Posted : August 19, 2013 9:38:31
On June 18, Corporate Board Member and the Center for Audit Quality (CAQ) held a significant event called the Board/Shareholders Forum: Relations & Expectations. Many of the largest institutional investors, pension funds, and proxy advisers were represented and spoke at the forum: BlackRock, ISS, CalSTRS, Glass Lewis, AFL-CIO, T. Rowe Price, just to name a few. The purpose of the April event, which started with a planning dinner with investors hosted by the CAQ, was to understand expectations of the board/shareholder relationship and discuss whether there is a way to improve the structure for healthy engagement between investors and boards.
Simply put, we are attempting to turn what today is a contentious relationship into a more positive and constructive exchange. Now, I recognized with my colleague Cindy Fornelli, executive director of the CAQ, that this was going to be a yeoman’s task in a dinner and one-day event but the spirit of most of the participants in the room was “let’s give it the old college try.” The end result was some ideas that had merit and are in the process of being vetted even as I blog.
But my favorite part of the day was moderating one of the expert panels and asking the group of prestigious panelists, “If you were a board member versus an investor, what would you say are the expectations corporate boards have of shareholders?” Obviously this is a reversal of the more popular and often discussed “What are shareholders’ expectations of boards?” question debated at most corporate governance events.
What made this even more interesting were the two investors that were on the panel, along with Jon Foster, who sits on the board of two public companies and was there to represent corporate directors. Joining us on stage were Anne Sheehan, director of corporate governance, California State Teachers’ Retirement System (CalSTRS), who is responsible for a $3 billion activist investment management portfolio, and Michelle Edkins, global head of corporate governance at BlackRock, the largest asset manager on the planet with almost $3.8 trillion in assets under management, representing individuals and companies around the globe. Two very knowledgeable and capable people, very familiar with boards, and ready to tackle this unique question. So what did they say boards’ expectations should be of shareholders? Here’s what they had to say:
1. “Shareholders should give boards the appropriate ‘space’ to focus on long-term value creation.”
Translation: In the end, most investors are buying a stock for the long haul, so you shouldn’t sacrifice long-term performance for a short-term boost unless the long term is in jeopardy of not being realized.
2. “Boards should be allowed to respectfully challenge investors.”
The key words here are “respectfully challenge” since both parties should have the right to challenge the status quo, particularly when earnings and issues are not moving in the right direction. This right or expectation is realistic since all shareholder activists don’t necessarily speak for a majority of the shareholders.
3. “All parties should agree that conversations will be confidential.”
Translation: Not an easy issue to commit to if a meeting would bump up against Reg FD fair disclosure regulations. But I believe the point being made here is that neither party will use the information garnered out of an arranged meeting against each other; otherwise, it is difficult for these kinds of communications to advance.
4. “Boards should expect that shareholders will come prepared to planned meetings.”
Translation: If you are going to command the time of already overbooked board members, there needs to be a constructive agenda and organized shareholder effort on the other side.
5. “Shareholders will give the company a fair hearing to address problems.”
Translation: This expectation of shareholders was centered on the issue of boards meeting with shareholder groups and, particularly, proxy advisory firms to explain actions or correct problems. This becomes a real challenge during proxy season when companies typically want to meet the most. Both boards and shareholders/proxy advisers need to come up with a better system to alleviate what is one of the real frustrating components of the board/shareholder relationship.
6. “Shareholders should give kudos where kudos are due.”
There are many more boards that are doing all the right things than those that are lax on their fiduciary duties. We all might benefit from some positive feedback as well as publically listing the poor performers. We see organizations salute a board or two at some annual awards dinner, but there needs to be a credible option to positively reinforce the masses that have great governance foundations. I believe there are a lot of investors that would favor a positive reinforcement alternative.
In addition to the six expectations that the panel listed, all panelists agreed in some form that
A. both shareholders and companies should make a best effort to try and meet outside of proxy season;
B. both parties should strive to make an exchange of views normal—not something that happens only in bad situations.
The event and the paraphrased synopsis above is really interesting stuff, but it leaves us with the same old challenge of what can we do with this information that will truly make a difference. Dialogue and communication at any level can break down small barriers to understanding each other’s goals, but I really don’t believe that one forum can move the needle much. At the same time, it is a realistic challenge to construct a process or system that can counterbalance the current negative board and company buzz with some good, old-fashioned positive feedback. I’m sure Coach K at Duke, Nick Saban at Alabama, or the late Vince Lombardi with the Green Bay Packers would say that in the end, positive reinforcement is the most valuable tool to consistent goal achievement. It’s ironic that shareholders and boards have the same goal: “Improve the value of the company.” Don’t you think with that as a foundation we can match expectations a little closer on how to get there? Hopefully this event and others scheduled that are asking and discussing the same questions are steps in the right direction.
Posted : June 20, 2013 1:36:29
(As published in C-Suite Insights magazine 2nd Qtr 2013) Since the fallout from the Enron and WorldCom events in 2000 and 2001, we have seen a concentrated effort to get more director independence in the boardroom. Both the NYSE and NASDAQ were quick to roll out updated listing guidelines that required their issuers to follow a much more stringent definition of what constituted an independent director. We saw many companies respond quickly to reduce the number of insiders and ensure new directors were not conflicted by a personal or business link to the corporation. Companies that continued to have three or more inside directors were targeted by proxy advisory firms and institutional investors to get on board with this investor-encouraged governance best practice. There are still some holdouts, which we’ll address in a second, but the question to be asked is: Has this push for board independence actually benefited shareholders and enhanced company value?
Simply put, when I examine the research to date on this question, the empirical evidence is mixed. To ultimately answer the question of whether board independence has a correlation to increased shareholder value, we would need to weigh the variables of short-term performance, long-term performance, fraud prevention, and, in a perfect analytical world, one’s culture. Multiple studies, just looking at performance, suggest that there is no correlation between the percentage of independent board members and the bottom-line company performance. At the same time, I found one reputable study that concluded that there is a correlation between the percentage of independent directors and the likelihood of corporate wrongdoing. One of the problems, however, is this study was done in 2004 and doesn’t incorporate any of the empirical results from the infamous financial meltdown from 2008 to 2010. Interestingly, one of the much talked about questions following that period was, “Would boards have provided better oversight and potential whistleblowing if having knowledge about the business was given similar emphasis as board independence?”
My take is that independence at the expense of industry knowledge has swung too far. Technically, these two objectives don’t have to be mutually exclusive. But the reality is, finding an independent director who is knowledgeable about the business is not a challenge in some industries but is very difficult in others. (This is a similar challenge when building compensation peer groups.) In discussions with leading proxy advisors and institutional investors there has been increasing support for making sure directors have industry knowledge or experience. In some cases, I feel they’ve even hinted at including additional insiders on the board, but I actually haven’t heard anyone come out and support that. I’m sure that most people still would be concerned that a CFO or chief operating officer board member would be beholden to the CEO, and I understand that concern. For what it’s worth, I did a stint as an inside director as president and COO of the public company and never had a problem with being independent, and my CEO encouraged me to serve that role as I saw fit. Many might argue that this situation is the exception, however.
Board independence is another one of those governance issues where one size doesn’t fit all and therefore, it probably will be debated forever. I’d never argue against boards’ being independent and certainly don’t want director recruitment returning to the “good ole boy” days. But in the end, I favor boards that are industry knowledgeable rather than favoring independence for independence sake. Yes, boards have benefited from the independence push, but don’t accept that independence alone is the solution to creating an effective board.
Posted : May 21, 2013 4:14:40
I’ve been around this board business for a long time but it never fails that I’m still regularly surprised by what others’ research exposes about the current boardroom environment. Just recently I received a blog from the Wall Street Journal titled “A Boardroom With a View” that talked about how few current S&P 500 company CFOs serve on public boards and quoted studies done by James Drury, founder of his own executive search firm, and by Equilar titled “A profile of CFOs Serving as Independent Board Members.” Equilar’s study looked at the performance of companies where S&P 500 CFOs serve on an outside board versus companies where their CFO currently doesn’t have that experience . I’ll let you review the article and see if you share the same reaction of surprise that I do, but it’s worth making some comments on.
First let’s talk about how few CFOs actually serve on boards. Equilar’s study showed that only 102 of the S&P top 500 companies serve on a public company board. Maybe equally surprising is that the same study shows that only 234 of the S&P 500 CEOs serve on outside public boards. It seems like whenever you speak to a board every company wants a sitting CEO to serve on their board. So I am surprised that both those CFO and CEO numbers are so low. I will have to disagree with Mr. Drury’s comment that “he isn’t aware of any large company that would bar its CFO from accepting a seat on another board, so long as it made sense.” He may not have experienced such but I know more than a handful of larger companies that have prohibited their CFO and on rare occasions their CEO from serving on an outside board. Personally I think those companies are a little short-sighted on how it will help both the CEO and CFO, particularly CFOs who are potential candidates for succession to the chief executive. I’m sure some companies recognize that when things go awry at companies these days, sometimes board members can have a meeting every week until the company is out of hot water. That’s a big-time distraction to your senior executive, but I’m convinced that the pros of senior officers serving seriously outweigh the cons and am confident that I would get confirming support from hundreds that have served, learned, and benefitted.
Regardless of the fact that some companies actually do restrict their executives even when it makes sense, a CFO is a very valued and potentially contributing board member that I would think would be especially sought after if for no other reason than his or her financial expertise on one’s audit committee. When legislation passed years ago that required a financial expert on the audit committee, there was a rush to invite CFOs to boards. I guess the question is…where did they go, and why aren’t we seeing more serving?
Equilar, which is currently the source for everything that touches tracking and benchmarking executive and board compensation, wanted to take its research a step further and analyze whether companies that let their CFO serve as an outside board member in fact, benefitted on the bottom line by those CFOs being more “experienced.” The simple answer in its report was YES they are! (While confirming that this was the only variable to the improved performance would take a little more digging, the numbers speak for themselves.) Companies that have their CFOs serve on outside boards had a median three-year total shareholder return (TSR) of 19.9%. Compare that to those companies whose CFO didn’t serve as an outside board members, which reported a median three-year TSR of 15.2%. Disputable or explainable—possibly as outlined above—but still interesting food for thought.
Actually, I didn’t need this data to profess my support of having senior officers serve on outside boards, but it did make me dig deeper into its results to find out what else would surprise me. One thing that was equally interesting was Equilar’s statistic whereby 20 of the 102 board-serving CFOs are women, which means that 45.5% of the S&P CFO women serve on a board versus only 18.7% of their male counterpart CFOs. Rarely do I get to blog about a favorable diversity board statistic, so this is a treat. And even though it means we could still use more women CFOs, it does say that board nominating committees and/or search firms are finding them for board seats.
Studies and articles almost never result in a marked change in behavior, but I can guarantee that this one will raise some eyebrows of those companies that restrict senior executives serving as outside board members. The bottom line is, the profession needs those CFO candidates as directors because they are some of the most qualified directors on the planet. Maybe a little propaganda is needed to nudge companies in the right direction. Hmm, imagine a big poster with Uncle Sam pointing at the reader saying, ”We Want You To Serve!”
Posted : May 2, 2013 6:56:38
Well I can’t say I was really surprised at the volume of emails I received, both pro and con, on my board term-limit thoughtful review. Some readers saw red and fired off mean responses suggesting I didn’t finish any post-secondary education… seemingly without taking a moment to digest this reflective thought leadership piece. A perfect example of this was my activist follower (see comments on last blog) who, in addition to regularly commenting on The Board Blog, once campaigned in his blog to “vote TK off the island.” This individual must feel that I don’t respect shareholders enough, but nothing could be further from the truth, particularly since I am a significant “shareowner” myself (as he chooses to call shareholders of public companies).
In a way, I’m glad he brought up this concern, because it gives me the opportunity to clarify why I have suggested a term-limit model of two, six-year terms. His view is that shareowners would never go for six-year term limits because they want annual elections. This is an important point, but in this context, it confuses term limits with director elections. Term limits are a replacement for a mandatory age requirements or, as I will explain in a moment, a valuable tool for boards, companies, and shareholders.
I am a proponent of annual elections for directors, and if a director doesn’t receive a majority of shareholder votes, they should be required to submit their resignation. There may be an extreme case where a board wouldn’t accept the resignation (it could happen), but typically boards should honor shareholders’ views that someone who is representing them should have the ability to be replaced. Now, before my business-world friends fear that I have totally gone soft on the role of corporate boards, rest assured that with my support for annual elections comes the adamant request that shareholders stop submitting questionable proposals so they can sit on the shoulders of board members and second-guess every decision a board makes, even though they will never have the same access to information as the board. If anyone has ever had a job where your supervisor just sits on your shoulder watching you work, you know it is one of the most annoying and least productive environments imaginable. If we’re going with annual elections, please let the board do its job without second-guessing every decision. We can’t let this board governance system deteriorate to a level that our most qualified directors don’t want to serve as public company directors. Sorry, I didn’t mean to digress and get on my soapbox… so back to the issue at hand, which is term limits.
Let me explain why I think term limits is a good tool for all concerned. Term limits are viewed favorably by shareholders because they don’t allow directors to become entrenched, out of touch, or lose independence after decades of years of service. But more importantly, allowing two terms gives board leadership a tool to replace or, better stated, not re-nominate, directors who are not contributing. I’d like to believe that with good board evaluations, this kind of assistance or tool wouldn’t be necessary. But the facts are, getting directors off a board is not easy, nor is it exercised as often as it should. Boards strive to be collegial, and casting off directors who are close associates isn’t an easy task for anyone. Term limits don’t eliminate the need to deliver the tough message, but it does make it easier. There is no magic to the six-year terms I suggest, except that 12 years of service seems logical to me.
It is interesting to me that since writing the first term-limit blog weeks ago, I have met two more young directors (below 40 years old) and have witnessed some bad examples of companies being hacked, which is the most rapidly growing risk challenge for managements and boards today. This supports one of my reasons for term limits, so that you have directors who are more familiar with today’s true enterprise risks. It also provides some support to my premise that the benefit for term limits will continue to grow and that more companies should embrace it as a good step forward. Another side benefit in planned board turnover is increasing director diversity, but I will save that issue for the future or you can read my past blogs on board diversity.
For those of you who are interested in the personal aspect of my activist saga, I should share that I had the opportunity to meet my challenger face to face when I was speaking at a directors’ conference in California. As typically happens in these cases, we discovered that while we would never agree on the importance of certain issues, he was far from radical in his quest to improve board performance. We parted amicably by agreeing to disagree, but interestingly, the more we interacted face to face, the more I discovered that our goals were, in fact, not that markedly different. Time will tell, after he reads this, if he thinks I’m still bad for shareholders. Right now I’m sleeping just fine, thanks.
Posted : March 8, 2013 3:35:40
Fortunately I don’t give out my home address with the distribution of the Board Blog so those who might have the inclination to form a “lynching party” will at least have to do some extensive investigative work to hunt me down. The topic of term limits touches emotional heart-strings much like discussions about a mandatory board retirement age. Actually I have a much more effective and ultimately more important argument to make on why we need term limits for Congress (yes I made that case in a previous blog), but considering the changing environment in the boardroom, this topic is worthy of a discussion in this blog as well.
When I refer to the changing board environment, I’m talking about how increasingly, younger people are being asked to join boards. When Clara Shih joined the board of Starbucks at 29, it was a well-publicized event. In that same context I wrote a blog in 2011 on Chelsea Clinton joining Barry Diller’s holding company at age 32. With the digital world dominating much of every industry’s creative growth these days, it should come as no surprise that younger tech-savvy executives are appreciated as a valuable commodity on many strategically built boards. Both from a growth and a risk perspective, most of us are way behind the curve on what’s happening in the digital world that affects almost every discipline of our corporations. Keeping pace, particularly when one is a director that is retired from business operations and is forced to keep up with this paradigm shift on their own, is a daunting task. All the rhetoric above sets the foundation for why I now support term limits, but the core issue I want to discuss here is the challenge of younger people joining boards.
Using my example of Chelsea Clinton, with a mandatory retirement age of 75, the younger Clinton could conceivably serve on the board for 42 years. There are boardroom pundits who say that any individual who serves on a company’s board for 10 years or more should not be considered independent. Their theory is that one might get too comfortable and familiar with the setting and organization to be a pleasant skeptic. I not sure that any research out there confirms that this transformation occurs at 10 years, but I might buy-on that say 30 years is too long for someone to serve on the same board. Truth is, I’m not sure of the right number but am a growing fan of starting some term limit program and see how things go. Another reason I like term limits is the need for fresh blood in an organizational structure that can, if left alone, get stale. Also on the plus side of term limits is that it creates more opportunity for diverse boards. Proponents of increasing board diversity are quick to offer that board openings have decreased in recent years, and that it’s tougher to get diverse members on boards and change today’s current lack of board diversity trend in the U.S. I believe this is true, and I would hate to see this problem escalate leaving us no options except to institute quotas as we have seen in several European countries.
For those who want to argue against board term limits, there is no question that some very valuable experience can walk out the door at the end of a term. I also buy the argument that both term and/or age limits are not necessary if a board has a robust board evaluation process. Truth is, even with a viable evaluation process, boards are reluctant to ask members to resign or not put them up for reelection knowing they in fact might be the one that is asked next. Those events affect collegiality, which is a good trait with a board that performs well. Unfortunately, we can’t solely rely on board evaluations to handle the selection challenge of who is qualified to stay, although I must say boards are getting better with this process each year and might get us part of the way there.
So what would I do if I were Czar of U.S. Board Governance and had a free rein to set the rules? I would have a charter that permitted directors to serve two terms of six years each. I would still have a mandatory retirement age of 75. (I used to say 72 but I’m getting older now. Those of you that are my age 62, don’t worry—the older I get most likely my mandatory age will increase.) I would still have rules about when you must submit your resignation for review, such as if you changed or left your job or declared bankruptcy. And finally I would mandate a robust board evaluation process that would not be shy about asking board members to resign or if they refuse, would not put them up for re-election. This may sound harsh, but it is really not too far off what many boards have in their charters and governance guidelines today. I’m pretty sure I’m correct in some 6.5 % of companies have term limits today and everyone I’ve ever interviewed would say they are willing to get rid of not performing directors…it’s just that some are better at executing their policies and procedures than others.
One final piece of advice to make sure you can orchestrate the above without too much angst. Grandfather the current board members to your current retirement plan and have the vote only affect those new board members being recruited. Otherwise people my age and up will feel like we are being wrongly targeted and will dig our heels in and you won’t get anything of value approved. If we can’t do what is right in the business world with this issue of performance and retirement, how can we expect Congress to do it where this country desperately needs it? For those of you older than me that are upset by this blog, I will be on vacation out of the country for the next two weeks. Ciao!
Posted : November 27, 2012 10:16:32
Back many years ago (and I do mean many), when I started in the business of providing education and thought leadership to corporate directors, I came across Equilar, a small but growing company on the West Coast. At the time, Equilar’s vision was to collect and distribute compensation information for public and some private companies.
Corporate Board Member (CBM) was subsequently involved in its own database construction project at the time, but I can remember thinking how I wish we could have collected both executive and board compensation information along with our array of board and committee information.
Several years later I crossed paths again with Equilar’s founder and CEO David Chun and was pleasantly surprised that it had become the premier, and some may argue captive, compensation information resource for companies, board committees, and compensation consultants across the U.S. It was at this reunion of sorts that David and I agreed we needed to offer some programs together to help boards. Little did we realize then how significantly challenging executive compensation would become with SEC and Dodd-Frank regulations. Because both of us were stretched to focus on the growth of our individual businesses, it took us 10 years to bring that collective wish to fruition… but now I couldn’t be more excited about what’s around the corner.
In the last decade, Equilar has grown into a well-respected compensation and boardroom data powerhouse, and for our part, no company touches more directors of public companies than Corporate Board Member. So David and I were sitting at a table with a blank white board in front of us with one very basic challenge: What could our organizations do collectively that would help boards, and specifically compensation committees, deal with what is viewed today as the biggest boardroom challenge—getting compensation plans right in the eyes of both management and the shareholders?
We knew we wanted any joint program to be unique as well as chock full of valuable and usable content. Thus, the Compensation Boot Camp was born, and our quest for creating best-in-class compensation committees was under way. Our first hurdle was in coming to terms with the fact that there is never enough time to touch on all the issues that warrant discussions. Board members are very busy, and physical conferences have time limitations as well. CBM has always valued peer exchange opportunities; however, there were topics and data that needed to be presented in general sessions so that appropriate discussions could occur. Our solution: Offer both pre- and post-conference webinars that provide valuable information but don’t steal valuable discussion time away from the live event. That being said, one of the interesting features in our development meetings will be Equilar’s pre-event webinar for Boot Camp attendees covering its always-anticipated “Top 10 Issues for Compensation Committees in 2013.” Viewers will be able to ask questions while getting a solid foundation and related materials for the physical Boot Camp scheduled two weeks later. And then since most of our event time will focus on executive compensation, we’ll conduct a board compensation post-event webinar to address board member pay structures approximately two weeks after the Boot Camp.
One of the things I pushed Equilar about was to make sure they spent time on their research and unique programs around establishing relevant peer groups. CBM gets that informational request as much as any topic we cover. Our Boot Camp solves that challenge by offering an optional workshop for those companies that struggle or are challenged by shareholder groups or proxy advisory firms about how they form their compensation peer groups. By merging in our peer exchange sessions, information on trends, and shareholder expectations features during the live event in Miami in January… we really feel we have created something special. In addition, I hope to seed some of the discussions at the Boot Camp on my personal favorite comp topic—discretionary pay—and its growing use as a strategic tool as well as the best way to describe it in the proxy statement.
I promise you I can tell you a lot of thought and energy went into making this event best-in-class as well. I’ll be reviewing the event highlights in a future blog but hope anyone who sits on a comp committee gives this a real hard look. I’ll be there ready to debate my definition of best-in-class.
Posted : September 21, 2012 11:31:37
If you are surprised by that headline, then either you are a full-fledged propeller head (IT geek) who is all over cyber risk as part of your full-time job or, in contrast, a person that has spent the last three years living under a rock. Interestingly, I don’t view this headline reference as necessarily a knock against boards but rather it reflects the reality of how fast environments can change and why boards need to be prepared to move equally fast. I honestly don’t believe that today’s boards can keep pace with the IT and cyber risks that are popping up every day, and I know a lot of experts that would support that premise. That doesn’t mean they don’t have the responsibility to shareholders to keep knowledge and processes moving forward, but the pace and negative ingenuity that exists in today’s hacker world is mind boggling.
This realization started for me several years ago when I witnessed the vicious internet reputational attack on Taco Bell about the quality of its meat. Taco Bell and its holding company, Yum Brands, proceeded to launch a digital counterattack that today, is a case study in battling web or reputation assaults. The understanding of this vulnerability came to a head this year when I read Corporate Board Member’s 12th Annual Law and Boardroom Study, conducted with FTI Consulting. The most informative results out of the research addressed boards’ and GCs’ areas of concern or, put another way the issue “most likely to keep them up at night.” Data security owned the top concern spot in both respondent groups, leading the GC list with 55% and the board area of concern with 48%. These numbers are double the percentages that were expressed in 2008 with the same survey and question. Interestingly, if we had spelled out that this includes social media, I think the board members concerns would have been even higher. Since this research hit the street, this feeling of oversight inadequacy has been supported by the directors I talk to and research conducted by other board providers. Even the audit chairs on our peer exchanges have listed it as the number one topic they want to discuss in their peer exchanges coming up at the Annual Boardroom Summit. Ladies and gentlemen… meet the new board Public Enemy Number One.
And this is one of those risks that we will never feel comfortable that we have our arms around so we can “sleep at night.” And the sad part is, what we know is a real risk pales in comparison with what we are reasonably sure we don’t know. Getting hacked, stealing credit card numbers, digital reputational attacks on the World Wide Web—you name it, and there are more exposures than all other risks put together outside of data. So what’s a board to do? (Because I need my sleep at night!)
Well my friends, this is one of the few times in this blog’s history that I can’t give you an answer. I honestly don’t know how to respond, because so much of this is stuff I am still learning how to handle myself. What I can do is make an important suggestion that was developed to address this very problem that I am looking forward to. Since cyber risk is the board’s biggest issue, and we ourselves don’t know the answer, we’re calling in the big dogs to learn about what we don’t know. That’s right, even Corporate Board Member admits that it is overwhelmed but that didn’t stop us from getting people who can provide a educational foundation on this risk that we can successfully build on.
On October 18th in Chicago, Corporate Board Member will be holding its first data security event for the board titled “The Board IT Challenge: Oversight of the Cloud, Cyber Risk and Social Media.” This event is not just designed for audit or risk committees, but for every director who understands that risk oversight is one of the board’s foundational responsibilities. Sometimes I just have to laugh when people start talking to me about “the cloud” because I only understand the basics, but I love the name. (Who thinks of these names?) So I for one am happy that this event will touch on the most important topic this year, and I hope you’ll join me for this critical tutorial in the Windy City.
To conclude, on October 13, 2011, the Securities and Exchange Commission (SEC) released guidance regarding disclosure obligations of public companies relating to cyber security risks and cyber incidents. The regulators know that American companies are becoming more reliant on data-driven systems and are equally susceptible to cyber attacks. In that guidance they outlined that “companies are required to disclose their conclusions on the effectiveness of disclosure controls and procedures on a quarterly basis.” As usual, directors are asked to review those disclosures. I have one simple question:
Are you prepared to do that?
Posted : August 20, 2012 3:03:11
Hello. My name is TK Kerstetter. It has been so long since I updated this blog that I feel like I need to re-introduce myself to whatever followers I have left waiting for part II of this blog. I apologize to all and my poor excuse is that I have spent this gap on vacation and getting daughters settled in new college apartments at William & Mary (Go Tribe!) and University of Georgia Graduate School (Go Bulldogs—but I’m not sure those dogs will like her Alabama undergraduate wardrobe... so maybe it’s better if I say “Go SEC!”) So now that I’m back in the fold, let’s see if I can’t earn some of you back with some interesting and informative blogs.
In Part I of this blog entry, we looked at how often one should do board assessments, who should facilitate, and the merits of inviting a third-party facilitator into the boardroom. In Part II, I want to discuss evaluation goals, evaluation method options, and how the results can be used. First let’s talk about board evaluation goals.
Evaluation goals. There is much to gain from an effective board evaluation. You can get feedback on myriad aspects of your boards governance, such as the effectiveness of board and committee meetings and agendas, board and individual director performance, company direction and leadership, a self-assessment of performance, board and committee strengths and weaknesses, board and committee composition, board size, quality of information and presentations received, quality of planning and/or retreat process, CEO/senior management/board relations, views on CEO succession and the CEO evaluation process, board compensation views, board governance and operating guidelines and policies, director liability and/or ethical concerns, and more. As you can see, there is almost no limit to the type of questions you can ask or the amount of information you can assess from your board members or committees. The key is having the board chairman or lead director and/or the nominating/governance committee decide what the goals of the evaluation are. Then the process of structuring the evaluation can begin.
Method or process options. As one might suspect there are multiple methods of collecting the feedback from directors, as well as many options on what process structure can be used. Having a clear vision for the goals of the evaluation can help dictate which method might work best, but in my experience, boards are all over the lot in which method they use. One of the big decisions to determine early on is whether to do a peer-to-peer evaluation of individual directors. Many companies shy away from this option because they feel it might be considered too confrontational and hurt the collegiality of the board. It is true that some people can take constructive criticism the wrong way and it could damage some already-fragile relationships, but on the flip side, I will say that there is no better way to change negative board behavior than with a peer-to-peer process. The majority of board evaluations are still done as a review of the entire board or committee versus individual board members. I see this gradually migrating to peer-to-peer and adding assessment features as people recognize how valuable a board evaluation can be in many areas. Many companies supplement what they do with board evaluations by giving each director a self-evaluation that a he or she is asked to complete, but not turn in. The theory here is that this self-help exercise forces a board member take an introspective look at his or her own board performance and habits and make a personal commitment without having to publicly share their self-perceived strengths and weaknesses. After I posted Part I of this blog topic, I was asked if I could provide a sample of what I’ll call a self-evaluation, so I am attaching this link. The Society of Corporate Secretaries and Governance Professionals also has a resource center that houses many examples of board evaluations and other helpful board documents that you should have access to if your general counsel is a member.
Probably the most debated decision that boards have to make is which method to use to solicit the board feedback. You can use survey forms (both paper and online) or conduct strictly interviews or employ a combination of both. I must admit, I get nervous about the online versions because I’m not sure you can ever truly destroy the responses, which creates an issue down the road where past board evaluation responses will be discoverable, thus allowing good forensic investigators to recover all past responses. I may be old-fashioned these days, but I still prefer a policy where any written information is paper-based and all surveys are destroyed following any analysis as a normal procedure. For this very reason, many people swear by interview-only evaluations. This way, there nothing is documented on paper and the facilitator summarizes any critical issues. Personally I’m a fan of both. I’ve found that an open survey covering relevant issues including board composition is valuable, so when I get to the interview process, certain hot spots can be targeted and focused on. Having an outside lawyer as your facilitator is preferred by many companies to establish the attorney-client privilege, but I would focus on having a good facilitator and interviewer first and then worry about the privilege versus putting emphasis on having a lawyer who isn’t a good facilitator. Also attorney-client privilege has not proven to be foolproof, especially when SEC enforcement officials put pressure on to have it waived. The bottom line is, get a method and facilitator that work for your company and board. Make sure you’re getting the most out of this exercise and experience.
Developing a more effective board. Once the evaluation facilitator receives the feedback, there is typically a meeting to review the findings and determine what is relevant to put in an action statement to the board. This meeting could include the chairman of the board (outside or inside), the chairman of the nominating/governance committee, the lead director, and/or the CEO. This is a critical part of any board evaluation process because a) whatever is submitted to the board becomes part of the minutes and is clearly discoverable and b) If boards have identified action items or issues they want to correct in writing, failure to implement those changes can have a major impact on how the board is perceived to handle its affairs. In other words, don’t identify an action commitment to the board unless you are certain that it will be acted upon and implemented within a reasonable time frame. Usually, many issues are discussed and questions answered at the board meeting but the only item that ends up in the minutes is the agreed-upon action statement that expresses what the board is committing to do to become a more effective board.
Now I won’t bore you on all the great information that can be derived from a board assessment or evaluation. If you just reference the goals above you quickly recognize the breadth of information that can be garnered by board leadership if done correctly. I can’t think of any exercise or process that the board could undertake that can contribute more to becoming more effective than engaging in a properly structured board evaluation. When I first entered the board space after serving on a public board, the thing I enjoyed most was working with a board on its board evaluation. Today, any such assignments are too few and far between, since my time is so constrained with the growth of Corporate Board Member. Maybe a return to the facilitator role is in my future when the time comes to pass the torch but today I’ll accept the assignment to keep everyone informed of the value of board evaluations. I’ll leave you with the above words of wisdom and the following quote from the late Dr. Seuss…“Be who you are and say what you feel because those who mind don't matter and those who matter don't mind.”
