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Directors & Boards
Robert H. Rock,
Publisher
James Kristie,
Editor
Martin D. Porter,
Associate Editor
Lisa
Cody,
Chief Financial Officer
David Shaw,
Publishing Director
Scott Chase,
Advertising Sales
1845 Walnut Street
Suite 900
Philadelphia, PA 19103
+1 (215) 567-3200
The Directors & Boards e-Briefing is produced by GRID Media LLC.
From Jim Kristie | Article of the
Month | Columnist
Reader Profile |
Research | News | Forum
Executive Committees: Artifact of a Past Era?
Here at Directors & Boards
we frequently like to zag in our
coverage of governance developments to the zigs of our press comrades
and other critics of corporate behavior. Or, said another way, when
everyone is obsessing on some aspect of governance we try to focus our
readers on opportunities for action that will put them a step ahead of
the crowd.
Traditionally the executive committee of the board was charged with acting in an emergency/special situation kind of role. Well, when you think of it, in a world of 24/7 and instant communication with anybody anywhere, what kind of an "emergency" driver could there still be to rationalize the existence of this committee?
Also, the executive committee was traditionally a "super" board within the board in terms of power of action and accountability. Now, with every board member individually and as a group having magnified accountability, is it appropriate for an executive committee to have such greater umbrella accountability and powers of action?
And the traditional knock against the executive committee is that it created two classes of directors: those on the executive committee and those not. I have even heard directors say that they would not serve on a board if they were not also serving on the executive committee. Does such an exclusionary policy square with a post-Sarbanes world?
These and other questions posit that the executive committee may be an artifact from a bygone era of governance. That’s what we examine, and the answers may surprise. So while we join other commentators in giving you good guidance on the Big 3 -- the audit committee (see below), the compensation committee, and the governance committee -- throwing a spotlight on the executive committee shows D&B’s facility for not letting current obsessions obscure the identifying of future opportunities for enhancing board structure and operations.
What has been your experience with executive committees? Have they worked in your board situations? Are they still working? Or are you seeing them fade into the post-SOX sunset? We welcome you to share your insights for the next edition of the e Briefing. E-mail me your comments and we’ll publish them in the next issue of the e-Briefing.
Jim Kristie is the editor and associate publisher of Directors & Boards.
From failing to fully understand complex accounting concepts to failing to interview key sales personnel, a repeating pattern emerges of shortcomings in the work of the audit committee.
By Frederick D. Lipman
Audit committees of public companies are trying their best to adjust to
the Sarbanes-Oxley Act of 2002, related SEC rules, and the increased
focus by shareholders, corporate governance rating groups, and others
on audit committee oversight. This has resulted in longer, more intense
and more frequent meetings of audit committees.
Despite their best efforts, I have observed the six common mistakes
made by audit committees:
1. Failure to Fully Understand
Complex Accounting Concepts
It is the duty of audit committee members to fully understand the
accounting used by the company. Accounting concepts can be very
complex. Anyone who has read any of the recent opinions of the
Financial Accounting Standards Board is aware of this complexity. The
accounting in certain companies is extremely complex even for trained
accountants, let alone the average audit committee member. SEC
accounting pronouncements (such as SAB 101 and 104) further compound
the problem.
It is difficult to ask incisive questions of the auditor or management
if the audit committee does not fully understand the accounting used by
the company. A number of auditors and CFOs have privately advised me
that they do not consider anyone on their audit committees to have the
necessary accounting expertise to fully understand the financial
statements.
The audit committee should schedule special education sessions with the
CFO, the auditor, and possibly a consultant to the audit committee
(e.g., an accounting professor) to make certain that they fully
understand the company's accounting policies. It may be necessary to
have continuing education sessions over a period of time to enhance the
audit committee's expertise. [Read
the Full Article]
Time to Revisit Your CIC Agreements
To avoid embarrassment
and deal
complications, the compensation committee should demand detailed
estimates of total change-in-control liabilities.
