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Directors & Boards
Robert H. Rock
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James Kristie
Editor
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Cody
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From Jim Kristie | Article of the
Month | Columnist
Reader Profile |
Research | News |
Goldman:
What Might Have Been
A major missed opportunity for the firm to restore its sacred
reputation for trusted and far-sighted leadership.
There is no surprise that Goldman Sachs settled with the SEC last
month. The firm would have been foolish not to, and the sooner it
settled the better. The firm is not in the clear yet: It is still
possible the agency can bring additional action pending new findings of
questionable activity, and the Financial Crisis Inquiry Commission is breathing
heavily down the firm’s neck as the panel continues studying the
causes of the financial collapse.
Two surprises did come out of the SEC settlement, one minor and one
major:
- The minor surprise was the settlement amount of $550 million. I thought the SEC would peg the fee to get out of the penalty box at $1 billion, a number that would memorialize for the ages the whole reason it brought its case against Goldman. In my opinion, at its core this case was never really about the Abacus deal. It was a statement by the SEC that the ethos of Wall Street, from the head firm (Goldman) down through the tentacles of every trading outfit, was poisoning the capital markets and jeopardizing the soundness of the economic system. The lower number dialed down that statement, but the SEC accomplished its intended and appropriate "come to Jesus" moment.
- The major
surprise was that Lloyd Blankfein kept his hold on the firm. "Some had
speculated the legal dustup would at least cost him his chairmanship,"
noted New York Times reporter Graham Bowley in his account of the leadership
implications of the SEC deal for Goldman. I, too, thought that.
I
never expected that the SEC would force Blankfein out. I did anticipate
that, in allowing him to stay on as CEO, the agency would insist on the
firm having an independent nonexecutive chair. This would not have to
be a permanent split, but long enough — perhaps two years — for the
firm to rebuild its battered reputation.
This is the action that would have made a substantial statement to a
nation still suffering from the ill effects of a Wall Street run amok
that this leading firm in finance is indeed serious and committed about
finding its "true north" again.
I use that phrase deliberately, because here is the thing — Goldman
Sachs has sitting on its board the one person who could step into the
nonexecutive chair role and get the firm immediately perceived as being
regrounded in a sense of ethical leadership. That person is Bill George. Mr. "True North"
himself.
A passing glance at Bill's career — his business accomplishments and
contributions to the thought leadership of "doing the right thing" —
would persuade that Goldman had taken a decisive step in addressing its
sullied image.
That should have been a desired outcome of the settlement, one that the
firm fully embraced — meaning that Goldman might have proactively taken
this action, with or without SEC prompting. It certainly could live
with shared leadership, as there is a legacy of shared leadership
(albeit insiders) of the firm, as witness the eras when John Whitehead
and John Weinberg shared the reins, and then when Robert Rubin and
Stephen Friedman were co-leaders.
So, a major surprise in the Goldman SEC settlement, and a major missed
opportunity for the firm to restore a sacred reputation for trusted and
far-sighted leadership.
As always, I welcome your comments at jkristie@directorsandboards.com.
Jim
Kristie is the editor and
associate publisher of Directors
& Boards.
Why Microsoft Adopted ‘Say on Pay’Just as Microsoft believes in constant innovation in our products and services, we believe there is considerable room for innovation in shareholder dialogue.
By Brad Smith
At Microsoft’s annual shareholder meeting in November 2009 more than 3 million stockholders had the opportunity to cast an advisory vote on compensation programs for senior Microsoft executives. This was the first time that Microsoft shareholders could weigh in on the compensation of the company’s top leaders — a practice known informally as shareholder say on pay.
Our say on pay policy was shaped in an environment of economic crisis and low public confidence in the business community. We saw it as an opportunity to express our longstanding commitment to strong corporate governance principles and progressive practices, and to take our own step toward helping restore public confidence in business.
We recognized at the time that policymakers in Washington, D.C., were focusing as well on strengthening corporate governance policies via federal legislation, but we also felt it was important to take the initiative ourselves.
For Microsoft, our say-on-pay policy grew out of extensive study and dialogue with corporate governance advocates, other companies, our largest shareholders, and shareholder proponents of say-on-pay, including the United Brotherhood of Carpenters, Walden Asset Management, and Calvert Investments. To read more, click the link below.
[Click
Here to Read
the Entire Article]
The George Steinbrenner I Knew
He had all of the intellectual attributes and many of the leadership ones that every great CEO must have — but. . . .
By Leo Hindery Jr.
"His lantern was always on the bow, not the stern."
What better way to describe George Steinbrenner, who began his career on the Great Lakes marshalling ore boats and who passed away last month, only days following his 80th birthday.
George will always be remembered for marshaling the New York Yankees to greatness, in the process turning the premier baseball team in the country into a premier media and entertainment franchise.