Posted : June 11, 2012 10:20:17
I have always been a big fan of the benefits that can be afforded a company’s board after it undergoes a prudent board evaluation. Next to executive board sessions, I believe a well-structured board evaluation is one of the best corporate governance practices of the last 10 years and it appears the practice is quite prevalent. PwC’s 2011 Annual Corporate Directors Study found 94% of public companies conduct some level of board evaluation. Obviously, that finding partly reflects the requirement by the NYSE for all its listed companies to conduct a board evaluation. NASDAQ doesn’t require an evaluation as part of its listing requirements but has repeatedly promoted those benefits, as well.
I received my background and experience in board evaluations when serving on a public board in the 1980s, and during the last 12 years, I have conducted several board evaluations a year for public company boards whose members felt that a facilitator such as myself, who had served as both a corporate director and chief executive, would be very helpful in sorting through their governance challenges. Taking on such challenges is particularly interesting for me, because there is no deeper look into a company’s soul than through a true board evaluation. Of course, it goes without saying that while many of the situations I have encountered over the years have spawned ideas for educational articles and conference topics, the information gathered in this type of venue is completely confidential. I have been very out front and vocal about how boards should handle directors that leak information out of the boardroom. You’d better walk the walk, if you going to talk the talk.
What I do want to pass along in this blog are my observations about what elements can improve your chances of having an effective board evaluation process. I will stop short of calling these “best practices,” because I‘m not sure that term fits most governance issues (and as my readers are well aware by now, I support the theory that “one size doesn’t fit all”). I’ll probably make this a two (or three or four)-part series just because of the plethora of issues that need to be discussed when dissecting the board evaluation process, but here is the first set of issues to consider.
Who should facilitate your board evaluation: Let me start by saying who I think shouldn’t be the facilitator (the person who directly receives and analyzes the results): The lead director, chairman, or the chair of the nominating/governance (or similarly named) committee. And here is the logical reason: How can you evaluate the entire board and all its members if one of those members is conducting the evaluation, especially if the board member facilitator is part of the problem? Will other board members feel comfortable criticizing the facilitator when that insider will then know what each board member’s comments were? Now, I recognize that some boards are so collegial and candid with one another that this self evaluation can work, but I still don’t think that having an existing board member, regardless of title, creates the right environment for candid feedback. Now, again, before I get swamped with readers who think the chairman or the nominating/governance chair should own this process, I don’t disagree. I just don’t think that it makes sense for them to be the facilitator of the evaluation.
Next, let me address the issue of an inside (member of the company) versus outside facilitator. Here’s where the practical and management side of me takes over. Enlisting an outside board evaluation facilitator each year can get expensive, and time flies, so before you know it, it’s time to start up the whole board evaluation process again. So unless you have had a significant event over the past year (merger, restatement, board leak, failed say on pay, etc.) it might make sense to have an effective but no-cost inside facilitator perform the task every other year—or even more often. I would recommend that a company have an outside proven facilitator at least once every three years, which will give an organization a legitimate, independent process to uncover a governance, composition, or other related concern.
Who are viable third-party board evaluation facilitators? Most companies first look to their outside corporate counsel. Board members and management often feel comfortable with the pre-existing relationship and these established advisors offer the additional advantage of the client-attorney privilege. While this seems to make logical sense, I would also emphasize that a facilitor should be a good interviewer and experienced in getting board members to open up—which will often prove more valuable than the legal structure a law firm will bring to the process. Obviously when outside counsel excels at both, they will probably have a good reputation in this corporate governance space. There are also consultants and organizational experts that do board evaluations for a living, and my personal experience with such individuals is about 50/50. It doesn’t take too much homework to sort out the better performers, and doing so is an important decision, since you will be trusting them with your board both collectively and individually—and often without any observational supervision. It is just as important to develop a relationship with your board evaluation facilitator as it is with any board or legal advisor, and I have seen cases where either a GC and/or outside counsel has worked hand in hand with the third-party facilitator with great results.
So back to my quest for who inside the organization would fit the bill for the interim year facilitator. I guess my favorite choice is the corporate secretary. In smaller organizations where the GC is also the corporate secretary, this individual seems to be the most prevalent collector of anonymous information. In fact, this very scenario can put a GC in a precarious situation if a real problem emerges out of the evaluation feedback but they spend every waking minute solving problems and handling crises… so they may come to feel like: “What’s one more?”
I prefer it when the corporate secretary’s job is separate from the GC, because I do feel that evaluations can be one of their duties. These individuals are very schooled in the critical and topical governance issues and can call in some outside interview help at a reasonable cost if it is needed. Beyond that, in some companies where the HR executive is very respected within the organization, I think that individual can serve in the facilitator role as well.
Wow, I’m only on the first issue and look at all the space I’ve eaten up already! I think I’ll present my evaluation views in digestible segments and cut this one off here. Up ahead, you can expect related blogs on the following: What methods are best for a board to garner director views and concerns? What should be done with the information? What can or should be included in an evaluation? How can an evaluation help with board composition and effectiveness? Do you have a board evaluation question that you want me to address in this series? Now is the time to let me know. I hope you find this helpful or at least food for thought. One final point. In no way am I suggesting that the board doesn’t own this process. Any results meeting can and should include the chairman, chair of the nominating/governance committee, lead director and the CEO. The success is in the details, and that’s what we’re talking about!
Posted : April 30, 2012 4:31:37
And the simple question is, “Are you on board?”
Now, anyone who knows me well knows I am not a tree-hugger. I approach issues very logically and realistically. At this point in time, we all recognize that the issue of diversity is a sensitive one. In the past, board members have told me they would like me to avoid this topic, particularly with respect to board diversity...but alas, I cannot or I wouldn’t be doing a good job of covering real board issues and offering one person’s experience and advice.
Before you read on it’s important that I communicate my position on board diversity. To those of you who have followed this blog or our web show, “This Week in the Boardroom," this will come as no surprise. I am not a fan of “one size fits all” governance solutions that are often proposed in response to various accounts of corporate wrongdoing. So as it relates to boardroom diversity, this means I don’t support regulatory mandates or board quotas for women or ethnically diverse candidates. At the same time, I am a huge proponent for diversity of thought with regard to any issue that touches the boardroom. And while I am intrigued by the wide range of studies that either support or refute that diversity affects a company’s bottom line, I can honestly say I don’t need validation by such studies to take a stand on my own beliefs about the benefits of a diverse board.
Simply stated, they are as follows:
1. Boardroom diversity is just the right thing to do! It gets back to the fact that that in most facets of life, we need diversity of thought to be effective, and you get that well-rounded knowledge via a diverse group of people who represent your audience, customers, and the world. I have a hard time with today’s leaders grasping to hold onto lifestyles that mirror the 1960s when we are living 50 years ahead in the 2010 decade. I understand that people of influence don’t want to be told what to do; quite frankly I’m older too, and often feel that way myself. But the truth is, stonewalling the building of a diverse board in today’s world now borders on stubborn and even foolish. Which brings me to my next point of interest...
2. Diversity is like any other rapidly emerging topic. If you don’t think that is the case, then you have been living under a rock. Initially many of us sort of ignored Norway’s 2003 edict that the country’s companies have 40% of board seats filled by women by 2008. Whether this has been successful depends on who you talk to and frankly, I don’t want to debate that here, because I simply do not like quotas. But in the last two years, hardly a week goes by that I’m not involved in a board diversity discussion. It might be with institutional investors like CALSTERS announcing a diverse board candidate database, or ISS discussing its disappointment with the makeup of many of today’s boards—both of whom are quite influential on governance today. Now boards butt heads with these groups all the time—we did with executive compensation and look where we are today: facing the most binding non-binding Say-on-Pay vote you could ever imagine. Yet to me, the most telling event when I look into the crystal ball is the number of other countries that are on the brink of following Norway’s lead. Particularly are the rumors out of the UK that it will favor a "comply or explain why you haven't" boardroom diversity process. Remember, this is the same overseas contingent that has effectively instituted this same method to effect the splitting of CEO and chairman roles, and I daresay this movement will have the world or at least U.S. companies and investors watching intently.
All this had led Corporate Board Member to encourage companies to do the right thing and take control of their own destiny in this arena. Now I often hear from boards: “We can’t find a qualified diverse candidate for our board seat.” But to me, that means a company is only accepting sitting CEOs or CFOs who probably are considering offers from multiple companies because their ranks are so few. That goes under the “weak excuse” category, which won’t hold water in the future, much less today. So to help allay that concern, I’d like to share information about a program where you will be able to find over 100 qualified diverse board candidates and current board members networking, as Corporate Board Member presents a viable way to help companies and boards that sincerely want to be proactive about boardroom diversity.
On July 18-19, Corporate Board Member, with the support of the New York Stock Exchange, will present “Moving the Needle - Building Effective Boards with Qualified Diverse Candidates” at the New York Stock Exchange. The goal of this event is to identify qualified diverse board candidates through a CEO and chairman referral system complimented by an in-person networking exchange, where identified candidates will have the opportunity to interact with nominating and governance committee representatives and executive board search firms. Specifically, our objective is to expedite the number of diverse board members currently sitting on corporate boards and debunk the myth that there is a shortage of qualified diverse board candidates to meet the need of today’s U.S. corporations. “Moving the Needle” is not about quotas or token director representation—it’s about building boards that can improve all facets of a U.S. public companies’ performance, which will ultimately enhance the shareholders’ investment value.
Here are the highlighted facts about this important event:
- The Moving the Needle event will consist of a July 18 reception on the NYSE trading floor followed by a dinner on the 7th floor for CEOs, chairmen/lead directors, candidates, public company nominating/governance committee chairs and members, search firms, pro-diversity organization leaders, and invited guests.
- The following morning (July 19) after breakfast, candidates, nominating/governance committee chairs and members, and search firm representatives will participate in an interactive networking exercise until approximately 10:30 a.m. ET.
- During that same time, CEOs in attendance will be invited to a peer workshop hosted by Duncan Niederauer, CEO of NYSE Euronext. And chairmen/lead directors will enjoy a comparable workshop Led by Cigna’s chairman of the board, Ike Harris. This session will also run until 10:30 a.m. ET
- Public company CEOs, chairmen, and lead directors are being asked to invite at least one (1) qualified diverse board candidate to join them in attending the “Moving the Needle” event. Directors and officers offering these nominations are encouraged to accompany any candidates to the event as a demonstration of support, but in instances where these senior executives’ schedules conflict with the event, alternate executives can substitute as hosts or Corporate Board Member can assign a host for the event.
- A resource program book (both printed and digital) will be created to publish candidate biographies, board candidate resources, highlights of a Corporate Board Member think tank, and information on event sponsors. It will also include contact and information on associations and groups organized to help corporations and search firms indentify qualified diverse candidates. Following the event, this program book will be sent to all U.S. public company nominating & governance committee chairs.
- An event website (www.boardmember.com/movingtheneedle) has been created to display more in-depth candidate information, contact, and mission information on associations and groups organized to help corporations and search firms indentify qualified diverse candidates, and will also include a pictorial recap of the event’s activities.
- On July 18, event representatives will ring the NYSE closing bell to showcase the “Moving the Needle” event and its efforts to increase diversity on corporate boards. The bell ceremony will be viewed globally by more than 100 million people.
Now I know that is a ton of information to absorb in one blog, but we are counting on the support of many CEOs, chairmen, and nominating/governance committee members to make this initiative a success. I feel sure the vast number of this blog’s followers will want their companies represented in such an endeavor and we are happy to answer any questions you may have.
Here are links to an information sheet and invitation to your board and senior leadership. As you’ll note, this is not something we are tackling alone. Also involved in supporting this program is an impressive advisory council, many respected diverse organizations, as well as corporate support from our Diamond sponsor PwC and our Platinum sponsor KPMG. Without both organizations’ leadership and experience, these efforts would never have the push to succeed that exists today. Corporate Board Member is in this because we know it makes sense and is the right thing to do for companies and investors. I hope you’ll join us.
Posted : April 12, 2012 2:36:12
I’ve wanted to talk about the topic of risk oversight for some time and it moved to the top of my list when a director of a global company recently approached me at one of our conferences on the topic. He described his feeling of inadequacy in truly being able to oversee or even comprehend all the risks associated with his company, which operates in the U.S. as well as several other foreign countries. In the course of our discussion, he admitted that the challenge at hand for many directors (particularly those at large companies with operations abroad) seems almost impossible. We ended up chatting for almost 15 minutes, and the fact is, this director’s views surrounding investors’ and regulators’ risk oversight expectations have been echoed many times in Corporate Board Member’s annual research. If you think about the daunting oversight task, coupled with the lawsuits and public ridicule that accompanies a financial crisis or a cruise ship running aground, it could easily weigh heavy enough for many of us to actually lose sleep. So what advice did I offer? It was not anything groundbreaking, but hopefully valuable perspective nonetheless.
First, since the passage of Sarbanes-Oxley, the concept of companies’ managing and boards’ overseeing enterprise risk management has turned the term “risk” into a four-letter word. It’s important to remember that managing risk is not new, and it’s been a part of every operating business in the world since time immemorial. While some businesses and industries are riskier than others, the old adage "no risk… no reward" still stands true today. So embrace risk as a part of the business and do your best to think through which risks seem appropriate and which ones may not be worth betting the farm. Now, I don’t believe businesses in the past always did a great job of anticipating black swans that have caught companies by surprise—and will continue to do so in the future. In my humble opinion, it is practically impossible to think of everything that might happen in the future. Yes we learn from past experiences. I’ll bet there is a special global task force looking at mitigating the risk of a tsunami for example. But let’s be honest, the list would be endless with either human-made or natural causes that could result in a catastrophe. At the same time, there is no excuse for not having a plan to handle emergencies even though no one can spend every day dreaming up all the scenarios that could cause havoc. Identify the ones you can control, like IT risk or levels of environmental safety, and ensure that strategies are in place to mitigate those risks. But after that, it’s time to move on to the next set board challenges and duties.
My second piece of advice to the director was more tangible. Since as a director, you cannot oversee or anticipate every risk of a global or even domestic company, it becomes imperative that you take time to set the tone at the top of how you want your employees worldwide to respond within their day-to-day operating environment. Nothing is more important than identifying the thought process and conduct that is expected by those that represent your company in the field. This involves training, constant top-down reinforcement, and compensation programs that reinforce the desired behavior.
The board of directors will often undergo two or three watershed events during the year that will test their resolve if they truly support this tone. These events might be anything from an employee relations problem, a safety issue, or even a possible FCPA violation, where an executive has cut ethical corners to get ahead. For the moment, let’s use the latter example, looking at FCPA. If, for example, a division head in the Far East has surpassed his performance goals, which normally would result in both financial and career rewards, but it is common knowledge throughout the organization that this division cuts corners and isn’t hesitant to use bribes as a way of meeting goals, how should the board respond? Situations like these serve as critical education and tone-setting opportunities with the whole company watching. While it may be unfortunate, especially when such an event involves good employees, such an incident must be handled swiftly and decisively so everyone knows breaches in compliance and ethics will not be tolerated. Doing so reinforces the tone at the top and will result in fewer worries as a director about whether you have set the ethical bar high enough. If you miss or consciously avoid the opportunity to make a statement that “dirty performance” is not acceptable, then rest assured the remainder of the organization will soon be cutting corners. Tone at the top can either be a board’s best friend or worst enemy.
While I hoped that I had helped this inquiring director, I felt especially good at the end of day with respect to our Risk Oversight in the Boardroom conference audience. The depth and breadth of topics (particularly IT Risk) and the resulting interaction with the audience made it the most informative board risk event that Corporate Board Member has held thus far.
I do have one closing observation. It is interesting that in all dictionaries I could find, the term “risk” is defined only as a negative event. For example a business dictionary defined risk as “A probability or threat of a damage, injury, liability, loss, or other negative occurrence that is caused by external or internal vulnerabilities, and that may be neutralized through preemptive action.” I’m going to need to get all the dictionary authors together and explain that risk has a positive upside too. That is, when overseen correctly with a good tone at the top… risk can also be positive and very rewarding!
Posted : March 13, 2012 9:39:56
So do you think you have to spend a lot of time reading this blog to find out how I really feel about employee-to-CEO pay ratio disclosure? This Dodd-Frank Act provision might even be less logical than the much-discussed whistleblower provision. The facts are, while the whistleblower provision could have a bigger negative impact on U.S. corporations, it only affects companies in which someone steps forward. Compare that to the comp ratio disclosure provision—a process that will affect everyone and, in my mind, a disclosure that has no real investment value to most investors. My guess is when the lawyers get done with their legalese, even the most devoted activist will throw their hands in the air and say “I give up!”
I know a lot of logical people feel the same way. The facts are, companies now have to gear up to fight federal regulators over Dodd-Frank Act Section 953(b), the provision that asks public companies to reveal the ratio of median employee pay to CEO compensation, as the SEC works on writing final rules for that section of the law, which it hopes to adopt in 2012. A group of 23 business organizations, including the National Investor Relations Institute and the Society of Corporate Secretaries and Governance Professionals, have sent letters to the SEC saying they would like the commission to hold roundtables on the proposed rule so that it will undergo a formal cost/benefit analysis. (One large company I read about recently said it may cost $7.6 million and take about 26 weeks to gather the information needed for the rule.) Meanwhile, a pending bill in the U.S. House of Representatives (H.R. 1062) would repeal Section 953(b), to which I say: Go House!
I suspect, with last summer’s legal proxy access defeat, the SEC will at least undertake an appropriate cost/benefit analysis, after which we can only hope that the exercise might derail this movement as well. The AFL/CIO seems to have taken the lead on why Section 953(b) is important to investors, and in the interest of fairness, I’ll concede there are examples of companies that could use some checks and balances on their CEO pay. However, we know one size doesn’t fit all when attempting to evaluate companies, and on any issue such as this, both the companies and investors can and should cite examples of either high reporting costs or the need for benchmarking.
In the bigger picture, what’s frustrating to me is the constant identification of governance fringe issues that end up taking company and board attention that should be devoted more constructively to improving company performance. Unfortunately skids for Section 953(b) were greased with the recent financial crisis, even though 95% of companies had nothing to do with the events that led to the downward economic spiral. Yet these same decent companies now have to live with an angry mob that believes corporate boards are made up of lazy and often-greedy Wall Street types.
I have voiced my solution to this governance mess many times. I realize my view is probably not supported by either companies or investors, but I’ll espouse it again, anyway: We need to create a viable proxy access rule that will allow shareholders to annually determine who should represent them on the board. It is the shareholders’ company; therefore it is logical that they have a voice in who represents their interests. History has shown when boards do a good job they are supported by both retail and institutional investors. Under this premise, it will still be hard for single-interest groups to get their specially selected director elected if they aren’t proposing a qualified board candidate.
Once system such as that is in place, we can do away with all other regulations where shareholders attempt to sit on the corporate directors’ shoulders and second-guess their decisions. I’ve always contended that in the real world, the worst working environment is having a boss standing over you, watching your every move. Under my solution, we would have no say-on-pay, proxies could be cut in half, and no longer would shareholders press for more transparency and information. The balance to that would be that if specific directors did a poor job or refused to make changes when necessary, then the replacement of a director or several could be reasonably executed.
Now I’m not sitting here thinking that this grand idea could possibly be established, at least during my lifetime. But I do think the principles associated with this conceptual structure merit discussion. In the end, shareholders would have the power to make changes and companies and boards could focus on the business at hand and save a ton of administrative costs. I do feel slightly bad for the governance activists under this scenario, especially the ones who don’t own any company’s stock, since this structure would take away or change their platform. (They can always move to health care—plenty to debate there!) For the rest of you, however, feel free to copy and paste my opinion of the 953(b) pay ratio disclosure or the ultimate proxy access solution and send it on to your congressmen. After all, don’t we the people have the power to change, as well?
Posted : January 26, 2012 9:43:32
Whoa, it’s good to be back, computer in hand, after a short sabbatical to make sure the mind and body were at peace with one another. At 6’4”, it takes a little longer for the brain to communicate throughout all the extremities, but now the world is in balance, my batteries are recharged, and I am ready to take on 2012 with the same spirit and zeal of last year. So what better topic to start the new year off than a couple thoughts on proxy access?
That ‘s right. Just when you thought this issue was dead after a resounding defeat at the hands of the U.S Chamber of Commerce and the Business Roundtable in the U.S. Court of Appeals, the proposed shareholder right that won’t die is back again. This time, it’s in the form of an SEC rule called “private ordering,” which basically says that shareholders can submit a proposal to permit a designated group of qualified shareholders the right to nominate a director(s) and include them in the proxy.
The formal rule, known as 14a-8, was not challenged by the Chamber/Business Roundtable team and, while it resembles the mandated proxy access rule proposed by the SEC in 2009, there are differences. The rule establishing private ordering stipulates that the shareholder proposals to nominate must be filed company by company and can only come from shareholders who meet certain ownership threshold criteria.
So where is this likely to land? If you think a little challenge like requiring company-by-company filings is going to deter shareholder groups then I have a sweet land deal in a wonderful part of the country I’m sure you would be interested in. In fact, I just finished speaking at the Corporate Directors Forum’s annual Directors Forum, an event in which nearly every session included large share owners. (Incidentally, they like to use the term “owners” so that directors don’t forget who they work for.) CDF is a Southern California-based, not-for-profit, governance organization that runs a great annual conference if you want to understand how institutional investors, pension funds, and other asset managers feel about today’s boards of directors. It was a great experience for me to hear how an entity like BlackRock, who is the largest asset manager in the world, investing $3.3 trillion (yes, that’s trillion with a “T”) in some 10,000 public companies across the globe, feels about issues like executive compensation, corporate political spending, and board evaluations. Those present at the CDF event got a heads-up on what large-block voters like BlackRock will and won’t be challenging in its 2012 proxy voting.
Almost all of the investor giants who spoke on the CDF panels stated that they would look or vote favorably on proxy access proposals if the shareholder criteria was reasonable. BlackRock was the notable exception… not because it doesn’t think proxy access won’t be a good thing for investors, but as an organization it is committed to evaluating companies’ unique situations and steers away from sweeping commitments to vote “yay” or “nay.” Just recently, in fact, in a letter from its CEO to its best clients, BlackRock stated:
“I also want to encourage you or your independent Board members, as appropriate, to engage with us if you anticipate any such issues might be raised for your company this proxy season.
“We listen carefully and respectfully to a company’s positions, and are willing to support unconventional approaches as long as they can be expected to serve the interests of long-term shareholders. I can promise you a fair, respectful and in particular, open-minded airing of views.”
Wow… who are these folks? They could be the new role model for proxy plumbing revisions. I’m certainly going get them on our “This Week in the Boardroom” webshow so I can find out more.
The point that should be made clear is that until there is a tool for investors to remove directors who have been identified as poor performers or worse yet, just don’t get it, active shareholder groups and proxy advisors with voting power will continue to push this proxy access agenda. And my take is, this will not just be a polite nudge, but more like a real hard push.
No matter what, 2012 is going to be a very interesting proxy season, even though I’m not sure that all of these investor organizations will have their act together enough to affect a ton of companies this year. As of this posting, around 17 private order shareholder proposals have been filed to date, and my assumption is many of these organizations are just getting used to the power of say-on-pay for this season and may not be ready for “proxy access II.” But rest assured, this is a big freight train that is starting to coast downhill, without any brakes, and any company that gets in its way will be “posterized” (to borrow a colorful NBA term referring to the making of a poster when a player is badly dunked on).
Now, I predict that some companies will go on the offensive and implement proxy access using criteria that resembles what was described in the early SEC version. They’ll do this to appear proactive to shareholders and to garner qualifying criteria that is reasonable, verses the lower thresholds we are likely to see down the road. In my view, this is worth having a discussion about, but while you do, at least keep an eye on what’s happening around you in the early proxy season. The majority of companies might emerge fairly unscathed this year, but I predict next year, there will be no stopping this train.
Posted : December 19, 2011 11:20:49
I’ve always wanted to do one of these light-hearted blogs that was fun and interesting to read yet still sent a message about how someone felt about certain issues… so here goes. Here is TK’s politically incorrect holiday boardroom gift list for this season.
- Lead directors: I’d like to give lead directors a new pair of glasses so they could clearly see the difference in compensation between what the average non-exe chairman is being paid and what the median pay is of serving as a lead director. To me, both have the responsibility to be a key player in providing board leadership so I’m not sure why there is such a discrepancy in pay when, in reality, the jobs don’t differ that much at most companies.
- Compensation committee chairs: I like to give compensation committee chairs and members a balancing scale and a Kevlar vest. The balancing scale is so committees can be fairer to senior executives in a down market and fairer to shareholders in an up market. Too many executives that are doing some of their best managing performances and saving the shareholders millions of dollars are getting cheated in a down market because most comp committees are afraid to reward someone for performance when the stock is down. Conversely, when the market is steadily rising, too many senior officers are being rewarded when they haven’t moved market share or improved the company. They just rose with the tide and were paid handsomely for it. The Kevlar vests are for when the activists and media come to the office with guns drawn and pointed at the compensation committee for doing anything other than lowering compensation when either stock price or earnings are lower than the year before. Have the courage to do what’s right, my friends, and the vests will protect you!
- Qualified diverse board candidates: I’d like to gift this group a jackhammer. I’m really frustrated when I hear that there are no qualified diverse candidates to recruit to their company’s board. I’d rather someone just come out and say, “We just want guys like ourselves sitting across the table.” That’s at least being honest. The jackhammer will allow qualified diverse individuals to , once and for all, break through this concrete ceiling and by doing so, open the door for some amazing board candidates (who also happen not to be sitting or retired CEOs). By the way, I’m actually talking about diversity of thought when I say diverse candidate but that can’t help but include gender and ethnicity as well.
- Investors: My gift wish to them would include a punching bag, a Ouija Board, and one of those 8-Ball toys that we all had when we were young that would answer any question we asked by saying yes or no. With the way the markets have been going this last year… 200 points up one day and 300 down the next, I’m betting that many investors could hang with the averages just buy asking these prediction toys which direction the stock market’s going that day. Then if they want to get mad because they guessed wrong, they can beat the crap out of the punching bag and stop blaming corporate boards every time the stock drops a couple points. This will result in boards that can truly focus on strategy rather than on compliance or their D&O policy, at which point company bottom lines will improve, like a well-balanced Circle of Life.
- Congress: It should come as no surprise that I’m not gifting them anything at all. I can’t even give them coal because it is too valuable. In fact, I am so outraged over this recent insider trading fiasco that I would like to take every congressman who gained financial benefit from using insider information and mandate that they pay those profits back by the end of the year or face additional monetary penalties. Just think of this… some of the very people who brought you Sarbanes-Oxley and Dodd-Frank and chastised directors for being greedy and unethical, were sitting there in Washington using confidential information about laws that would affect various industries, and bought and sold stock before the rest of us knew what was happening. WHAT WERE THEY THINKING? Why can’t the plaintiffs bar go after these guys? And they thought this was OK because…? But just to keep in the holiday spirit, I want to gift our Washington politicians TERM LIMITS, and the same RETIREMENT and HEALTH CARE PLANS that they created, we have to negotiate, and they don’t because they have elite benefits. The U.S. political system is broken and I’m the millionth person to say it in writing. So no gifts for Congress but maybe 2012 will be the year that our elected officials will see the light. “Tis the Season!”
- Public Company Directors: To the 95% of corporate directors who have given tons of hours, worked hard to represent shareholders, and did their best to do what’s right… I wish the gift of staying informed. There is no question that 10 years ago some dramatic reform was needed to improve governance and focus directors on their fiduciary duties. Many of you should be proud of how you answered that bell and improved your effectiveness. Still others are actually starting to get it, slowly but surely. Unfortunately, all directors were painted with a broad brush that says they are part of the problem in American companies. I, on the other hand, like to look at the board as part of the solution; so doing what you believe is right for the company and its shareholders is a great place to start. We may not be able to change public opinion overnight, but we sure can feel good about our own personal effort.
Well, I really didn’t start this blog thinking I would be so cynical, particularly when this was supposed to be my holiday message to my faithful readers. But the words just flowed…It was easy to write and I had a ton more gifts on my list to distribute but all good things must come to an end, just like this year. I consider any year that ends with me at home with my family, surrounded by health and happiness, and living in a great country like America, as a real blessing. Wishing you and yours a great holiday season.
Posted : November 28, 2011 12:57:20
Are shareholder activists friends or foe? I’m actually asking myself that very question as I prepare to interview a famous (or infamous) shareholder activist when he and I team up for the after-dinner keynote at Corporate Directors Forum’s upcoming annual event. As many of you may know, the CDF is a Southern California nonprofit organization founded to promote high standards of professionalism in corporate governance, and this year, their annual event ”Directors Forum 2012: Directors, Management and Shareholders in Dialogue” is being held in San Diego January 22-24, 2012 at the Hilton San Diego Resort. (I know, I know… tough duty in January.) During the keynote, I’ll be interviewing Nelson Peltz, who heads Trian Fund Management LP, and is one of the most well-known shareholder activists in the business.
Now I must admit that my first reaction to appearing with Peltz was to imagine the bigger-than-life movie character Gordon Gekko, immortalized by Michael Douglas in the movie Wall Street, or the Gekko’s real-life equivalent, Carl Icahn. Activists like Icahn resemble hungry lions stalking a herd of gazelles, hunters who are particularly adept at identifying weak prey and wasting no time going in for the kill. Their reputations have been built around what I know as Pirate Capital, and they certainly haven’t been afraid to break companies apart and terminate large groups of employees to further their own cause. While this is clearly a practice that can result in increased shareholder value, it is typically not something that is well-received by the masses and most certainly not by the managements, employees, and communities that are occasionally devastated by this extreme value-creation method. My initial impression of Peltz was also colored by my remembering that he once took part in a small but well-publicized, skirmish with the Wendy’s management team and board prior to orchestrating a successful intervention. This incident, in fact, led to the memorable quote from Corporate Library’s Nell Minow who referred to Peltz as “a case of the cure being worse than the disease.”
With these mental images as a backdrop, one might think I’d fear for my life on stage with such a corporate predator. Fortunately for me (and probably to the detriment of those with a sympathetic ear to managements and boards that continually underperform or feel entitled to serve regardless of their performance), early on in my career, I was exposed to the realities of investing as a shareholder and being frustrated by nonproducing investments. This lesson in shareholder rights and the need to perform was further emphasized when I was in the banking business, when I watched fellow bankers fend off angry activists shareholders who were eager to help management improve performance, or better yet, put them up for sale to seek short-term profits. While I was initially glad that I wasn’t targeted, as it turned out, eventually I did get my turn in the bucket. A very sobering but eye-opening experience, I can assure you.
