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Directors & Boards
Robert H. Rock
Publisher
James Kristie
Editor
Lisa
Cody
Chief Financial Officer
David Shaw
Publishing Director
Scott Chase
Advertising Sales Director
Nancy Maynard
Account Executive
Barbara Wenger
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From Jim Kristie | Article of the
Month | Columnist
Reader Profile |
Research | News |
Rich Guys
The fuller compensation disclosures will
tell tales — of ethical intent and, uh-oh, of wealth behaving badly.
I always thought it was a shame what Jack Welch did right at the end of
his magnificent career at General Electric. Why would he put a pall on
his reputation as a brilliant manager with that unseemly grab into the
GE shareholders’ pockets to pay for living arrangements, flowers for
his apartment, theater tickets, and other lifestyle perks?
He’s a rich guy. Rich guys can afford to pay for their own flowers.
What is the pathology behind a current or past CEO wanting the
shareholders to pick up the tab for these trappings of the rich and
famous that are so easily affordable for someone of such wealth?
Rich guys are much on everyone’s minds these days as the new
compensation reports trickle into the market. And speaking of perks: In
its 2007 executive compensation preview Mercer Human Resource
Consulting anticipates the coming disclosures of perquisites to be
“inflammatory.”
You might say shareholder-subsidized perks aren’t worth getting in a
twist about, since the big transfer of wealth from owners to managers
will be documented in the other columns — for salary, deferred
compensation, etc.
The point is ethical mindset and ethical intent. I’m in agreement with
longtime boardroom veteran Warren Neel, who extends this discussion in
his op-ed column below, when he says, “The CEO’s actions become the
cultural norm … that attitude percolates downward to infect other
layers of the organization. It is an affirmation of an old truism: Show
me how you act and I will know what you believe.”
If one of our most-heralded CEOs believed it was okay for shareholders
to spring for flowers for his company-paid apartment, what message is
that sending not only to the management and ownership of GE but also
throughout corporate America?
What message will boards be sending to their shareholders when they
disclose compensation arrangements? I hope it’s one of ethical intent,
but I’m fearful that it will be one of wealth behaving badly — of rich
guys reaching into the shareholders’ pocket for things and services
they can readily afford on their own dime and of boards complicit in
this pickpocketing.
Tell me if I’m offbase with this opinion. I’ll welcome your comments at
jkristie@directorsandboards.com.
Jim Kristie is the editor and associate publisher of Directors & Boards.
Avoiding Risks in Option GrantsIf you want to sidestep ‘spring-loading’ or ‘bullet-dodging’ problems, the following recommendations may head off trouble.
By Robert L. Messineo
The practices used by companies in making option and other equity awards to their executives, employees, and directors have been subject to intense attention in the past year. Options investigations by the SEC and internal company reviews now involving over 100 companies have introduced a new vocabulary to the discussion of options — “backdating,” “spring-loading,” and “bullet-dodging,” although at this point no precise legal definitions of the terms have emerged. Recent court decisions have also raised issues regarding the fiduciary duties of directors regarding such practices.
Backdating has been the subject of the most scrutiny, almost on a daily basis. The following analysis focuses on the less addressed spring-loading and bullet-dodging practices, and offers guidance regarding grant practices that boards of directors and senior management should consider adopting.
Spring-loading generally refers to the practice of granting options in anticipation of the disclosure of material information that is expected to produce an increase in the market price of the shares to be acquired pursuant to the option — i.e., under circumstances where it is intended that the options will in fact have intrinsic value.
The Market’s Reaction
The corollary practice of bullet-dodging involves the intentional setting of an option grant date after the approval date so that material information that is expected to cause a decrease in the market value of the related shares can first be disclosed, or the intentional timing of option grants so as to follow the release of material information of such nature, in either case with the result that the exercise price will reflect the market’s reaction to the information and be lower than it otherwise would be.
[Click
Here to Read
the Entire Article]
Balance of Power:
Boards, ‘Birthers’ and Builders
Beware CEO icons who are confused about their legal powers and their moral obligation to the real owners of the company.
Enron, WorldCom, Tyco, HealthSouth, and Adelphia are but a few of the scandal-tainted company names indelibly etched in the public memory. When viewed collectively, these scandals raise the question: Are there observable patterns that might help boardrooms of the future?
