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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
Barbara Wenger
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From Jim Kristie | Article of the
Month | Columnist
Reader Profile |
Research | News |
Stop
Being Stupid
This is really the best way to run a corporate governance system.
I am borrowing the title of this editor’s note from one used by New York Times columnist Bob
Herbert in December 2008. Here is a sample
of where he went with his column:
Herbert was looking at a big picture with his rant. This appeal to
“resolve to be smarter going forward” readily applies to what goes on
in the boardroom.
On the day that I write this, March 12, the Wall Street Journal is reporting
three developments that absolutely cry out for someone to say, "Stop
being stupid." Allow me the dubious honor:
• AIG wants to recoup millions of dollars in retention payments slated
for employees who have already left the firm.
• The Black & Decker board felt there was no perceived conflict of
independence in putting on a special committee charged with appraising
the company's acquisition by Stanley Works — which would trigger an
enormous payout to Black & Decker's CEO — a member who was
significantly invested with the CEO in a personal real estate
development.
• What the WSJ describes as a
"scathing report" has just been released on the collapse of Lehman
Brothers, alleging transactions designed to distort a clear picture of
the financial soundness of the firm; a follow-up statement from a
lawyer for Lehman's then CEO, Richard Fuld, is saying: "Mr. Fuld did
not know what those transactions were — he didn't structure or
negotiate them, nor was he aware of their accounting treatment."
C'mon, people. What is a board doing approving a multimillion-dollar
compensation arrangement designed to reward executives to stay but will
still pay them royally if they leave? What is a board doing permitting
a director who is in bed with the CEO on a real estate deal to be on a
special committee approving a huge payout to him — and not thinking
that's a conflicted situation? What is a chairman and CEO,
well-documented for his hands-on role in running the firm, doing in
saying that he had no involvement whatsoever in a tactic crucial to
staving off the collapse of his company? Granting that he had no such
involvement, why would he issue such a statement anyway — what kind of
a reflection is that on his leadership to be claiming ignorance? I
know, I know . . . but still?
And all this is from just one day’s
board-related reportage!
Some of the best minds in governance believe that "courage" is the most
important attribute in being a director. Last year I
devoted an editor's note to that very topic. Yes, exhibiting
courage in the boardroom is one way to have a governance system that
functions the way it should.
Another way is to stiffen the spine of the system through legal and
regulatory ordering — hastily enacted legislation like SOX or some of
the stuff now spewing from Washington.
A third way, maybe the best way — thank you, Bob Herbert — is to just
stop being stupid.
As always, especially when the need to vent overtakes, this editor —
who has his own boneheaded moments to reckon with — welcomes your
comments at jkristie@directorsandboards.com.
Jim
Kristie is the editor and
associate publisher of Directors
& Boards.
****
Please join my
colleagues at Family Business
Magazine at the upcoming Transitions:
The Changing Environment for Family Companies conference, April
15-16 in Celebration, Florida. Click
here for more details, and to register.
Vetting Your Board
Members and Board CandidatesAs the SEC establishes a 10-year ‘look back’ for legal proceedings, be even more comprehensive in your due-diligence assessment.
By James Rowe
A new rule adopted by the Securities and Exchange Commission requiring disclosure of broader categories of legal proceedings involving directors or nominees going back 10 years (rather than only five years) is neither unexpected nor burdensome. In proposing this rule last summer, the SEC said that such enhanced disclosure would help investors understand why a director is a “good fit” for the company.
This rule relates to the last step in a corporate board’s naming of a candidate. The first step is the board’s own determination that a candidate is suitable. The second is performing a due-diligence background check on the candidate, and that’s where firms like ours come in. Our clients — the leading public and private companies, top not-for-profit institutions and international executive search firms — have customarily insisted on comprehensive background reports on C-suite executive candidates and board nominees that are much more ambitious than what the SEC is requiring. To read more, click the link below.
[Click
Here to Read
the Entire Article]
When a D&O Policy Could Leave You Bare
Don’t presume that your ‘mother company’ policy offers any protection when you accept an outside board seat.
By Anthony Galban
Even the largest and most sophisticated companies may not have consistent procedures that ensure their executives who sit on the boards of outside organizations have adequate directors and officers (D&O) liability insurance for this service.
As a result, whether it’s joining a new outside board or retaining a long-held seat, many outside directors may face a financial peril they do not realize exists. An outside director may unknowingly have assumed a personal financial risk should they be sitting on the board of a financially challenged company.
The financial risk is personal because many outside directors are woefully underprotected — regardless of their outside organizations’ or mother companies’ indemnification provisions and D&O liability insurance limits. To read more, click the link below.
