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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 |
A Revisit with Two Chairmen
A dip into the Directors & Boards archives
offers a resonating dimension to today’s headlines.
Close readers of this newsletter know that one of my beefs with
corporate management and boards is their shortsightedness when they
treat their companies’ human resources as expenses to be minimized (or,
worse, eliminated) rather than assets to be well tended.
It is refreshing, then, to unearth from the Directors & Boards archives an
article authored by Fujio Cho, the just-named chairman of Toyota Motor
Corp. I recognized Cho as a comer back in 1991 when he spoke to the
World Affairs Council of Philadelphia about Toyota’s approach to
managing its people. His insights found their way into our pages that
year. At the time he was CEO of Toyota Motor Manufacturing U.S.A. Inc.
in Georgetown, Ky., the location of the automaker’s first plant in
North America. Over the next 15 years he would help propel the company
into a commanding position in the world auto industry as its most
profitable operator.
When his appointment as chairman of Toyota was announced in June, I
dusted off his article and saw that it still resonates with a message
for enlightened management of HR assets. We give him the Columnist
spotlight in this month’s e-Briefing to inspire us again on how those
who wish to be leaders value their people. (Full and happy disclosure:
I am the owner--a very satisfied one--of two Toyotas.)
Ken Lay’s death on July 5 is a sad coda to the Enron collapse, and
prompts us to again dip into the
D&B archives for our Article of the Month. In all the press
attention to the Enron board, there has never been much coverage of
Lay’s outside board service. No matter how you feel about him, you may
find of interest the story we did when he joined the board of an
e-commerce company in 2000. It’s a piece for the historical record and
an anecdotal insight into tactical director recruitment.
Question of the Month
Our Question of the Month for July teed up a proposition put forward by
former SEC Chairman William Donaldson at the Yale Center for Corporate
Governance and Performance: Thanks to Sarbanes-Oxley, “It used to be
said that it’s the CEO’s board; now it’s the board’s CEO.” Your
reaction:
• Strongly agree: 0%
• Agree somewhat: 43%
• Disagree somewhat: 57%
• Strongly disagree: 0%
And a representative selection of your qualitative comments:
“God forbid management is no longer allowed to manage and the board
becomes the manager. Call your broker and sell!”
”I suspect there are still many directors who are owned by the
CEO.”
”While
there is movement in that direction, I am still running across boards
that do not even routinely hold executive sessions without the CEO
present. Donaldson's statement is more likely to be true for those
firms that have split the roles of CEO and chair.”
”While the tide has turned somewhat towards greater board oversight,
there are still a few good-ole-boy boards out there that haven't seen
the light yet.”
”Fortune 500 companies continue to be the CEO's board. They remain
stocked with nodding trophies and friends.”
”It depends upon the company, but generally, the CEO, knowing far more
about the company, its markets and prospects, and controlling the
non-standard information flow, is the man in control.”
Count me in the “agree somewhat” camp. What the survey response and
your comments tell me is that there is still very much a lively
marketplace of ideas on governance leadership to keep a journal like Directors & Boards hopping.
Talk about a lively market. This year is proving to be a barn burner
for M&A activity. As I write this note, the buyout of HCA Inc. is
breaking news.
This Month's Question
Conventional wisdom, backed by several academic and consultant studies,
is that most M&A transactions, netted out, are losers from a
value-creating standpoint. I’ve always been skeptical of these studies.
My feeling is you could drive a truck through the holes in some of
them.
But
nonetheless,
I invite you to click here and render your judgment that “On balance,
mergers and acquisitions destroy more value than they create.” And
keep your eye on your inbox for the arrival next month of our latest
Boardroom Briefing on boards and M&A.
Jim
Kristie is the editor and
associate publisher of Directors
& Boards.
Kenneth
L. Lay, Corporate DirectorA remembrance: When the Enron chairman joined the board of i2 Technologies in 2000, it was a bridging of the Old and New Economies.
Ed. Note: This article is a
condensed version of a profile of Kenneth Lay that appeared in Directors & Boards in the Winter 2001 edition. Written by
Martin Porter, then the journal’s associate editor, the article
spotlighted Lay’s role as a corporate board member. Lay died of heart
failure on July 5, only weeks after being convicted of fraud and
conspiracy in the collapse of the company that he built into an energy
giant during the 1980s and ’90s.