One pattern that stands out is that the egregious acts involved CEOs who were founders or were those who built a new company on the ashes of an old business and who considered themselves corporate icons. Whether they were founders or builders, their behavior suggests they acted as if they were “owners” — that is, as if they owned the business.
How were they different in attitude and behavior from other chief executives who run companies? Is there something inherently different about a founder/icon CEO that affects the boardroom, and, if so, what might be observed?
These questions resonate as we read continuing reports of option backdating at over 140 companies and wondering about the decision climate in those boardrooms.
[Click Here to Read the Entire Article]
President
The Delves Group
Editor's note: Each month, we ask a
Directors & Boards reader to comment on critical issues facing
directors today. If you'd like to participate in this section in
the future, please email Scott
Chase.
Shareholders and Executive Compensation
You are an expert on executive compensation. Should shareholders be allowed to vote on executive pay?
I do not believe that shareholders should vote on executive pay any more than they should vote on where to build a plant or how a product should be priced. However, I do believe that shareholders should have more influence on who is nominated and elected to the board of directors. By having a greater say in the composition of the board of directors, shareholders are more likely to have their best interests represented on corporate governance issues such as executive pay. At the same time, corporations need to preserve the delegation of decision-making authority to its board and management.
In a public corporation, shareholders do not have the right to manage the company. They relegate that right to management who act as their agents. The agents are, in turn, overseen by the board of directors, which is elected by shareholders. Like our federal and state governments, this is a form of representative democracy. In this instance, executive pay is a business decision that should be made by the board of directors and management, with the best interest of shareholders in mind.
[Click Here to Read the Entire Article]
As risk management receives heightened scrutiny in financial institutions’ boardrooms, additional investment and management attention is needed, according to the fifth edition of Deloitte & Touche USA LLP’s global risk management survey.
While executives at financial services firms rated their risk management processes as extremely or very effective in the areas of market, credit and liquidity risk (each between 70 and 80 percent), respondents acknowledge that they have not yet created effective processes and systems to manage less traditional risks. Only 47 percent considered their institution extremely or very effective in managing risks associated with business continuity/IT security, 43 percent each for operational and vendor risk, and 35 percent for geopolitical risk.
This occurs as more institutions increase their focus on risk management, by elevating the responsibility for risk management to the top of the organization as a board-level oversight responsibility. The executives surveyed found that 70 percent of boardrooms now have this charge, an increase from the 59 percent reported in 2004 and 57 percent in 2002. In addition, the number of institutions with a chief risk officer (CRO) reached new heights, with 84 percent of institutions reporting that they now have a CRO in place, up from 81 percent in the 2004 survey, while another 8 percent said they plan to establish this position.
Deloitte’s “Accelerating Risk Management Practices” report focused on the range of critical risk management issues facing financial services firms today. The report’s authors surveyed chief risk officers – or their equivalent – at 130 institutions across the globe. Institutions that participated were primarily commercial and retail banks, as well as diversified financial institutions; the aggregate assets of those surveyed totaled nearly $21 trillion.
The progress in implementing enterprise risk management programs illustrate both the progress and the remaining work to do in risk management in the industry. Only 35 percent of executives reported that their institutions had already implemented an ERM program, while almost a third (32 percent) are in the process of establishing one.
Where ERM programs have been created, they have yielded benefits— roughly three-quarters of executives from companies with ERM initiatives said the total value of their programs had exceeded the costs. However, this assessment of value is largely qualitative, as only 4 percent of executives said their institutions quantify the benefits of their ERM programs.
Among other findings from the survey:
More than 70 percent of executives reported that their firms had established formal enterprise-wide programs to implement Basel II. At the same time, many institutions still have significant work to do in reaching key Basel II qualification standards.
Although more than 60 percent of executives reported that their institutions used value at risk (VaR) extensively for fixed income, foreign exchange, and equity, less than one-third said it was used extensively for a range of other instruments including asset-backed securities, structured products, credit derivatives, and energy products.
In the area of operational risk, only about one in four executives said their operational risk management systems were very capable in terms of reporting and data gathering, and more than two thirds said they were at least somewhat capable in those areas. Lagging behind were exposure calculations and scenario model building.
More than two-thirds of the executives reported increases in risk management expenditures over the last 24 months. In looking ahead, 30 percent of executives in North America foresaw substantial budget increases in this area during the coming 24 months.