In the end, being labeled a shareholder activist is like anything else… one size or impression doesn’t fit all, and there are people that cross the line of good taste and there are those that handle their affairs professionally. That’s why I look forward to meeting and interviewing Nelson Peltz at the CDF event. There are times that change is needed, and the fact is, it’s never popular to be the change agent--even if you are within the company. From all I can tell, Peltz’s and Trian Fund’s strategy is to take companies who have floundered and disappointed shareholders and then implement a strategic roadmap for how the company can be rebuilt and grow. I’m sure there are directors on the boards of Wendy’s, Heinz, or my neighbors at Cracker Barrel that might feel very different being a target of someone’s else’s vision, but on the surface, I’m looking forward to my chance to draw that conclusion for myself. The bottom line is that a shareholder activist can be either a friend or foe depending on where you are sitting. Just like everything else in life, it all depends on “whose ox is being gored.” From my standpoint, I prefer the constructive, longer term activists’ process to government regulation as the answer to improving today’s companies, so wish me luck on my interview. If you have anything specific you think I should be asking my guest, or you think I am way off base, please let me know.
They say that who you are is a result of your experiences along life’s path, and I feel like I have had good exposure to all sides of the corporate world. I guess in this case, you are never too old to learn, so stay tuned. I’ll pass along my feelings after the interview.
There is one last thing I want to say in this blog. As I am writing this during the Thanksgiving season, I want to take a moment and add a reflective thought about how lucky we are to be living in a country like America. Even as I squeeze by the Occupy Wall Street protesters on my way to the New York Stock Exchange and worry about the gap between the haves and have nots--a gap that most surely will result in further social unrest--I am amazed at how this country continues to protect the freedom of voicing our opinions. All that being said, I hope everyone enjoyed a wonderful Thanksgiving break with family and friends, with a reminder to just take a moment to think about those less fortunate or, just as important, those that are overseas striving to protect our borders and freedoms by putting themselves in harm’s way. Come to think of it… I think I’ll start today as an activist voice for a returning soldier’s rights. Hey, now I’m an activist!
Posted : November 1, 2011 4:20:15
They say that newspaper headline writers make their living creating sensational headlines that will sell, sell, sell. This revelation is nothing new for most of us who have been walking the earth for the last 50+ years and have seen our fair share of crowd-stopping yet questionable headlines. You’d also like to believe that having a literary license to create a clever headline starts with a professional reading the article to get the gist of what the reporter or editor has written. I can only hope that is the case. Unfortunately I have my doubts and boards of directors seem like prime targets for these shocking and scandalous headlines about the board abuse of America. And we wonder why directors are fighting their Silas Marner reputation.
So in case you are asking yourself, “Why is TK on his soapbox about the media again?” It’s because this time, it happened to me, and I was right in the middle of the action. As so happens in my job, I am often contacted by reporters for a statement about a board or director issue or event. In this instance, I was contacted by my local newspaper from a business reporter that I had talked to many times. His question seemed pretty straight forward as he asked me if it would be correct to print that a certain newly named director would be making $270,000 a year with his retainer and restricted stock. I answered yes it would be accurate. Now I should point out that this wasn’t any normal director candidate in the Nashville, TN. area. It was former Governor and one-time Nashville mayor Phil Bredesen. And when a Tennessee public company asks the former Governor to sit on the board of directors… it is a big deal in the Music City.
A series of logical questions followed, some of which probed whether I thought the former Governor would make a good director and was $270,000 a year in director compensation considered to be a standard for a company this size. Knowing those figures I answered positively and gave a rather glowing synopsis of why I felt Phil Bredesen would make an excellent director of a health care company. Now truth be told, I’ve met the man only once and never really had a conversation with him. But for the 15 plus years I have lived and worked in Nashville, I have never witnessed a more balanced and knowledgeable businessman/politician in my years of interacting or observing public officials. I thought to myself, “This guy is going to make an excellent director.” So after finishing the call and picking up the paper the next morning you can imagine my surprise when the top headline of the business section read “Vanguard To Pay Bredesen $270,000” Not “Bredesen joins the Vanguard Board” or “Vanguard lands Top Director Prospect.” I understand that in these “Occupy Whatever” times, this looks like a ton of money or a possibly a political favor , but the tone is the typical reflection today of what the media thinks about board members and their contribution to companies: Not Much!
Oh, and I’m not done yet! Several days later I picked up an edition of USA Today and the top headline of read: “Company Directors See Pay Catapult.” The article goes on to explain that director pay is up year over year due to a small increase in retainers and a good jump in equity pay. Anyone surprised that a directors equity pay might be up from a lousy stock year the year before? I’m betting I could find some years earlier where the equity pay and director compensation was higher than 2011. If this is what sells newspapers and fuels websites today I strongly suggest that directors fasten their seat belts because the ride has just begun, and the tone of how the media feels about public board members will only go further south.
My rant is on this topic is over and I am reasonably sure I won’t bring up this topic for a while. Sometime this week I will get another call from a reporter asking my opinion about a boardroom or governance issue and I will do my best to give a balanced answer of the facts and what I think. However, I’d sure make a lousy headline writer!
Posted : October 10, 2011 1:42:52
For those of you that missed this in the press about a week ago, Chelsea Clinton, that’s right—the daughter of Bill and Hillary Clinton—was named to the board of the publicly held IAC/Interactive Corp. at the age of 31. Now before too many of you jump to conclusions, it is important to point out that this is not a typical public company, in the sense that the long-time Clinton supporter and business mogul Barry Diller owns over 36% (and thus arguably controls) this Internet media holding entity. Even so, from all appearances, shareholders shouldn’t be disappointed with Diller’s controlling interest and leadership, since the company’s stock is up 41% at the time of this writing (a true feat in this market). Yet, the addition of Clinton to the board would make great fodder for activists and investors pushing for independent and qualified board members. Yes, IAC resembles a family-owned and controlled company, but it is still under the regulatory watch of the SEC and has many nonrelated shareholders who equally need to be represented. So the question at hand: Is Chelsea Clinton a qualified independent director?
It is probably appropriate at this time to disclose that I do not know Chelsea Clinton personally. She seems to be a bright, 31-year old, a graduate student pursuing her doctorate that has had some business experience, and there is not a soul who would argue that she certainly has connections. But here is the interesting question: How will IAC describe her director qualifications in its next proxy? Hmmmmmmm?
Let’s first take a look at why, on some fronts, Clinton’s appointment is an interesting choice for IAC shareholders. If you look at the businesses of this Internet holding company, it makes sense that you need someone on the board who understands the fast-changing online world as well as the youth and young adults who are IAC’s target customers today. I think the act of replenishing board composition by recruiting members with a range of ages and experiences is a positive event for most boardrooms, particularly for companies that count Generation X and Y as their customers. Due to their lack of on-the-job business experience, there probably are not too many legitimate board candidates in their late 20s or early 30s, but hey, do you really think IAC’s other high-profile board members, folks like Edgar Bronfman or Michael Eisner, can really relate to Match.com or Shoebuy.com? I think I’m safe on saying, probably not! So, given a legitimate business reason for bringing Clinton on the board, will her great connections and awareness of the company’s customer base alone pass muster with the proxy advisory firms? Or rather, when evaluating board member qualifications and experiences, will interested parties look at this $300,000-a-year board seat as an individual growth opportunity to a friend of the family?
First, let’s look at the tough questions Clinton might have been asked before she was invited to serve as a board member. “Would you be comfortable having a confrontational discussion with fellow board members and business titans like Eisner, Bronfman, and, most importantly, Diller, if you felt the company was moving down a bad path? Will your current business and board governance experience allow you to contribute to and vote on issues that affect the shareholders you represent? Which committee would you be most qualified to serve on and what contributions might you bring to that committee? And finally, when confronted with the unlikely (but not unthinkable) situation of having to remove Diller from his position (i.e., the Hank Greenburg ouster at AIG) would you be too conflicted to do what’s right?” These are only a few of the plethora of questions that could have been asked of Clinton prior to her being offered the board seat, and are deserving of legitimate answers. As for myself, I find it hard not to place Clinton in the category of “celebrity director” at this time. It’s hard to believe a less famous person with her credentials would be offered a similar board seat, and my guess is she will have a difficult time contributing as an equal with IAC’s high-profile board members.
The good news is that independent and qualified or not, Clinton is now a corporate director for IAC and I’m rooting for her to be successful. As the proud father of two daughters myself, I would certainly support such an amazing opportunity to learn on the job and contribute to any company that would ask them to sit on the board. I look forward to the day when Chelsea Clinton will grace the stage of a board education conference and espouse the virtues of a diverse board. And my biggest wish is that she proves people like me wrong and quickly becomes a model director for IAC. It won’t be easy, but then again when you are the daughter of the 42nd U.S. President and the nation’s current Secretary of State, you’re probably used to living in a transparent world with loads of media scrutiny. My bottom line advice for Clinton: Keep your ears open, learn every day, read Corporate Board Member, and don’t take any crap from any other director, since you are now their equal in the eyes of the SEC and thousands of shareholders. Welcome to the Club!
Posted : September 19, 2011 12:24:52
I’m just coming off hosting and moderating our Russell 2000 Risk & Growth event and, as might be expected, it was interesting to hear how various companies and boards handle (or in some cases don’t handle) the challenge of monitoring a company’s risk management process while making sure the company is growing profitably in its targeted directions. I thought I’d pass along something, a key point I was reminded of during the event that can help companies that struggle with an appropriate risk/reward process. In doing so, I will also remind my followers of some points I made on this same subject about a year ago.
First, I need to pass along one important core concept, and that is directors do have a role to play when it comes to establishing a company’s risk culture. Now I’m not suggesting that directors get their fingers in managing risk. Remember the board’s golden rule: Noses in … Fingers out! What I am saying is directors are in a great position to step back and observe what behaviors or culture exists in the organization. Let me explain. A CEO’s day-to-day activities (no matter what size company) are related to handling problems and putting out organizational fires. Often it’s too hectic to take a step back and observe how policies or decisions have translated into corporate behavior. For example, is the company’s compensation structure promoting the desired behavior? If you end up rewarding and promoting individuals that have achieved their financial goals by cutting corners, or worse , by bribing people in a third-world country for new business (clearly an FCPA violation), then the board and management is sending a message that “as long as goals are met, we don’t care how you get there.” We’ve all seen this occur—I don’t have to list the number of companies that wish they could reverse the course of history over that ill-fated corporate mindset.
Another example may be the company that touts itself as innovative but punishes department heads who prudently launch a new innovative product that does not meet expectations. Employees at a company like that will quickly learn the best way to get ahead is to keep your head down and not take risks. That’s obviously not the culture of an innovative company. I tell corporate directors all the time that they have the opportunity and responsibility to take a look at the kind of culture management and its recommended policies and actions have created and make sure that it fosters the proper behavior and decisions that support your carefully vetted strategic plans.
Another fun fact that I was reminded of during this conference relates to pushing the risk/reward thought process down to the business units. If I was the risk czar of a company right now, I would certainly ask the board and senior management to list what they feel are the top 10 risks that could threaten the company. This should be a standard strategic planning exercise. But the most important tool I would institute would be to require that each business-unit head undertake a risk/reward analysis of his or her own business-unit strategies. Having these key movers and shakers be on the same wavelength as senior management and the board is one of the most valuable risk tools the company can institute. And remember, this exercise is not designed to thwart innovation or growth; in fact we want to reward those who identify new opportunities even though everyone will have an occasional “dog” along the way. The process of managers educating their direct reports on understanding this thought process is invaluable.
I suspect I might be criticized about being so high on building the right culture. Many nuts-and-bolts managers find this kind of talk a “soft issue.” But the truth is, I believe it is the foundation of a successful organization and to me, board members are in a great position to take a company’s culture temperature. I’m ready for the critics. If they heard the same experiences that I did from the Russell 2000 companies that have just absolutely blitzed through the current economic downturn, they wouldn’t think of culture as soft. Say hello to a new generation of cultural “hard bodies!” As one of the heroes on Flight 93 famously said, “Let’s roll!”
Posted : August 30, 2011 11:46:31
I have gotten quite a few inquiries lately about Corporate Board Member’s September 15th webinar on director liability. The truth is we don’t often focus on this issue, because even though it is certainly important to whomever is serving as a director of a public company, history shows that there isn’t tremendous risk as long as you take the right steps to protect yourself. Even so, having confidence in your personal liability coverage is very important and, as witnessed in most board surveys, it’s a topic that always sticks in the backs of directors’ minds. So while I am no expert, I’ll share a few points here on the subject, and you can tune into the aforementioned webinar for more specifics.
First let’s talk about the current liability environment for corporate boardrooms. The good news is there are many legal protections or tools that are available to corporate directors and their companies to help mitigate this liability. Specifically, these protections involve the bylaws of the corporation, laws within the state the company is incorporated in, and D&O insurance. First and foremost, however, to be able to leverage these various risk mitigation tools, there is an assumption that:
a) You are acting in good faith, and
b) You are acting within your rights under the law.
So to begin with, ethical and legal conformity are critical and, if maintained, put you on a pretty strong foundation for keeping your personal liability risk at bay. Now, notice I am just talking about personal liability risk here. This doesn’t speak to one’s all-important reputational risk. In those cases, the media and the court of public opinion become judge jury and executioner, and unfortunately, I haven’t yet figured out the secret to completely mitigating that risk.
Given the constraints of this blog, I can’t get into the meat and potatoes of the legal protections that exist for board members, but I’ll mention a couple of key points here. Certainly, companies are permitted to protect their directors as provided in the bylaws or in the certificate of incorporation for a particular state. Many companies have incorporated themselves in certain states, such as Delaware, to take advantage of favorable business incorporation statutes, as evidenced by the watershed rulings that have come out of the Delaware Court of Chancery such as Disney, Revlon, and Caremark, to name just a few.
Directors can also take full advantage of protection afforded by their directors and officers liability insurance (D&O) policy which, if a company and its board get sued and the case moves forward in the courts, outlines the protections and funds available to defend the company and its directors. And here’s where it is particularly important to understand the fundamentals.
First, not all D&O insurance is created equal. Most of us just ask (or worse, assume) that the right D&O insurance is in place; but to protect yourself, you must investigate and ask some important questions. A few of those questions might be: What if your corporation is basically insolvent? If the company uses all the insurance money fighting the lawsuit, what will be available for the individual directors? In what cases will insurance not provide the necessary coverage? How much coverage is enough? And finally, if you don’t know what Side A of your D&O policy is (and nearly 30% didn’t in a recent survey) then you could be flying without a parachute.
To date, very few directors have had to dip into their own pockets to settle claims or lawsuits. And while this is somewhat of a relief, there is no guarantee about what lies ahead. Therefore, it’s wise to pay attention to the corporate structure and your insurance policy so you can put aside worrying and turn your attention to the task of growing the company’s bottom line—which I still maintain is the most effective deterrent to suing the board.
I have hit upon a few high points here, but my advice is to learn more about D&O liability and director protections from an expert. One good place to start is by checking out Corporate Board Member’s September 15th webinar, D&O Liability: The Risk of Serving on a Board. And remember, as with all Corporate Board Member educational offerings, you can either register for this event by itself or attend free as part of the NYSE/Corporate Board Member Board Education Program.
As the long time former coach of the Dallas Cowboys, Tom Landry, was fond of saying..."If you are prepared, you will be confident, and will do the job." Sounds about right to me!
Educational Tip: If you are a Russell 2000 company and have not registered your management or board for the Small-cap Risk vs. Reward Strategies growth conference to be held at the New York Stock Exchange on September 14th then you still have time. Tell the registration staff member that you read about it in the Board Blog and directors can attend for $100 each. Offer is limited while conference openings remain available.
Posted : August 11, 2011 10:19:27
I’ve been pretty negative in my last couple of blogs and last time I promised to have a new tone, so let’s see how I do with this subject. I was thinking the other day about how corporate boards have such a poor image these days, and I was trying to figure out what could be done to change this perception. I think it is pretty safe to assume that out of the 300 million-plus people residing in the United States, a small minority, or maybe as few as half of 1%, could explain a director’s duties. Surely more than 10% of U.S. citizens are shareholders who have purchased stock through a broker, own stock as part of their 401k, or perhaps own stock through a mutual fund. But just because you happen to own shares doesn’t mean you understand directors’ duties. Now, I’ll grant you that many shareholders understand, in its simplest form, that corporate directors are suppose to look out for the shareholders’ interest. But do they understand the innate challenge of serving both long-term and short-term interests and how board members go about doing that? Wait, I’m already getting too complicated. Let me take a step back.
The facts are that corporate board members used to have a pretty good image, known as pillars in their community and titans of business. Frankly that hasn’t changed much. They still are pillars (if their businesses survived the crisis), and a sitting CEO is still the most sought after candidate for a board seat. So what’s had the most impact on their reputations or created confusion in the public’s mind on what a director is supposed to do? Three things immediately come to mind.
The first and most critical is that the actions of a few have painted everyone with a very broad brush! I have often said most corporate directors are sincere, thoughtful, ethical, and motivated to do a good job. I stand by this 100%, yet I understand that there will always be those who become greedy or lazy and make poor decisions at the expense of the shareholders. But these directors are the exception—not the rule. In today’s world, however, where bad news and signals on poor performance goes viral in a matter of minutes, even the best director becomes guilty by association.
This brings me to the second reason, which I partially explained above. People who want to promote change or stand to benefit seem always to migrate to the extremes. The media is a great example of this in their quest to sell papers or promote their shows, and with today’s amazing means of communications, this dynamic is even more exaggerated. The same could be said for activists and others who want to promote change in the boardroom with board-related regulations. Personally, I would use the same tactics, so I am not blaming them for holding up the most distasteful examples of poor governance or decision making to make their point. But even so, I say these cases are not the norm across all companies.
My third point about what has clouded the public’s understanding is actually a rather silly issue, but one that I think has had impact. Can you imagine how many people are watching Donald Trump’s “Apprentice” television show and thinking that this is really what goes on in a boardroom? A king-like director or officer calls in all his executives, makes them rat on each other, and then the board suggests to the king or chairman who should get fired. I cringe when I imagine how many people might believe that his show comes close to a real boardroom scenario. Okay, so that point was just for fun, but we should still realize that television is a powerful medium.
So knowing all this, what can I suggest to get the boardroom image pendulum moving in the other direction? Unfortunately, not much! This is not something that will turn around fast. My best advice is to keep a stiff upper lip, keep doing what you believe in your heart and your head is right, don’t whine, and remember to communicate with the shareholders whenever it makes sense to do so. So far the majority of shareholders have been pretty supportive, so while certain few activists want to hang board members in effigy, I think with the proper focus and a little time, our governing pillars and titans will emerge as even better directors from the humbling experience of being the goat. Happy Governing!
Posted : July 25, 2011 9:26:08
In the last blog I talked about the potential problems brought on by nonbinding shareholder votes, and now it is my misfortune to bring you the reality of just what a problem nonbinding votes can be. I won’t argue with the fact that some companies had structurally bad compensation plans or situations where the CEO’s pay was not linked to performance, and that those companies might deserve to be singled out and possibly even sued. I understand that there are always cases where these extreme measures make sense. But companies that failed the say-on-pay shareholder vote (that is, they did not garner a majority of shareholder support) that are now being sued have fallen into the black regulatory hole known as: UNINTENDED CONSEQUENCES. I equate this to the modern-day expression: “My Bad!” In other words, it’s the creators of the regulation saying, “Oh, sorry companies… This wasn’t our intention, but now it is what it is.” Who couldn’t see this coming? Even I (fully admitting I’m not the sharpest tool in the shed at times), knew that the plaintiff’s bar would capitalize on this newly formed soft underbelly of American companies. And it sure didn’t take long.
So you’ve failed the say on pay vote and now you are going to be sued for alleged corporate waste and breach of fiduciary duty for excessive compensation and a slew of other legal terms that go to mismanagement of corporate assets. The sad part is, every expert I have been able to talk to believes these cases (eight filed so far) are frivolous and cannot be won if they to go to trial. And that’s OK for the law firms that filed the suits because more often than not they would prefer to settle than fight it in court. Two of the cases, one of which was clearly in the “egregious abuse of comp” category, have been settled. The other targeted companies are going through that frustrating exercise of, “Should we spend the time, energy, and money to fight a frivolous lawsuit that we are pretty sure to win?”… or “Do we settle, pay our blood money for not getting shareholder support, and get our company and board out of the negative limelight?” I wish that decision was as easy as it sounds and that all companies would stand their ground. But the facts are, sometimes settling is the best business decision… no matter how bad it ticks you off.
Unfortunately we can’t talk about the nonbinding votes without bringing up the role of the ISS and proxy governance firms. The ISS voted against all the say-on-pay proposals of the companies now facing lawsuits. And while I’ll admit that I haven’t read the complaints in full, I do think some of these companies and boards haven’t gotten a fair deal. Example: There are at least two companies that I know have increased bottom-line performance nicely during the year even though, due to market conditions, their stock didn’t follow suit. This to me is one of the flaws of the mechanical evaluation used by of proxy advisory firms and shareholders who look only at short-term stock price. In my previous career in financial services, I remember a time when my bank had the best earnings performance in the company’s 125-year history, and because it was the late 80s in the banking industry, financial stocks were going in only one direction: DOWN! There went my stock options that were based on good operating performance. The bottom line is, it’s a reality that operating performance and stock price will not always move together. And if companies’ managements do a good performance in a bad market and hit some of the other financial goals, isn’t it in the best interest to retain a good management team? That doesn’t sound like a poor strategic decision to me.
As I’ve said before, many of these lawsuits aren’t developed based on mass shareholder discontent and unfortunately they don’t have to be. All it takes is one volunteer or malcontent shareholder (or sometimes a recruited shareholder) for the plaintiffs’ bar to file the suit. Then they hope for what all these chasers hope for: a company eager to settle. Well I’m here to support those companies, because what’s right sometimes overrides what’s prudent ,and I hope that some companies will fight the battle and clear up this mess for the rest of us.
Maybe more important, though, is to make sure your congressmen and the SEC see how ridiculous some of these lawsuits are and ensure they understand that nonbinding shareholder votes—even those won but where the percentages of votes were close—are not incidental, and often there is nothing “nonbinding” about them. I promised in my last blog that after this rant I would turn to some positive issues. Honestly, it might take me a while because with all that facing today’s American businesses, this is an unintended consequence that we could have predicted and we shouldn’t be dealing with.
Posted : June 27, 2011 1:47:14
I feel like I just finished the corporate governance biathlon. Last week I attended the Investor Relations National Conference national conference in Orlando and this week I’m headed home from the annual conference for the Society of Corporate Secretaries and Governance Professionals in Colorado Springs. They were both great conferences, but before you think that I just look for any reason to travel to interesting resort locations, let me explain that I was a speaker on board relations at both those conferences and that we filmed two live, on-location “This Week in the Boardroom” shows on the floor of the NIRI general session hall. It was our first true remote experience and it paid off—it put us in the heart of the conference action and I’m sure we’ll do it again.
My observations at both conferences has prompted what will be a two part blog on Say on Pay or, as characterized above “Say on (Fill in the Blank).” The say on pay vote mandated by Dodd-Frank was the topic of many of the sessions, and I must admit I was discouraged with how many (not all) of the panelists (not IROs or corporate secretaries) answered the question of whether the say on pay regulation was a success, or put another way, “Is Say on Pay a good or bad thing?” Many of the panelists and experts said either it was a good thing or it was too early to tell. It probably doesn’t surprise you that I have an opinion on that.
First, I want to note that, in a way, we as directors have to accept some of the responsibility for the pickle we are in. Although 95% of boards didn’t create the financial crisis, I believe there are still too many examples for the media where executive comp has been abused and performance has not matched excessive pay levels. Shareholders are still reeling off huge losses in their stock portfolios due to the deflated economy and really don’t need much fodder to vote in favor of more controls or reform proposals. But even with all that, and knowing that a significant majority of the companies do handle their affairs and compensation responsibly, I would like to give you reasons that I think we will regret the introduction of say on pay.
The first is philosophical and doesn’t include anything I haven’t been saying for some time. I understand the logic of shareholders wanting to have more say in who represents them on the board. We have seen many lopsided votes to accept majority voting in Fortune 500 firms, along with the elimination of classified boards. Proxy access, while stuck in the courts today, will most likely survive in some form and the reality of shareholders having more control on who represents them on the board will be squarely at every company’s doorstep. It is tough for me to argue (as long as we have a balance of how we limit too many single interest activists) that directors who have done a poor job shouldn’t be replaced. Obviously I am stating this in its simplest form, and as we all know, these issues are never simple and take on many nuances. In other words, if you don’t like how the board has handled certain issues and the company isn’t performing, then you should be allowed to put someone else on the board who can make a difference. Again while it’s not as easy as it sounds, it has some logic.
Where I have my biggest problem with say on pay is that it is an advisory vote. I am philosophically against advisory votes for the following reasons:
- A company will rarely ever be able to supply all the necessary information in a fashion that gives shareholders all the information they need to make advisory vote decisions. We just can’t invite everyone behind the boardroom doors to hear all the presentations and discussions that led to the board’s decisions. There are a host of reasons this information can’t be shared with the public—not the least of which is a competitive one.
- No one can do a good job at their duties with somebody sitting on their shoulders watching and evaluating their every move. I have never met an employee or officer that has enjoyed that structure. If shareholders want to have a say in who represents them… that’s great. But as soon as those directors are elected, get out of the way and let them do the job. If they aren’t happy, let them express that with their vote at the next election but they should not evaluate every move a board makes. Let them focus on profitably growing the company.
All this oversight lays the foundation for my main concern, which is reflected in the blog title above. What will come next, now that a vocal group of activist shareholders have their advisory vote foot in the door? Say on sustainability, say on strategic direction, etc.? If the opening of Pandora ’s Box leads to advisory votes on any key corporate issue, then we will see an exodus of qualified directors willing to serve. To me, the future of that environment is bleak. Now I realize that, in this blog, I’m doing the very thing that aggravated me about some presenters at the conferences—taking things to the extreme when the reality is closer to the middle. However, do I see institutional shareholders and proxy advisory firms continuing to push for more control or new areas of transparency beyond what I think makes good corporate sense… you bet.
On a final note, there were representatives from Australia at these events that reported that companies down under have had say on pay for some time, and it all balanced itself out. Well my response to Australia is, last time I checked, your society wasn’t even close to being as litigious as the United States and that scenario changes the environment significantly. Which leads me to my follow-up blog that you can look for soon: Companies that have derivative law suits filed against them because they failed the say on pay vote!
Ugh! I promise in the near future we are going to look for positive issues to talk about!
Posted : June 8, 2011 11:23:37
It has been a whirlwind board member tour the last several weeks and I've had personal contact with hundreds of corporate directors. First, I was a guest at the Women’s Corporate Directors Institute where I shared war stories with a small portion of our country’s current diverse board member group. From there I traveled to Corporate Board Member’s Chairman/CEO Peer Forum to host our annual event that brings company and board leadership together to discuss how successful companies handle communications between the CEO and the board. This was a treat, mostly because of the great lineup of speakers who gave attendees some substantial points of view to discuss in the peer groups. CEOs and chairman/lead directors met separately in the morning peer sessions and they were mixed together in the afternoon. The feedback on those sessions let us know that most attendees favored being in the mixed sessions, where the views of each board and management leader were candidly shared and one was able to measure his organization against some very successful CEO/chairman duos who discussed how they make sure both board and management are pulling in the same direction. Still, it was clear in the end that one size doesn’t fit all, as we noted successful leadership structures in many different forms. And finally, yesterday I hosted our Board Education Program informational webinar to review our newly launched voluntary continuing education program. (If you missed it but wanted to hear about the program go to http://www.boardmember.com/education.aspx.) While I didn’t get to speak face to face with anyone during the webinar (questions were asked over the computer which I repeated) I participated in numerous follow-up phone calls with directors and corporate secretaries, as people had many unique board situations to discuss. Being a problem-solver at heart, I probably enjoyed that interaction the most, because I was truly in a problem-solving mode and felt people were very appreciative.
It was at the end of the day, when I was cleaning off my desk to go home, that I came across a blog that someone had apparently copied for me where the blogger was taking company boards to task for not controlling CEO pay. This blog (whose authors shall go nameless but if they read this they will know who they are) referenced the financial crisis and the lack of performance on the part of corporate directors, referring to them as “asleep at the switch.” This prompted me to take a reflective minute just thinking about how far the image and reputation of directors has fallen from the its heyday, when they were well-respected, to what can be described as the post-financial crisis doldrums. What frustrated me at the time was I had just experienced hundreds of personal interactions with directors in the past couple of weeks, and I just wish I could have conveyed to the world—or at least the mass media who seem to paint with one broad brush—how sincere the directors I have met are about doing a good job for their companies and shareholders. The majority of the directors in today’s businesses had nothing to do with the financial crisis that sickened this country, but nevertheless they have felt the pain themselves and have suffered overall profession image attacks. To suggest that the directors I interacted with were greedy and didn’t care about their personal reputation, as long as they “got theirs,” would be doing them a terrible injustice.
How did it happen that good hard working men and women, most of whom won’t get adequately rewarded for the time or the risk they take for serving as a director, can have their “profession” smeared so badly where the general public and media dubs them as disinterested and greedy. The saddest part of this is I think it is going to take a long time to change the current public and average investor perception. Newspapers don’t sell copies by telling the great company board stories like Apple or Tractor Supply. In fact, look back at a couple of blogs ago of mine and Apple was under attack even though their bottom-line performance has been off the charts.
Within our profession, Corporate Board Member does its best to get the story straight. Don’t worry, Corporate Board Member isn’t turning Pollyanna on anyone. We know there are less-than-stellar directors out there still roaming the halls putting themselves ahead of shareholders and company. You can still count on good balanced stories as usual. But if you followed me around for the last several weeks, you would have seen what I saw: dedicated people who will work hard at their board duties and who care about their reputation. Ladies and gentlemen, I wish I had better news on the short-term prognostication of the board of director image. But as my grandfather used to say, “Son, you can’t always control about what other people are going to think and say about you, but if you can be happy with how you handle your own affairs, it’s funny how other things seem to fall in place over time.” I wish he were with us today. We could use him.
Posted : May 17, 2011 9:54:51
It’s not often I will get off my virtual soapbox and approach a topic that has a commercial aspect to it but as a former president and director of a public company, this is a topic that I am very passionate about. My favorite subject in the whole world is board leadership, particularly the relationship between the CEO and the non-exec chairman or lead director. As I have stated many times in this blog, on our “This Week in the Boardroom” webshow, and in speeches across the country, I believe the most important but least-discussed CEO skill set is guiding or managing the board. Now I know this will have the hair stand up on the back of the necks of many governance purists, but for me, nirvana is when the CEO and chairman/lead director can blend their board leadership skill sets, each providing the board what it needs to be a great company and build shareholder value. Having said that, I recognize the risk of a CEO becoming too imperial and manipulating the board, and I equally recognize the risk and challenge of making sure you have selected the right CEO to lead the company. But when those duties and skill sets come together and when trust, information flow, and healthy questioning resulting in great products and/or services creates maximum shareholder value, it is quite a sight and feeling to behold.