[Click Here to Read the Entire Article]
Gary Kaplan
Author
The Executive Guide to Managing Disputes
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.
You suggest in your book, "The Executive Guide to Managing Disputes," that there are ways other than litigation to resolve business disputes that yield better outcomes at less expense. What drives you to this conclusion?
It is difficult to imagine a more inefficient way to resolve business disputes than litigation.
First, business litigation involves an extraordinary level of redundancy. Each side must pay for competing teams of costly professionals to review the same facts and legal issues. Because of the long duration of litigation, moreover, each side typically must review the same materials and make the same arguments multiple times.
Second, there are few, if any, economic incentives to limit costs. Everyone understands the implications of hourly fees; that attorneys have incentive to promote longer rather than shorter cases. Perhaps more importantly, litigation is analogous to the "prisoner’s dilemma" of game theory. The prisoner’s dilemma illustrates situations where self-interest and the absence of cooperation between the parties lead to worse result than cooperation. In litigation, each side has incentive to make the case as costly as possible for the other side which, of course, leads to spiraling litigation expense. To read more, click the link below.
[Click Here to Read the Entire Article]
UN PRI Signatories Should Factor Gender Diversity into Investment Decisions
A new report from The Corporate Library, an independent corporate governance research firm, concludes that assumptions that women are now well represented on corporate boards are not entirely valid. The report is based on a review of The Corporate Library’s database of more than 30,000 board positions in the Russell 3000 index.
The first principle of the United Nations Principles for Responsible Investment (UN PRI) states that signatories will incorporate environmental, social and corporate governance (ESG) issues into investment analysis and decision-making processes. Signatories and members of the responsible investment community therefore should be concerned with gender diversity among corporate directors as they seek to incorporate social (“S”) and governance (“G”) issues into their investment decisions.
Additional findings from the report include:
- Gender diversity is much less prevalent in the universe beyond the largest and highest-profile companies. For example, while almost 90 percent of S&P 500 index companies have at least one woman on their boards, only 60 percent of Russell 3000 index companies and only half of Russell 2000 index companies have at least one female director.
- Only 57 percent of S&P 500 index firms have at least two women on their boards, and only 19 percent have more than two female directors.
- In the entire S&P 500 index, there are only 14 female board chairs (11 of them are also the CEOs of their companies).
- Very few companies in the S&P 500 index have women in two or more board leadership positions (e.g., a female board chair and a woman leading a key committee, or two female chairs of key committees).
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The year 2009 was a record-setting period for women being named to corporate boards — at least by the tracking metrics of the Directors & Boards Directors Roster:
- For the year as a whole, 38% of newly named directors recorded in the Roster were women.
- A breakdown of the board additions by quarter in 2009: Q1, 38%; Q2, 32%; Q3, 43%; and Q4, 41%.
- The total number of all new directors recorded in the Roster in 2009 was 425, of which 162 were women.
- In a year-over-year comparison, for all of 2008 women made up 25% of board appointments in the Roster.
“To put this breakout year in some perspective,” says Directors & Boards Editor James Kristie, “when we first started the Directors Roster quarterly record of new directors in 1994, it was more the norm for the percentage of new women directors to be in the low teens if not high single digits.” He points to the final quarter of 1996 “as a rather inglorious example”: Of the 199 new directors in that Roster, 16 were women — “8%, if one has the temerity to count,” Kristie says.
Kristie notes that the Directors Roster data on women board elections diverge from the results reported by the major surveys on board composition, which still show a poor representation of women on boards — typically in the teens as a percentage of overall composition. One such survey released last month by The Corporate Library is referenced in the Research section of this e-newsletter. Another discouraging report was released in March by the InterOrganization Network.
One way to reconcile the discrepancy, Kristie explains, is that the Directors Roster measures the "velocity" of new women entrants onto boards. “If that quarterly velocity stays strong, the overall representation that is measured by the annual surveys should gradually rise. The Roster might be seen as an early indicator of a ‘change in the atmosphere.’ ”
Click here for a copy of the Roster that includes the director additions during the October-December 2009 quarter, which just appeared in the new issue of Directors & Boards published last month.
Director Resources
Managing Risk: A newly released Institute of Internal Auditors Practice Guide, Evaluating Corporate Social Responsibility/Sustainable Development, can help internal audit executives and their stakeholders alike successfully meet additional risk identification and management challenges at a time when organizations may be overwhelmed by market, credit, human resources, and other huge governance risk issues coming out of the recent financial crisis. This 24-page Practice Guide explores upside and downside CSR risks that chief audit executives should consider when crafting their audit plans and procedures. The guide is available from the IIA at http://www.theiia.org.