About Deloitte
Deloitte refers to one or more of Deloitte Touche Tohmatsu, a Swiss Verein, its member firms and their respective subsidiaries and affiliates. As a Swiss Verein (association), neither Deloitte Touche Tohmatsu nor any of its member firms has any liability for each other’s acts or omissions. Each of the member firms is a separate and independent legal entity operating under the names “Deloitte,” “Deloitte & Touche,” “Deloitte Touche Tohmatsu” or other related names. Services are provided by the member firms or their subsidiaries or affiliates and not by the Deloitte Touche Tohmatsu Verein.
Deloitte & Touche USA LLP is the US member firm of Deloitte Touche Tohmatsu. In the U.S., services are provided by the subsidiaries of Deloitte & Touche USA LLP (Deloitte & Touche LLP, Deloitte Consulting LLP, Deloitte Financial Advisory Services LLP, Deloitte Tax LLP and their subsidiaries), and not by Deloitte & Touche USA LLP.
April 11, 2007
The Benjamin N. Cardozo School of Law at Yeshiva University hosts T. Boone Pickens and Charlie Rose for a discussion on "Shareholder Activism and the Thriving Public Company: A Response to Critics." Pickens, founder and chairman of BP Capital Management, will speak about why shareholder activism enhances the value and health of public companies. Drawing upon his legendary experience challenging public company boards, he will respond to the critics and make the case for vigorous shareholder activism. The evening discussion will run from 7:30-9 p.m. and is open to the public. Reserve online at
April 17,
2007
Women on Boards, an annual panel discussion focused on providing the
necessary tools and knowledge for serving as a director, holds its 2007
event at the Ritz-Carlton St. Louis. The program is designed for women
who are interested in getting on a board or making the transition from
nonprofit to corporate boards, as well as women who are currently on a
board and want to network with other women board members and hear about
best practices. Panelists include Maxine Clark, founder and chair of
Build-a-Bear Workshop, Juanita Hinshaw, president of H&H Advisors,
and Madeleine Condit, senior partner of Korn/Ferry International. For
more information, visit
April
23-25, 2007
The Milken Institute holds its 2007 Global Conference in Los Angeles,
the 10th anniversary of this distinguished gathering of leaders from
diverse sectors and international regions. Last year's conference sold
out early. To register, visit
April
26-27, 2007
The Practicing Law Institute presents "Corporate Compliance and Ethics
Institute 2007." A distinguished faculty drawn from major corporations,
ethics organizations, law firms, academia and the government will offer
tools to develop and advance an effective compliance program. The April
program is held in San Francisco and will be held again in May in
Chicago and in June in New York. Register at
May 4,
2007
The NYU Directors' Institute presents "Corporate Governance: The State
of the Art," an intensive one-day program that will focus on highly
topical issues, including options backdating, monitoring the challenge
of financial restatements, and the significance of changing rules and
practices in corporate voting, along with perennial topics such as
crisis management and CEO selection and compensation. Keynote address
will be "Governance from a Hedge Fund Investor's Perspective," with
William Ackman, managing member, Pershing Square Capital Management.
For further information, call 212-998-0565, or visit
May 5,
2007
Simmons School of Management Leadership Conference in Boston hosts its
28th annual leadership event, "Ways Women Lead." Attendees will hear
firsthand from many women of accomplishment their candid stories of
struggles and triumphs and experience the collective energy of some
2,500 professional women participants. Register at
May 9-10,
2007
Ethical Corporation and Business in the Community will host an
unprecedented gathering of world business leaders to discuss the
evolution of corporate responsibility up to 2020. The conference is set
to be the largest corporate responsibility gathering of 2007. It will
address how international business leaders think responsible business
will evolve; the emerging opportunities - and risks - to consider in
the run up to 2020; and practical solutions to help you deal with the
changes ahead - from the world's top corporate responsibility
directors. The conference marks a merger of the annual BITC CR Index
conference and Ethical Corporation's Europe Summit. Go to
May
14-17, 2007
The UCLA Director Training and Certification Program will be held to
increase the expertise of new and experienced directors. Foundational
topics include fundamental duties of directors, current SOX
requirements, corporate reporting and disclosure issues, and protection
mechanisms for directors. Faculty co-directors are Alfred E. Osborne
Jr., senior associate dean, and Carla Hayn, associate professor of
accounting, UCLA Anderson School of Management. The program will be
held again on Oct. 8-11, 2007. Visit
June 7,
2007
The 11th Annual Wharton Leadership Conference presents "Developing
Leadership Talent: How Organizations Prepare Their Present and Future
Leadership." In this intensive one-day program, presenters draw upon
their own organization's experience in finding, identifying,
recruiting, preparing, and training their talent for positions of
responsibility. Where are the best sources of talent? What are the best
development experiences for building leadership capacities? When is the
time to invest in leadership development? Who has the best programs for
fostering leadership - and what are the secrets of their success?