Only two weeks before his inauguration day, George W. Bush met with
leaders of mostly Blue Chip, high-technology companies to discuss ways
to revive the New Economy sector. Among the high-profile executives in
attendance at the two-day economic workshop was longtime friend Kenneth
L. Lay, chairman of Enron Corp.
“Enron today is a pretty good mix of New Economy and Old Economy
businesses,” Lay tells Directors & Boards. He notes that Enron
began its major embrace of high-technology in the late ’80s, when it
established its wholesale energy marketing and trading networking
businesses.
Important Window
Lay’s board service offers a window on how technology is transforming
the business landscape. He has been a director at Compaq Computer Corp.
since 1987. His newest directorship at i2 Technologies Inc., an
innovative developer of B2B and e-commerce supply chain management
software, “will provide another good window to look into technology and
software development,” he says. He is also a director of investment
firm Trust Co. of the West and pharmaceuticals giant Eli Lilly &
Co. He joined the board of i2 in October 2000.
[Click
Here to Read
the Entire Article]
How a company treats its workers will determine whether it can compete in the world of producing high-quality, reasonably priced products.
Ed. Note: This article is reprinted from the Fall 1991 issue of Directors & Boards, in which Mr. Cho, then a senior U.S.-based executive for the auto maker, was a keynote author for a special 15th anniversary issue of the journal, themed “Being a Global Leader.” Our 30th anniversary issue will be published in October of this year.
At Toyota, we have four principles that guide us in our actions and decisions:
• To produce America’s No. 1 quality car based on “customer first” philosophy.
• To contribute to the quality of life, as well as to the economic growth, in the communities we serve.
• To promote stable employment and improved well-being of employees through steady growth of the company.
• To develop unique, innovative production and management systems by combining the best ideas of two countries.
The three main factors for plant operation in a manufacturing company are often expressed with three M’s — man, machinery, and material. Let us consider the relative importance of these three factors in the success of present-day manufacturing industries. (In order to succeed, of course, all three must be working well.)
[Click Here to Read the Entire Article]
Chairman of the Board
Deloitte & Touche USA LLP
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.
What are the most important tasks that a board should accomplish in connection with leadership succession planning?
The board should provide oversight to management’s identification and development of candidates. Often, this is done in conjunction with a succession-related committee. In addition to providing support in these areas, the board should encourage the development of diversified talent, and ensure that there are a sufficient number of qualified candidates who are reviewed and exposed to leadership.
While the board and the succession committee’s responsibility is to ensure that viable candidates are placed into leadership roles, they should not explicitly endorse specific candidates. Development plans for identified successor candidates are usually prepared by existing executive leadership, but the plans may be reviewed by the succession committee and examined for conflicts, gaps and other potential areas for improvement.
Let’s discuss the composition of boards themselves. When looking to fill board seats, risk-averse nominating committees often look at a "short list" of candidates often composed of sitting C-level executives and people who have served on other boards. Do you think nominating committees should be looking at a broader talent pool?
Nominating committees must absolutely be looking at a broader talent pool. Increasingly, board composition has become a criteria by which companies are evaluated and rated. To broaden their searches, committees will have to dig deeper than the office of the CEO to unearth new talent. Additionally, fewer CEOs are willing to take on the added time demanded by today’s boards, or are willing to take on the added financial risks of service. This scenario may actually be a good thing, however, since it creates additional opportunities for diversity.
[Click Here to Read the Entire Article]
Additional Heightened Focus on Accounting Judgments and Estimates, Risk Management
While a majority of audit committee members today rate their committee as “very effective,” many concede some specific issues and processes could be improved—including oversight of accounting judgments and estimates, risk management, and agenda-setting, according to a recent survey by the Audit Committee Institute of KPMG International.
“With Section 404 compliance processes largely in place, we’re seeing audit committees refocusing their agendas on additional oversight issues and activities they feel are most important,” said Kenneth Daly, executive director of KPMG’s Audit Committee Institute (ACI), which conducted the survey with the National Association of Corporate Directors (NACD).” Most audit committees have been keenly focused on their effectiveness over the past several years, and the capital markets benefit from that focus.
Of the 317 audit committee members polled, about 70 percent rated their committee as “very effective.” In addition, when it came to helping ensure the external auditor’s independence from management and accountability to the audit committee, nearly 85 percent rated themselves “very effective.”
But there remains room for improvement. For example, nearly one in three said they were not fully satisfied with the committee’s oversight of management’s accounting judgments and estimates. Eighty percent of those surveyed by KPMG’s ACI said they were not fully satisfied with the board’s or audit committee’s oversight of risk management or the processes that management uses to identify and manage the company’s risks. And nearly 40 percent said the approach used to establish the committee’s agenda/work plan could be improved.
