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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 Director
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
Some
Salve for the SOXed Out
Let’s
let boards rediscover and renew the essence of their character.
The holiday season is here, and none too soon for those who toil in the
vineyards of governance. It has been a grueling year for CEOs and
directors -- a year of being further SOXed into submission, and paying
astonishing sums for the privilege of being SOXed.
To uplift the spirits, our holiday gift to our e-Briefing readers is
Steve Odland’s Article of the Month that follows. Odland, CEO of
retailer AutoZone Inc., sounds a much-needed note of hope and good
cheer for the corporate sector.
“While not perfect, the U.S. has the best corporate governance,
financial reporting, and securities markets systems in the world,”
Odland writes. “The future is worth looking forward to.” That’s a
sentiment worth summoning up the energy and enthusiasm to chime in with
a hearty “Amen.” (Incidentally, a major investor in Odland’s company is
Edward S. Lampert, architect of the just-announced Kmart Sears merger.)
Here in the editorial vineyards of Directors
& Boards, we will by duty continue to monitor the SOXing of
America’s boardrooms. But I’m anxious to do something that many boards
probably are too -- to get back to the essence of things. Remember the
business best seller of a few years ago, “The Soul of a New Machine”?
Let’s get back to “the soul of the boardroom”: What drives accomplished
individuals to become directors, and what happens when such individuals
gather around a board table to try to make smart decisions on behalf of
the corporation and its stakeholders? Stripped of its SOXist layers,
isn’t that the essence of governance?
What kinds of “back to basics” advisories would you like to see in the
pages of Directors & Boards
and in the e-Briefing in 2005? As an example of the return to
essentials, in the First Quarter 2005 edition you can look for a major
refresher on the board’s role in strategy. Let me hear from you with
other suggested agenda items for next year--you can email me here. And if Steve Odland’s article cheers you
up, as it should, click here
for a PDF copy of the full-length article that he authored for Directors & Boards. Happy
holidays.
*****
Directors & Boards is
pleased to sponsor The Wall Street Transcript's Executive Compensation
Analysis Conference, January 11-12, 2005 at the Harvard Club in New
York City. You can save $350 on
registration fees if you register by December 17 and mention Directors & Boards. Call
Naomi Barazini at 212-952-7454. And see below, or click the
banner ad above, for more information on this conference.
Jim Kristie is the editor and
associate publisher of Directors & Boards.
Roots of a Nation’s WealthWhy we can look forward to a 21st century of greater prosperity and human progress.
By Steve Odland
In his landmark book, “The History of the Corporation,” Bruce Brown
noted the roots of the modern corporation reach back to the guilds of
the eighth-century B.C. Roman kingdom. It later attained its first
known written form in St. Benedict’s organizational rules for his
monastic order at Monte Casino in the sixth century A.D.
In fact, it was the early Christian Church that established the
corporation as a central organizing principle -- and even many of its
aspects we regard as modern. For example, in the 12th century,
Cistercian monks held the first corporate convention on record. There
were even early versions of the leveraged buyout phenomenon, resulting
in a complaint by the Dominican bishop of the ill effects of borrowing
against the assets of a corporation to gain control of it.
By the Renaissance, secular corporations expanded, with merchant
guildsmen in Italy using such business devices as compound interest,
double-entry bookkeeping, and even expense accounts.
Two centuries later, the joint-stock company became the earliest means
of the British colonization of North America -- Virginia by the
Virginia Company and New England by the Massachusetts Bay Company --
selling stock to numerous investors who expected to earn a tidy profit.
[Read
the
Full Article]
Board Recruiting: Beyond the Wider Net
What’s next as the
‘sitting CEO’ model of board composition ceases to be the dominant form?
Because of the turbulence we’ve gone through in the last few years, we are now learning that checklists and boardroom protocols, while useful, don’t ensure effective governance. What does work is the presence of a highly engaged group of people who trust one another. A group that is unafraid to raise important challenges and is even willing to have a good fight now and then. The challenge is to create such a group.
