include emerging risks that range from geopo-as leading cybersecurity standards. In addition, theylitical changes to demographic shifts. For publicshould understand the main kinds of cyberattacks,companies, directors’ role in risk includes review ofincluding malware, phishing, and denial-of-ser-the annual report’s MD&A and, for audit committeevice (DoS) attacks. Keys to strong oversight includemembers, discussion of risk-management policies.giving cybersecurity adequate agenda time, estab-In addition, public company directors must providelishing an enterprise-wide cyber-risk managementa report in the proxy statement that describes theirframework, and strong policies for communicationsrole in risk oversight. To improve their oversightand disclosure.Risk OversightCybersecurity Oversightof risk, boards can monitor critical alignments ofstrategy, risk, controls, compliance, incentives, andpeople.Topic 2Crisis OversightA corporate crisis may originate from a number ofpotential sources, ranging from corporate scandalsto natural disasters. The board’s role in a crisis notonly involves providing oversight of the effectivenessof crisis preparations carried out by senior leaders,but also involves actively participating in the company’s response when a crisis actually occurs, aswell as conducting a postmortem to review lessonslearned after a crisis.NACD DIRECTORSHIP CERTIFICATION STUDY GUIDE SECOND EDITION: EXECUTIVE SUMMARY3

CHAPTER 3PARTICIPATE IN LEADERSHIPDEVELOPMENT, EVALUATION, ANDSUCCESSION PLANNINGTopic 1Topic 3Directors oversee the CEO evaluation process,Recruiting, retaining, and developing talent is a keymonitor the CEO succession process, and select andcomponent to driving strategy, managing risk, andonboard a new CEO. To fulfill these duties, manycreating long-term value for the corporation. Theboards follow certain recommended practices,board plays a key role here, working with the humanincluding annual CEO evaluations with a midyearresources function in supporting the board and busi-review, setting the shortterm and long-term succes-ness unit leaders in talent development, overseeingsion plan, and developing an internal talent pipe-the hiring philosophy and incentives used to attractline. They also disclose the board’s CEO successionand retain talent, overcoming challenges related toprocess to shareholders.the future of work, and supporting diversity andCEO Succession Planning and EvaluationTopic 2Executive CompensationTalent Oversightinclusion.Topic 4The board is responsible for setting a pay philosophyOversight of Corporate Culturefor executives, as well as for the entire organization.Boards and committees can build their own positiveWorking through the board’s compensation commit-culture by encouraging open discussion and debate.tee, the board selects the elements of executive payThey can also ensure that the company has rewardplans, establishes performance goals and determinesand recognition systems in place that incentivize thepayouts, and considers the impacts of current andright behavior. Red flags for a deteriorating corpo-pending executive-pay rules. Executive pay packagesrate culture include putting results above behaviorinclude both fixed elements (e.g., base salary, pen-and a reluctance to face bad news.sion and benefits, and any perquisites) and variableelements (e.g., annual incentives and long-termincentives).NACD DIRECTORSHIP CERTIFICATION STUDY GUIDE SECOND EDITION: EXECUTIVE SUMMARY4