Two years ago after Corporate Board Member had successfully launched its chairman/lead director peer exchanges as part of its bigger Peer Exchange Program, it came to me that we were missing the opportunity of showcasing how various company boards and executives have accomplished this quest. While not every scenario has turned out perfect , and there are many unique aspects to each companies chairman/CEO relationship, I recognized that there is plenty for CEOs and board chairs to learn from each other about how certain companies and teams have “gotten over this hump.”
Last year this premonition resulted in our first Chairman/CEO Peer Forum, where chief executives, chairs, and lead directors heard from other teams of CEO/Chairmen/Lead Directors. These individuals spoke about their tricks of the trade and then divided into small groups to discuss specific challenges and solutions. I knew when I led our opening discussion with then-Reynolds American CEO Susan Ivey and lead director Thomas Wajnert on the topic of how they had developed as a team that we had something of value for our larger board audience. I couldn’t wait to meet with our education group to help put this year’s event together. And it’s turned into an amazing agenda—one that provides valuable takeaways for every company mover and shaker.
Here’s an example of what’s to come: First, if you want to know about building a culture and “guiding” a board in a fashion that can create a decade of performance, you won’t want to miss Jim Wright, the CEO of Tractor Supply. If you haven’t heard of Tractor Supply, then you don’t follow the market’s top performers—particularly those who managed to shine through the financial crisis of 2008 and 2009. Don’t tell Tractor Supply’s management and board that because the economy was bad you just have to accept bad performance. We’re talking about a decade of performance, with numbers like a cumulative annual growth rate (CAGR) of 24% in earnings per share. Or how about a share price CAGR of 43.3%? Quite a decade—and quite a culture.
Once again, our forum will kick off this year with team presentations, leading off with the Automated Data Processing team of CEO Gary Butler and Chairman Leslie Brun. You’ll find them very different from last year’s Reynolds American team, but their success is built on a similar foundation. Throw in perspective from The Hershey Company’s outside chairman, D&B’s CEO, and the NYSE Euronext’s Deputy Chairman, and you can see we’ll have plenty of fodder for some great small-group peer exchanges.
If what I’ve said makes sense to you as a person involved in board leadership, and you haven’t signed up for the event but now would like to attend, call my colleague Pat Weaver at 615-309-3232 and tell her you read about the Forum in TK’s blog. If you are one of the first three to call and not currently registered for the forum, you’ve just earned yourself a free $2,000 registration fee for reading this week’s Board Blog. So take that, activists that want to vote me off the island and say my blog isn’t worth reading. Today it might be worth $2,000!
Posted : April 27, 2011 9:46:04
Less than two weeks ago I had the privilege of hosting both our Risk Oversight in the Boardroom and the Compensation Strategies to Build Shareholder Value conferences held at the New York Stock Exchange on successive days. Both these sessions go right to the heart of the two major challenges facing boards today: risk management oversight and executive compensation. I thought I would share some of the issues and topics that seemed particularly interesting to me during the two days.
If I tweeted, which I don’t, (although we did have a Corporate Board Member staffperson tweeting out some juicy morsels during both events) I would have definitely tweeted about how Constellation Energy Group has organized and handles risk management and the board’s oversight. Interestingly enough, it wasn’t really the board’s duties that struck a chord with me, it was the way they make sure the business unit leaders accept the responsibility for managing risk at the business unit levels. First, let me set the stage. On our panel, we had a board member who serves on the audit committee in addition to the chief risk officer for Constellation Energy and during the session, they discussed how they worked together to manage and oversee risk. While that was fascinating, because I really thought they had their act together, the most telling part of their session was describing how they establish their company’s risk/reward culture. To make a long story short, they make sure that all the business managers understand that they are the front line of managing risk and while senior management and the board are always pushing to grow the company, they make sure that the risk thought-process is part of every business-unit head’s strategic plan and subsequent presentations. I’m sorry that I can’t do the session justice in this blog, but the presentation was very compelling and really gave you comfort that Constellation Energy knows what it is doing with regard to enterprise risk management. When the session was done, I felt the chief risk officer was going to get several new job offers and Ann Berzin, the board member, might receive a few new board seat offers.
And while I’m on the topic of the Risk Oversight conference, I have heard for years now that most people feel the audit committee should not be responsible for the entire risk management process. Most surveys overwhelming say it is a full-board function, or at least a shared responsibility, because we still see very few formal board risk committees outside of financial services. Yet in my own little survey talking to the directors in attendance, it seems like the audit committee is where most of the core risk management still resides in most companies. We did a session on “to have or not have a board risk committee” and while we heard from one company that had and one that hadn’t, I didn’t sense that the session had a definitive conclusion one way or the other. This fact in itself doesn’t surprise me, since we’re all advocates (at least I assume most of us are) of the premise that one size doesn’t fit all.
When it came to the following day with the topic of compensation, I felt even less secure in providing guidance to directors who seek our counsel on this topic at times. I’m comfortable with the basic structure of comp for most executive pay packages but the issue of “how much is enough,” and the discussion about a rising tide benefitting all boats whether you have excelled as a captain or not, was an interesting topic of conversation. Again, in our case study, we put the comp chair for CSX Corp. on stage with the company’s Head of Human Resources and Labor Relations, which gave us a good glimpse at how—when companies structure their inside resources correctly—departments like HR are tremendously valuable to a board’s duties of recruiting, rewarding, and retaining human talent.
What struck me most about the second day was not all the discussion around executive compensation and peer groups but the session on director compensation. I think it is safe to say that many directors struggle on how to give themselves raises, even though almost everyone agree that the job of being a board member has become harder, requires longer hours, and is involves increasing risk all the time. While I was sitting at the conference thinking that there isn’t much question about the need to address director pay in many companies, it struck me that it comes back to the same old concern: optics. This seems to be particularly sensitive when proxy advisory firms have such leverage with majority voting in place at many companies, as well as with new rules around voting discretionary shares for the election of directors in place. Believe me, there was plenty of talk around the frustration with ISS and Glass Lewis but I’ll save any discussion about what’s good and bad about proxy advisory firms until another blog.
My take is directors shouldn’t be shy about giving themselves a raise if their compensation is out of line with markets and peers. In most companies added director compensation is a rounding error. If you are still having problem giving yourself a raise, I suggest you go talk to your congressmen. The country can be a trillion dollars in debt and they seem to have no problem increasing their pay and benefits regardless of the optics. (Sorry Washington, I didn’t mean for it to sound quite that bad!) In the future, I think we’ll see more boards adjusting pay because some are really out of line, and as long as directors are reasonable, it won’t be an issue. So that’s where I ended up at the end of the day at the Compensation conference: Companies that are reasonable have no real worry about “say on pay” or proxy advisory firms. Yes, some greedy people have made it hard for the rest of us to do what’s right without worrying about optics, but in the end, most companies and CEOs themselves are overseeing this function well.
Look for Corporate Board Member to offer these risk and executive compensation events back-to-back again next year. I suspect these will continue to be the two most challenging duties for today’s directors and, hopefully, as 12 months go by, we will have many more positive case studies to choose from. Til then, remember that risk is not a bad four-letter work and it is best used when linked with the word reward!
Posted : March 31, 2011 11:42:04
I mentioned in my last post that I wanted to finish my rant talking about the Apple board. Actually I really don’t want to rant. Rather, what I am trying to do, using Apple and its board as my case study, is get my arms around what position I should take when I see investors pushing for change when a company has performed beyond anyone’s reasonable expectations. As illustrated in our current issue of Corporate Board Member and referenced in my last post, Apple was the top performer by shareholder return for large companies over the last 5 years, and we could find no performance correlation associating governance issues with bottom-line performance. Yet Apple and its board was the target for shareholder proposals requiring an expanded CEO succession disclosure as well as a move from plurality to majority voting for election of directors. And unfortunately, it doesn’t stop there. The front page of the Wall Street Journal’s Money and Investing section on January 18 featured an article on Apple with comments from Delaware Investment’s Christopher Bonavico expressing deep frustration over Apple’s failure to pay a dividend or buy back shares with a 50+billion cash stockpile on Apple’s balance sheet. Ironically, the article has him raving over Apple’s performance in nearly the same breath.
I guess in its most simplistic form, if I was a regular Apple shareholder, should I be happy, upset, or indifferent about my fellow shareholders rocking the boat?
Here is where I come out, coupled with some corporate meanderings…
My first reaction to the criticism over Apple is, why would I want to change the status quo of a company that has given me increased wealth and currently possesses one of the world’s most respected brands, product strategies, and management teams—just about everything that any investor could ask for? As a smart investor, do I always have to have an eye on the future? Certainly, but from my vantage point, the overall strategy and future still looks pretty solid, even if Steve Jobs is temporarily out or can’t make it back at all. So I am taking the position that the longer-term performance and track record of Apple is good and the stock has rocked; therefore, the board must be doing something right. I certainly would feel different about a poorly performing company versus a real value-builder like Apple. So my first thought would be to ask my fellow shareholders to back off. (Fat chance!)
Second (and unfortunately this is the million-dollar issue), “Is there any harm in having shareholder tools in place to make leadership changes if things unexpectedly turn south?” In theory, I support the premise that shareholders should have a say on who represents them in the boardroom. However, I believe there is a happy medium that would balance shareholder involvement between companies that perform and do what’s right, as opposed to companies and boards that have done a poor job. It is hard to believe that we can’t come up with a logical and fair legal structure that accomplishes that. I’m honestly not sure that majority voting or proxy access is the answer, but I appreciate that there has to be a process whereby if shareholder representation is poor, then an investor can have a voice in instituting change. There is a contingent of professionals that feel that proxy 452, majority voting, and possibly proxy access accomplishes that quest. My response to that is, we might be getting closer, but unfortunately, it appears those tools are open to manipulation by interest groups, disorganized proxy advisor recommendations, and very short-term thinkers.
The bottom line is, while I understand the need for shareholders to push for more say, I have to reiterate my first point: Is this really the right time for Apple shareholders to be pushing such an agenda and distracting the company when I would want my returns to continue? The truth is, I have trouble understanding what really will please Apple shareholders if its past five-year performance isn’t satisfactory. Isn’t having great, long-term returns an investor’s main goal of investing? If not, what is the goal?
The conclusion of the Apple story from this proxy season is mixed. While the shareholders did not support the proposal to mandate an enhanced succession disclosure, one well-known California pension fund was successful in getting a majority of the votes cast confirming that Apple’s shareholders support having a better process to unseat or replace current directors. While these votes are technically nonbinding, we all know when shareholders speak with one voice and the board chooses to ignore their wishes, confrontations will surely follow. We’ll have to watch the Apple board and management’s next moves, but it’s a shame they have to be distracted by an issue like majority voting when Corporate Board Member and many other preeminent researchers have confirmed it’s no guarantee to long-term performance.
Posted : March 8, 2011 2:43:12
I expect this blog to have its share of controversy, but what’s an informative read without a little excitement? It all started for me when I had a chance to review Corporate Board Member’s article in the latest issue titled “The Bottom Line on Good Governance.” In this article, our editors and writers took a look at 10 large companies who have performed at the top of their class in bottom line performance and shareholder value and then compared those top performers to a list of governance practices and issues that are often contested and discussed by today’s companies and investors. This analysis resulted in a matrix that attempted to define a pattern of governance practices inherent in all top-performing companies over the last five years. As the chart shows, CBM looked at nine governance categories ranging from board size to majority voting. And the results… will be shared following this important message.
The CBM editors, writers, in addition to the author of this blog, recognize that this is not an in-depth study into the cause and effect of good governance to the bottom line of today’s companies, and without controlling all the variables associated with performance, no viable statistical conclusions can be drawn. Also before any followers get too wacky about any unstated references that good corporate governance isn’t an important exercise for all boards to practice… nothing could be further from the truth. We support all the benefits and values of companies following good corporate governance. What we are trying to get our arms around is the theory that 1) board success can be measured by checking the boxes, and 2) that there one governance formula or list of approved practices that truly fits all companies reaching for the holy grail of bottom-line performance. Finally, our aim was to determine, once the boardroom doors close the rest of the world out of the affairs of the company, what are the most important characteristics that helps boards ensure long-term, bottom-line success and growth of shareholder value? A lofty set of goals!
Back to the results… As you can see on the chart, the results of the nine categories show no pattern of uniformity except for possibly one category. In fact it’s not what one might expect. It is not majority voting (five have it, five don’t), it is not staggered boards (six have it, four don’t), it is not even splitting the chairman/CEO roles (six split, four don’t). The only one you might infer some commonality with each other is that only one of our selected companies has a risk committee. Now being familiar with the current debate around the topic of where risk management belongs and whether enterprise risk management is a full board responsibility, I am not surprised by nine top performing companies not having a separate risk committee, particularly with the unlikely chances of a financial services corporation being a top ten performer in the last five very challenging years.
Now at this point, our curiosity was raised enough that we wanted to see how the top mid-cap performers over a five-year period looked against this same corporate governance criteria.
As you can see (select the chart for a larger view) the results are equally interesting for the top Russell 2000 top performing companies. As might be expected the variance of those that have instituted some of the more discussed corporate governance practices is even wider than their large counterparts. Majority voting (two have it, eight don’t), staggered boards (two have it, eight don’t), splitting the chairman/CEO roles (two split, eight don’t). And to no surprise, none of the Russell 2000 top performers have a separate risk committee. These results show that directors are a little younger and have less board experience with other boards, both of which shouldn’t surprise anyone.
And I couldn’t stop there; I had to satisfy my own curiosity by looking at these same criteria against a snapshot subset of those companies that went on to declare bankruptcy (select the chart for a larger view). Interestingly again, the results against our governance list was not that different from our Russell 2000 top company results except that this group was 50/50 on splitting the chairman/CEO roles while the mid-cap group was 20/80%. Very interesting in its own right, but nothing too shocking or enlightening about that this segment.
This CBM magazine article is worth the read, especially to hear how governance experts and institutional investors/activists responded to the findings. My own personal conclusions probably won’t get me listed as one of the great governance gurus of this decade, but personally I think they are the most important observations and comments I will make as part of this blog this entire year. And while they may be obvious to me, I suspect they will get lost in the ongoing debate centered around investor unrest and the growing shareholder process of withholding votes based on checklist issues.
My conclusions are that one size doesn’t fit all when it comes to what governance steps a company should and shouldn’t take to reach the primary goal of long term shareholder returns. Corporate governance’s contribution to the bottom line cannot be measured or truly evaluated in any checklist form, and while best governance practices are good, the prudent governance formula for each company is and will always be different. And finally since better people than I have tried to measure or equate governance principles to bottom line performance, both in boards and also in what an individual director should look and act like, I come to this conclusion: The success of a board and a company is directly proportional to the character and the relationship of the directors and senior management of the corporation, and while good governance gives them the shell to operate effectively, their ability to do what’s right for the company and shareholders is what ultimately separates good-performing from poor-performing companies.
Now don’t think I’m done just because I’ve stepped off my soapbox on this issue. It the perfect segue way to my next blog, since I haven’t even begun to express how these results impact my feelings about the Apple board, who directs the top-performing company on our performance list. You won’t want to miss this rant as I wonder out loud why institutional investors and hedge funds are upset with Apple directors. I am on a roll!
Posted : February 17, 2011 9:41:59
Once again I find myself apologizing on the speed of which I am finishing this blog series on board challenges. It is certainly not due to our web editor Laura Finn, who reminds me every day about my need to complete the series with the quest of maintaining a reasonable conversational flow. To say I have been distracted recently by the NYSE Euronext and Deutsche Börse merger announcement would certainly be a fair statement. Most of the this week’s merger information was a result of an early leak that sent both companies scrambling to answer media questions on the deal—the details of which were still in discussions and internal approval processes. I’m sure I am not the only one who will find it interesting to follow the progress of this transaction as final decisions are made around the social and business issues connected with it. Look for a TK blog on the deal when I get the full facts. Now, back to the blog at hand.
As a follow-up to our first three key board challenges for 2011, we have a final key board challenge to consider. Remember, these are the key board challenges outside of risk and executive compensation, which we have agreed should top anyone’s list. Just as a reminder, here are the first three which I elaborated on in the last 2 posts.
Challenge 1: Finding time and a viable board process for discussing long-term strategy and profitably growing the company
Challenge 2: Communication with shareholders
Challenge 3: Board Composition, Structure, and Leadership
The final key challenge that the board faces this year is Board/CEO Relations.
My take is that as more and more pro-shareholder regulation gets put in place (which it has for the last couple years), the more a potential wedge is driven between the CEO and the duties of the board. We don’t need to remind board members about scrutiny on pay-for-performance compensation packages and/or severance or change-of-control agreements. In addition, now we’ll all get to look at and discuss the disparity of executives’ salaries when compared to an understandably confusing median annual total compensation of the company’s employees. Better yet, we’ll also have to figure out the best plan for letting us clawback incentive compensation when restatements result in material non-compliance with securities law. I honestly don’t mind the principles of clawbacks when compensation was not rightly earned, but my point is, are shareholders putting pressure on boards for the above or are they just insisting that a CEO give up their chairman title? Everything today puts the CEO and board relationship on edge.
For me, the final challenge, and it isn’t just the board’s challenge, is to find a way to cut through all the noise and to make sure, at the heart of this relationship, there is a trust and confidence in each other performing her duties and working together to make a company the best it can be. It sounds corny, but I’m sure if you look at the best companies over time you will find a strong board/CEO relationship built on a lot of trust and good communication. Do you have to make sure you have the right person for the CEO job? YES. But once you have someone in whom you are confident, it is time to make some beautiful music together.
I’ve spent at least one previous blog, if not two, on the subject of a CEO’s skill set of “guiding” the board without them feeling like they aren’t contributing or advising. I don’t want that to sound the wrong way, I just mean that there is so much going on with our big corporations today, that directors need guidance to understand all the nuances of monitoring an entity with potentially 50 businesses in 50 countries. That’s hard to do when you’re in the boardroom four to six times a year for board meetings and the same number of times for committee meetings. I think my GC friend David Snively from Monsanto said it best when he stated (and I paraphrase), “Corporate directors are the all important external view. They bring real world-experience and independence which allows them to be heard as super-peers and to fill a key role. That role cannot be discharged by anyone else. It is important that a CEO know how to listen well—and the board know how to guide… and the reverse is true as well.” I couldn’t have said it better myself.
So there you have it, my take on the key board challenges for 2011, not counting monitoring risk and executive compensation. I know you may be thinking right now: “How can he write a complete series on board challenges and not talk about risk and compensation?” Well, compensation is so screwed up I don’t know what to say about it that can truly be helpful and frankly I’m just worn out talking about all the risk monitoring issues so I will leave that for others, at least today. I suspect you feel the same. Best of luck in 2011.
Posted : January 25, 2011 1:32:57
As a follow-up to Part I, we have another key board challenge to consider. Remember these are the key board challenges outside of risk and executive compensation, which we have agreed, should top anyone’s list. Just as a reminder, here are the first two which I elaborated on in the last post.
Challenge 1: Finding time and a viable board process for discussing long-term strategy and profitably growing the company
Challenge 2: Communication with shareholders
Which brings us to our next key challenge…
Challenge 3: Board Composition, Structure, and Leadership
Let’s break down each of Challenge 3’s components individually. While they certainly interrelate, each has its own specific issues to comment on. Let’s start with the topic of structure.
What we are talking about here is everything from independent chairs to formal risk committees. Issues related to splitting the positions of CEO and chairman will remain hot in 2011 and you will see more companies move to a split as CEOs retire or are replaced. Personally, I don’t think it is a critical issue to bottom-line performance. Whether a company needs a formal risk, finance, or planning committee will continue to be debated but also aren’t critical issues in my mind. But structure becomes more prominent when we start to discuss the topic of board leadership. A good point to make here will be the growing importance of the nominating and governance committee chair. First it was the audit chair that was singled out and typically rewarded with a higher retainer or board pay package. Then it was the compensation committee chair who everyone felt sorry for after all the additional focus on and reporting around executive compensation. And soon it will be the nom/gov chair, because everyone is recognizing that many of the disclosures and transparency requirements of board composition and conduct will, and should, fall with the nom/gov or board chairs’ positions.
I don’t want to spend a lot of time on leadership because I don’t think there is a best practice or single solution, and I have seen it handled successfully in many ways at many different corporations. Standard structure calls for an outside independent chairman or a lead or presiding director who has clearly delineated responsibilities. This may be all good and comforting from the outside looking in, but once those boardroom doors are closed, that’s when leadership gets interesting. It may well be that an outside director may not have the time to be chairman or lead director but once the meeting is in session and the board is behind closed doors, this director’s, or a group of directors’, years of leadership experience kicks in. If you want to support the case for why sitting or even retired CEOs are so valued by boards… it is the leadership and cross section of experiences that become so cherished, particularly in challenging times.
At the same time, I also don’t want to diminish the CEO’s role in board leadership. I have often said in this blog or on our “This Week in the Boardroom” webshow, that one of the most important un-vetted (if there is such a word) skill sets of a CEO is to guide the board in a way that they don’t feel they are guided. There is no way a board that meets four times a year in board meetings and a similar number of times with their committee assignments can possibly get their arms around all the issues of a multinational company. And governance activists who push for CEOs to be less and less involved in the board process make the hairs on the back of my neck stand up, and suggests to me that they have never served in senior management of a corporation. I’m all for better governance and heaven knows some companies are in desperate need of help, but excluding the CEO from playing any role in the board leadership formula is suicide to long-term, bottom -line performance. Does that mean the board better make sure it has the right CEO? Yes, it certainly does, but once that is confirmed, let the executive work with the chairman or lead director to figure out how they can best help guide the board.
I actually wanted the third challenge to be solely on board composition, but I have let my exuberance on this entire topic run away with this blog. Board composition will be a much discussed topic this year, and mostly, in my opinion, related to industry expertise. The big reason I say this is because of the recent financial crisis that we all felt the effects of during the last two to three years. Shareholders and stock watchers want to know that there are people on the board who know the business and can evaluate its risks. Enterprise risk management will drive board recruitment and composition more in 2011 than ever before. This mindset will also touch one of our most recent “sacred cows.” For the last five years, governance enthusiasts have preached board member independence so hard that we nearly forgot that industry knowledge is such a valuable board resource. I taped a “This Week” show that will air shortly with Pat McGurn from ISS, and prior to the show, he discussed this issue of board independence and industry knowledge. McGurn stated that the ISS doesn’t want companies to take its emphasis on independence too literally at the expense of having knowledgeable directors. Now he made it clear that ISS also isn’t a proponent for an influx of inside directors, but the point he was making was that there are multiple factors that need to be considered when building an effective board, and industry knowledge must be considered as an important skill set when evaluating a board. Also note that boards will become much more diligent in evaluating their board skills and strengths and weaknesses. This may become part of the board evaluation process, or we will even see nom/gov chairs take it upon their committees to make this a special project.
One of the discussion points that should be discussed but that, unfortunately, I don’t think will get any added traction in 2011, is board diversity. I say that with a heavy heart, knowing that Corporate Board Member and others have worked hard to bring a brighter light to the advantages of a diverse board. With all the focus on “righting one’s ship” in 2011, corporate issues perceived as “softer,” such as greening and diversity will not make great advancements until at least 2012. The attempt by the SEC to bring the diversity issue to the forefront has fallen short of its expectations when one reads last season’s proxy sections on diversity philosophies. Further, the legal safe-haven explanations made a joke out of this exercise, and I don’t see any impetus for this changing in 2011. I know that disappoints a lot of people, but I have faith that some chairmen and nom/gov chairs who truly understand the benefits of diversity of thought will lead by example, so let’s hope it becomes more of an issue this year than I’m forecasting.
One final point on composition is that I really don’t see any shortage of qualified directors if companies are willing to look past sitting CEOs, even though director surveys would suggest that directors continue to believe there is a shortage. Being creative enough to look beyond traditional board candidate titles and sources will produce a new type of board candidate in 2011. I think my favorite new category will be retired GCs because of their experience in both risk and compliance, but also don’t overlook the possibility of tapping senior officers who have been responsible for a large business segment and has experience growing businesses and managing risk.
Well I have found myself again in the position of running too long to address my last key challenge and still keep the blog as a manageable read. That means I need one more issue to finish my key board challenges thoughts. Look for a Part III to this series that will bring you a final challenge for directors in 2011. I welcome your comments if you think I have missed something obvious or have suggestions for key issues we might expand on.
Posted : January 7, 2011 9:11:25
The beginning of each year gives bloggers an excellent opportunity to predict what might be in store for the future and to prove their value as expert prognosticators. Therefore, my role in creating the first blog of the new year is to take a look at what issues boards should be prepared to tackle. I have come up with four key challenges to which all boards should be giving some serious thought in 2011. Now, just to be clear, two obvious topics that aren’t on this list are monitoring risk and developing a viable compensation plan. Needless to say, these topics are the 800-pound gorillas in the boardroom, and directors will continue to be tested to establish appropriate risk/reward processes for both enterprise risk and compensation. I think we can all agree that these would rise to the top of anyone’s challenge list, but for the purposes of this blog, we’ll touch on a few other not-so-obvious, but equally sensitive, challenges.
Challenge 1: Finding time and a viable board process for discussing long-term strategy and profitably growing the company.
Every board study that Corporate Board Member has been a part of, or that I have read, clearly states that directors want to spend more time on strategic planning. There is across-the-board frustration that too much board and committee time is spent on regulatory and compliance issues and not enough time on growing the business. Yet while everyone complains, not enough is being done by either board leadership or management to facilitate this shift in time allotment. Often it’s the directors themselves who find it hard, with all the board and committee meetings that are required, to give more time for any new meetings, regardless how important, and this is exactly why I list it as my number-one board challenge for 2011. When you think about it, a planning process should drive both discussions surrounding risk and compensation, so it seems logical that one’s identification of risk and risk appetite should happen when strategic goals and initiatives are reviewed. Now to be clear, I’m not suggesting that it is the board’s responsibility to do the strategic plan, we know that’s management’s job. But in the many court cases surrounding the business judgment rule in the Delaware courts, it is clear that courts look to see if directors have played a role in setting the company’s direction. Successful companies have found many creative ways to tap their board’s expertise to help shape future growth and expansion plans, and unless you give your own process a fair chance, your company will be relegated to compliance-centered board discussions and probably less-than-attractive shareholder returns. So, CEOs, chairs, lead directors, and corporate secretaries unite! 2011 is the year of the strategic planning retreat.
Challenge 2: Communication with shareholders
This is less attractive than the proposed vibrant planning discussion above, but in 2011, communication with shareholders will be an important challenge. It is no longer satisfactory to simply explain your company’s views in the proxy. First, few shareholders read the whole proxy, and frankly, I can’t blame them, because after lawyers get done with the language, I can’t understand half of what I’m reading, particularly within the compensation MD&A. Unless you have been living in a hole, it should be clear that the SEC disclosure rules and the Dodd-Frank Act have greased the skids for institutional shareholders and activists to push their agendas, providing stakeholders with more muscle to impact company decisions. We have seen more than just rhetoric from big institutional investors like CalPERS and CalSTERS as they join forces with traditionally aggressive investors that aren’t afraid to push their own board slates… and that was before Dodd-Frank and the now-stalled proxy access. One of the biggest complaints I hear is that directors don’t know why proxy advisory firms like ISS withhold votes against them. My response is that the days of directors being elected without much to-do are gone. So companies have to find out who holds their stock and talk to their shareholders. When I hear directors say that their compensation plan doesn’t make sense for the company because they are losing good employees, yet if they do what’s right for the company they risk withhold votes for their re-election, I know we’ve got a problem. I also know that some company boards need to listen to what shareholders are telling them, because they are making some poor strategic moves. At the same time, not all shareholder suggestions are right for the company. So it gets back to one-size-doesn’t-fit all, and you need to do what you think is right and do your best to communicate your views to the shareholders, including the proxy advisory firms. If it’s a sound analysis, then logic should prevail. Furthermore, you must engage in dialogue that goes both ways with the shareholders. It’s easy for me to say “Don’t be a brick wall” and also, “Don’t be a pansy,” but basically that is what I’m expressing here. Overcoming this challenge is not a piece of cake, but, as they say… that’s why you’re paid the big bucks! (OK, not every director is paid for the risk or hours that’s required, but you know what I mean.)
Well, I’ve pontificated on the beginning of this list long enough. If I haven’t driven you off and you’re curious about my other two challenges, stay tuned for Part II. Until then, just remember “The harder you work… the luckier you get.” It’s true.
Posted : December 15, 2010 9:31:51
If you have to ask what an IRO is there is a good chance that you won’t think this is a very good source for new directors. IROs are investor relations officers and like their counterpart, the corporate secretary, they perform an important function as a resource to the board in dealing with the shareholders/investors who hold your stock and re-elect the directors. I actually had this epiphany when I was speaking at the National Investor Relations Institute’s Senior Roundtable Annual Meeting, a gathering of some of the most respected IROs in the business.
I was at the conference to talk about the relationship between the board and the investor relations department, but my “aha” moment came when I was reading the bios of the talent in attendance. Many of these IROs previously had illustrious careers in accounting or treasury departments where they had learned an enormous amount about the operations of their company’s primary business. Their 5+ years in IR had then expanded their knowledge in everything from corporate governance to financial reporting. Now when I say financial reporting, I’m talking about not only understanding quarterly earnings but also having the knowledge to handle detailed explanations of the business to answer queries from hedge funds and shareholder activists. Furthermore, years of being involved in road shows and responding to new disclosure regulations have made IROs very valuable to the CEO and quite the knowledgeable staff member in general.
Now while I’m not expecting a run on investor relations officers for open board seats, nor do I think many search firms would place them very high on their board seat candidate list (which would be a similar stance in how they feel about general counsels or chief legal officers [CLOs] as candidates), just follow this logic through for a moment. Let’s just say that our mystery board candidate worked as the IR officer for one of the big West Coast tech companies and had achieved this position after being the finance leader for the proliferation of business operations software throughout the globe. This person served 10 years as the corporation’s investor relations guru, not only communicating with financial experts all over the world, but also preparing the CEO for road shows and large investor meetings. So she knows the tech business and business operations in general, qualifies as a financial expert, understands board operations and corporate governance better than any average director, and could serve as chair of either the audit or nom/gov committees. In this current environment where so many companies have given up on finding a sitting CEO and genuinely feel there aren’t enough qualified board candidates, could we tap a new vein of corporate talent to mine?
I have stated before that I personally don’t buy on to the premise that there is a shortage of qualified directors if boards will just consider some nontraditional sources. I particularly think the expertise that an IRO could bring to a small or even a mid-cap company in the stock/shareholder arena would be invaluable.
Posted : November 23, 2010 11:10:41
As we approach the holidays, many of us reflect on giving to others less fortunate than ourselves. Even with all the downturns and regulatory burdens placed on boards and companies throughout these last couple of years, most of us can be very thankful for both our standard of living and, hopefully, our health. Taking the extra step to give in a season where we’ve witnessed increased numbers of less fortunate people who are really struggling to make ends meet should be a vivid reminder about thankfulness to us all. Each of us can make a difference this season.