George was arguably the most complex man to ever come into my life, and for the nearly four years that we collaborated on the formation of The YES Network, I struggled to understand his complexity, while emulating and learning from his good parts and avoiding the bad.
George had all of the intellectual attributes and many of the leadership ones that every great CEO must have. To read more, click the link below.
[Click Here to Read the Entire Article]
Harry L. “Hank” Gutman
Director, KPMG’s Tax Governance Institute
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. This month, we're pleased to feature two in-depth
advisories.
The IRS currently has three initiatives that touch on the issue of tax risk disclosure, two of relatively recent vintage and one a little older.
The first is a general call by IRS Commissioner Douglas Shulman for expanded board and audit committee involvement in overseeing entity tax risk (http://www.irs.gov/newsroom/article/0,,id=214451,00.html). The second involves a tax return schedule (Schedule UTP) that would require many corporations to disclose uncertain tax positions (UTPs) and quantify the maximum related tax exposure. A third initiative, the Compliance Assurance Process (CAP) provides for audits that are near real-time examinations, requiring the taxpayer to disclose completed material transactions as they occur throughout the year. CAP is generally viewed by the 100-plus taxpayers engaged in a pilot program as a positive alternative to a conventional IRS audit.
Of the three, Schedule UTP has received the most recent attention, sparking numerous comments to the IRS from the corporate, legal and accounting communities. The goal of the Schedule, according to Commissioner Shulman, is to increase audit efficiency. The IRS has said that the information it receives will cut down the time it takes to find and prioritize issues and to complete an audit. To read more, click the link below.
[Click Here to Read the Entire Article]
Steve KrouskosGlobal and Americas Markets Leader, Transaction Advisory Services
Ernst & Young
What is the outlook for M&A?
Deal activity should pick up, as market fundamentals are strengthening and businesses that have conserved cash are implementing growth plans that were on hold during the recession. Other businesses are looking to sell business units that are more valuable to someone else in order to raise cash. Strong growth prospects in markets such as Brazil and China should also portend a continued rise in deal volume in the second of 2010, despite concerns over instability in other developed markets.
Ernst & Young and the Economist Intelligence Unit recently updated our Capital Confidence Barometer, a survey of over 800 senior executives in major corporations around the world to gauge their confidence in economic recovery, capital availability and other issues pertinent to their capital agendas. Nearly half (47%) of those surveyed in the first Quarter 2010 said they expect to make acquisitions in the next six months and 67% predicted acquiring over the next two years, compared with 25% in the last half of 2009. To read more, click the link below.
[Click Here to Read the Entire Article]
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A new report from The Corporate Library, an independent corporate governance research firm, found a gap between academic and corporate understandings of the function of board diversity. Although academic analysis has shown diversity makes boards more efficient overseers and more realistic judges of value, corporations appear to view board diversity as a moral, political or social justice issue.
“Companies almost uniformly claim to value a diverse board, but they’re typically pretty vague about what difference it could make to the functioning of a firm,” said Dr. Kimberly Gladman, Director of Research and Risk Analytics for The Corporate Library. “Academics, meanwhile, have done some fairly precise analysis of diversity’s impacts, finding that it is good for the efficient functioning of boards.”
Effective February 28, 2010, the Securities and Exchange Commission requires public companies to disclose how board diversity is considered in the process by which director candidates are considered for nomination. The Corporate Library’s report presents the findings of a side-by-side survey of a sample of these new board diversity disclosures, as well as academic literature about board diversity posted to the Social Science Research Network in the last three years.
The report, titled, “Beyond the Boilerplate: The Performance Impacts of Board Diversity,” is available as a free download from The Corporate Library’s online store.
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On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Dodd-Frank Act is predominantly focused on the regulation and oversight of financial institutions. However, certain corporate governance provisions within the legislation will have a broad impact on most public companies (including non-financial institutions).
Law firm Kirkland & Ellis LLP has prepared a chart that usefully summarizes the key corporate governance requirements of the Dodd-Frank Act. Click here to access. Given the significant impact of the new Act, the firm also offers the following set of action steps for members of senior management and boards of directors to consider:
- Take Inventory: With the assistance of a chart like Kirkland & Ellis’s and with outside counsel, consider the potential impact of the Dodd-Frank Act on your company.
- Update Shareholder Communication Procedures: The Dodd-Frank Act will make it more important than ever to communicate effectively with shareholders and understand the composition of the company's shareholder base.
- Comment on Any Proposed Rules: The Dodd-Frank Act vests a significant amount of discretion with the SEC. Given the vast array of potential "outcomes" on proxy access in particular, companies should consider taking an active role in attempting to shape the final outcome of any SEC rulemaking.
- Assess Compensation Consultant Independence: Given the enhanced scrutiny of compensation consultant independence under the Dodd-Frank Act, a critical assessment of potential conflicts of interest and propriety of fees paid should be considered.
- Begin Planning for a "Say on Pay": Successfully navigating say on pay depends on a sound planning and communications process. Changes to the company's compensation policies, practices, and disclosures may be necessary, so early planning is critical.