Traditionally, the ideal candidates for a board position were sitting CEOs. They were considered ideal because of their experience, their insight, their presumed like mindedness with other board members, and, let’s face it, their status. I don’t entirely discount star power. In the marketplace, prestige counts for something -- but maybe not as much as it used to.
Furthermore, sitting CEOs are more often declining the request to serve on other corporate boards. The time requirements as well as the additional risk just don’t make it practical. If they do serve on an outside board, it’s likely to be on only one, rather than several like before.
So what would replace that model? Many people have championed diversity as the new boardroom standard. As we open up the American workplace to different kinds of people, the argument goes, we need our corporate leaders to reflect that diversity. American society has changed, and so should the boards that govern our companies.
[Read the Full Article]
Chief Executive Officer
LCM Resource 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.
At recent industry conferences and other events we have heard the remark that Sarbanes-Oxley and other regulatory initiatives have created “a direct line to the federal penitentiary.” Does D&O insurance make that an overstatement?
Here’s a scenario: It had been a long week at the corporate headquarters of XYZ Corporation (‘XYZ’). The firm’s quarterly earnings were to be reported the next morning. A revenue recognition issue had been resolved. In the words of the CFO, “Everyone needs to get on board with the decision made to recognize that the current quarter’s revenue is in accordance with FASB.”
A new employee in the accounting group had taken issue with the approach and was not alone in her position. The debate had become heated, but the CFO said he had to make the call. The new employee (now whistle-blower) left XYZ three months later and went to the SEC with her view of the company’s accounting practices. The SEC began an investigation. XYZ hired independent outside auditors to conduct an investigation. XYZ’s stock price went down. The outside auditors concluded that revenue had been improperly recognized and a multi-year restatement was necessary.
XYZ’s lenders and debt rating agencies became aware of the situation. The lenders were concerned because the company was in violation of several of its debt covenants including its net worth ratio. The debt rating agencies downgraded XYZ’s credit. Institutional investors had to get out. Securities and shareholder derivative lawsuits were filed against XYZ Corporation and the company’s directors and officers. The price of the stock continued to go down. XYZ filed for Chapter 11 protection.
A ‘follow-on’ lawsuit was also filed under the Employment Retirement Income Security Act of 1974 naming all directors and officers alleging breach of fiduciary duty because XYZ had invested some of its own stock in its 401K Plan.
XYZ’s shareholders lost lots of money…many employees lost jobs, and all directors and officers were involved in litigation. But since the company had D&O insurance, the directors and officers presumed they were protected from any personal liability. This scenario is precisely the type of situation when D&O insurance is needed—right?
[Read the Full Article]
Survey of Tax Directors Finds Tax Risk
Management Gaining Prevalence in Governance
Ernst & Young, one of the world's largest professional services firms, announced the results of a worldwide independent survey of corporate tax directors, which found that as legislative and regulatory changes around the world have made tax risk planning an urgent and top priority, many companies are aligning their tax strategies with their organization's overall enterprise risk profile to meet this challenge.
The Ernst & Young study, "Tax Risk Management: The Evolving Role of Tax
Directors," found that 95 percent of respondents acknowledged the importance
of planning a tax strategy that is consistent with overall enterprise risk profiles, and nearly half (45%) already are actively doing that.
In fact, half of the tax directors surveyed said that their tax department is represented on their company's overall enterprise risk management team, and 60 percent of those who said it was not believe it should be. What's more, nearly 70 percent of tax directors said that they expected to see demands for more disclosure and transparency over the next two years.
Tax Department's Growing Influence
Nearly half (44%) of tax directors said that their tax function's influence on executive-level business decisions has increased in the past year, and 41 percent expect that influence to increase next year. In addition, almost two-thirds of tax directors say they are receiving more direction on tax risk matters than they were two years ago, and over 75 percent say they are now receiving active direction from three or more different areas within their organizations.
Survey respondents frequently linked reputation with the issue of tax risk management. According to 70 percent of tax directors, "tax risk management is considered critical to preserving the organization's overall reputation."