The headline of a recent Wall Street Journal article suggested: “Want a Bonus? Acquire a Company.”
The so-called “I Must Do a Merger Bonus” rewards a CEO for deal-making, and many CEOs have been rewarded handsomely for growing their companies through acquisition. However, given the gargantuan size of some golden parachutes, perhaps a more appropriate headline would read: “Want a really big bonus? Sell your company!”
If a CEO wants to get rich fast, selling out is often the way to do it. The typical change-in-control (CIC) agreement provides a CEO with a raft of lucrative payments, which typically include three years of pay and bonus, accelerated vesting of stock options, and enhanced retirement benefits. Some agreements go further, often much further.
For example, some contracts provide for three times average annual W-2 compensation, and thus recent option exercises greatly enhance the CIC payment. Some agreements promise to gross up payments to ensure executives receive the net of any excise taxes. In terms of enhanced retirement benefits, the most liberal CIC agreements credit service to age 65, provide a benefit not discounted for age, and continue certain benefits and perquisites such as medical insurance and automobile usage. As a result, it is not uncommon for parachute payments to be in the tens of millions of dollars. [Read the Full Article]
Lerner College of Business & Economics,
University of Delaware
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.
Charles Elson: On its surface, because of increased responsibilities and increased scrutiny of directors, board service certainly is becoming more time consuming, and it would appear to be more risky. I don’t think it’s more risky in terms of ultimate liability if a director comes to board service as independent and as someone who invests equity in the business itself. The threat of time commitment involved in defending your actions is certainly real and has to be taken into account. But I believe that if you are independent, do your job diligently, and devote the appropriate amount of time and effort to what you are asked to do, there should not be any increased liability and it shouldn’t be more risky than it was in the past.
The difference, of course, is that with the increased responsibilities that directors are now faced with, there is a greater focus on what they’re doing, and there is obviously the potential for increased liability. But the fear really is having to respond to questions that bear on your conduct as a director, as opposed to actual liability.
More on a personal level than on a financial level?
Elson: Right. Assuming that you are independent, have a real commitment to the company, and are diligent, if you meet those three requirements you should be perfectly fine. However, that is not going to stop someone – a shareholder – from asking questions. Again, with greater responsibilities come potentially greater liabilities. The more you are responsible for, the more you can miss something, and there’s a potential for questions being raised. [Read the Full Article]
Global Merger and Acquisition Activity on the Rise
70 Percent of
Companies Undertaking or Planning Mergers or Acquisitions Within Next 12 Months
Business executives have a dramatically renewed
appetite for mergers and acquisitions (M&A), with more than 70
percent either currently undertaking an M&A transaction or planning
to do so within the next year, according to the results of a global
survey released by Accenture (NYSE: ACN).
The survey, which queried more than 100 executives at large companies
in North America, South America, Europe and Asia, found that a
confluence of factors, ranging from the global economic recovery to a
perceived lack of organic growth opportunities and increased debt
availability, are spurring this activity.
At the same time, survey responses indicate that overall deal size
relative to percentage of acquiror revenues is shrinking and that
executives are more skeptical of the value that can be achieved through
"mega deals." For instance, only 8 percent of respondents expect
a merger of equals, and the vast majority (74 percent) expect their
companies to acquire smaller players. In addition, M&A
transactions are expected to provide less than 20 percent of overall
company growth.
"Businesses increasingly seek to drive growth
through mergers and acquisitions because there are fewer perceived
opportunities to increase operating efficiencies or grow organically,"
said Ravi Chanmugam, a partner in Accenture's Strategy & Business
Architecture practice "However, we find that few companies have
well-established post-merger integration processes that can capture
value from their transactions and very few executives are measured on
effective integration metrics." [View
the entire survey]
August
25-27, 2004
The Directors' Consortium, a joint offering by the University of
Chicago Graduate School of Business, Stanford Law School, and the
Wharton School of the University of Pennsylvania, presents an intensive
program exploring the fundamentals of corporate governance and board
service. The program will be held in Philadelphia at Wharton's Aresty
Institute of Executive Education.