- Assess Existing Incentive Compensation Arrangements: Consider existing methods and approaches to incentive-based compensation, and potential use of new or modified clawbacks.
Director Resources
Ethics: Among the findings in the fourth annual Ethics & Workplace Survey released on July 26 by Deloitte: over one-third of employees (36%) feel that trust in their companies’ boards has decreased since the start of the recession; and the large majority (83%) of executives agree that the board of directors has a responsibility to play a role in building employee trust. The survey also points to one-third (34%) of employed Americans planning to look for a new job when the economy gets better. Within this group of respondents, 48% cite loss of trust in their employer. A large majority (65%) of Fortune 1000 executives who are concerned employees will be job hunting in the coming months believe trust will be a factor in a potential increase in voluntary turnover. Click here for more on the survey’s findings.
Chief Financial Officers: Some indicators coming out of the latest Russell Reynolds Associates quarterly report on CFO Trends and Moves: The pace of CFO turnover has dramatically slowed over the past 12 months at Fortune 1000 companies; CFOs were more confident making changes to their teams in this year’s first quarter; there has been a significant pickup in new CFO searches for portfolio companies by private equity firms; and increasingly CFOs are being tapped for CEO positions at Fortune 500 firms (almost 50 recently, with ex-CFO Marcel Smits becoming CEO at Sara Lee as a prominent example). The global executive search and assessment firm is also seeing a “dramatic increase” in CFO searches in the U.S., Europe, and Asia (especially in financial services). Click here to access the report.
Insurance: As risk managers strive to maintain effective and competitively priced insurance programs, Marsh has unveiled a real-time, on-demand industry benchmark reporting service available to clients and prospects. Available through Marsh’s Global Benchmarking Portal, the new service provides clients with real-time benchmarking analytics on purchasing and pricing trends in the United States for approximately 20 major industry groups, as well as cross-industry reports on property, casualty, and financial and professional lines. Marsh’s Global Benchmarking Portal contains information on 90,000 policies, covering $50 billion in premium placements, $4 trillion in limits, and $15.5 trillion in total insured value (TIV). Click here for more information.
Executive Compensation: Explosive growth in CEO pay has led some critics to question whether firms are biased in how they determine executive compensation. In fact, companies that used compensation peer groups to determine executive pay did artificially inflate such compensation — but only by approximately 10%, according to research from the Indiana University Kelley School of Business. The study is among the earliest to analyze data resulting from a 2006 SEC mandate that companies disclose members and benchmarks in compensation peer groups, which compensation committees create to ensure executives are paid at levels that will retain and attract top talent. Click here for a copy of the research paper.
Talent Management: Mercer has launched Human Capital Connect, which the firm describes as “a comprehensive rewards and talent management consulting and technology solution that addresses today’s most pressing human capital and business performance issues.” Click here for more information.
Audit: An insightful new report from The Institute of Internal Auditors (IIA) explores the initiatives chief audit executives (CAEs) of more than two dozen of the world’s largest business enterprises are undertaking or considering to capitalize on opportunities afforded by the nascent and still fragile global economic recovery. Click here for a free download of the 26-page report, “A Glimpse Ahead: CAEs Look Beyond the Recession.”
Author Notes
James P. Liddy, 50, has been named vice chair-audit, and Thomas J. Duffy, 50, has been named national managing partner-audit, for KPMG LLP, the U.S. audit, tax and advisory firm. Liddy, who most recently was national managing partner-audit, succeeds Henry R. Keizer, who was previously announced as deputy chairman and COO of KPMG LLP.
Compass Advisers, an investment banking partnership that provides independent, senior-level advice regarding mergers and acquisitions, restructuring, complex capital markets transactions, and private equity placements, has launched its new website. New features include descriptive case studies of many of its recent transactions. The firm, distinguished for its successful execution of cross-border transactions, is active in North America, throughout Europe, China, India, Russia, and the Middle East.
The Corporate Library and GovernanceMetrics International (GMI) merged on July 22. This unites two leading global corporate governance research and risk rating firms dedicated to the development and sale of corporate governance risk ratings and environmental, social and corporate governance (ESG) advisory and analytical services. The combined firm provides in-depth coverage of a universe of more than 5,400 companies. “The financial crisis has catapulted ESG information on public companies into the spotlight,” said Nell Minow, editor and co-founder of The Corporate Library. “As a combined entity, The Corporate Library and GMI provide a unique suite of services and products to meet the global ESG risk analysis needs of investment professionals and other stakeholders.” Howard Sherman, recent CEO of GMI, has become executive director and head of global business development of the combined entity. For more information about the merger, read the Frequently Asked Questions page on the Corporate Library’s website.
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Directors & Boards e-Briefing is a monthly service of Directors & Boards. All contents copyright 2010, MLR Holdings LLC.