Shareholder Activism: The Conference Board Governance Center is now offering a complete set of resources designed to address the critical issues that may expose corporations to expensive proxy battles or litigation. In addition to a 400-plus page report, a “Shareholder Activism Resource Portal” will have regularly updated material such as a directory of over 400 activist investors, extensive profiles of the top 50 activist investors, 200 sample documents such as shareholder letters, presentations and settlement agreements from activism campaigns, voting policies by influential proxy advisory firms, and extensive literature such as legal memorandums, timely articles, and other useful documents and tools necessary for quickly navigating the complexities of shareholder activism. For additional information, contact Timothy Concannon at timothy.concannon@conference-board.org.
Diversity: The 2010 DiversityInc Top 50 Companies for Diversity list has been released. Sodexo was named the No. 1 company. This year, 449 companies participated in the competition, up 12% from last year and up 75% in the past four years. Rounding out the top 10 were Johnson & Johnson, AT&T, Kaiser Permanente, Ernst & Young, PricewaterhouseCoopers, Marriott International, IBM, Bank of America, and Abbott.
Ethical Leadership: The Ethics Resource Center has released a new white paper, “Ethical Leadership and Executive Compensation: Rewarding Integrity in the C-Suite.” The paper addresses the lessons to be learned about ethics and leadership from the U.S. financial crisis, and recommends how boards can connect ethics to financial reward. Click here to download a copy of the paper.
“Flagged” Board Concerns: The Corporate Library, an independent corporate governance research firm, has added a new enhancement to its flagship product, Board Analyst: the ability to visually flag specific board-related concerns, which include: directors over age 70; independent directors who sit on more than four corporate boards; current CEOs who sit on more than two corporate boards; directors whose tenure is greater than 15 years; independent directors whose relationship with the company may be conflicted; directors who have failed to meet minimum attendance standards; directors who own zero shares in a company; directors who received a 10% or higher withhold vote in the most recently reported election; directors who sit on boards assigned a D or F rating by The Corporate Library. For more information, contact sales@thecorporatelibrary.com.
Governance Reform: ShareOwners.org, a nonprofit and nonpartisan organization that is educating and organizing U.S. investors to support both short- and long-term financial market reforms, has issued a 10-point plan for financial reform. Its agenda focuses on the need for stronger regulation (including a beefed-up SEC), increased accountability of boards/CEOs, improved financial transparency, and the protection of the legal rights of investors.
Executive Performance: You might think that leaders promoted from inside their organizations would have a distinct advantage over those hired from the outside. However, new research from RHR International finds that internal leadership transitions are far more complex and challenging than many realize. The firm’s analysis of the data shows that five reasons seem to dominate. One is: A new position is over-interpreted by the leader as an unqualified vote of confidence, leading to an unwarranted level of overconfidence and optimism; problems and issues are dismissed too quickly and allowed to fester, leading to frustration, disillusionment and derailment. Click here to download the complete research summary report.
Fraud: The Network Inc., a provider of governance, risk, and compliance solutions, along with BDO Consulting released the fourth quarter 2009 findings of its Quarterly Corporate Fraud Index. Following a surge of in-house fraud in 2008, the latest Index indicates that fraud reports stopped climbing in 2009—even decreasing slightly in the third and fourth quarters of 2009. Click here to download a copy of the report.
Audit Committee: KPMG’s IFRS Institute is holding a series of public webcasts providing further context and information about differences between IFRS and US-GAAP. On April 20 the firm will webcast a presentation on “IFRS 1.”
Author’s Notes
Daylight Forensic Executive Director Scott Moritz was a panelist at the 2010 Global Ethics Summit, held in February in New York City. He participated on a panel, "Picking Your Partners." Moritz is the practice leader for Daylight's Global Anti-Bribery and Corruption Services, including FCPA and investigative due diligence.
John A. Fry has been named the new president of Drexel University (home of the LeBow College of Business Center for Corporate Governance), replacing interim president C.R. “Chuck” Pennoni. He is the current president of Franklin and Marshall College in Lancaster, Pa., where he served for eight years that were marked by impressive growth in finances and infrastructure.
Dr. Peter Cappelli, professor of management at the Wharton School, has been named to the new advisory board for The Human Capital Institute, a catalyst for innovative new thinking in talent acquisition, development, deployment, and new economy leadership.
Ronald E. Berenbeim, principal researcher, business ethics, of The Conference Board, has been selected for a Fulbright Teaching Specialist Award to teach at the School of Law, University of Cergy-Pontoise, located outside Paris. An authority on business ethics and corporate governance issues, he has authored 44 studies for The Conference Board.
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