This opening paragraph didn’t have a lot to do with the blog topic that follows, but in these days just before Thanksgiving, it seemed like an apt message… but now, back to boardrooms and governance. I’ve spent the last couple of months participating in our industry peer exchanges where directors who sit on boards from various industries (such as insurance, manufacturing, healthcare, and media/entertainment) get together to receive updates from industry experts and then disperse to a boardroom to share their particular experiences with their peers. In these exchanges, directors discuss the challenges their companies face as they try and administer their board duties in what has become an increasingly stringent—yet ever more transparent—regulatory environment.
I must say that the media’s portrayal of corporate directors might be projected entirely different if they could participate in these exchanges and hear the passion and energy I have witnessed. I heard many comments on how board members just want to do the right thing and want to be recognized as valuable stewards of shareholders’ interests. Sitting there, I couldn’t help but be struck by how many good ideas these board members had developed to ensure that they had given appropriate discussion time to risk, strategy, compensation etc. And it wasn’t until the end of two of the four peer group sessions that a chairman and a lead director threw a veritable wet blanket over the group’s discussion by asking the question: “How can we expect to get these great ideas accomplished when we can’t even complete our existing board agendas in a day?” This comment resulted in the last hour of the discussions being focused on enhancing board agendas to better utilize directors’ time and to attempt to limit the number of agenda items that are related to compliance and regulatory issues that are now required to be handled by the board.
In the end it was a little disappointing when most of the directors felt that implementing new processes, particularly if they took significant time, was probably a pipedream within the context of today’s boardroom demands. It was sad to see the energy sucked out of the room, but it did give those of us who were acting as advisors some good fodder to suggest how some boards might streamline their board meetings and spend more time on strategy and growth markets and less on compliance and regulatory issues. The good news is that the managing of risk (management’s job) and the monitoring of risk (the board’s job) is an integral part of the strategy discussion, as is compensation. Thus, there are a variety of strategies that boards might try to better manage their agendas. In the future, we will attempt to highlight some companies or processes that can improve your board’s time management. Along those lines, I’m happy to invite outside chairs, lead directors, and corporate secretaries who have figured out how to make meeting agendas more strategic to our “This Week in the Boardroom” webshow (www.boardmember.com). In the meantime you may just have to be more giving...of your time!
Posted : November 3, 2010 10:25:25
This week I was asked to speak at a service club luncheon to a group of about 250 prominent Nashville business people. My topic was corporate boardrooms and I decided to address some of today’s legendary board myths. The following were the myths and my feelings on legitimizing or dispelling them.
Myth #1: CEO and executive compensation is out of control
I was hoping to dispel this myth, but actually, our research shows that this is not just a myth. For the last five years, more than 60% of corporate directors have felt that boards cannot control CEO pay, although interestingly, only a handful think that is the case for their company. Actually, the more I think about this topic, the more frustrated I get. Plain and simple, we still don’t have a good system that truly pays executive management for performance in both the upside—and the downside—of a capital market cycle. Here’s what bugs me: Right now it’s all about optics, not pay for performance. If the stock price and earnings are up, executives get big paydays. It doesn’t matter if they have improved the company or not. From 1990 to 2000 we experienced the longest running bull market since World War II, and stock options made mediocre executives millions even though they didn’t increase market share, improve earnings over average industry performance, or move up in any peer group analysis. So we got spoiled. When we returned to regular market cycles (with both ups and downs), optics took over. Activists and proxy advisory firms couldn’t stomach executives being paid if the stock price was down, yet in reality, there were good C-suite officers who saved shareholders millions of dollars in shareholder value in the down cycle by managing the company well, increasing share in their industry, and climbing their peer group earnings listing while others were faltering. Unfortunately all earnings were lower due to downturns in the cycle, and stock prices dropped due to conditions rather than performance. I’ve ranted enough about optics and my frustration with what experts, the media, and shareholders think is “pay for performance.” Let's move on to Myth #2.
Myth #2: Today’s board members are asleep at the switch
The simple answer is no. Are there directors that are asleep? Yes, but they clearly comprise a small group. This blog isn’t long enough to list all the parties guilty of tanking this economy with their greed and betting the ranch. And some directors do deserve to be prosecuted, and I don’t ever remember saying that in the past. But the facts are, there are just a few. The sad part is that the reputation of directors is tarnished and it will be for a long time to come, which is just not fair to the majority who take their duties very seriously. So this one is a myth. Before Sarbanes Oxley, I might have had a harder time refuting this myth but since SARBOX we have seen directors very focused on their duties, and arguably, those duties have gotten a much more complex with the introduction of a ton of new regulations and disclosures.
Myth #3: We could have prevented the financial crisis with more government involvement and regulation.
Whoever started this myth must have worked for the government. Truth is, our government played an equal part, along with Wall Street and its greed, to give us the worst financial collapse since the Great Depression. It was the SEC that lifted the leverage requirements for five firms: Bear Sterns, Lehman, Merrill Lynch, Goldman Sachs, and Morgan Stanley. (Need I say more?) It was government-sponsored enterprises Fannie Mae and Freddie Mac that purchased hundreds of millions of subprime loans on the premise that everyone deserved to be a homeowner, and then subsequently had to be bailed out with taxpayers’ dollars. And now we have Dodd-Frank, which has some good (or even great) provisions, but it also has some disaster provisions waiting to happen. And after all the Washington rhetoric about protecting a financial debacle in the future, I don’t believe there is anything in the act relating to Fannie Mae or Freddy Mac. But maybe the worst thing to come out of Dodd-Frank is the whistle-blower provision, where an employee can be rewarded for up to 30% of the fine levied by the SEC for information that their company is in violation of certain regulations. Now, imagine that for a moment. Why would I ever tell my supervisor that there is a potential problem internally when I can go straight to the SEC and have at least a chance of earning $300,000 on a $1 million dollar fine? Talk about unintended consequences—that’s a major one! Do we need government regulation in our capital markets? ABSOLUTELY, without question. Is government intervention to the Nth degree the way to go to prevent future problems? I think we have proven that more regulation is not always the solution. We need balance and the pendulum is about to swing too far. So Myth #3 is just that, a myth.
After my presentation, the audience applauded, but I wasn’t sure if it was just polite southern hospitality or if they liked the exercise I had them do, where I made one side of the room investors and the other side board members, and I instructed both sides to do an imaginary say-on-pay vote. There was not much sympathy for executives or board members in this crowd. But hopefully I won them over with my stimulating pay for performance lecture…. We’ll see if anyone comments on this blog from the Music City.
Posted : October 20, 2010 7:42:49
The simple answer is YES. But if you ask me to qualify that response by choosing whether I would rather have a board full of independent directors who aren’t necessarily familiar with the business or industry versus a board with a mix of independent and non-independent members (assume more than one insider or recent insider that is still categorized as a non-independent), I’ll take the less independent board that is more knowledgeable any time. But before some of you accuse me of heresy, know that I’m not alone in this thinking, even though in the last five years there has been a great deal of emphasis about benefits of an independent board. A case in point would be the recent report produced by the NYSE Commission on Corporate Governance. (http://www.nyse.com/pdfs/CCGReport.pdf).
First, let me provide some history. In 2009, as part of a thoughtful response to the financial crisis, the NYSE created the commission to review the numerous governance changes that have occurred over the last decade and their impact on boards and the financial markets. The commission also examined a host of other fundamental topics ranging from shareholder voting, management’s responsibility in governance, and board/shareholder/management relations. To make sure that it had diverse perspectives and experiences to help craft these guiding principles, and to provide a respectable level of thought leadership, the commission invited a host of representatives that included corporate secretaries, institutional investors, academics, leading corporate attorneys, general counsel, mutual fund principals, and corporate officers. The mix of these groups is quite interesting—in fact, it would have been great to be a fly on the wall to hear the discussions that ensued—many of which were surely more interesting than any report an eclectic group like this could agree to publish.
But back to my point… Principle #7 out of this NYSE report states: “While independence and objectivity are necessary attributes of board members, companies must also strike the right balance between the appointment of independent and non-independent directors to ensure that there is an appropriate range and mix of expertise, diversity, and knowledge on the board.” I couldn’t have said it better myself!
Personally I feel we have gone too far in our quest for total independence, and while some corporate boards today are, in fact, technically independent, some of these same boards are lacking knowledge about what is being put in front of them about their industry and the company they are governing. Now while you might logically question my thought process on this, I can assure you I am not lobbying against the benefits of a board being independent. But to those who say that you can’t have an officer who reports to the CEO serve on the board because that officer won’t be honest if his or her views differ from the CEO, I say “BULL.” I was once a chief operating officer who was asked to serve on the board in order to better prepare me for my future, and my first words to the board chair and CEO were: “Don’t put me on the board if you expect me to be subservient to the CEO when important issues come up in the boardroom.” In my case, the CEO always knew in advance how I felt about the issues, but he understood that when I sat down in that board seat, all directors—including me—had equal say. Truth is, I changed several board decisions with my comments about our operations—a few of which actually proved to be the right decision.
The bottom line is with the proper board leadership, and a foundation of independence and knowledge, your board is set to be effective. I’m not sure how much blood was on the sidewalk after the commission deliberated on Principle #7, but I salute the members for just having the discussion.
Stay tuned as I will analyze some other commission report principles in future blogs.
Posted : October 6, 2010 8:12:39
I am writing this the day before I preside over the orientation of more than 160 Fortune 500 board committee chairmen just before they are shepherded into groups to participate in Corporate Board Member’s Board Committee Peer Exchange. It is quite a sight to behold as eager board members march off to one of 20+ makeshift “boardrooms” consisting of eight to ten audit, compensation, and nominating/governance chairs of similarly sized companies. It makes me proud that eight years ago, with the help of some great companies and expert governance advisors, we launched what is today considered the finest learning format for board education available—a claim I doubt other educational providers would object to, since many have taken this format, tweaked it, and incorporated it into their own conference agendas. And while I’m not saying Corporate Board Member invented peer exchanges, we have certainly popularized the format within the board education arena, with results that have been next to amazing.
I often get questions from board members asking “What is the best event I as a director or my board could attend, both from the standpoint of content and price?” In same vein as our Annual Boardroom Summit, which follows the Board Committee Peer Exchange, there are other providers that provide quality board educational experiences. Stanford’s Director’s College comes to mind, as well as NACD and a host of other university programs. But what has always made the Board Committee Peer Exchange unique is that the board chairs set the agenda for the discussions in their session. We have found no better vehicle to meet the needs of educating directors than matching them with a group of their committee and chair peers and then to let them talk about the challenges and solutions related to performing their fiduciary duties. The peer groups have one director who serves in the facilitator’s role and the only other person in the room is an advisor whose role is to answer technical or legal questions. Having orchestrated this event for going on eight years, it comes as no surprise that when I’m asked what is the best event in which a director can improve his or her performance and effectiveness, I offer peer exchanges as the No. 1 option.
Now for those of you that are worried that you are not a committee chair or if you sit on multiple committees, we have not forgotten about you. Corporate Board Member offers a similar experience for ALL directors on November 3-4 in Chicago. This event follows the essentially same format as the chair event, except you get to rotate to a new committee group in the afternoon to ensure you obtain the required knowledge on all the committees on which you serve.
So now that I have given you the overview, what can you expect if you’ve never been to a peer exchange?
- The chance to get well acquainted with eight to ten board members peers of similarly sized companies who struggle with the same issues you do—all for a very nominal price (under $200).
- The opportunity to either validate what your board is doing today or take back key solutions related to challenges that other boards have already dealt with.
- The fastest, yet most chocked-full six hours of education and meaningful dialogue that you can imagine on board issues.
- The satisfaction of knowing that you have just made a giant step in being a more knowledgeable and effective director.
As a supplement to this information in this blog, please feel free to click on the link below that will direct you to the Corporate Board Member’s semiannual Guide to Board Education, which highlights many of the great university education programs for directors’ continuing education. Finally, I’ll leave you with one of my favorite thoughts, and while I don’t know the author it goes something like this… “While you can’t control the winds and tides, you can adjust the sails and rudder to get where you want to go.” Think about how that might be relevant to all of us, as board members.
Guide to Board Education
Posted : September 27, 2010 9:51:04
To those of you who follow my insightful reporting, or what some may call TK’s meanderings, you’ve heard me talk many times about two of the foundational responsibilities of the board. One is to select and retain the right CEO, and another is to make sure prudent risk management processes are in place to ensure the risk/reward formula is being properly administered within the execution of the strategic plan. So I was taken aback when I saw the results of a recent survey conducted by the American Institute of Certified Public Accountants (AICPA) and the Chartered Institute of Management Accountants (CIMA) that reported that “45% of U.S. respondents—many of whom were CFOs—have no enterprise risk management (ERM) framework in place and do not plan to implement one.” I inquired with the AICPA about this finding and learned that 19% of those responding were not-for-profit companies. However, that still leaves 26% of either public or private for-profit entities without an ERM structure. I also found out that only 1.5% characterized their risk oversight processes as "very mature" or "robust" and that the lion's share (84%) rated these processes in the range of "very immature" to "moderately mature." At this point, I am guessing that most of the respondents are from small companies; but regardless, there is plenty to take away from this study.
It’s not a surprise that many companies, both public and private, struggle to implement a viable risk analysis process, but in today’s times, for any board, no matter what size company, to accept that their management team is making no effort in structuring even the most basic enterprise risk management system is hard to believe. Where have these companies been for the last 10 years during corporate debacles, economic meltdowns, and a veritable sea of governance regulations? Living under the proverbial rock?
Here’s an obvious tip to directors serving on boards of companies that don’t plan on implementing enterprise risk management. Check your D&O coverage to ensure you have Side A protection for you as a director and make sure you are not counting on the company’s portion of the policy to cover you. I say that not to accuse you of doing anything illegal, but in today’s times, shareholders or the plantiffs’ bar could accuse a board of being negligent if it is not addressing the issue of risk in some organized fashion.
Now I’m truly hoping that these survey numbers were the result of a question that was confusing, or perhaps that these companies do have a risk management structure in place but don’t actually call it enterprise risk management. But if those situations are not the case, then it’s too bad we can’t get a list of that 45% so we could issue a stock alert to their shareholders so they could consider selling their stock or at least shorting it in today’s volatile and transparent environment.
I do try to offer some valuable information in every one of my blogs and in this one the message is simple: Please don’t be on a board that doesn’t push its management to be on top of risk management. And understand this important distinction: I’m not saying don’t take risks, but we have certainly had enough corporate examples where the failure to balance risk, ethics, and long-term shareholder value can be very costly to the bottom line, and even more important, to a company’s reputation. You can destroy decades of positive brand recognition in just 30 quick minutes, so make sure your company thinks about this balance. As Ben Franklin said many years ago, “It takes many good deeds to build a good reputation, and only one bad one to lose it.”
Posted : August 29, 2010 12:14:44
Well, the long-anticipated event has finally occurred. There is no more guessing on the rules as the SEC has set forth new proxy access guidelines with a split vote and some interesting speeches on August 25th. I am pretty sure it will not go down as a “Day of Infamy” or even get some fancy handle like “Bloody Corporate Wednesday.” We’ve been waiting and talking about this so long that it is almost anti-climactic. The fact is, many institutional investors, corporate directors, activist hedge funds, and CEOs don’t know whether to celebrate or cry foul. Let’s take a logical look at two scenarios where both corporate directors and self-interested shareholder groups could either be happy or sad.
#1. The Happy Scenario:
Activist shareholders –This group is very happy to finally have some clout and the ability to nominate new directors without having to go into their own pocket to fund a proxy battle against a company’s slate of directors. Therefore, companies that are poorly governed and have equally dismal bottom-line performance are now on notice that while it will still be a challenge to meet the proxy access guidelines, shareholders have a tool to be better represented on the board. This tool isn’t perfect though, because while it may be easier to nominate a candidate, shareholders will still need to go out and round up the votes for that person to be elected. This could be no small task at times, especially when the company will pull out all the stops by hiring a proxy solicitor for their slate. But even so, activist shareholders, you are happily in the game.
Corporate boards and management – You are likely to be happy as well, because simply put: In the grand scheme of things, with these rather lofty thresholds, we may not see many shareholders or even groups able to garner the required 3% of stock and have held it for 3 years. But what really should make you excited is what didn’t end up in the Dodd-Frank Reform Act. No mandatory majority voting, no discretionary votes on areas other than the election of directors, and no nonbinding advisory votes on critical decisions except say on pay. So unless you have completely overpaid management or taken the company in a strategic direction that has resulted in a death spiral, you’re still in control of your company even if you do have to hire that proxy solicitor to make sure you get out the vote. You are likely also delighted that some smart folks out there feel that there are aspects of the rulemaking that still can be legally challenged.
#2. The Sad Scenario:
Corporate boards and management – Just the fact that the camel got its nose under the tent is a downer. If we now mandate proxy access and say on pay, what is next? Some may say that, in a way, we only have ourselves (or a few public companies) to blame. The fact is, this could get ugly. We’ve seen publicity that CalSTRS and Relational Investors are building a war chest of directors who could be viable shareholder nominees under these new rules. The bright light on boards has just gotten brighter.
Activist shareholders – Even though you are in the game, you have to feel a little sad about what might have been. Whoever struck the deal that resulted in keeping proxy access but walking away from the other potential shareholder election and oversight tools has left some key issues on the table. There has never been a better or more vulnerable time in the corporate world for shareholders to push for enhanced powers and, while they got a few, I honestly expected more influence to have swung your way. The final proxy access rules certainly narrowed the field of those who are in the game, and we’ll have to see if your investors prove to be good aggregators of those who are disgruntled, long-invested shareholders.
I recognize that there could be more scenarios where members of one party might be celebrating a victory and the other licking their wounds, but it was by stepping back and considering the perceptions of all the different interested parties that suggested to me that people’s views are all over the place, and that only time will tell how tell how Wednesday, August 25, 2010 will be will be remembered in the business school textbooks of the next decade.
My perception is that there is no question that the corporate world has given up some valuable ground that will never be returned. The real question is, will the Dodd-Frank Act’s corporate governance section and the added power to shareholders truly help in holding directors accountable and improve performance? Or have we just added more disclosure and distraction, which focuses directors on things other than some good old strategic planning. I actually have faith in the capital markets and the desire of board members to be successful boards. My glass is half full.
Posted : August 18, 2010 10:45:34
Well once again Hewlett-Packard’s board is in the hot seat as they try and put the CEO Hurd debacle behind them and move on with their search for a new chief executive. There is no question their directors have had their share of the limelight in the last several years and I suspect many of them have developed some pretty thick skin. That may be helpful, because this could be a media issue that won’t go away until the all the intimate details are revealed and the reporters who cover “lifestyles of the rich and famous” refocus on the latest exploits of Lindsay Lohan.
Everybody likes to read the bawdy details of a business bigwig getting influenced by a sultry “consultant,” but let me start with one important fact. Even though we don’t know the actual relationship with consultant Jodie Fisher and whether her sexual harassment suit was fabricated as the internal investigation seemed to confirm, Mark Hurd did file false expense reports to the tune of a reported $20,000 and it wouldn’t matter what other allegations are associated with his bizarre behavior, that is enough for the board to terminate his employment…maybe even for cause. Can you imagine the culture of an organization where it’s OK for the CEO to fudge his or her expense reports? Was there anyone out there that felt that this incident alone wasn’t enough for the board’s actions? I don’t know what went on inside the boardroom, but I certainly won’t criticize the board for disclosing what they felt was relevant and why Mr. Hurd was asked to resign. Also, when the facts presented themselves, I can’t criticize the board for hiring a damage control consultant to address certain organizational and media repercussions. They certainly didn’t need the PR consultant to establish what the right step with Mr. Hurd was in this case.
Columnist James Stewart, in the Common Sense section of the Wall Street Journal (8/11/10), chastised the H-P board for not disclosing all the relevant facts. The column was actually a very interesting read except for what seemed like a strong push to hear all the details on the relationship with Ms. Fisher. He closed the column by saying “it is hard to have any confidence in the judgment of H-P’s board” and goes on to say that as an investor, he’d avoid the stock. (Actually if you bought close to the bottom of the last debacle you would have made some good money, but I get his point.) Not being in the boardroom and not knowing the truth, there are plenty of reasons to not disclose the details of the relationship. Many times it makes perfect sense to totally clear the air and put things behind you, but there are exceptions, and since we haven’t been privy to any of the board’s conversations we can’t criticize its thought process. Personally, I think the board disclosed enough, and I support its handling of this situation and feel its members have improved their governance process significantly after going through the board leak issue.
Unfortunately for H-P, as I’m writing this blog, up pops a related story that a pension fund shareholder is suing Mr. Hurd and the board of directors claiming disclosures surrounding the CEO’s resignation led to a drop in the shares. It’s no big surprise that someone sued, but I’m amused at how one might suggest the board could have made this announcement without the stock being affected. H-P, so far you have my approval of your efforts to handle this unfortunate incident after having some welcomed performance success over the last couple years. My advice is, don’t look up. I think you’ll see a black cloud that just might take a little more time to shake.
Posted : August 2, 2010 8:50:30
What a time for me to be on vacation, missing the signing of the infamous Dodd –Frank Reform Bill. First let me apologize to any readers or faithful followers for the lapse in blog content. You know how it is when you finally go on that family vacation and innocently go to the computer to do a little work and you get the evil eye from the rest of the family. But now I’m back, mulling through the bill and its interpretations, and armed with great fodder for many blogs to come.
Since I’m rested and feeling somewhat spunky, I thought I’d address an issue that quickly came to light while I was paging through the bill.
Now I must confess I was never much of a fan of our first venture into protecting whistleblowers as part of Sarbanes-Oxley legislation of 2002. Under this regulation, employees could submit incidents to the board or a third party and be protected from retaliation (including keeping their jobs no matter what a slug they might be) under the SARBOX legal statues.
Actually I am a fan of the general benefits of Sarbanes-Oxley (minus 404) but my concerns over the whistleblower challenges were demonstrated when the magazine received a call about a company whose board had received a whistleblower alert that management was doing something associated with cooking the books. As they should, the board hired outside counsel and advisors to investigate. In the course of their rigorous interrogation, management didn’t like the tone of the investigators and hired independent counsel to represent them. Bottom line was there was ultimately no substance to the whistleblower’s claim. Turns out, the claim was submitted by a suspect employee who was on the verge of being fired but was now protected, and the company ended up with two expensive outside counsels dealing with each other and the board and management not talking. This is what I call an unintended consequence and a provision of a bill that needs more thought on how best it might work. While this might be classified as an extreme case as far as cost expense goes, it is representative of how convoluted even the best-intended whistleblower fraud detection program can be.
Now this is the time in most of my blogs where I let the readers know that I’m not some whack-job that doesn’t understand what is trying to be accomplished here and appreciates how the threat of one’s employees having an outlet to report fraudulent actions by officers of the company can be a very powerful deterrent. And on paper it might sound good but I don’t sense that anyone feels it has been worth the expense or time to the public companies. True, I haven’t heard any feedback from the SEC so I’ll leave the debate on Whistleblower #1 open for the time being.
Now we enter a new whistleblower era that we will call “Return of the Whistleblower” or “Son of Whistleblower” and as usual with movies, this feature of the bill is worse than the original. How can I bash this piece of the bill already? Because as best I can understand, now we are going to protect and reward whistleblowers–rewards to the tune of 10% to 30% of the monetary sanction imposed by the SEC. (Those of you that want the gory details, see section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.)
Now there are rules of how and when a whistleblower can be paid but it is easy to see where an employee who identifies possible fraud is incented to skip his internal compliance and ethical process and go straight to the SEC. In fact, if they report the occurrence internally and the company decides it is an offense it should self-report to the SEC or Justice Department, they lose their windfall. In retrospect have we just instituted another whistleblower regulation that has even more tenuous unintended circumstances than Sarbanes-Oxley. Time will tell.
One thing is for sure for directors and C-suite teams. You will have to analyze your current internal reporting programs and corporate culture. You can imagine the risks and expense related to this program not counting just the reputational risk for the company. As I reflect back it seems interesting to me that with all the provisions of the new Act that whistleblowers is the place I chose to start offering guidance. I’m all for bringing people who knowingly commit fraud to justice and I hate that people can destroy so many lives by trashing companies and not get stiff sentences. But maybe we can just cap the incentives to whistleblowers or provide equal incentive to have them report things up the normal chain of command.
As a final note we may have a real life example to watch. At the end of last week the Justice Department joined a whistle-blower in accusing Oracle, the business software giant, of defrauding the federal government by overcharging for software. If it’s true, find the perpetrator and prosecute, but I hope for everyone’s sake that some whistleblower doesn’t walk away with $50 million dollars.
Posted : July 9, 2010 8:27:07
Well, Congress didn’t meet its goal of getting the financial reform legislation to President Obama prior to the country’s Independence Day, but it doesn’t look like it will miss it by much. Current plans are for the Senate to address and vote on the bill July 12-13, (the house has already voted and approved the D-F Act) and current indications are that it could land on the president’s desk soon after. This bill has become my source for cheap excitement as I watched the televised committee process take place merging the Senate and House versions and then watching the lobbyists and special interest groups water down many portions of both versions. (It is a little sad that committee watching is a form of entertainment for me, but it is something I live almost every day.)
I’ve actually enjoyed reading experts’ synopses of the 2,300-plus page proposed document and hearing specialists prognosticate how certain sections of the act will affect different companies. Two summaries I read this morning that are decent recaps are PricewaterhouseCoopers’ “Special Edition on Financial Services Regulatory Highlights” and Paul Weiss Rifkind, Wharton & Garrison’s “Corporate Governance and Executive Compensation Provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act.”
As far as fun facts go that I’ve learned from those sources, one is that the new law will require more than 60 studies be conducted on a wide range of issues and, under the title of “investor protection,” there will be 20 separate studies alone. And if you are into acronyms, this act is the mother lode of all documents. See how many you can figure out that will be required to adopt new regulations in the next 180 days: FRB, FDIC, OCC, SEC, CFTC, FTC, FERC, NCUA, HUD, CFPB, FSOC. (Scroll down for the correct answers.)
This strongly suggests that the regulators will have a major say into how practical and beneficial this bill will actually be. Because the regulators will possess the final say on many of the law’s actual parameters, how they make final decisions on those guidelines and then choose to administer them will have a significant impact on many public companies and boards. To me, it will help me decide exactly how far the pendulum has swung, and whether I give more credence to those who are complaining about too much government intervention or to those who say the Dodd-Frank Act will be one of the most important pieces of legislation since the Securities Act of 1933.
If you have any “fun” facts that I missed, let’s hear them. Once the bill is signed, watch for me to take a look at its components—particularly those that are directly related to you as a board member. You can also tune into www.boardmember.com where “This Week in the Boardroom” looks at the nongovernance issues in Dodd-Frank that will still affect a lot of public companies. It’s 2,300+ pages… so you’d better get reading right away!
Federal Reserve Board
Federal Deposit Insurance Corp.
Office of the Comptroller of the Currency
Securities and Exchange Commission
Commodities Futures Trading Commission
Federal Trade Commission
Federal Energy Regulatory Commission
National Credit Union Association
Department of Housing and Urban Development
Consumer Financial Protection Board
Financial Stability Oversight Council
Posted : June 22, 2010 1:37:07
I can think of multiple examples over the past years where I thought to myself, “Boy, I’m glad I don’t serve on that board today.” One of those early memories was HealthSouth (still one of the best articles to come out of our magazine), when I found out that its directors ended up having 52 board meetings over the course of a year during the height of its accounting troubles in 2003. I had the same thoughts in 2009 when it seemed Bank of America couldn’t do anything right in the media’s eyes. In that case, although we actually didn’t know what was going on in the boardroom, we saw signs BofA followed some less-than-stellar best practices concerning fundamental board duties that likely contributed to its rocky journey out of the limelight.
With all that is going on today with BP, I’ve conjured up some of those same feelings, but wanted to take my thoughts a step further and ask myself what I or others might learn from what we’ve witnessed so far. Truth is, we don’t know much about what is going on among the BP directors, so it is tough to be too critical without first-hand knowledge. This would be a hard time for any board to deal with what BP is experiencing. Shareholders and related activists are calling for the CEO’s head, while there is huge political pressure for the company to cut its dividend and just stop the leak. The media is on a feeding frenzy looking for any sound bites to sell publications or TV advertising. Throw in environmentalists, damaged businesses and employees, and municipalities who have lost tourism dollars and you have quite a mess. So with all that going on and, unfortunately, no good solution in sight, what might we director types learn as we watch this experience from afar?
Even without knowing what is going on in the boardroom we can understand the importance of having a crisis management plan. Early responses to the oil leak were not well organized, and spending money on ads that touted what a good company BP was could have been used much more effectively. I like what BP is doing with its claims program, but it took almost two months to have anything organized—not to mention a plan to stop a leak that we all know now can turn into an environmental and economic disaster.
Another foundational duty that you can hope has been addressed by the BP board is its CEO succession plan. No board wants to get caught flat-footed like Bank of America, where it was pretty apparent that no plan was in place even though Ken Lewis (who is a very good banker in my eyes) was under extreme outside pressure for months and eventually ended up leaving the bank. With all the pressure on BP and its CEO Hayward, it, too, will have some tough decisions on the best course of action for the company going forward. Notice how all these duties interact. Crisis management, CEO succession, board leadership, etc.
But maybe the most important lesson that board members can learn from the BP situation is one that is rarely talked about till well after any crisis: the importance of a company’s culture. If I were to investigate any issue that might have prevented this disaster, I would dig deeper and understand the culture developed and supported by BP’s management and board. Was there an internal corporate environment where problems had a path that led up the organization? If workers knew and tried to communicate the risk of poor drilling equipment did those concerns rise to an investigation level? Another way to ask that same question is… was there so much pressure (and/or incentive) to meet profit targets that the risk of colossal environmental accidents was increased? If so, it might be said that a bad strategic plan was instituted from the start. This type of faulty culture just isn’t restricted to those that present an energy or environmental risk. These same cultural dynamics can be tracked to the financial crisis and to any company that is exposed to Foreign Corrupt Practices Act (FCPA) risk.
So, even without knowing how the BP board has performed under this intense scrutiny, we have much to learn. I am very sympathetic to its directors’ plight, but would encourage everyone to take the related lessons to come out of BP’s situation quite seriously.
Posted : June 7, 2010 1:59:31
If you are a corporate director you shouldn’t really be surprised, but it looks like the final shoe is about to drop in what I suspect is the biggest corporate governance power shift in the history of the modern American company. That’s right, the Financial Reform Bill is out of the Senate and is up for review with what the House had passed in December of last year. While I’m sure there will be banter and lobbying of epic proportion, I sense that we will end up with a bill that, even though its focus is financial reform, will also address multiple governance issues. Most important, the SEC will likely end up with proxy access regulatory authority that eliminates, or at least reduces, any previously anticipated legal challenges.