Oversight of risk management also is a major area of concern. Many audit committee members polled were not fully satisfied with management’s process to identify and address risks facing the company, or with the committee’s oversight of that process. About one in three said there was no clearly defined process for assigning risk oversight responsibilities among the board and its committees, and more than half believe the audit committee should not have primary responsibility for oversight of the company’s risk-management program.
Regarding specific areas of risk, many audit committee members identified room for improvement in their oversight of internal controls (36 percent), financial reporting implications of taxes (59 percent), fraud risk (61 percent), and information security (78 percent). In addition, most (84 percent) expressed concern that the lengthy checklist of the audit committee’s more routine compliance activities may “detract from substantial discussion” of company issues and negatively impact the committee’s overall effectiveness.
Although many audit committee members said they generally are satisfied with their interaction and support from management, auditors, and others, a considerable number cite room for improvement: Roughly one in three respondents said support from the CEO, external audit partner, in-house and external legal counsel, corporate secretary, and the full board could be better.
“What we’re seeing in these survey results is a combination of healthy skepticism, with audit committees asking more probing questions about critical areas of oversight, and a real need to continue strengthening the financial reporting process overall,” said KPMG’s Daly.
About KPMG's Audit Committee Institute
Founded in 1999, KPMG’s Audit Committee Institute (ACI) interacts and communicates with thousands of directors and corporate officers every year through semiannual roundtables, conference and board presentations, thought leadership publications, periodic distribution of time sensitive information, online resources (www.kpmg.com/aci), and a toll-free hotline (877-KPMG-ACI). In addition to ACI in the U.S., KPMG International member firms host ACIs in 19 countries around the world.
KPMG is the global network of professional firms providing Audit, Tax, and Advisory services. We operate in 144 countries and have more than 104,000 professionals working in member firms around the world.
The independent member firms of the KPMG network are affiliated with KPMG International, a Swiss cooperative. KPMG International provides no client services.
September
25-26, 2006
The Practicing Law Institute holds its Fourth Annual Directors'
Institute on Corporate Governance at the PLI New York Center. Key
program topics include: What the Board Expects of the General Counsel;
Accounting for Directors; Understanding Directors' Executive
Compensation Duties; and Corporate Social Responsibility and Charitable
Contributions. Ira Millstein will do the kick-off address, and John
White, Director of the SEC's Division of Corporate Finance, will do a
special luncheon presentation. For more information, visit
October
12, 2006
CompensationStandards.com will hold its 3rd Annual Executive
Compensation Conference in Las Vegas, which will also be available by
audio and video webcast. The theme of the one-day conference is
"Meeting New Standards: What Every Director (and Advisor) Needs to Know
-- and Do -- Now!" and is designed for all parties involved in and
responsible for implementing executive and equity compensation plans.
For further information, visit 3rd Annual Executive Compensation
Conference at
October
15-17, 2006
The National Association of Corporate Directors (NACD) holds its 2006
Annual Corporate Governance Conference. Themed "The Board Agenda:
Driving Long-Term Value," the program will cover the evolving best
practices in board oversight of executive compensation, strategy
development, succession planning, board evaluation, and the results of
the NACD's 2006 Blue Ribbon Commission on "Board Practices in
High-Performing Companies." The conference will be held at the
Renaissance Mayflower Hotel in Washington, D.C. For registration and
hotel information (last year's conference sold out) call 202-775-0509,
or visit
October
29 - November 2, 2006
The Thunderbird Global Family Enterprise Program will present "Are You
Prepared to Operate Your Family Enterprise on a Global Scale?" The
program is designed to prepare family enterprises to effectively manage
growth, establish successful governance strategies, and ensure
continuity across generations of family leaders. It will be held at the
Royal Palms Resort in Phoenix. Visit
November
1-3, 2006
The Center for Corporate Excellence will hold its "Changing the Game"
Forum in Denver. The event is designed to be a thought-provoking
conference covering current issues in corporate accountability and
executive responsibility. Vanguard Group Founder Jack Bogle will be
presented with the Center's Exemplary Leadership Award, which
recognizes those who have demonstrated excellence in corporate
governance and ethical leadership. For more information, visit
November
2-3, 2006
The University of Wisconsin-Madison presents its Directors' Summit.