Speakers include Jennifer Deal, research scientist at the Center for
Creative Leadership; Richard Greene, consultant and author of Words
That Shook the World; Stephen Harrison, chair of Lee Hecht Harrison and
author of the upcoming book The Manager's Book of Decencies: How Small
Gestures Build Great Companies; David Nadler, vice chairman of Marsh
& McLennan and chair of Mercer Delta Consulting; Thomas Stewart,
editor and managing director of the Harvard Business Review; and Tim
O'Toole, managing director and CEO of the London Underground and former
CEO of Conrail. Details about the conference and online registration
are available at
June
19-20, 2007
KPMG's Audit Committee Institute and the National Association of
Corporate Directors will conduct a session on "Audit Committee
Fundamentals: Roles, Responsibilities, and Resources." The program is
for both new and more experienced directors. To register, visit
Stanford Law School conducts its 13th Annual Directors' College, which brings together leading CEOs, directors, jurists, scholars and regulators for a rigorous examination of corporate governance. Among the keynote speakers will be Paul Otellini, president and CEO of Intel; former Rep. Michael Oxley; Linda Chatman Thomas, director of the SEC's Division of Enforcement; Patricia Dunn, former chair of Hewlett-Packard; Justice Jack Jacobs of the Delaware Supreme Court; and Charles Munger, vice chairman of Berkshire Hathaway. Visit
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Business Roundtable, an association of 160 chief executive officers of leading U.S. corporations, named Anne M. Mulcahy, chairman and CEO of Xerox Corp., to be the next chairman of its Corporate Governance Task Force. She succeeds Steve Odland, chairman and CEO of Office Depot, who led the task force for three years.
“Members of the Business Roundtable understand that all eyes are on Corporate America today to ensure businesses are run with the highest ethical standards,” Mulcahy said. “I’ll advocate for a strong, fair system of corporate governance that emphasizes integrity, transparency and accountability.”
The Roundtable was the first major business group to strongly endorse the Sarbanes-Oxley Act, and supported the efforts of the Securities and Exchange Commission to implement the law. In addition, the Roundtable established the Business Roundtable Institute for Corporate Ethics (http://www.corporate-ethics.org) at the Darden Graduate School of Business Administration at the University of Virginia in 2004 to strengthen ethics and governance in corporate culture.
Mulcahy began her Xerox career as a field sales representative in 1976 and became CEO on Aug. 1, 2001, and chairman on Jan. 1, 2002. In addition to her Xerox board membership, she is a director of Citigroup Inc., Target Corp., and Catalyst.
New Leadership at The Conference Board
Jonathan Spector, vice dean of The Wharton School at the University of Pennsylvania, was named president and CEO of The Conference Board. He assumes the position on April 16.
Spector began his career at McKinsey & Company in 1980 and was elected a principal in 1986 and a director in 1992. In 1989, he moved to Hong Kong where he helped develop and expand its business practice in China and Southeast Asia. In 1991 he founded and managed McKinsey’s office in Taiwan. Returning to the United States in 1995, he was a leader in building the firm’s electronic practice throughout North America, leaving the firm in 2000. He was chairman of the board of the March of Dimes in Massachusetts from 2003 through 2006 and is credited with leading a major revitalization of the organization. He continues to be a director of the organization and is also a member of the National Board of Advisors of the March of Dimes.
“Jon is bright, worldly, experienced and skilled at working with people,” said Douglas R. Conant, president and CEO of Campbell Soup Co., who chaired the executive search committee that selected Spector from some 250 candidates. “His work experiences as a CEO, a global consultant and as vice dean of The Wharton School have perfectly prepared him for this new role.”
