I recently came across an article reporting that the interim president of a state university system had failed to report a number of corporate board seats on his ethics forms. That got me thinking about the forms he may have been asked to complete, which in turn got me thinking about D&O questionnaires.
Getting directors and officers to accurately complete and return questionnaires in a timely manner is one of the most frustrating tasks faced by corporate secretaries. Years ago, I was speaking at a program for aspiring corporate governance nerds, when a young aspirant asked me if I had the secret to getting this task done. If memory serves me correctly, my response was to the effect that if I had the answer to her question, I could retire.
However, I sometimes think that people who circulate questionnaires are their own worst enemies. For example, a recent study reported that D&O questionnaires averaged 40 pages and 65 questions. That means that some, perhaps many, questionnaires are far longer. It’s unrealistic to expect someone with a life – much less a day job – to devote the amount of time necessary to complete a 40-page (or longer) questionnaire, particularly when many questions don’t lend themselves to simple “yes” or “no” answers.
HINT: It’s not a silver bullet, but I’ve found that one way to help is to delete questions whose answers are known to the company and easily accessible in its records. For example, why ask a director about the compensation she has received from the company or what equity grants she has gotten from the company when the company has that information?
The study also reported that “[m]ost companies pre-populate…responses for each questionnaire but some pre-populate entire questionnaires using responses from the previous year.” It’s fine to pre-populate a questionnaire with things like the individual’s name, date of birth and other ministerial items, but in my experience pre-populating a questionnaire with last year’s responses is not a good idea, because it enables directors and officers (or, more likely, their assistants) to simply say “no changes,” when in fact there are often many changes.
WAR STORY: Once upon a time, when I included the prior year’s answers, a director who owned lots of stock in all sorts of trusts said his ownership was the “same as last year.” However, after the proxy statement had been filed and distributed, he asked me why I hadn’t reported the changes in ownership among his various trusts. I told him he’d said “same as last year,” to which he replied “but I thought you knew that they weren’t.”
Pre-populating with prior responses can also be risky, as rule changes and other factors often require changes – even minor ones – to the questionnaire, and pre-populating in this circumstance can easily lead to incorrect responses.
HINT: Even when it’s not called for by rule changes, consider changing a couple of questions, or the order in which they appear, so you can legitimately inform the recipients that the questionnaire is not the same as last year’s, and that they should therefore pay attention in filling it out. Also, in a cover memo or email, it can be helpful to point out questions where rules have changed or where directors and officers should pay special attention.
Another infirmity of far too many questionnaires is the use of the text of the relevant SEC rules in crafting questions. It’s no insult to say that the SEC doesn’t always follow plain English when drafting rules, and in my experience it’s well worth the time it takes to simplify the language. (If you don’t believe me, think about the definition of beneficial owner.) And in many cases, a rule will have lots of language that’s not relevant for questionnaire purposes, and deleting the irrelevant language can make the questionnaire shorter and more comprehensible.
The survey reports that companies often allow three or four weeks to return paper questionnaires, or two to three weeks for digital questionnaires. That seems reasonable, but don’t be afraid to remind your directors and officers early and often to get their questionnaires done and back to you on time. Like chicken soup, it may not help, but it wouldn’t hurt.
For calendar year companies, proxy season is very much in the rear view mirror. However, it’s never too soon to improve your questionnaire. The next proxy season will be upon us all too soon.
Author’s Note: Thanks to QDiligence for performing the study and to the Society for Corporate Governance for reporting it.