What all this change will really mean to today’s public companies remains to be seen, but it can hardly be described as insignificant. I will admit that I thought the implementation of Proxy 452, which restricts the brokerage houses from voting discretionary or street shares without shareholder instructions, as well as the fact that many companies had previously installed majority voting (which means the only votes that count are those actually cast), would result in some directors not being reelected. However, sitting here today, I have not heard of one case where a company-recommended board member has been blindsided and not been reelected due to withhold votes, Proxy 452, and/or majority voting. (It doesn’t mean it hasn’t happened, but it certainly hasn’t been close to the effect that some thought was likely to occur.) Part of the reason we have not seen an increase in incumbent director turnover is that many companies that felt the heat stepped up their proxy solicitation efforts to ensure their candidate’s vote totals had good reelection chances. (Maybe Corporate Board Member should get into the proxy solicitation business. It sounds like those folks will be busy for many years to come.)
I tend to think that the proxy access aspect of the Financial Reform Bill is the biggest elephant in the room to today’s boardrooms just because the early SEC version had so many unanswered questions. I must admit I still don’t understand how the first come-first serve selection process of shareholder-nominated director slates will be handled. It sounds to me a little like getting a Southwest Airlines seat. Imagine something like “first request received 24 hours ahead of the proxy deadline date gets their slate listed in the proxy.” Actually, how many new board slates will be selected for the proxy is probably a small issue compared to the concern some experts have with its effect on boardrooms of the future.
Marty Lipton, one of the grandfathers of board governance, provided little doubt about the fears that he had for tomorrow’s companies. In a Wachtell Lipton whitepaper, he and his colleagues had this to say about the SEC’s proxy access process: “We believe that proxy access has the potential to wreak havoc with American business and that the SEC’s adoption of proxy access rules is dangerous and unwise.” Hmmm, I wonder how they really felt?
So to sum up, continuing with our air travel metaphor: “Ladies and gentlemen, this is your governance compliance attendant informing you to fasten your seatbelts because it may be a little bumpy ahead before we hit any clear or smooth sailing. The current report calls for an accumulation of newly proposed directors, coupled with a heavy dose of both mandated majority voting and say-on-pay. Also, indications are that there is a 99% chance of selected SEC decisions defining just what are significant discretionary voting matters as well as seasonal clawbacks timed with the release of restated financials. Your captain for this experience will be Representative Barney Frank and your estimated date for takeoff will be July 2010. We’re happy you agreed to serve as a corporate director, and we’ll look forward to having this experience again after the next crisis that politicians believe board members had the power to avoid.”
OK, after all that ranting, how do I really feel? One word: CAUTIOUS! My experiences are that Congressional and regulatory corrections that follow crises are never as bad as people think they are going to be, and there are so many questions left unanswered at this point that it is hard to be critical of something that is still so undefined. In fact, most of us won’t be around to experience whether this watershed shift in shareholder power ended up to be a good decision or not over the long term. But even so, for now, I am buckled up!
Posted : May 13, 2010 11:37:09
Meet Your Peers
For the last several blogs I have discussed the issues of board leadership and splitting the titles of CEO and chairman, so it only seems fitting to pass along some information that is a real-world application of what I’ve been talking about. On June 22-23, Corporate Board Member and the New York Stock Exchange will conduct the first annual Chairman & CEO Peer Forum at the NYSE headquarters on Wall Street. Designed to bring together chief executives, board chairs—or in cases where the CEO holds both titles, lead directors—the Chairman & CEO Peer Forum presents the opportunity to a select group of people to get together and share ideas on what has worked well, and what has challenged them, in their CEO/chairman relationship.
Those who take time from their busy schedules to attend, will hear from the likes of these formidable leaders: Harvey Golub, the former CEO of American Express and current chairman of AIG; Duncan Niederauer, CEO of the NYSE Euronext; Tom Pritzker, executive chairman of Hyatt Hotels; the CEO/lead director team from Reynolds American; and finally, one of America’s leading legal governance spokespersons, Marty Lipton. And while all these speakers will help put board leadership in the proper perspective, it is the opportunity to participate in the peer exchange—where small groups of CEOs, chairmen, and lead directors can confidentially discuss their challenges and solutions—that will make the Forum uniquely successful. No matter how you feel about titles, this event is about helping board leadership handle difficult situations and, most importantly, fostering more effective boards.
I personally wish Board Member Inc. was a public company so I could participate in the peer portion of this event. There is no better learning experience than sitting and sharing issues that are not usually aired among your peers. Some of the topics I know will be discussed include the chairman and board’s role in strategic planning and setting direction, the best board process for handling oversight of enterprise risk management, and determining the lead director or outside chairman’s role when building effective communications with the CEO and management. If anyone can go into these peer groups and not take something constructive back to their own company, just let me know after the Forum. I’ll make sure the conference folks give your money back. Our annual October Board Committee Peer Exchange has grown to more than 240 board committee chairs who come from mostly Fortune 500 companies. I am sure you’ll discover the same thing they have—that this is a great format to either validate or bolster your board skill set.
One last point on something you can expect from me at the Forum. If you’ve read my previous blog (“Guiding the Board…The Unspoken CEO Skill”), you will know that I support the unspoken tenet that holds that no matter how much authority or independence you want to give to the board, the CEO needs to provide guidance in a way that doesn’t feel like he or she is dictating, but does make sure everyone is pulling the oars in the same direction of where the business is going. This is a critical CEO skill set, but it isn’t something that is evaluated during the interview process. Hmmm… I wonder how that will be received by the independent chairs and lead directors at the Forum?
Posted : April 23, 2010 12:54:04
Apologies to all for not bringing closure to my prognostications on splitting of the CEO and chairman roles prior to having to board a plane last week, but if you had the chance to read my last blog post, I was making a case for what I’m about to espouse as my prediction for the future of the dual title and role of CEO/chairman.
It should come as no surprise, for all the reasons previously offered, that we will see companies splitting these roles as early as the opportunity presents itself, and some won’t even have the luxury of waiting until a logical time. Certain companies will have withhold votes issued on them in the current proxy season for their reluctance to split the roles and for failing to address the board leadership issue through a lead or presiding director position. Yes, as I look at this year’s proxies, there are companies and boards that have chosen not to address the board leadership issue regardless of what governance reforms or disclosures swirl around them. It’s hard to believe they would want that attention in the increasingly transparent boardroom environment, but nonetheless it is true.
The remaining companies that haven’t split the roles but that have addressed the lead director/board leadership issue will gradually feel pressure from Congress, regulators, shareholder groups, etc. to make a role-splitting change at one of the following opportune times:
- When the current CEO comes forward and recommends that the company make the change at the next reorganization or as soon as possible.
- When the current CEO retires, or is replaced, and the board can exercise the split without disrupting the current CEO/board relationship.
- When there is an M&A or similar transaction that results in a meshing of management teams and boards.
There may be other opportune times that I can’t recall right now that would expedite the splitting of the roles, but you get the picture.
I’m on record (several times now) stating that I don’t think the splitting of the chairman and CEO roles is all it’s cracked up to be and that I’m much more concerned about how a board views and orchestrates leadership, whether that is through an independent chair or lead director. However, I won’t argue that there aren’t benefits to having separate CEO and chairman roles, because in certain companies I think that visual title support helps some boards foster additional courage and independence. Remember, however, that Enron and WorldCom had split roles, so it doesn’t guarantee good governance.
For those accounting or legal types who want something more definitive in a prediction, I offer the following: If several years ago 50% of U.S. public companies had already split the CEO and chairman roles, my prediction is that by the end of 2012 that number will be near 70% and by 2014 it will reach 85% (assuming regulators don't mandate it earlier).
There you go… my crystal ball has provided great wisdom and hopefully given you the chance to reflect on your board leadership issue in the years ahead. Just be sure to focus on the steak, and don’t get caught up in the sizzle!
Posted : April 12, 2010 3:31:57
There is no topic we deal with at Corporate Board Member that has been more sensitive to our readers and viewers than the splitting of the roles and titles of the CEO and chairman. There really doesn’t appear to be much grey about this issue—it’s mostly black and white. But actually, I’m somewhat grey about it because, as I have said before, I actually think many kinds of leadership structures can work, and while the splitting of these roles does have some possible advantages, there are plenty of cases where such a split has failed to perform effectively, as well. Board leadership is a people issue more than a structure issue, and no title solves the leader issue.
All that being said (again) leads me to what I really wanted to cover in this blog: “What do I think will happen to the splitting of the roles in the future as I gaze into my crystal ball?” Some may not like what I see, but here goes.
First, I am surprised by how strong this movement has become. Organizations like RiskMetrics and CalPERS, who previously seemed comfortable with a lead director structure, have gotten more vocal about the viability of splitting roles. Former CEOs, like those who are active in Yale University’s Chairmen’s Forum, are making an appeal to their former peers that an outside chair is important in order to have a good corporate governance balance in a public company. Also, there is the SEC’s new requirement to disclose the structure of board leadership (i.e., their new code word for splitting the roles) in the proxy. Furthermore, every piece of legislation coming out of Congress has a portion of the bill requiring public companies to split the roles of chairman and Chief Executive Officer. This is now more than just one group of activists looking to wrestle power away from selected imperial CEOs. This is a real, live movement.
Second, from what I’ve seen in the early proxy writeups on board leadership, neither the SEC nor the organizations that carefully read and follow proxy disclosures will be happy with how the issue is being addressed. What that means is that many boards might need to respond to SEC comment letters they’ll receive, and RiskMetrics will either put out guidance about how this needs to improve, or it likely will withhold votes on some poorly thought through explanations, particularly in cases where a board hasn’t even addressed the lead director alternative structure. Because this is the first year of disclosure and it comes right on top of proxy season, there is the possibility that RiskMetrics may use this year to school some boards that have at least addressed the lead director concept, after which it will send a more meaningful warning shot across the bow of the nonresponders.
We’ll have to wait and see how that all plays out, but no matter what, you can count on 2011 being much tougher. When all is said and done, who knows what regulation may eventually pass, and what rules will be in place that directly deal with the splitting of roles.
So when I look into the crystal ball, what does all this mean to current CEOs and boards charged with explaining their philosophy on board leadership… oops, there’s my boarding call for my plane. I’m very sorry… it looks like you’ll just have to wait until the next blog to hear what I predict will happen. By the way, I am surprised that I haven’t heard from Warren Buffett yet about his views on the last blog. Anyone have his cell phone number?
Posted : March 29, 2010 11:03:28
When a board takes part in unacceptable actions or makes bad decisions, how do we ultimately determine the appropriate penalty?
Over the last 18 months I’ve been thinking a lot about that proverbial line in the sand that determines when we should hold public company directors responsible for their actions (or lack thereof) as they represent the shareholders. Moreover, what does holding boards responsible really mean? Recently, we heard some very strong comments from the Oracle of Omaha and the world’s best shareholder, Warren Buffett, on this topic. He said that “CEOs and the boards that hired them should pay a steep price if their companies get into trouble with risky investments.” Does “steep price” mean they should be fined, or lose their jobs, or perhaps be prosecuted for negligence? I’ve also thought about the 200 banks that have recently failed and the additional 400 that are still projected to close their doors in the next 12 months. We’re talking about billions of dollars of shareholder and taxpayer dollars, either lost or used for government bailouts and assistance. What is the right thing to do when everyone says we need to hold directors accountable?
Let’s see if we can make some sense of this. Some things we need to remember as we think this through are:
We currently have a sophisticated legal system, particularly in the Delaware courts, that continually evaluates whether a board’s or individual director’s actions warrant having a lawsuit filed against them, or alternatively, whether they should be given a pass for making a good effort that resulted in the wrong decision (i.e., business judgment rule).
Also, other than the companies that caused the subprime debacle, can we really hold boards of other companies that were wiped out accountable when the economic conditions were beyond what any reasonable director could have anticipated or planned for? So, again I ask, how should we hold directors responsible?
One situation that has a pretty clear answer is when a director has been involved in fraud. Do something illegal or even make decisions for the benefit of yourself over the interests of the shareholders you’ve been elected to represent, and you should do the time or pay for the crime. That’s an easy one. What’s not so easy is determining what level of effort a director or board must demonstrate to be a good board. How do we ultimately judge whether true financial penalties against directors should be involved or if directors should simply be replaced? And who makes that decision? Actually, as I read back through what I’ve said above and consider what might be the best tool for shareholders to hold boards accountable, I may have just made a case for loosening proxy access rules, particularly if you buy into the notion that we don’t want to create an environment of prosecution that dissuades top director talent from serving on a corporate board. If everything except for fraud is too ambiguous to make that determination, then I suppose shareholders should have the ability to replace directors they don’t feel are protecting their investments or adding value.
Interestingly enough, I have never been against proxy access as long as the process around putting candidates up for election is sound and not too cumbersome or time consuming for today’s public companies. My problem with much shareholder activism has always been that once the board is elected, we need to let the directors do the job without having outside scrutiny of every decision or votes (even nonbinding) that serve to second-guess their actions without having access to complete information. Everyone can relate to how hard it is to manage when a supervisor or boss is sitting on your shoulder.
I’m going to have to think about this subject more, because outside of considering the possible merits of expanded, but still controlled, proxy access, I have not been able to answer my own question yet. It sure would help if Warren Buffett could define for me exactly what he means by “pay a steep price.” Maybe he’ll respond when he reads this blog.
Posted : March 12, 2010 10:26:23
So who is to blame for this compensation conundrum? Too bad this is only a blog and not an epic movie where we’d have three or four hours to unwind this complex web of conspicuous contributors. The truth of the matter is almost all related parties have contributed in some way to getting us where we are today with executive compensation. Wall Street, CEOs and boards of directors (past and present), compensation consultants, compensation attorneys, etc, etc, etc. Whether some were greedy, delivered what the client wanted, promoted short-termism with corresponding rewards, or were just ignorant of what they were approving, if you look back and see how we got ourselves in this position it seemed to start with just a few high-profile abuses on annual bonuses and severance payments and has now morphed into a full-range concern of not just what executives are being paid, but maybe more importantly, how are they being motivated to perform their responsibilities. The most recent downturn of the economy has appropriately swung the door wide open for everyone to question the system and that has resulted in major change and transparency. Whether your CEO’s pay multiple is being compared to the average worker or shareholders now expect a non-binding vote on what constitutes their CEO’s compensation package, everyone is having the chance to be a compensation expert.
The fact that executive compensation is such a publicly discussed and debated issue from Congress to the neighborhood card club is unfortunate, because most of the public and private CEOs and their boards have gotten the pay balance right and are not the greedy spendthrifts that the media and activists have made them out to be. There are well-publicized exceptions, but that’s exactly what they are—exceptions—versus the thousands who get fair rewards for efforts and performance given.
Unfortunately this less-than-desirable position is even supported by the corporate directors themselves. In the 2009 Corporate Board Member/PricewaterhouseCoopers “What Directors Think” survey, and in our surveys several years prior, when directors were asked in general if they believe that “U.S. company boards are having trouble controlling CEO compensation levels” the response was “yes” more than 60% of the time. This is a troubling result from the very group that should have control over the process and are in the position to push for change.
We just finished our West Coast Peer Exchange where over 115 board committee chairs met in California to discuss boardroom challenges and possible solutions. One of the things that became apparent was that more than a few compensation committee chairs and members felt that compensation consultants were still part of the problem and that a lot could be corrected if they wouldn’t keep escalating pay packages. Some felt the size of salaries and pay packages was exacerbated by information and recommendations supplied by the comp consultant. Now, as stated above, I’m reasonably sure that compensation consultants, particularly in past times when they were selected by and reported to the CEOs, contributed to some of the abuses in companies where escalating pay packages were designed to meet the 75th percentile of their peer or industry group. It shouldn’t come as a surprise to anyone that this familiar formula will grow pay packages each year. But that was in the past, right? In the new, more transparent compensation world, where compensation consultants report to the compensation committees and they know that they need to do a good job or the compensation committee won’t hire them again, I’m having trouble seeing why they wouldn’t deliver what is being asked for from the committee.
Let me state this another way. It was a good governance initiative to make sure that compensation consultants are hired and report to the compensation committee if they are involved in assisting to structure CEO comp—for all of the reasons stated above. It is especially important to the governance of the board because now compensation committees are officially in control of CEO pay. That means if you don’t like the existing plan, then tell the consultant you want to change the structure. Maybe one that pays for performance better or has a more realistic set of peers, or does not pay more than X times the average factory worker’s salary or whatever you think is appropriate for your company to be fair and motivating to your CEO. The point is, if the compensation consultant reports to the comp committee—directors are now in control.
The fact is, I’m not concerned today about who’s to blame for the compensation woes of the past. If I’m chairman of a compensation committee today, I’m going to sit down with my CEO and get his or her input, (yes I really care about their suggestions), ask my compensation consultant to update the committee on what’s going on in executive pay that we should know about, review our pay structure against what kind of behavior we want to solicit, ask the compensation consultant to make any changes necessary to improve its results, and then bask in the glow of a great bottom-line performance and a satisfied senior management, knowing we got it right.
Posted : March 2, 2010 8:32:41
This week I had the chance to moderate a panel at the Global Ethics Summit hosted by Dow Jones and Ethisphere in NYC. I was very impressed with the number of companies represented and the spirit among the attendees in the room that ethics and compliance are manageable tasks. Having mostly served on small and mid-cap boards, I often wondered how a company and their board members could possibly oversee a holding company that operated 40 different businesses in 40 different countries--especially when a handful of those companies traditionally conduct business by taking bribes. In a time when hitting one’s numbers is such a big corporate deal, ensuring that your culture is a zero-tolerance environment when it comes to competing ethically seems like a yeoman’s task. I have to tip my hat to the managements and boards of multinational corporations that have successfully ingrained that business process into their daily operations. Now, I’m not saying that every company is doing a good job today, but with many Fortune 200 companies represented at the recent summit, it was interesting to hear both compliance and ethics officers talk about their board’s involvement in a zero-tolerance culture. This is in stark contrast to five years ago, when I was asked to moderate a similar panel on ethics and there weren’t that many ethics officers at Fortune 500 companies, and the whole conference was a complaint-fest on how hard it was to get the directors’ attention or carve out any time on board agendas.
My panel session was titled “Tone at the Top,” which turned out to be the most popular phrase for all the presenters discussing ethics and compliance at the summit. Everyone reinforced that if management and the board doesn’t support ethics programs and procedures, any money or time spent on training and operational procedures is a waste. “Do as I do… not as I say” is a phrase that is highly relevant to boards regarding ethics. Truth is, it sounds easy, but its not. The main point of our summit panel and the point I want to make with this blog is that each board will have several watershed events that will test their members’ resolve on having zero tolerance and those events will, perhaps more than anything else, determine one’s ethical culture.
A good example of a watershed moment test for a board of directors was the situation faced by the Walmart board about eight or nine years ago when its vice chairman was caught abusing company gift cards. Now imagine if you will, the challenge to the other board members when one of their own was caught taking a cookie or two out of the cookie jar. In times of old, that would surely be a “slap of the hand and sweep it under the rug” kind of incident. To Walmart board’s credit, they knew they had 1.5 million sets of employee eyes watching how this would be treated. If they let this slide, I’m sure it would have undone millions of man hours and dollars that had been spent to mold their employees and culture into making sure that workers knew that doing the right thing is important at this company and that not doing the right thing will not be tolerated… no matter who you are. That event was Walmart board’s watershed test and the best I can tell, they passed with flying colors.
Throughout my career and while serving on a public company board, I can only remember one such watershed moment in my quest to be a good director. I’m happy to say that I provided a level of leadership that helped us pass that test and I still carry that feeling proudly at my work and when I explain the importance of those decisions to boards today. Don’t let anyone tell you that these moments are easy to identify or are easy decisions to make—because they’re not. It just isn’t always clear at the time how important your decision might be, or who and what it might ultimately impact. If you serve on a board you can pretty well be assured that your time will come. Here's hoping you pass the test with flying colors. Take it from me… it will make you feel good inside for many years to come.
Posted : February 17, 2010 8:14:03
Traditional Banks Thwarted from Leading Recovery
Things are getting a little testy…
And it’s still pretty dark over the horizon. I recently had an experience that seemed to shine new light on how stress (and in this case I’m talking about the stress of a crippled economy that plunders company bottom lines and stellar reputations) can cause even the most stable of people and industries to get a little frustrated, and sometimes even downright upset.
My experience was at one of our own events called Acquire or Be Acquired, a conference for bank CEOs and directors built around ways to grow your bank. The conference name may sound a little harsh, and perhaps it is, but the reality is that the U.S. has some 7,000 banks serving its population—much more than most other countries. (Canada, for example, boasts eight.) This is the 16th year of the conference, and we had more than 500 attendees eager to discuss how banks could work themselves out of the most dreadful banking environment since the Great Depression. Now, first let me make it clear that the bankers who attend this conference are not from money-center banks that contributed to the subprime debacle, taking what we now know are senseless risks that sent our economy in a nosedive. The bankers who attend this conference are those who serve our local communities—about one-hundredth the size of Goldman, Merrill Lynch, or Citibank. But to the outside world, they are being painted with the same broad brush, as President Obama continually tells the American public what bad people the bankers are. I really wish Mr. President would delineate between the investment or money center banks and community banks. They are totally different animals yet they are getting hammered together.
I apologize for digressing…
What was significant about the conference is that Bank Director magazine, Corporate Board Member’s sister publication, thought it would be useful to bring the banking regulators and the community bankers together with meaningful dialogue to see if they could make some improvements in the turnaround process. Sounds like a good plan for detente, especially if you understand the challenge. Here are the issues, in a nutshell.
1. Community banks have money to lend and would like to do so, to improve their bottom line.
2. President Obama is chastising the banks for not lending more, and he is telling the American people that bankers are selfish bums.
3. The regulators (FDIC, Fed, Comptroller of the Currency) are appointed by the government to oversee the banks safety and soundness. (not investment banks per se)
4. The regulators fear the worst in this economy and won’t let banks make loans without stipulating conditions that are unrealistic, therefore no money goes out the door.
5. So the administration criticizes the banks, while at the same time throwing the wet blanket of regulation over them, and preventing community banks from making progress.
A good end of this story would have been to report that everyone understood the others’ challenges and a lot was accomplished at this conference. Obviously the headline of this blog would be different if that had been the case. Instead, here’s what happened: the bankers ripped in to the regulators and the regulators defended themselves and their actions in these terrible times, which only made the bankers even more upset.
This whole scenario is really a mess, and this session did nothing to benefit the situation. I am doing my best to support President Obama and his administration because he is the president of our country and the people’s choice, but something has got to give if we are going to get commerce moving forward with the banks that really serve our communities. I understand why community bankers are frustrated, and I appreciate how hard the regulators’ job is to solve the entire industry’s problems as the whole country looks on. I hope the best minds in the country will soon recognize the gravity of this situation and take some balancing action. I was once a community bank president and can only imagine the challenge of the job today. At our conference, I saw the problem first-hand and wouldn’t bet there’s a solution is right around the corner. Sorry to be the bearer of bad news, but I think Bernanke just saw his shadow.
Posted : February 2, 2010 8:13:34
Many of you saw in the paper that RiskMetrics was rumored to be for sale, which might well have some extended ramifications for corporate directors but actually wasn’t the most significant news to impact today’s boardrooms. That news is RiskMetrics’ announcement (formerly known as ISS) that it will stop accrediting board education programs as of March 1, 2010.
This is pretty significant, since RiskMetrics has been accrediting director programs since 2001 making the accreditation a part of its Corporate Governance Quotient (CGQ) rating system. The fact that it had the power to recommend board or director withhold votes to the 1,500-plus institutional investor client organizations it advises when voting shareholder proxy ballots made most boards and directors aware that there was a “premium” that they attend board educational events accredited by RiskMetrics. When ISS (Institutional Shareholder Services) launched the accreditation program, it felt that education that met its guidelines offered exposure to broader debate around corporate governance best practices. As most of you know, Corporate Board Member is a significant provider of boardroom and governance education and welcomed the review of our boardroom programs. We were always happy to report that RiskMetrics and its predecessor, ISS, viewed the quality of our programs in a very favorable light.
Why the RiskMetrics change you may ask? Well here is their stated reason:
“Over the past several years, we have seen tremendous improvements in the quality and quantity of such programs. Director education programs are also becoming more specialized, looking at finance, risk oversight and other aspects of the director's job in addition to corporate governance. Recent changes in disclosure requirements will provide investors with more detailed information about the qualifications and backgrounds of board members. In light of the increased professionalism and specialization in Director Education, we have decided that there is no longer a need for us to accredit such programs.”
RiskMetrics went on to say that it will soon be introducing the successor to CGQ, titled Governance Risk Indicators™. Governance Risk indicators presents a new, transparent global methodology for rating corporate issuers on their corporate governance structures, based on best practices as encapsulated in RiskMetrics’ benchmark policies. Market participants will also be able to identify and suggest improvements to the methodology, which will be evaluated annually in parallel with RiskMetrics’ policy updates. As it is closely aligned with the organization’s proxy voting policies, the new rating methodology does not include a factor related to director education. Find more information on Governance Risk Indicators.
So what does all this mean and should we be happy, sad, or indifferent? Well, I assume if you’re a corporate director then you are mostly happy. None of us like being told we have to do something, so obtaining some relief from the CGQ is liberating. At the same time, none of us really knows what to expect from the SEC’s new qualifications and experiences disclosure, which might eventually evolve into a similar emotional weight. Some directors, who really value the focus that ISS brought to getting educated in the boardroom will feel like I do—a little sad.
With all the things that RiskMetrics/ISS did that got on companies’ nerves, their focus on education was a good and important thing they championed. This may sound selfish, being in the board education business, but I will miss its commitment to quality education. I have a fear that every opportunistic provider will now hang his or her shingle out as an expert board trainer or, worse yet, we will see numerous groups creating certification programs that lack merit and/or muscle. Frankly I hope the stock exchanges or the SEC will consider how best to fill this void.
To RiskMetrics and ISS, its predecessor, I say thanks for the moving the snowball down the hill for the last nine years and we’ll do our best to take it from here. At the same time, I know you’re not just walking away from the importance of board education, even if it is not a direct part of your new Governance Risk Indicators. Good or bad… you just weren’t created to act that way!
Posted : January 18, 2010 7:51:50
One of the areas of focus that was part of the SEC’s recently expanded Governance and Executive Compensation Disclosure Rules that go into effect on February 28, 2010 (http://www.sec.gov/rules/final/2009/33-9089.pdf) was the requirement for companies to disclose whether, and how, the nominating and governance committee considers diversity in its board composition. I must admit that while I wasn’t surprised that there was some kind of disclosure related to board composition, I think what we will see in this year’s proxies will be very interesting.
First let me lay some groundwork that the issue of board diversity is not new to us. Last May, Corporate Board Member hosted a Boardroom Diversity Symposium designed to educate diverse (gender and ethnicity) board candidates about what it takes to serve as a corporate director from the perspective of existing board members. In addition, we invited U.S. publicly held companies’ nominating and governance committee chairs to come and network with these diverse candidates in the hope that those who felt there was a shortage of qualified minority or women directors could be able to network among this talent pool. We ended up with an audience of approximately 130 attendees—the majority of whom were candidates and existing diverse board members. We had very few nominating and governance chairs in attendance, even though Corporate Board Member’s annual What Directors Think research conducted jointly with PricewaterhouseCoopers shows that almost 40% of current board members feel there is a shortage of qualified diverse candidates. This lack of standing committee chairs was unfortunate, because it created a missed recruiting opportunity for many boards who feel challenged to find the right diverse candidates. To complete my background on this topic you may want to scroll down the The Board Blog sequence to May 2009 and read about the event and some companies that gave eye-opening presentations to a very receptive audience.
So with all that background and some serious efforts on Corporate Board Member’s part (including forming a Diversity Council in 2009) to bring a bright light to this important topic, why do I think that this disclosure will be so interesting this year? First, there is no SEC-mandated definition about what board diversity is or isn’t. The SEC mentions factors that boards can consider such as: professional experience, education, race, gender, or national origin. Most of us link ethnicity and gender to the term “board diversity,” but the expanded SEC rules should create some creative board diversity proxy disclosures.
Second, I wonder, after reading the disclosure language, if it wouldn’t be better for boards to have a formal policy on diversity going into this exercise. I say that because if you do, you will need to describe how the nominating and governance committee implements and assesses the effectiveness of that policy. It seems to me, if you aren’t very effective that it would just be better to have a statement on how the nominating committee looks at diversity in board composition and save being scrutinized on its effectiveness. The point here is that you will have to define it, and if a formal policy exists, you will have to defend it.
All that being said, and knowing the background of Corporate Board Member’s support of diverse boards, I feel it’s important to reiterate my stance of how diversity contributes to being an effective board. A simple answer might be to review the experience of Denny’s Restaurant chain. A recent book (The Denny's Story: How a Company in Crisis Resurrected Its Good Name and Reputation by Jim Adamson) written about its experience of being insensitive to diversity throughout the organization, outlines how their lack of understanding about the importance of diversity led to well-publicized lawsuits. Denny’s remarkable turnaround and current insight into why a diverse board is important and how it revitalized the company and staff tops any lecture or research we could offer on this topic.
I like to look at board diversity this way… One of the most important attributes I want from my collection of board members is diversity of thought. Diversity of thought at the board level will mean that there is more sensitivity to a variety of risks; that there is a better understanding of markets, employees, and suppliers; and it positions the board to be more helpful in a multitude of situations that many management teams might not be familiar with (a la Denny’s). I support the SEC in the sense of agreeing that how we get there and how we define diversity can and should be different for every company, but just the mix of markets/customers, employees, and suppliers suggests that board composition should translate into gender, race, and national origin representation.
In closing, diversity, particularly on the board level when inviting someone into the “club,” is still a very difficult topic for many directors and companies to discuss openly. Yet, we have made progress over the years, and it seems that this disclosure rule will push the envelope further. Good luck with your disclosure statements and quest for diversity of thought. As I said… this proxy season will be interesting!
Posted : December 29, 2009 11:37:12
Just as we are debating the merits of the SEC proposed disclosure of director and nominee qualifications for board service in the blog below, the SEC formally adopted its expanded governance and executive compensation disclosure rules on December 16. The bad news is that abuses by those who embellish their bios as well as the tendency for those reading resumes to overanalyze what is written will continue. So we’d first better prepare ourselves to overcome those challenges. The good news is, even though I still view the formality of the qualifications exercise as a waste of human assets, time, and money, the act of requiring boards to give careful thought to who serves and what skill sets they bring to the board can only be a positive to improving boards overall.
I would have preferred that director qualifications not be regulated, but I understand that too many outside groups felt that with all that has occurred, director selection and board composition must be flawed—so much so, that the withholding of votes and board evaluations would not be demonstrative enough to provide the kind of change the public and Congress demanded. So we find ourselves with a bunch of new disclosure rules that it appears will be in affect for the 2010 proxy season. I plan to address these piece by piece or disclosure by disclosure over the next several blogs. We will also be covering them in our “This Week in the Boardroom” show as well on www.boardmember.com. If you can’t wait and the excitement is just too much, you can go to the SEC website and read it for yourself. For now, here is one excerpt I wish to address further:
“Under the proposed amendments, a company would be required to disclose for each director and any nominee for director the particular experience, qualifications, attributes or skills that qualified that person to serve as a director of the company, and as a member of any committee that the person serves on or is chosen to serve on, in light of the company’s business. In addition to the expanded narrative disclosure regarding director and nominee qualifications, the proposed amendments would require disclosure of any directorships held by each director and nominee at any time during the past five years at public companies and registered investment companies, and would lengthen the time during which disclosure of legal proceedings involving directors, director nominees and executive officers is required from five to ten years. As proposed, this expanded disclosure would apply to incumbent directors, to nominees for director who are selected by a company’s nominating committee, and to any nominees put forward by another proponent in its proxy materials.”