Resources for Directors
Director Compensation Report: The National Association of Corporate Directors has publicly released its 2006-2007 NACD Director Compensation Report for directors and boards to use in benchmarking their own pay practices by company revenue, industry, and key committee. Based on 2006 data and analysis from the compensation consulting firm of Pearl Meyer & Partners, this report provides timely information for boards as they reevaluate their pay plans in the context of increased director responsibilities. The report is available for purchase at http://www.nacdonline.org.
Tax Advisory Assistance: Do you serve on or advise a small company board? If so, then you will want to make sure that the staff knows about a news service, e-News for Small Businesses. Distributed every Wednesday, it brings timely, useful tax information right to your computer, including, but not limited to: important, upcoming tax dates; what’s new on the IRS Web site; reminders and tips to assist businesses with tax compliance; IRS news releases and special IRS announcements. To start a free subscription to e-News, just go to http://www.irs.gov/businesses/small/content/0,,id=154826,00.html and type in your e-mail address and submit.
Controlling Health Care Costs: A growing number of companies have introduced or expressed interest in on-site health centers. If your company is one, a recent issue of Spotlight, a Sibson Consulting publication, discusses the implications of taking this step and what employers should consider before introducing an on-site health center. Click here for a copy of the summary briefing.
Leadership in Science-Based Industries: Harvard Business School has created a new executive education program, “Leading Science-Based Enterprises,” that will address the many distinctive challenges faced by executives in industries such as life sciences and biotechnology. It will take place at the school's campus in Boston from June 28-30. The three-day program will focus on strategies for successfully moving research and scientific discoveries from the lab to the market, and is designed for executives with strong science backgrounds as well as non-technical managers with key business responsibilities. Kent Bowen, professor of business administration, is faculty chair of the program. Admission is based on professional achievement and organizational responsibility. For more information or to apply online, visit http://www.exed.hbs.edu/programs/lsbe/1/.
Author Notes
Bruce R. Ellig has been honored by the University of Wisconsin-Madison School of Business with its Distinguished Business Alumnus Award. Ellig received his BBA in 1959 and MBA in 1960. He retired in 1996 after a long career with Pfizer Inc. He was the company’s senior human resources executive and has been a longtime national expert on executive compensation. “My Years with the Pfizer Board,” published in the Summer 1997 issue, is one of several articles he has contributed to Directors & Boards over the years. The award is being presented at a gala dinner at the New York Athletic Club on March 30.
Oracle Corp. announced in March an agreement to buy Hyperion Solutions Corp. (http://www.hyperion.com), a leading global provider of performance management software solutions, for approximately $3.3 billion. Hyperion contributed to the “Director’s Guide to Compliance Software,” published in the Directors & Boards Summer 2005 issue.
Susan Shultz has joined OakBridge Inc. (http://www.oakbridge-global.com), a boutique global search firm, as a partner and will head its board practice. Shultz is the founder of SSA Executive Search Int'l Ltd. and also founded The Board Institute Inc., which developed a Web-based suite of tools to help organizations assess, benchmark, and enhance their boards of directors and their committees. Her article, “Conducting a Committee Assessment,” appeared in the Fall 2005 Directors & Boards.
Reef Point Associates has appointed Molly Neary as managing director for North America focusing on the Midwestern United States. Reef Point is an interim executive management firm that assists companies through periods of significant change (http://www.reefpointllp.com). The firm contributed the article, “Turning to the Board for a Fill-In CEO” for the Spring 2006 edition.
Lewis H. Ferguson III has joined corporate tax advisory service Seigel & Associates LLC (http://www.seigel-llc.com) as vice chairman of the board. He was formerly the first general counsel of the Public Company Accounting Oversight Board (PCAOB), an organization established by Congress in 2002 as part of the Sarbanes-Oxley Act to oversee accounting firms that audit U.S. public companies. “With the imminent disclosures required under FIN 48, companies will soon realize the significant implications of tax-reserve disclosure in their financial statements,” said Mr. Ferguson. Under FIN 48, a new ruling by the Financial Accounting Standards Board, public companies must disclose more details about their reserves for potential tax liabilities on their financial statements than had previously been the case. Look for a future article on this in Directors & Boards by Mr. Ferguson.
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Directors & Boards e-Briefing is a monthly service of Directors & Boards. All contents copyright 2007, MLR Holdings LLC.