CHAPTER 4MONITOR MANAGEMENTPERFORMANCE AGAINST FINANCIALAND NONFINANCIAL OBJECTIVESTopic 1Oversight of Financial PerformanceTopic 3The board oversees financial performance, in someOversight of Environmental, Social, andGovernance Issuescases with the help of finance committees. As a rec-US companies are coming under increased pressureommended practice, all directors should be finan-to disclose how they address environmental, social,cially literate, that is, able to read and understandand governance (ESG) issues, with many sharehold-financial statements (e.g., the balance sheet, theers and other stakeholders now expecting a compa-income statement, and the cash flow statement).ny’s long-term strategy to create not only positiveThis is a requirement for public company auditfinancial returns but also positive social and envi-committees. To understand financial statements, itronmental results. Boards need to keep sustainabilityis important to know key financial ratios such as theissues on their agendas, and they need to communi-debt-equity ratio and earnings per share.cate with shareholders and other stakeholders aboutTopic 2Oversight of Ethics and ComplianceDirectors must provide proper oversight for theircompanies’ ethics and compliance programs, includ-them—for example, through an annual sustainability report, now common practice in major publiccompanies.Topic 4ing hotlines for reporting violations. Public com-Shareholder Engagementpany audit committee charters require committeeShareholder engagement is an important boardoversight of policies and procedures regarding legalpriority for public companies, where directors arecompliance. In addition, some boards establishelected by shareholders and are expected to con-separate compliance committees to reinforce theirsider their interests. The US Securities and Exchangeoversight of the company’s conformity to laws andCommission requires public companies to discloseregulations. The board should work closely with thecertain activities to shareholders through various fil-company’s chief legal officer (general counsel) toings. In addition, boards should be willing to engageensure strong integrity and effective compliance.in regular face-to-face engagement with shareholders, particularly for topics such as corporate strategy; CEO evaluation, succession, and compensation;board nomination criteria; and the set of issuesknown as environmental, social, and governance(ESG) issues.NACD DIRECTORSHIP CERTIFICATION STUDY GUIDE SECOND EDITION: EXECUTIVE SUMMARY5

CHAPTER 5CONTRIBUTE TO ENSURINGEFFECTIVE BOARD PROCESSESAND CULTURETopic 1Topic 3The effective board will set annual board and com-Compensation committees play an important rolemittee calendars, as well as individual meetingin setting and monitoring executive compensa-agendas for the board and committees. Directorstion. Independent compensation committees areshould receive (or have board-portal access to)required in public companies, with some excep-meeting materials at least one week before thetions, and common in companies of all kinds. Stockmeeting and they should review them carefully.exchange listing requirements set the criteria forDuring the meeting, the chair should ensure fullcompensation committees’ size, independence, andparticipation in meaningful discussion that is bothcharters. Key areas of oversight range from reviewcandid and collegial. Boards should have a docu-and approval of corporate goals relevant to CEOment-retention policy for all board documents.compensation to ensuring compliance with rules onBoard Processes and CultureTopic 2The Audit CommitteeAudit committees play a vital role in overseeingfinancial reporting, internal controls, and risk management. Independent audit committees are requiredThe Compensation Committeeexecutive pay, including pay clawbacks; shareholdersay on pay; independence of compensation committees and their consultants; pay-ratio disclosure; andemployee or director hedging.Topic 4all kinds. Stock exchange listing requirements setThe Nominating and GovernanceCommitteethe criteria for audit committees’ size, indepen-Nominating and governance committees (also calleddence, and charters. Key areas of oversight rangedirectors and governance committees) nominatefrom audit matters (e.g., appointing, compensating,directors and set governance policy, typically as aand retaining the auditors; overseeing the audit; andsingle committee. The New York Stock Exchangereviewing the auditor’s report) to discussing policiesrequires such committees, which must be inde-for risk management.pendent. Nasdaq has a similar requirement, within public companies, and common in companies ofimportant exceptions. These committees identifyindividuals qualified to become board members andselect director nominees for the annual meeting.They also develop corporate governance guidelinesand oversee the evaluation of the board and management, unless this latter duty is performed by anindependent compensation committee. 2021, NACD. All rights reserved. More on NACD Directorship Certification can be found at certification.nacdonline.org.NACD DIRECTORSHIP CERTIFICATION STUDY GUIDE SECOND EDITION: EXECUTIVE SUMMARY6

NACD DIRECTORSHIP CERTIFICATION STUDY GUIDE SECOND EDITION: EXECUTIVE SUMMARY 3 CHAPTER 2 PROVIDE RISK OVERSIGHT Topic 2.1 Risk Oversight The board's role in risk oversight has broadened beyond traditional business and compliance risks to include emerging risks that range from geopo-litical changes to demographic shifts. For public