One of the things that you get to do on the SEC’s website is to read the rationale that went into the final regulations. I’ll never be swayed that this final announcement isn’t a case of the pendulum swinging too far, but once again I’m bolstered by the meaningful thought process that the SEC exercises in having to weigh the various interests of Congress, American businesses, and outside investors. It’s a difficult position. The SEC did not rule on the early proxy access proposals, which tells me that even more thought is being given to that issue, to make sure those delicate rule changes don’t have unintended consequences that could be damaging to our corporate structure over the long term. In the end, I wish that the final announcements might have been different, but now it’s time for each company management and board to take the regulations and make prudent disclosures. Let’s hope my fears are not founded and the end result just creates a more thoughtful nominating and governance committee. Investors have made a big step forward in getting heard and prompting action. Let’s see what happens next.
Posted : December 9, 2009 1:42:11
One of the published SEC board of director proposals titled “Proxy Disclosure and Solicitation Enhancements” put out for comment this fall has a section labeled “Enhanced Director and Nominee Disclosure,” which is crafted to improve investors’ ability to evaluate an existing board’s composition and outlines qualifications disclosure requirements for new board nominees (http://www.sec.gov/rules/proposed/2009/33-9052.pdf). Specifically the proposal states:
"We are proposing that, for each director or nominee, disclosure be included that discusses the specific experience, qualifications or skills that qualify that person to serve as a director and committee member. The types of information that may be disclosed include, for example, information about a director's or nominee’s risk assessment skills [emphasis added] and any specific past experience that would be useful to the company, as well as information about a director's or nominee’s particular area of expertise and why the director's or nominee’s service as a director would benefit the company at the time at which the relevant filing with the Commission is made. This expanded disclosure would apply to incumbent directors, to nominees for director who are selected by a company’s nominating committee, and to any nominees put forward by other proponents. Regardless of who has nominated the director, we believe a discussion of why the particular person is qualified to serve on the company’s board would be useful to investors."
There are several more paragraphs outlining the look-back time period and how to disclose any legal proceedings but I spared you because I am sure you get the picture. Personally, I think this governance or investor improvement exercise is a waste of time and has the potential to be grossly misunderstood or abused.
But to support my theory, I first must ask you to buy into the following assumptions. If you can’t concur with these assumptions, I suspect that you will not agree with my hypothesis.
- History tells us that there is no direct (or indirect) correlation between who is a great director behind the boardroom doors and who is not a contributor at board meetings based on how meaty their bio looks or how accomplished they might be in their profession.
- If my company goes as far in this qualifying process as to identify me as a key contributor to the audit committee with superior accounting and risk management skills (as asked), and then I choose to leave the board, might one surmise that the audit committee is weaker by my departure unless an equal or better qualified audit candidate takes my place.
- Any corporate secretary, well-versed securities or proxy lawyer, proxy solicitor expert, or good public relations guru will be able to make a director bio or qualifications paragraph look fairly impressive. Especially if you add in the board education one attends coupled with the professional accolades that probably contributed to getting them the board seat invitation in the first place, then no one should be surprised that corporate spin doctors will make most directors appear infinitely qualified. (whether they are or not)
So assuming the above, where does that leave us if this coming January when we find ourselves with the SEC requirement to disclose director qualifications starting with the 2011 proxy season? The truth is, I’m not really sure. If I look at the potential extremes, it either leaves us with a further* costly proxy disclosure exercise that neither the retail or institutional investors take seriously or bother to read and hence is rendered somewhat worthless, or at the other extreme, it might be a mass overanalysis of each director on the merits of his or her proxy qualifications bio, which could lead to additional criticism of the nomination process or even to board ineptitude lawsuits.
I don’t want to this blog to sound like I am so pro-company that I can’t weigh logical arguments on this issue. I am supportive of Mary Schapiro’s efforts in changing the status quo and lord knows there are a lot of boards that need a push to change. But I am very skeptical on what the positive end result will be of this proposal and the subsequent yearly exercise.
Maybe my biggest fear is that this is just another burden to America’s public companies and another deterrent to any private or foreign company wanting to list in the ole USA. Our country’s financial debacle has virtually greased the skids to permit seemingly any pro-shareholder proposal to be advanced and discussed regardless of it long-term merit. If you’ve ever served on a board and witnessed the dynamics of what goes on behind the closed doors of a corporate boardroom, you know the pendulum has swung too far on this proposal.
*(I say further to go along with the thousands or millions of dollars a company might spend on proxy solicitors to ensure the company slate has the best chance to be reelected, because how would you feel as an incumbent director if you know you will have X-number of no votes from RiskMetrics due to a past sin?…Is your company going to sit still and let its current directors get voted off the island because they instituted majority voting and because Proxy 452 will no longer let brokers vote discretionary shares for the election of directors? I Think Not!)
Posted : November 24, 2009 9:17:29
Corporate Board Member just finished hosting its Director Peer Exchange in Washington, D.C., and we came back with some great experiences. After five years of holding peer exchanges in NYC just for committee chairs, this was the first time we held a peer exchange open to all board members who sit on committees, and it proved to be just as beneficial to the committee members as it has been to the chairs. In addition, a new feature at this event was a session for chief executives to discuss CEO/board relations. I facilitated that discussion, and can assure you we had plenty to talk about, starting with everyone’s feelings about the various legislative proposals to mandate the splitting of the CEO and chairman roles. (See my two earlier blogs on this issue: Will Mandating an Outside Chairman Solve Anything? and Mandating Split CEO/Chairman Roles – Part II)
Actually, most of our time was spent discussing the CEO’s relationship with the chairman or lead director, and during the discussion summary period, probably the most telling thing was that everyone in the room agreed that this relationship was unique to each company, and therefore, didn’t fit into any “cookie-cutter” solution or best practice mandate.
For example, we discussed founders who initially served as CEO/chairs who later moved to just chair but still remained very active. There were other situations where the existing CEO requested that the previous CEO sit on the board even though he or she had retired. We also discussed family situations, where the family members still owned a majority of the stock and one or several members still served on the board. We even heard about an entrepreneur who, after holding the various executive chairs, finally had to move his office out of the headquarters to emphatically demonstrate that he had officially handed the reins over to the CEO. We heard about difficult cases where retired CEOs were disruptive to the board governance process when they still occupied a board seat after officially leaving the company, as well as positive stories where those subsequent relationships were very productive.
I went into the peer discussions with the strong feeling that some legislation will be enacted regarding the CEO/chairman roles and contemplating how really onerous it would be if the role split was actually mandated. During the course of the morning, I must say that my eyes were opened wider.
The more I take the time to step back and really look at the ramifications of the proposed bills by Congressmen Schumer, Frank, and Dodd, the more frustrated I become that the governance and boardroom changes that are being proposed are not strategic, but are, unfortunately, simply political. What is particularly sad about that is we have seen signs of a much different and improved governance tone in the boardroom today. A majority of corporate directors are engaged and we have some previous regulatory and legislative changes to thank for that. The fear is that some of the proposed legislative changes will swing the pendulum too far. I understand that this is on the heels of a terrible financial debacle that happened right under the noses of some of our most visible companies and their boards, but it won’t help the country to recover if we create a corporate board system where the best candidates won’t want to serve and tomorrow’s new public companies won’t want to list in the U.S.
Memo to Schumer, Frank, Dodd and Schapiro: A one-size-fits-all governance solution may create more problems than it solves. We all believe some change is in order...so let’s make sure it addresses the true problems with our system and isn’t just a way to appease the angry mob for the moment.
Posted : November 6, 2009 9:56:40
It has been an interesting several weeks for anyone who is curious like me about the inner workings of corporate law and its effect on the boardroom and governance as a whole. First, we had Stephen Lamb as our knowledge partner on “This Week in the Boardroom” discussing the liability of serving as a director on one of today’s public company boards. Stephen is the former Vice Chancellor of the Delaware Court of Chancery and is now a partner with the law firm of Paul, Weiss, Rifkind, Wharton & Garrison LLP. Then yesterday, I had the pleasure of partaking in some governance banter with William Allen, the former Chancellor of the Delaware Court of Chancery and Director of the Center for Law and Business at NYU. Bill serves on Corporate Board Member’s Academic Council and visited This Week in the Boardroom as a guest on our education segment.
In the past, Bill and I have had what might be described as some emotionally charged discussions about when boards should seek outside advisors if they are facing a critical board decision that could significantly affect a company’s performance and shareholder value. Now I’m not talking about an M&A transaction or a FCPA lawsuit, where outside counsel and/or forensic investigators are a must. But say there is a billion-dollar capital expense that involves technology that forms the basis for a new company direction, or a proposed $100 million off-balance-sheet transaction that is not standard in the industry. In this very litigious and ever more transparent bubble in which directors must govern, is there any guideline, both “liability-wise” and “health of the company wise,” that says “our board doesn’t have the expertise in this area even to ask the right questions, so should we get professional help?” And even if you forget the personal liability issue, many fear the company or director reputational blemish more than the remote chance that you would be personally liable.
Actually, Bill and I agree on most of the foundations from which to make that decision. Those are:
1) Start with selecting and trusting the right management. If you are on solid ground with trusting the CEO and key officers, you can feel very confident with the background that they provide for important decisions.
2) You can’t hire outside advisors for every decision the board doesn’t feel comfortable with. Yes, you have the duty as a director to be informed and ask questions, but the law does provide for a board to make mistakes if it makes an honest effort to be informed. (Again, that may not help a reputational disaster, but many of those are hard to predict anyway and you just can’t tiptoe around the boardroom and expect to be a good board.)
3) You are on the board, at least partially, because of your good judgment. Not much these days is really black and white, so using one’s experience and listening to your gut is often required.
Despite our agreement on the above, we had trouble pinning down when the risk magnitude of the decision requires a board member to ensure (even past management’s information) that he or she is supporting the right recommendation or direction and not potentially putting the company in financial or reputational peril. After 20 minutes of debate we jointly acknowledged that while those situations do occur, there is no way to create a standard or guideline that covers when to seek paid professional advice to help with board decision making.
Furthermore, as we all know, hiring outside advisors is no guarantee that you will have solved your informational gap and will blissfully walk away fat, dumb, and happy. As stated above, you would be equally foolish not to use professional advisors in many governance and operation scenarios, but deciding when it makes sense is not something on which this blog will be able to give you absolute guidance. My best advice is to recount a discussion a director had with me in my bank leadership days after we recommended to the board that we truncate customers’ checks and then just send them an electronic listing without the actual checks. His words were, “This sounds like a giant dissatisfier for our customers, but I trust that your team has thought this through.” Fortunately, for us, we had!
Posted : October 27, 2009 3:23:34
I’m doing my best to understand what is evolving in front of our very eyes with respect to controlling compensation or, in some cases, controlling the risk of excessive executive or incentive compensation. The Federal Reserve has just put a new proposal out for comment that would mandate guidelines for all banks on what is “sound” incentive compensation policies. We’re also recently seen the Obama administration through its Pay Czar Kenneth Feinberg cut base salaries of executives from seven companies’ that have benefited from our tax dollars’ rescue program. And while I’m sure the general public is applauding this hard stance, I sit here very worried about what the long-term ramifications will be by either of those actions.
Immediate questions are:
- Will this mean the very companies that need the best minds will now lose their top talent, particularly talent that has been cultivated for many of the corporation’s key top jobs?
- Are we putting any of these companies at a disadvantage versus their competitors at just the wrong time and, in essence, sending them into a dreaded death spiral?
- What about a company, or worse, a foreign company that was giving consideration to listing or going public on one of our esteemed U.S. exchanges? Does Sarbanes-Oxley and the new compensation rules drive valuable listings away from the U.S. business environment?
I honestly don’t know the answers to the above questions but they are real concerns. A crystal ball would certainly be helpful so that we could eliminate all us “Chicken Littles” who are warning that the sky is falling. Or maybe the best we can hope for is that when we see signs this might have been a long-term mistake, that we are confident enough to man-up and make the appropriate changes to make things right. The true growth of the U.S. economy may depend on it!
Now, as promised in an earlier blog, here are the responses to the questions asked during the Mike Halloran/Harvey Pitt session at Corporate Board Member’s Annual Boardroom Summit earlier this month. We only have Mike’s answers so far due to Harvey’s busy schedule but we want to get those to you as quickly as possible. Enjoy!
Q: When do compensation programs cause "material risks" to a company?
Mike Halloran: When they are structured to produce short-term performance(e.g., immediate revenues, fees, bookings) in a business whose performance is properly measured in terms of longer term performance(bookings of loans to go bad over five years, fees on deals that result in liabilities in connection with the deals over a few years,etc.). American business should ask itself over what period of time its performance should be properly measured and should structure its compensation, particularly the incentive component, to match that.
Q: NYSE said that biggest challenge today is to rebuild trust in our capitalistic system. They (NYSE CEO Neiderauer) also said that trust takes a lifetime to build up but it can be destroyed in a day. In the wake of Madoff... how can the SEC build up trust again?
Halloran: This is of course, a personal issue for me, because I was at the SEC during 2006-2008 and never even heard the name Madoff even though the entire Division of Enforcement reported up to me for the chairman. The SEC in my opinion is already building back up its reputation under Mary Schapiro; the Enforcement Division is ever so aggressive. However, to be credible, the SEC needs to figure out a way to bring in more experienced hands at various levels in various offices—even by bringing in retired people from the Street. If you read the Inspector General Report on Madoff, you will see one of the major problems is that the Enforcement Staff in the New York office under Mark Schoenfeld simply did not understand the type of index and derivatives trading in which Madoff was engaged, did not understand the markets in which he traded, and did not know what leads to pursue.
Q: The London Stock Exchange mandates "nominated advisers" (NOMADS) for certain list companies. Does this make sense for U.S. companies?
Halloran: I could be wrong, but I thought it was only the AIM part of the London Stock Exchange that required NOMADS. These are companies that elect to do an IPO on the AIM rather than the LSE—they are usually smaller companies with a limited following. The purpose of the NOMAD is similar to the purpose of having an underwriter in the U.S. to underwrite your IPO—that underwriter is responsible for due diligence obligations on the company under Section 11 of the Securities Act of 1933. My understanding is that the NOMAD system is designed to be, in effect, a substitute for that. But so far, I am just talking about IPOs. If the asker of this question is saying that AIM or even the LSE requires NOMads on an ongoing basis for listed companies, even after the IPO, I was unaware of that and really would like to learn more about it. I would think that if it were required on an ongoing basis, that it could be similar to a market maker for U.S. over-the-counter companies, but I am not sure.
Posted : October 13, 2009 8:11:11
First, I want to thank all of you who took the time to comment on the previous blog, by writing, calling, or approaching me at our Annual Boardroom Summit in NYC. Obviously, this is a much-debated issue and your feedback was very interesting and appreciated. In light of that, I felt compelled not to abandon this topic yet, since there were several folks that might have misunderstood my position.
The title of the last blog was “Will Mandating an Outside Chairman Solve Anything?” My comments were mainly directed toward the issue of mandating this decision, as well as the important point that title changes alone won’t provide the moxie a board needs to properly perform its duties.
What I perhaps wasn’t clear on is that I don’t oppose splitting the titles—and in fact, I support the separating of the positions when the opportunity presents itself and when there is at least majority agreement among the board members that it will be a positive move for the company. That’s not to say it’s the right decision for all companies, but I do believe in the long run that the presence of a outside independent chairman who doesn’t abuse the position (i.e., no company headquarters office or permanent staff) will provide a better corporate governance environment in which the company can be successful. However, as stated in the previous blog, if you think it is the short-term answer to a board’s problems, then you’re just kidding yourself.
In the course of doing research for statistical or bottom-line evidence that would support either side of this argument (you may recall none was found), I did come across an “educational campaign” organized by the Yale Millstein Center made up of over 50 corporate leaders, investors, and governance specialists whose charge it is to urge companies to bolster board oversight of management by splitting the roles in today’s corporations. It is called the “Chairmen’s Forum” and is headed by the retired vice chairman of General Motors, Harry Pearce, who currently chairs the boards of Nortel Networks and MDU Resources. There are several former CEOs like Harry Golub (American Express) and Stephen Wolf (UAL Corp.) who would be interesting to hear from on this issue, knowing their experiences on both sides of the table. My plan is to reach out to Harry Pearce or the Chairmen’s Forum and invite them to comment on splitting the roles in this blog. Like my experience of being in both roles, I value their opinions, and all interested parties should listen to why their experiences have led them to feel so strongly about this issue.
The reality is that corporations will continue to move toward splitting the roles, so no matter how you feel about it, it won’t be long before 90% of the Fortune 500 companies will have separate CEOs and chairpersons, even if it isn’t legislated or regulated. So don’t fight too hard for the right to choose whether the title will be lead director or chairperson, because there are more important issues pending and on the horizon. Like, say… proxy access and the election of directors for one!
And last, for anyone who was looking for the answers to the questions that Harvey Pitt and Mike Halloran didn’t have time to address at the Annual Boardroom Summit last week, I want to report that we hope to post some of their responses in the next Board Blog. And by the way, if you missed their session at Corporate Board Member’s Boardroom Summit in NYC, you missed one of the best panels we have ever heard on regulatory issues that affect the boardroom. Thanks Mike and Harvey for a great show.
Posted : September 28, 2009 12:27:05
The quick answer to this blog’s headline is “Yes.” It will satisfy the interested parties who feel that this is a big issue that will improve board governance. There are governance issues… and then there are meaningful governance issues. Mandating the split of the roles of CEO and board chair is just a governance issue.
On this topic, there is plenty of rhetoric, both pro and con, to help us get a good night’s sleep for months to come. The Corporate Library, a compensation and governance research firm in Maine, says dual-titled CEO/chairmen “tend to have less shareholder-friendly governance practices.” Likewise, folks at the Millstein Center at Yale are using their voice to encourage NYSE and Nasdaq to alter their listing requirements to mandate that when a dual-titled CEO leaves that post through retirement or other means, the roles must be split. From the other end of the spectrum, the Wharton Center for Leadership and Change Management states that after reviewing available studies separating the CEO and chairperson roles, it believes the split “has no bearing on corporate financial performance.” What’s a prudent capital markets investor suppose to believe? The fact is, investors really don’t care about who holds what titles as long as the company achieves long-term (or sometimes short-term) shareholder value growth. If splitting the titles means better performance and a higher stock price, than split away! Will it prevent fraud or mismanagement… right now I don’t think so, since two of our most storied corporate debacles, Enron and WorldCom, had separate CEO and chairman roles.
So as not to be left out of this so-far baseless debate, I too have an opinion to add to the fray. My less-than-expert opinion comes from my service as a president and director of a public company as well as my years of conducting director retreats and board evaluations for many various-sized corporations. It is as follows:
Do whatever you want with the splitting of the CEO and board chair roles, because it technically won’t change a thing.
Here’s why. If you as a board didn’t take command of your duties before you had an outside chair, then why would you think a mere title change is going to make things better? The reality is that the CEO and/or GC/corporate secretary completes most of the agenda, addressing what needs to be covered at the next meeting. Someone in the position of board leadership (titled or nontitled) should review the agenda and ensure that appropriate issues are on that list. As a director, I don’t need to be the board chair or lead director to make sure my board reviews the agenda and performs its other duties correctly. Furthermore, don’t ask me, or any other competent director candidate for that matter, to serve on a board if it isn’t going to fully perform its function of representing the shareholders—whether that entails requesting (or sometimes telling) the CEO what needs to be on the agenda, or exercising any other right I have as a corporate director overseeing the company’s operations. Hello…..this is not about titles… this is about action. So if your lead director couldn’t do it before, what makes you think this new title will provide him or her a new suit of courage to become more involved? So go ahead, mandate the split of the CEO/chairman roles and see what it truly gets you. Maybe I’ll be surprised and this whole scenario will mimic the Wizard of Oz when the cowardly lion was given a badge of courage and off he went to rule the forest. Come to think of it, forget mandating the title split—maybe we should just follow the yellow brick road.
One last point that sticks in my craw. These debates seem to promote a “we” versus “they” mentality, often pitting management against the board in a struggle over control. In my mind, both parties need to look at any governance challenge as an “us” issue. The best boards at the best-performing companies have directors and managements that work well together, pulling in the same direction. Too many times, outside activists paint CEOs as greedy and controlling. I’m not naïve enough to think those CEOs don’t exist, but they are clearly a minority. If both sides respect each others’ duties and roles, I think some amazing things can happen to the company’s bottom line and stock price.
Posted : September 18, 2009 8:40:37
As we prepared for the next “This Week in the Boardroom” program (thanks to everyone who has tuned in, we’ve had great feedback), we debated several topics on which to focus, one of which was CEO succession. If you buy into the theory that one of the most important and foundational duties of the board is to select and retain a highly competent CEO to lead the company, then CEO succession is one of the most critical tasks of the board. Yet if you look at the board research that Corporate Board Member (in conjunction with PWC) and other governance groups have done, it consistently ranks as the duty directors say they fail at the most. And I’m not talking about a handful of disappointed directors—for the last 5+ years, almost 45% of corporate directors have said they are unsatisfied with their management succession plan. No other important governance function gets a lower grade than succession.
Why do directors beat themselves up year after year without showing any statistical signs of improving the process? Well, I’m not 100% sure, but I do have theories that are supported when we specifically asked directors why. First, no CEO, including me, wants to accept their mortality or thinks that they are going to fail or get hit by a bus. So it’s not on their radar. Second it is an awkward topic to bring up to the CEO, especially if you just brought a new one on board. Most directors I’ve talked to say it’s not a meeting agenda item or a planning retreat topic, and many feel that they’ll handle it “when the time comes,” most specifically, when the CEO is nearing retirement. Nice idea, but most of us recognize that it doesn’t always work that way, and if you’ve ever personally witnessed the difference between an organization that has a succession plan versus one that just wings it, please let my stock holdings be in the one’s that have a plan, because the shareholder value result from unexpectedly losing a CEO can be very hard on a company and its operations.
One company that can be the gold standard for why CEO succession planning by the board is important is the global burger giant McDonalds. In 2004 its directors were faced with the sudden death of then-CEO Jim Cantalupo and they immediately appointed insider and COO Charlie Bell as chief executive. Just 16 days after that appointment, Bell was diagnosed with cancer and within months was replaced by insider Jim Skinner. All this happened without a hitch and McDonalds’s board won the respect of a lot of board watchers and investors around the globe.
So it’s an uncomfortable and yet critical task for a company and its governing board, yet it is one in which a self-confident CEO can step in and take charge. Now I’m not going to propose that the CEO take ownership of selecting the next chief executive because I truly think that is the board’s job. But CEOs, if you want to help the company, let the directors know at one of the next board meetings or at the annual planning retreat that a viable succession plan is needed and that you’re ready to help. I assure you this gesture will be much appreciated and well received by the board. Boards that plan for succession will find themselves not only with the ability to make quick and sound succession decisions but in many cases, they will find they spend a lot less on CEO compensation packages than in situations where they conduct a harried search for a new leader.
So CEOs: Help the board feel less awkward and do what is good for the company and shareholders. Directors and boards: Follow what Nike has told us for years… Just do it!
Posted : September 9, 2009 7:22:08
I have been hearing from a lot of people after my last blog who have thanked me for simplifying the mystique around the business value proposition of social networking. Well, now that I have your attention on the boardroom technology revolution, I’ll take it one step further and talk about digital publications. First, though, I must make another admission that shows I am not terribly techno-savvy, namely that I do not own a Kindle (the digital gadget that is striving to replace hard-copy books and magazines). I’m amazed, however, at the number of people in their 50s and over that do use the device. I see people all over using these hand-held screens to read newspapers, books, magazines, and just about everything that currently comes in print.
So using that as a segue, I’m happy to report that Corporate Board Member magazine is now available in digital form. Currently we send the digital edition to about a third of our readership who receive the digital issue as a bonus, in case they want to read or reference an article when the hardcopy may not be available. If you haven’t seen this digital version yet, you should—if for no other reason than just out of curiosity. If you haven’t checked it out yet, just drop us a note with your email and we’ll gladly send one your way.
The bottom line is that even for a tech-challenged 59-year-old, the digital edition is very cool. You can turn the pages just like a physical issue and even click on links or answer poll questions. While I don’t see the publishing industry changing overnight to pure digital, seeing this edition gives a decent glimpse into the future of publishing. Right now, I’m not ready to give up my hardcopy altogether, but digital is a great tool when I’m on the road.
Another digital venue that Corporate Board Member is jumping into with both feet is on-demand webcast programming. For busy executives who find it hard to view television or want something that narrowly focuses on their existing need, (like board information) on-demand programming is the ticket. Starting Friday, September 11th Corporate Board Member will be launching “This Week in the Boardroom,” a weekly on-demand webcast series designed to change the way that directors receive information and prepare for their next board or committee meeting. That’s right, we are now providing a free, weekly program that will cover legislative and regulatory changes, boardroom events, and other governance issues that impact the strategic and operational decisions that boards and C-suite executives face every day. The weekly webcast is being offered in conjunction with NYSE Euronext and with the assistance of PricewaterhouseCoopers, our knowledge partner for the program. We just successfully finished our trial run and starting this Friday (September 11) you will be able to go to www.boardmember.com and click on The Boardroom Channel to view This Week in the Boardroom.
In addition to current events, my first guest on This Week in the Boardroom is scheduled to be Duncan Niederaurer, CEO of NYSE Euronext. I promise you, these 20 minutes will be well worth your time to be better prepared for your next board meeting.
Digital magazines and on-demand web TV focused on a specific niche—what’s next? Maybe a wristwatch that will buzz for directors when their companies are taking undue risk. You never know. Stay tuned!
Posted : August 26, 2009 3:02:25
Let me start this blog with a full disclosure. I have Twitter on my Blackberry, but have no Facebook or LinkedIn personal account. I have at least considered LinkedIn, but was scared off by knowing that I couldn’t keep up with any other new communication task beyond what I currently have today, so why set myself up to disappoint or be rude? The only reason I have Twitter is because my tech guy put it on my PDA so I could see who was re-tweeting this blog. (More on that in a moment) Personally, I have never tweeted and find the Twitter home page question “What are you doing?” to be just bizarre. I know people really get a charge out of following a celebrity or friend who lets them know that they’re going to the movies or just bought a new car, but I just don’t have time to be cool. So for those of you that have found personal and professional value in the art of social networking, I applaud you. As for me, I’m a slow learner and have not found the holy networking grail yet. (Although some might argue this blog is just one massive tweet!)
Now, all that aside, there is something very enlightening about how social networks can push content and information out to millions of people that you truly want to reach and who are actually interested in what you are doing professionally. Example: People have signed up to follow Corporate Board Member by clicking on Twitter, Facebook, and LinkedIn on our website. (www.boardmember.com) Every time I write a blog or we post a new interview on the site, a “tweet” or a Facebook posting goes out to our followers so they can click through to view that new content. Just think about that for a moment. Every business should be happy as a clam to have followers. And to make matters more interesting, let’s say I quote that the most recent legal research Corporate Board Member does with FTI Consulting shows that regulatory compliance is clearly one of the biggest issues concerning boards and general counsels in the next 12 months. Not only do we tweet that information to our followers, but FTI Consulting now has the opportunity to “re-tweet” this information so all their followers can gain access to the content as well. Networking is indeed a great term for this phenomenon… although it’s dubious how “social” it is, because it’s anything but social when you consider these distribution capabilities.
I joked about Twitter/Facebook/LinkedIn in the opening but what I’m about to say is very serious. Every director needs to know about the impact that these networks will have on their business. And this impact can be positive or negative. It may well become a major reason why boards will need to make sure they have a blend of skill sets and are diverse about knowing how our world is evolving and their strategic initiatives need to change along with it.
Really want to know what I’m doing right now?...... I’m learning something new that will make me a more effective CEO and board member.
Posted : August 17, 2009 5:40:25
It’s actions that count, not simply policies.
I haven’t hit the topic of compensation for several weeks, and if someone related to the media doesn’t write about compensation every once in a while they get the “shakes.” In fact, I feel better already, just thinking how I could continue to fan the flames and get investors and the general public into a feeding frenzy about executive pay. Maybe I’ll be like one of those local newspapers and find a performance-to-pay calculation that makes every CEO in America look lame and then the headline can read, “No CEO in America is worth what they are being paid.” Sorry readers, I just lost it there for a second, daydreaming what it would be like to have that much unbridled power.
I do have something of value to say about compensation, and it has to do with making sure that the board provides oversight by “staying above the trees or viewing from 30,000 feet.” One lesson I learned coming up through the corporate ranks that I tried not to forget as president was that it really doesn’t matter what you say about your compensation structure, if you ultimately reward people for doing something different. Let me offer two examples that describe what I mean.
This scenario is very important for directors of global companies that have to worry about the Foreign Corrupt Practices Act (FCPA). If your company operates globally, it has a high probability of doing business in a third-world country that offers contracts by receiving bribes. Your company, however, has a strict policy that it does not pay bribes to obtain or retain business (and we know there are many good legal reasons for that, along with all the ethical justifications).
But consider this: One of the top division heads ends up with the year’s best performance and receives a huge bonus and promotion. Turns out he/she achieved that through payments under the table—a fact other division heads are aware of. What are the chances that one of those other sales heads will resort to similar methods to get ahead?
A bank president has repeatedly gone in front of his branch managers and expressed how important it is for them to get out of the branch and develop new business. In fact, new business development in their market area is their No. 1 goal. Yet at the end of the year, those managers who were praised, rewarded, and promoted were those who had a good branch audit and didn’t have any compliance violations. How long do you think it will take the other branch managers to limit their calls and start focusing on having a good audit review?
The bottom line is that compensation plans mold corporate behavior, and it doesn’t really matter what the CEO or board says if performers are rewarded by playing outside the rules. I promise you that the “actual” rules will be communicated and adopted much faster than any written or communicated policies once employees see how people get promoted or become wealthy. Directors should take the time to ensure that a compensation plan is structured to pay for desired performance, as well as making sure that it is administered correctly. This task is not easy, but it is still a critical duty for the board and comp committee. Remember: You are what you reward!
Posted : August 3, 2009 12:23:22
The proxy advisory firm wants your feedback. Go ahead, speak up!