This ISS- and NACD-accredited event freatures keynote speakers John
Morgridge, Chairman of Cisco Systems and Tom Stemberg, founder of
Staples, as well as panel discussions on a variety of topics. For more
information and to register, visit
November
9-10, 2006
Bank Director magazine and NASDAQ present the second annual Bank
Executive and Board Compensation conference at the Four Seasons Resort
& Club, Dallas at Los Colinas. This event will focus on CEO and
director compensation challenges and solutions specifically related to
financial institutions, and brings together leading experts and
advisers, as well as experienced bankers, such as Harris H. Simmons,
chairman and CEO of Zions Bancorporation, to provide best practices.
Attendees receive a free, personalized board compensation review from
Clark Consulting (http://www.clarkconsulting.com) and option for a free
private consultation at the conference. For more information, call
800-452-9875 or visit
November
15-17, 2006
The 2006 University of Delaware Directors' College will convene at the
university's John M. Clayton Hall Conference Center in Newark, Del.
Topics to be tackled include: How can directors effectively oversee
executive compensation? How do your board activities compare to others?
Where will the regulators focus next? And, what can directors do to
protect themselves legally? The program is hosted by
PricewaterhouseCoopers and the University's Lerner College of Business
and Weinberg Center for Corporate Governance. To learn more about the
program, visit
here.
December
3-4, 2006
BoardSource, the premier resource for information on nonprofit
governance, will hold its "2006 BoardSource Leadership Forum: Set Your
Sights on Exceptional Governance" in Chicago. More than 600 nonprofit
governance leaders will come together to discuss key governance issues
relating to public charities, associations, foundations, and other
nonprofit organizations. Featured speakers will include Roxanne
Spillett, president, Boys & Girls Clubs of America; Richard P.
Chait, professor, Harvard Graduate School of Education; James E.
Canales, president and CEO, The James Irvine Foundation; David Nygren,
partner, Mercer Delta Consulting; and Michael Chu, senior partner,
Pegasus Capital. Forum sessions will address fundraising, board
leadership, executive transitions, board capacity building, effective
decision making, troublesome board members, and other topics. To
register visit
Directors & Boards' next Boardroom Briefing will take a look at mergers & acquisitions from the board members' perspective. This Boardroom Briefing will feature exclusive research, as well as a variety of expert opinions and commentary. Look for it in September.
Report: Break the ‘Short-Term Obsession’
In a report released in July, the CFA Centre for Financial Market Integrity and the Business Roundtable Institute for Corporate Ethics have jointly called on corporate leaders, asset managers, investors, and others to break the "short-term obsession" harming shareholders' interests by reforming practices involving earnings guidance, compensation, and communications to investors. The report outlines five broad areas of recommendations, including reforming earnings guidance practices and developing long-term incentives across the board.
The report's findings and recommendations are based upon a research review by the CFA Centre and the Business Roundtable and several symposia discussions with key stakeholders, including corporate issuers, analysts, asset managers, shareowners, institutional investors, hedge fund managers, regulators, and the media. "The participation of the various stakeholder groups was critical to achieving a set of significant recommendations," said Kurt Schacht, managing director of the CFA Centre for Financial Market Integrity. "Getting all of the parties involved at the same table led to meaningful progress. The discussions enabled us to construct what we believe are viable, achievable strategic solutions." The full report and an executive summary are available online at http://www.cfapubs.org/toc/ccb/2006/2006/1.
Class Action Filings Are Down
Stanford University Law School and Cornerstone Research released a 2006 mid-year Securities Fraud Class Action Filings report. Among the findings: the number of class action filings in the first half of 2006 is at the lowest level for any six-month period since 1996 and are also significantly below 1996-2005 historical averages; and the allegations of the backdating of options have not, in fact, had as big an impact as many people expected, as only eight federal class actions (filed in 2006) have alleged illegal backdating behavior. The report is available to view online and can be downloaded at http://securities.stanford.edu.
Improved Reporting for Private Companies
The Financial Accounting Standards Board and the American Institute of Certified Public Accountants have issued a joint proposal intended to improve the financial reporting process for private company constituents. The comment period ends August 15, 2006. FASB and the AICPA are encouraging everyone who plays a role in private company financial reporting--bank lenders, sureties/bonding companies, investors, owners and preparers, and practitioners--to review the proposal and comment on it. For more information, visit the FASB website at http://www.fasb.org or the AICPA website at http://aicpa.org.