September
15-16, 2004
On Board Bootcamp Seminar is a program designed to be an "insider's
guide" to getting on a corporate board and succeeding as a director. It
is co-directed by Susan Stautberg, president of PartnerCom Corp., which
creates and manages advisory boards, and Carolyn Chin, chairman and CEO
of Cebiz, a consulting and investment management firm. The program will
be held in New York.
October
6-8, 2004
INSEAD hosts its third International Directors' Forum in Fontainebleau,
France. This unique event brings together a select group of Chairmen
and Board Members from across Europe and the world who seek to improve
their Board's effectiveness, deepen their understanding of how other
top Boards operate, and exchange views on the implications of the
changing corporate governance context. The program is ISS-accredited.
Information on the event can be found at
October
17-19, 2004
The National Association of Corporate Directors (NACD) presents its
2004 Annual Corporate Governance Conference at the Renaissance
Mayflower Hotel in Washington, DC. To register, visit
November
14-15, 2004
BoardSource, formerly the National Center for Nonprofit Boards,
presents its Leadership Forum, themed "Challenge Your Board Practices."
Discussions will include: how effective are boards?; what is the future
of nonprofit leadership?; what does it mean to lead?; and, do your
board committees have "static cling"? Register at
The Directors' Education Institute at Duke University is an intensive two-day program developed by the Duke Global Capital Markets Center with the support of the New York Stock Exchange. With participation from leading executives, corporate directors, policymakers, and experts from the legal and financial services industries, along with academic authorities from the Fuqua School of Business and Duke Law School, the program will teach participants how to develop a framework for making informed board decisions and exercising sound business judgment. For additional information, visit
What's New
at Directors & Boards
Directors & Boards and the National Association of Corporate Directors (NACD) are collaborating on a special publishing project this Fall. This special Boardroom Briefing will focus on the future of the annual meeting. Are they "anachronisms of corporate democracy," or a valuable corporate governance and shareholder relations tool? Can the annual meeting be made more effective? And what alternatives are there? This special issue will feature the results of a major survey of directors on the topic.
To contribute editorially, please contact David Shaw, publishing director, at 301-963-6162, or be email at dshaw@directorsandboards.com. To advertiser in this special issue, contact Scott Chase at 301-879-1613, or by email at scottchase@verizon.net.
The Nominating Process and Corporate Governance Committees--A Business Roundtable Whitepaper
Directors & Boards' 3rd Quarter Issue is mailing with a special whitepaper from The Business Roundtable on "The Nominating Process and Corporate Governance Committees." Directors & Boards is proud to bring its readers this important addition to corporate governance knowledge and principles. You can also view and read the whitepaper here.
The Art of Corporate Governance
Directors & Boards' new book, "The Art of Corporate Governance," is now available for purchase. The book features 10 of the finest articles published in the journal from the past 20 years and focuses on the role of directorship. Authors include Norman Augustine, Chuck Ames, William Miller III, Robert K. Mueller and Murray Weidenbaum. For more information and to buy a copy of the book, click here.
Director's Guide to Compliance Software
Directors & Boards Third Quarter issue features the first in a series of Directors Guides, this one focused on what CEOs and directors need to know about compliance software. What questions should you be asking of your executive and IT team when it comes to compliance software? How can you measure ROI? The Directors Guide to Compliance Software will feature a handy checklist which you can use in your next board meeting. You can view and read the article online, here.
Notes
Directors & Boards Editor James Kristie addressed the annual conference of the American Society of Business Publication Editors on the topic of "Managing Editorial Advisory Boards."
Directors & Boards e-Briefing is a monthly service of Directors & Boards. All contents copyright 2004, MLR Holdings LLC.