You can’t do what RiskMetrics Group does as a proxy advisory firm and not ruffle a few feathers. Okay, okay, often it ruffles more than a few feathers, but it’s not like it’s going to disappear anytime soon, so it’s best to pay at least some attention to it if for no other reason than because blatantly ignoring its guidelines just may get you a withhold vote on your next annual meeting and election of directors. And with brokerage firms not being able to vote their “street name” shares without instructions (Proxy 452) and the proposed SEC election of director changes putting more power in the hands of institution investors, a withhold vote by a proxy advisory firm may well become a much bigger deal.
While all of the above is true and worth taking note of, this blog is letting you know that RiskMetrics wants your opinion on just what should be in its proxy guidelines next year. You heard me right… they want your input. If you go to www.riskmetrics.com you will see a survey called the Governance Policy Survey that lets you (corporate issuers) share your opinions about the 2009/2010 RiskMetrics guidelines. While visiting the website, you may be surprised to find all the other resources that are available to corporate directors. Its knowledge center, research, blogs, and other resources are chock full of relevant information for the interested board member.
I encourage you to take the time to complete the survey. It’s important that RiskMetrics gets feedback from sitting board members and senior officers. Now in doing so, I’m not promising there will be sweeping changes in next year’s guidelines, but I have had discussions with several of its powers that be who are genuinely interested in creating a better process for companies to be successful long term. Several years ago we (Corporate Board Member) wrote about how Institutional Shareholders Services (now RiskMetrics) was the 900-pound gorilla that, on occasion, seemed to bully companies into governance and boardroom changes. Today, I still see examples of where RiskMetrics’ policies take on a one-size-fits-all approach, penalizing companies that are truly trying to do the right and logical thing. (This one-size-fits-all challenge is a question on the survey.)
The facts are, you need to stand up and talk when you know you are right, and, equally important, you also need to reflect on RiskMetrics’ position, and try to appreciate that often companies and boards don’t realize the message they are sending shareholders and investors by their actions.
I hope this blog is not too wishy-washy because I hate to sound that way. My main point is to encourage you to give some serious thought to both completing the survey and embracing what RiskMetrics has to offer to make you a better director. Together we can work to ensure that logic will prevail as the proxy advisers develop new policies in these tumultuous times.
Posted : July 24, 2009 9:27:24
Under the label of celebrity business stories, many of you might have read that the SEC had brought insider trading charges against sports entrepreneur Mark Cuban. When he is not “Dancing with the Stars,” Cuban is known for roaming the sidelines yelling at opposing players and pumping up the crowd as owner of the National Basketball Association’s Dallas Mavericks. Well this story has a happy ending (for Cuban) so far, in that his lawyers have convinced the federal trial court in Dallas that he really didn’t do anything wrong with seemingly privileged information. Thus, pending any appeal, all charges are dismissed. While nobody should feel good about the facts that led to the charges, and you might call his escape “a technical loophole,” this insider trading spotlight does give me the window to discuss the topic.
When I’m addressing boards and, particularly, recently appointed directors, I always seem to get this look of confusion when I bring up the topic of insider trading. Oh I’m not suggesting that directors don’t know it’s wrong and that it is a punishable crime, but I do think that more than just a handful of public directors don’t fully get the connection that once you have privileged information that has not been released to the entire investing public, then you have “insider” information. That should be your trigger not to buy or sell the company stock. Insider information could come in the form of monthly financials (when your company only reports quarterly), knowledge of an acquisition, the company is being investigated for a fraud, or the fact that you’re about to have a poor earnings announcement. There isn’t enough space on this site to list all the particular issues that might constitute insider information. Hence the header to this blog: If you have to ask… don’t do it.
Most companies spend time with directors or set up internal rules with the general counsel so as to ensure that a board member doesn’t slip and get the company on the front page of the Wall Street Journal. There is also the option of setting up a 10b-5 pre-existing buy/sell plan, in which you predetermine dates where you will buy or sell the company stock regardless of its price at the time. Mark Cuban has the best lawyers that money can buy and loves the spotlight, particularly when he can “beat the government.” You on the other hand, should appreciate a low profile and not have great expectations of getting rich off the stock of the company on which you serve as a director. If it happens… good for you. If you push to hard for it too happen, then I might be writing about you next time!
Posted : July 17, 2009 9:49:44
This week, I had the occasion to review our past “What Directors Think” research that we conduct with PricewaterhouseCoopers each year, and I always pause when I see the results of one question we typically ask: Is there a director on your board you feel should be replaced? We first asked that question in 2002, and at that time, 32% of the director respondents said “Yes, one of our board members should be replaced.” Seven years later in 2008, 28% said “yes” to the same question, with the interim years averaging pretty much the same percentage. So on what grounds do nearly a third of board members feel someone’s exodus is warranted? Surveyed directors (50% in 2008) said the primary reason is that the director in question does not have a necessary skill set. The second-highest reason selected in the multiple choice was “the director is not engaged” (38% in 2008). I tend to believe that these responses just happen to be the only way on the survey of politely saying that the director isn’t qualified or not contributing anything to the board. The third and fourth most popular responses as reasons for a need for replacement are “the director has been on the board too long (age)” and “the director comes to meetings unprepared” (approximately 25% each in 2008).
It disheartens me a little, with all the advancement we’ve seen in board evaluations, and with all the shareholder and regulatory pressure to make sure all board members are contributing—as well as the fact that nominating/governance committees have gotten much more active—that in fact, we haven’t seen improvement in these numbers. I know, by the questions I receive as I talk with directors around the country, that replacing directors or asking them to withdraw their name from future nomination is a difficult and undesirable process. But the fact is, it is equally difficult having your company and board portrayed on the front page of the Wall Street Journal as a dysfunctional group of managers that missed an obvious industry market signal or drove shareholder values to new lows. On one hand, it’s good that directors recognize that change in board composition is needed, even if they are saying so only within the context of a confidential survey. But the bad news is, it doesn’t appear that tough decisions are being made to change board composition behind the boardroom doors. Granted, I know these research numbers don’t always paint a clear picture, but this is just one of about 10 other survey numbers that reflect directors’ reluctance to take steps to make their boards truly effective.
Undergoing effective board evaluations and having engaged nominating/governance committees are the solutions to improvement in this area, and as I said earlier, these areas have improved somewhat over time. Let’s hope that when the 2009 What Directors Think survey is published in the 4th quarter issue of Corporate Board Member, we will finally see some real improvement in these numbers. Boards need to man-up (and woman-up) and do what is right for the company and its shareholders and take steps to build the most effective board possible. I’m anxious to see if 2009 brought any real progress with respect to this one issue.
Posted : July 8, 2009 8:48:03
We can officially put to rest any rumor that SEC Chairman Mary Schapiro will not be aggressive enough or was only appointed as a placeholder. “Big wheel keep on turning. Proud Mary keep on burning,” might be the SEC theme song of 2009, as the commission proposed another set of measures intended to better empower investors and improve public company corporate governance through increased proxy disclosure. Truthfully, I commend Mary Schapiro and support her mission to promote change in a system that is far from perfect. As I’ve stated before, though, I worry about the speed of the change and the unintended consequences that might result if the long-term aspects of these changes are not fully considered or if the result only leads to the realistic empowerment of institutional and activist investors. Moreover, if these proposed events result in significant board membership changes over the next few years, particularly within audit committees, then I am justified in being a concerned investor.
All of you who read the last board blog about making your voices heard should consider that advice repeated on this announcement: You have 60 days to view and submit comments on the commission’s proposals. As you consider your response, I’ll offer my perspective on one section of the rule revisions that affects companies’ proxy disclosures, specifically, the disclosure of the qualifications of directors, executive officers, and board nominees.
I understand why shareholders want more information on who they are electing to represent them in the boardroom and to provide oversight to their investment. I’ve often wondered why directors don’t play a significant role in annual meetings so shareholders can judge their competencies by how they handle themselves and answer questions under pressure. That is starting to change, but still, a majority of companies keep their board under wraps at public meetings versus showcasing their skills for all to judge. It will be interesting to see what the public’s reaction to the push for published director mini-resumes and justifications on why a nominee is the right fit for a particular board at a particular time. I dare say some of the country’s best directors don’t look good on paper yet they are superstars in the boardroom. And I’m sure if a nominating/governance chair wrote, “Joe Smith is the best director on the board because he asks management the tough questions,” it wouldn’t be well received by the members of the unofficial proxy review contingent made up of the few investors or governance gadflies who actually do read the entire proxy. In fact, I suspect every nominee will sound like a great choice when the lawyers put their finishing touches on the proxy.
So if you’re worried that future proxies will be so large they are printed as Volumes 1 & 2, I share your concern. If you think this rule change will inspire boards to give extra thought to why a new director nominee is the right person for the job, I am not sure that will happen, past what already is being done. If you think the scripted board qualifications disclosure more than balances the additional corporate dollars—and time—that will be spent on experts crafting substantive director and nominee qualification descriptions, then I have to respectfully disagree. And finally, looking at the bigger picture, if you think Proud Mary is giving it the good old college try, I’m with you 100%.
Posted : June 29, 2009 1:44:47
I’ve had several people and companies respond to my blogs that have addressed either the Schumer Shareholder Bill of Rights plan or the more recent SEC proposals centered on the election of directors. Specifically, people have asked, “What should we be doing to express our opinions, and where should correspondence be directed” What I’m going to pass along is not terribly enlightening, and you may have already figured out for yourself, but it will at least point you in the right direction if you need assistance.
First and most important is responding to the SEC on its election of directors proposal. The SEC has a formal process for comment, and I’m enclosing the link that will explain the proposal and how you should go about commenting. I view it as very important to respond as a director on behalf of a public company. Everything about responding is important. The volume of responses, the tone of concern, the logic for or against a proposal that might not been thought about…etc. The link is http://www.sec.gov/news/press/2009/2009-116.htm
The second and equally important step you can take is let your congressional representatives hear from you, starting with Rep. Schumer. You will see a list of organizations that support his bill on his site, and it might be argued that if you or your business is not from New York then your energies are best spent influencing your own state’s elected politicians or members of the respective committees that are dealing with the Schumer bill. Here are links to Rep. Schumer’s site and the bill and also a U.S. Chamber of Commerce website that you can get the names and contact information for your congressional representatives.
U.S Chamber Action Center (be sure to look down the page to find officials)
Other suggestions would be to contact the Business Roundtable and see how its members are responding to this important company issue. The Business Roundtable is an association of chief executive officers of leading U.S. companies with more than $5 trillion in annual revenues and nearly 10 million employees collectively. Member companies comprise nearly a third of the total value of the U.S. stock markets and pay nearly half of all corporate income taxes paid to the federal government. This is an organization that picks its battles carefully, but this could certainly be one of those battles to fight in Washington, D.C.
Just to be clear, I’m not opposed to some of the proposed changes that are included in the SEC’s proposal or in Schumer’s bill, but for the most part, I don’t think they are well enough thought through at this point to be enacted and will result in 2009 being the year of unintended consequences for American corporate boardrooms. Good luck with your communications and please let me, as well as our readers and online followers, know if you have other meaningful suggestions. Most importantly “let your opinions be known both positive and negative.” It’s the American way!
Posted : June 17, 2009 3:12:11
Under the title of “Be careful what you wish for” I wanted to reflect just a moment on the issue of mandatory stock ownership for non-executive board members of public companies. Years ago, most of us supported a movement that corporate directors needed to have their interests aligned with those of company shareholders to make sure boards would not pass up opportunities to increase short-term shareholder value. This most often came in the form of selling the company for a premium, where directors would benefit along with shareholders because they would be less entrenched and fearful of losing their board directorship. Investors, particularly institutional investors and activists, gave kudos to managements and boards that were significantly invested in their own company in this way.
This concept was widely propagated and advanced by issuing non-executive directors stock options and often by instituting a mandatory stock ownership plan where directors were required to own a flat number of shares or a percentage of their annual board fees. Over the years, we’ve seen some directors’ share values grow well into the millions (though decrease significantly in the last year), in addition to receiving an annual retainer. Recently, these stock options have been replaced by restricted stock so the joy (or pain as the case may be) of ownership would be more deeply felt, which I believe has happened. While there’s a good argument that the increase and decrease in value portion of this compensation plan is working as planned, I worry about the ever-mentioned unintended consequence of putting board members in such an upside risk/reward situation, and what kind of behavior, mostly by the result of human nature, we are incentivizing.
As often happens we may have pushed the pendulum a little too far, and I’m worried that this alignment of interests has skewed board members’ risk tolerance and taken their eye off risk—or at least made their vision a little blurry. This thought was bolstered when I read an interesting contributed article in Corporate Board Member’s Weighing In section by Fran Stoller, a corporate and securities attorney at Loeb & Loeb titled The Case Against Stock Ownership Requirements for Directors. It is definitely worth a read. In recalling her own experiences, Fran makes a real insider’s case for rethinking ownership requirements for boards.
Here’s the bottom line. When the subprime companies were generating revenue hand over fist, I wonder whether directors were focused on the stock price rising (arguably a good thing for shareholders and themselves in this case) when they really should have been asking the tough questions about long-term impact of subprime. Again, human nature has proven that if you incent me to look at something that affects me personally—I will. And I don’t buy the notion that board members are already wealthy and money doesn’t matter. No one ever has enough, and we most often are measured by how much we can collect, even if we are also good at giving it away. Fran makes another argument for how it affects the diversity of boards that I don’t have the space to discuss in this blog.
In conclusion, let me offer this. I think there is a good chance that we are out of balance with director compensation programs. Yes, I think board members are underpaid for the risk and exposure inherent with the position, but I’d like to see more money in either retainer or meeting fees and less concentration in stock. We need to focus boards at the task at hand of ensuring good management and overseeing risk. I agree that too much incentive can lead people to misprioritze their foundational duties.
Posted : June 9, 2009 3:30:51
I just recently spent a day moderating some very interesting panels on enterprise risk management (ERM) with around 70 officers and directors at the New York Stock Exchange. The occasion was an educational event entitled Challenges and Solutions of Managing Risk: A Return to Enhancing Shareholder Value. During the course of that day we had the normal discussions about how difficult a task it is to manage ERM and who should have ownership of the process (since many feel it is broader than just an audit committee function). But beyond that, several panelists reminded us that risk is not always a bad word—in fact, most of our businesses are built on some type of risk/reward basis, and therefore, managing risks correctly can make for a very successful company and happy shareholders.
These sessions provided many intellectual discussions on risk—probably more thought-provoking than most board risk monitoring discussions I have participated in recently—and while I could write about any number of interesting discussions, I wanted to talk about one in particular that seemed to resonate with me well after the meeting adjourned.
I am a skeptic (a pleasant skeptic, but a skeptic nonetheless) that a board member of a larger company can possibly get his or her arms around monitoring risks and processes to manage risk when you have hundreds of different business or divisions of a company often operating in multitudes of different countries. A corporate director’s responsibility for just managing the Foreign Corrupt Practices Act (FCPA) portion of that risk seems impossible, and we’re just talking about one compliance act with probably a 1000 risks to monitor. So during the NYSE panel discussions, I asked the question: “What’s a board member to do?”
Much to my surprise, more than one director and adviser provided a plan of action that made real sense to me and therefore, is worth passing on. “Yes,” they all said, when looked at it in its simplest form, it is difficult for any director to monitor all of a company’s risk, so the solution involves taking the time to identify those risks that could cause a catastrophic loss and spend time talking about them. The board and management should have an understanding about which risks might just make the patient sick for awhile and which ones could truly kill or severely cripple the patient. This dialogue, together with some meaningful discussion on how to mitigate some of this risk and whether the level of risk is acceptable to the board, as representatives of the shareholders, is a very valuable discussion. And this point was made to me: While you’re listing the 15 most critical risks to your company, take the time to follow the same process with the 15 best opportunities from which your company can prosper. Several directors and officers professed that this exercise is cathartic and provides a strong foundation for risk management and the strategic planning process.
Risk management is the second most important task of the board next to making sure you have the right management in place to lead the company. We all can learn from others—particularly if it will help us sleep at night and keep us off the front page of the newspaper.
Posted : May 26, 2009 10:22:21
In my April 1 blog, I cautioned current public boards to “Be aware… be very aware,” based on what I thought could evolve if both political and regulatory bodies decided it was time to revamp our current method of electing directors of public companies. At the time, even I didn’t think it could be upon us so fast, but guess what? With Sen. Schumer’s Shareholders Bill of Rights and the recent proposed changes by the SEC to federal proxy rules, on top of the proposed Proxy 452 voting changes, I’d say the perfect storm may well be just on the horizon. I confess I do not know all the ins and outs of every legal ramification of what has been proposed, but I do know the result could (and I repeat could) be quite ugly.
Here’s what we do know. The general public is upset with the subprime debacle, the apparent lack of leadership at the top of some of America’s most respected companies, the resulting economic downturn that has cost jobs and millions of dollars of people’s retirement funds, and finally the executive compensation that some of these CEOs make even when their company value takes a deep dive south. The general public is saying enough is enough, and telling their politicians to do something about this mess. In response, Congress does what it does best, and holds meetings to get to the root of the problem. The root of the problem is so complex that they do the next best thing, and that is, to tell the new SEC chair that they expect action and they want it now. Chairperson Schapiro, who was appointed to the SEC leadership position under speculation (somewhat unfairly) that she may not be tough enough for the cleanup job (which is like waving a red flag in front of a bull) says, “I’ll show you… action… and—boom!!! We have changes proposed to the federal proxy rules to get new representation on the board. What we end up with is proposals to revamp the election system coming from Congress (Schumer) and the SEC designed to give the “average Joe” shareholder more say in who represents his or her investor interests on the boards of today’s public companies.
Here’s what I would like to suggest. Everyone associated with the proposals, including those companies and directors that will be affected by the changes, please take a deep breath and take one step back. This is no time to make a knee-jerk decision on such an important change to our public company board election structure. We already see companies debating the merits of going public versus staying private, and I fear that both domestic and foreign companies that would have considered listing on a U.S. exchange in the past now feel that there are better alternatives for capital elsewhere, places without the rigid listing and federal requirements. Right now, I am candidly afraid of the unintended consequences that go with making a decision too quickly on how we fix our perceived problem. And by saying “perceived,” I don’t mean there isn’t a problem, but I’m still not sure the actions of a few aren’t wrongly painting our entire listing of public companies. I’m actually in favor of looking and revamping the current director election system, just not by adding millions of dollars of proxy solicitation expense and a new director election process that will make us yearn for the current system in 18 months. There are a lot of issues here, not the least of which is the federal-versus-state corporate law debate. Let’s hope the unintended consequences don’t outweigh the proposed changes themselves.
Posted : May 15, 2009 10:00:21
Wow, when I got the phone call today that Bill Seidman had
passed away, my emotions ran amok. I felt saddened for his family and for all
of us that he touched so strongly on a regular basis—he certainly will be
missed. But almost instantaneously I smiled, thinking, "What an amazing guy,"
and began considering how lucky I am to have known and worked closely with this
remarkable man. This is a life that shouldn’t be mourned but truly celebrated.
If you look up the term "straight shooter" you would most likely find a picture
of Bill Seidman. He said exactly what he was thinking, and to many, he was a
breath of fresh air, even during his time as a public official.
Best known for his White House, FDIC, and CNBC cable news
stints, many people don't know he was the publisher of Bank Director magazine and one of a small group of shareholders
owning Board Member Inc., which publishes Corporate
Board Member as well as Bank Director
magazines. Bill was a regular on our speaker circuit, and to say that he
was typically the crowd’s favorite would be an understatement. He had an
amazing ability to take a serious subject and somehow make his comments
humorous while still delivering an important message.
For me, with all due respect to the thousands of other
bright people that have crossed my path, he was hands-down the most knowledgeable
person with whom I had the pleasure to spend meaningful time. Whether he was
explaining the currency in Turkey
or arguing against Greenspan's monetary policy, there wasn't an international
business subject on which he wasn't well versed and willing to share his
opinion. CNBC didn't put him on the air just to be nice, Bill Seidman had a dedicated
following of people who wanted to hear his opinion, and boy he always left his
audience wanting more.
For the next couple of weeks, people will talk about how Bill
Seidman led Congress and the country through the S&L crisis (that $150
billion seems like pocket change today) or how he put ethics first when he turned
down a chance to play golf with Arnold Palmer and Jack Nicklaus because the
government played a role in getting an FDIC-owned golf course ready for a Ryder
Cup match. But personally, I will remember Bill for teaching me how to sleep soundly
at night by remembering how I conduct myself during the day. Time will tell if
the lessons will stick, but I feel great comfort in knowing that I have one of
the best watching over me.
Bill Seidman, yours is a life to be celebrated, and thank
you for just being you.
Posted : May 7, 2009 8:59:04
I just returned from facilitating Corporate Board Member’s first Boardroom Diversity Symposium, and there were so many valuable topics I’m not sure where to begin with what to pass along to other corporate directors—but here goes.
First, the turnout was a pleasant surprise, knowing the challenges existing at many companies with budget cuts and travel moratoriums. Boardroom diversity was an issue we wanted to address after a 2008 CBM survey reflected that almost 38% of current directors felt they had a shortage of “qualified” diversity candidates. Normally I would define diversity candidates to include diversity of thought, but in this case, we’re talking about gender and ethnicity. Frankly, I thought the shortage premise a little bizarre, so we decided to see for ourselves by taking on some new initiatives in this space.
We started by forming a Diversity Council made up of respected diversity associations and sitting directors (like Jack Krol, former CEO of Dupont and a Tyco Nom/Gov Chair, and Bonnie Hill, a well-known Home Depot director) and then proceeded to plan this symposium. Well, I don’t have to tell you what happened with the economy and travel budgets over the last year, but we were encouraged to persevere by our sponsors and selected readers. The result was a very uplifting two days centered on why a diverse board is a good business decision … and yes, this event confirmed there are qualified, diverse board candidates ready to serve if companies are willing to look in the right places.
Highlights of the symposium were an inspirational address from former labor secretary and current MGM and Coca-Cola director Alexis Herman and some lively sitting and prospective director peer exchanges. But the presentation that moved the audience most was the chilling and candid account by a Denny’s restaurants board member and GC about the crippling 1993 discrimination suits brought against the company by employees and customers and how a newly formed, diverse board rescued the company. The session featured a no-holds-barred discussion about why boardroom diversity is important from the very people who have the scars and results to prove it. There has been a book written on the experience that I would recommend to every board member titled The Denny's Story: How a Company in Crisis Resurrected Its Good Name and Reputation. In my mind, the “Grand Slam” is not only Denny’s featured breakfast item but also a fitting description of the chain’s successful recovery efforts, starting with the board having the courage to make changes that would restore its good name and save the company. Very cool stuff.
There are certainly other revelations I could talk about, but I’ll leave you with one last thought. Honestly, I’m not worried about diversifying the boardroom. All I had to do was stand up there on that stage and look out over the people I had met at that conference and know that that there are many people in that audience who will sit on a board sometime in the future. These were smart people who understood that the way to be invited to serve on a board is to bring value, and they are ready. I know boards are going to continue to become more diverse. We see it happening in the C-suite and in the boardroom every day. It may not be happening as fast as some people would like, but compared to the last 100 years, diversity is on a roll. I urge you to be a catalyst in helping your company embrace it and let it work for you.
Posted : April 28, 2009 11:56:47
We knew some kind of governance reform was coming and many of us hoped it wouldn’t be too onerous and/or too hastily developed without prudent thought. From what I’ve seen this morning before boarding a plane to New York, Senator Schumer’s proposed corporate governance bill may ultimately be described as both, particularly when we see simultaneous changes occurring at the SEC as well.
The most benign part of this proposed bill is the nonbinding shareholder vote on pay. “Say on Pay” is in place in other countries, and its impact on companies and boards to operate in the best interests of the corporation and the shareholders is minimal.
The bill’s suggestion of mandating a special committee of the board to oversee risk falls under the category of “developed without prudent thought.” Some of the companies that got in big trouble recently already had risk committees; therefore, mandating the existence of a committee doesn’t mean that a challenge is solved, particularly in an area as complex as enterprise risk management. I see this section of the bill as a knee-jerk reaction to a legitimate public outcry, but honestly, the biggest challenge that boards have today is overseeing risk—a problem that requires more thought behind it than just forming a special committee, which seems to be the answer for many governance challenges every time we have upset investors.
Risk management starts in the strategic planning process with management and boards setting acceptable levels of risk as part of the company’s business plan and then addressing the risk/reward of that plan, coupled the mitigation of catastrophic risk. It is important to remember, however, that boards are supposed to oversee risk, not manage it. Risk management is management’s job, and the last thing I want as an investor is for a group that meets six times a year at board meetings, and about the same amount of time for committee meetings, “managing” the company’s risk.
My biggest worry about the proposed bill is the effect of the mandatory annual director election regulation on corporate boardrooms, particularly in light of the other proxy and director-election initiatives that are bubbling up, such as Proxy 452 and the SEC’s loosening of the ability for shareholders to offer director slates. Taken together, we could find our corporations and shareholders in the perfect storm, rather than with a corporate panacea.
Finally, I’ve never been a fan of people that just criticize without offering solutions, so I’ll try and consider what I would propose if I were a concerned senator to improve the system that has the investor public in such a funk. If you have opinions or advice for me, I’d love to hear it.
Posted : April 22, 2009 1:12:59
I'm not sure that it’s politically correct to talk about a CEO guiding the board in an era where director independence is king, but I, among many others, recognize how important CEO/board relations are to a company’s success. This isn’t to say that the board doesn’t have duties and responsibilities it must administer on behalf of the shareholders, but almost any director I talk to acknowledges that with the complexities of today’s companies, there is no way to stay on top of their oversight responsibilities without the strategic nudging of their CEO and C-suite team. I refer to this as the unspoken CEO skill because it’s rarely discussed in public when a CEO excels at "guiding" a board to be effective, and I practically never hear that skill requirement listed in search criteria when boards look to replace their chief executive. Yet in today’s oversight-laden, corporate environment, the CEO is the board’s most knowledgeable adviser and, more importantly, is the first line of defense and protection over a director's personal liability.
Actually, I embrace the CEO guidance concept because I believe a director’s knowledge of a multibusiness/multinational company is going to be relatively shallow since they meet only four to 12 times each year for board meetings and about the same for the committees on which they serve. Considering most directors also have full-time jobs (often as CEOs of their own companies whose boards they, in turn, have to "guide") this just doesn’t leave a lot of time to oversee the plethora of issues facing public company boards today.
So the challenge is, how do CEOs develop skills for guiding the board without directors feeling they are being manipulated or advised on issues where they are strongly encouraged to be independent by best governance practices? In a future Board Blog we’ll dissect some of these guidance skills. In the interim, I urge you to think about your relationship with your CEO. While we don’t want to return to a past period of imperial CEOs, we do want the board/CEO relationship to be as collaborative as possible. If not, ask yourself why not—and if so, be appreciative and move on to the next critical governance issue.
Posted : April 1, 2009 11:38:14
NYSE Rule 452...It’s not a rule change that is necessarily on the tip of every director’s tongue but one could assume that it will have a much bigger impact than the current publicity that its getting. In a nutshell, currently brokers are given the authority for, and have traditionally voted, "uninstructed shares" (i.e., held in street name, where brokers ask the customers for whom they hold shares how they want to vote the shares, but many don’t provide any guidance) on routine matters at company annual and special meetings. Commonly, these votes are cast in favor of management’s recommendations, which include director elections—one of the matters heretofore designated as routine. Consequentially, director elections were rarely contested and a board’s membership rarely changed outside of the company’s slate.
Don’t look now, but we may be on the verge of a subtle change that could have a major impact on what board membership looks like in tomorrow’s public companies. Rule 452 proposes that director elections should not be considered as routine matters and would prohibit brokers from voting shares without shareholder instructions, which mean votes actually cast could be reduced significantly in many important elections. Now the impact of the rule change, in itself, may not seem that big, but think for a moment about the ramifications of implementing Rule 452 at companies that have adopted majority voting. Even more significant, consider the new SEC Commissioner Schapiro’s desire to open up the proxy director election process, which would allow shareholders easier access to nominate their own slate of directors. Put these corporate reform changes together and you can imagine a watershed type change in how directors get nominated and elected to public boards.
Is all this a bad thing? Well, I’m not sure from a macro sense, since we have witnessed many companies that could have been well served by a more aggressive, or at least better informed board, particularly when it comes to taking risk at the shareholders expense. I won’t argue that cases where the feared activist shareholder has successfully garnered a board seat have often worked out for the good of both company and its shareholders. Personally, I have seen this many times in the banking industry and often the change has resulted in a more savvy board and subsequently, more positive bottom-line results.
The unknown is what is at great risk here, and in its worst-case scenario, is what could get ugly. What happens to the collegiality of the board, and just as important, its relationship with management? I know directors are suppose to remain at arms length and be skeptics of management, but if I’m investing my own money, I want a board that can ask the right questions and not be afraid to say no, but in the end, has a great working and collegial relationship with management. If you look at the best-performing companies over time, that’s what you’ll find in their corporate DNA.
So my final thoughts are Be Aware...Be Very Aware of the implications of what changes are in front of you today. Are we getting to a point where one could see the most qualified board candidates not wanting to serve… or a board made up of directors with single interest agendas all focused on advancing their own governance or environmental views on every important decision? I honestly don’t think this is a Chicken Little warning that has no foundation but rather it is an issue that warrants your review that may be good—or terrible—for many public companies. All eyes should be wide open on what lies ahead!
Posted : March 29, 2009 8:29:18
Before people leap all over me for being flippant, I recognize the problem that corporations and specifically boards are having dealing with executive compensation. This really hits home with me when you look at our annual board research conducted with PricewaterhouseCoopers which reflects that over 65% of current directors feel that U.S. boards are having trouble controlling the size of CEO compensation. My first point today is while executive compensation is a problem in a select (yes, I do mean select) portion of today's companies, it is small potatoes to the challenges that our governance system faces to manage risk for the safety of shareholders. Compensation plans are part of that risk, but I hope that SEC Chairman Schapiro will not follow the route of the media and put pay package options ahead of the critical need to come up with a plan to help companies and their boards mitigate and manage risk. This problem starts with Wall Street's focus on short-term performance and the inherent idea that quality takes a second seat to meeting financial goals so as not to miss the precious whisper number and have your stock price hammered.
The fact is (second point) that executives are rewarded too handsomely when all markets rise and are penalized too much when all markets fall. I dare say that some of the best management performances of the decade are being accomplished as I write this blog, where shareholders are being saved hundreds of millions in value by a good management team making all the right decisions when responding to this crisis. These well-run companies are most likely at the top of their peer or industry group in performance even in a down market, and if I were their director or shareholder, I would be finding some financial way to say thank you. Yes, the shareholders' stock price went down, as did earnings, but that's what will happen when markets cycle. Last I heard there is not a market anywhere in the world that won't go through a cycle of being up... then down... then up. Down doesn't have to be dipping as low as we are today, but we live in a world where we must manage cycles that are unpredictable in length.
I'm standing in line with everyone else ready to pounce on the ridiculous severance packages or backdating fiascos that has made compensation such an easy target, but when I look at the real problem facing us today, it is managing risk. The SEC, along with the boards of today's public companies, play a major role in getting this problem fixed... so let's get on with it.