New Informational Resources for Boards
SOX 2.0: Aiming to help CFOs and other executives navigate the next series of challenges associated with Sarbanes-Oxley compliance, FierceMarkets (http://www.fiercemarkets.com) last month launched a
new informational resource called FierceSarbox (http://www.fiercesarbox.com). The newsletter and website provides a one-stop source of actionable information on cutting costs and increasing efficiency while avoiding noncompliance, the challenges FierceMarkets characterizes as "Sarbanes-Oxley 2.0." FierceMarkets is a digital business media company serving vertical markets with e-mail newsletters, websites, and live events. Based in Washington, D.C., FierceMarkets publications reach more than 365,000 executives in over 100 countries every business day.
CEO Comp Analysis: Mercer Human Resource Consulting (http://www.mercerhr.com) has been analyzing CEO compensation in 350 large U.S. companies for more than a decade. The data, first published each year in a special supplement of The Wall Street Journal, prompts many questions about the most newsworthy year-over-year changes in CEO pay. A new Mercer Perspective takes a somewhat longer view, reviewing the results of its studies from 1996 to 2005 and capturing the lead-up to the dot-com bubble, its spectacular pop, and current era of strengthened corporate governance and greater transparency. Click here for a PDF copy of the report.
Internal Audit Best Practices: Protiviti Inc., an independent internal audit and risk consulting firm, has released its latest publication, Internal Auditing Around the World: Profiles of Internal Audit Functions at Leading International Companies (Volume 2). This book, part of an annual series produced by Protiviti, details internal audit best practices, processes and strategies being employed at successful businesses operating worldwide and in a broad range of industries. An electronic copy can be downloaded at http://www.protiviti.com or http://www.knowledgeleader.com.
Governance Blogosphere
Pension Oversight: Valuation and risk professional Dr. Susan M. Mangiero has launched the first blog devoted exclusively to the topic of pension financial risk and fiduciary implications. The blog (http://www.pensionriskmatters.com) will serve as a resource for trustees, board members, consultants, money managers, attorneys and regulators to explore important ideas about pension risk issues and best practices. According to the U.S. Department of Labor, internal investigations have discovered a troubling lack of understanding among some fiduciaries as to what their responsibilities are. Litigation is on the rise. Mangiero's blog includes commentary on best practices, trends, research, and recent articles. She is the author of Risk Management for Pensions, Endowments, and Foundations (John Wiley & Sons, 2005) and many articles about risk, valuation, and fiduciary implications, and provides consulting for pension trustees, regulators, audit and compliance firms, hedge fund professionals, and attorneys.
SOX Assist: As companies continue to work through evolving implementation and interpretation of Sarbanes-Oxley, the accounting firm Citrin Cooperman has launched a corporate governance blog to provide analysis of areas such as executive compensation, board composition, internal controls, and more. The blog, at http://www.corporategovernanceblog.com, is the brainchild of firm partner Mike Rhodes, who spearheaded creation of the firm’s corporate governance practice in 2004 and has more than 15 years of experience dealing with governance issues at a then-Big Six accounting firm, a publicly traded firm, and now at Citrin Cooperman (http://www.citrincooperman.com). The firm, with a variety of clients in New York and New Jersey, with a special emphasis on the real estate industry, entertainment, food services, staffing and executive search, and professional services firms, was founded in 1979 and has offices in midtown Manhattan, White Plains, N.Y., and Springfield, N.J.
Author Notes
Louis M. Thompson Jr. will join Genesis Inc. (http://www.genesisinc.com), specialists in strategic positioning, integrated communications, and investor relations, as a partner in September 2006. Thompson will also be joining Kalorama Partners (http://www.kaloramapartners.com) in Washington, D.C., as a managing director. He retires from the National Investor Relations Institute, the country’s premier association of investor relations professionals, on September 6, following 24 years as president and CEO and a member of the board of directors. Additionally, he will also be a columnist for Compliance Week.
Debevoise & Plimpton LLP (http://www.debevoise.com), a firm that has supplied a number of legal advisories for Directors & Boards readers over the years, has for the third consecutive year been named by The American Lawyer to the top position in its “A-List” ranking of the nation’s leading law firms. The American Lawyer noted that “Debevoise has hit upon the rarest of combinations: sterling revenue per lawyer and associate satisfaction scores, a strong showing on diversity, and, naturally, a near-perfect pro bono score.” Debevoise was also ranked the No.1 firm in New York and second nationally for its pro bono work. “This is our firm’s 75th anniversary year, and so it is particularly gratifying to be recognized this year for maintaining a commitment to excellence and to the core values the firm has long held,” said Debevoise presiding partner Martin Frederic Evans.
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