The Increasing Role Of The CEO In Tax
While tax departments continue to get most of their direction from the CFO, other key influencers and stakeholders are emerging. Across the globe (50% in Europe; 55% percent in the United States and Canada; and 60% in Asia), tax directors are seeing increased direction coming from the CEO. In addition, audit committees and boards of directors are having a more active voice, as is the Chief Risk Officer. While nearly two-thirds (62%) of tax directors say their CFO is responsible for tax decisions, 31 percent said that final policy and procedure approval now rests with the CEO or Board of Directors.
About The Survey
The Ernst & Young survey, "Tax Risk Management: The Evolving Role of Tax
Directors" is based on telephone interviews with 354 tax directors from 10
countries conducted for Ernst & Young by independent researchers in the
Summer of 2004. To learn more about the study visit http://www.ey.com.
December
9-10, 2004
T2M's Summit 2004: Fourth Annual Directors & Officers Governance
& Compliance Retreat at the Stein Ericksen Lodge, Upper Deer
Valley, Utah. For more information, contact Kevin Jessop at
December
10, 2004
The New York Society of Security Analysts and the CFA Centre for
Financial Market Integrity present their "2nd Annual Corporate
Governance Conference: The Significance of Integrity in the Financial
Markets." The all-day conference will be held at the Princeton Club in
New York. The organizations have assembled top investors, academics,
and corporate governance experts to assess what progress has been made
and what remains to be done. For more information on the program or to
register for this conference that has been dubbed the "Woodstock of
Corporate Governance," visit the NYSSA's Web site
December
16-17, 2004
The Yale CEO Leadership Summit will hold its next session at the
Waldorf-Astoria Hotel in New York. The theme will be "The Return of
Invention, Imagination, and Integrity." Lead by Dr. Jeffrey Sonnenfeld,
president and CEO of the Chief Executive Leadership Institute, CEOs
gain perspective on their own current leadership challenges, looking
both at their personal styles and the global strategic context of their
industries. For more information or to register, visit
January
11-12, 2005
The Wall Street Transcript's Executive Compensation Analysis
Conference: Designing & Implementing a Rebalanced Executive Pay
Package will be held at the Harvard Club in New York City. Register by
December 17 and save $350 when you mention Directors & Boards!
Contact Naomi Barazini at
February
2, 2005
The Practicing Law Institute will conduct "Corporate Governance 2005:
Dealing with the Governance and Disclosure Challenges Ahead." The event
will be held in New York. It will include sessions on Emerging Best
Practices in Corporate Governance, Lawyer Ethics, Executive
Compensation, and Annual Report Disclosure. For more information, call
1-800-260-4PLI, or visit
March 1 -
3, 2005
Harvard Business School Executive Education conducts its Compensation
Committees: Preparing for the Challenges Ahead program. For more
information, visit
March
16-18, 2005
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
New
Directors Roster Additions
We
present a preview of five of the directors to be featured in our next
Directors Roster, appearing in the 1st Quarter 2005 edition of
Directors & Boards.
Henry W. McGee, President, HBO Video
In
present position since 1995. Joined Time Inc. in 1979. Under his
direction HBO Video became one of the first in the industry to use the
Internet to expand its marketing strategy. In 2003 initiated the unit's
expansion into the international market with the start-up of an HBO
Video label in the United Kingdom. Age 51.AmerisourceBergen distributes pharmaceutical products and services to hospitals. Revenues are $50 billion. Time Warner is a media and entertainment company. Revenues are $40 billion.
Denny's Corp.
Henry Nasella, Venture Partner, Apax Partners Inc.
Has
had 30 years of operating management, consumer retailing, and venture
capital experience. Practice focuses on consumer retailing and venture
capital at Apax. Formerly was president of Staples Inc. Also is a
director of Phillips-Van Heusen Corp. and Spyder Active Sports Inc.
Denny's is a restaurant chain. Revenues are $720 million. Apax is a private equity firm.
Electric Data Systems Corp.
W. Roy Dunbar, President of Global Technology and Operations, MasterCard International
In
present position since September 2004. Responsible for MasterCard's
global payments operations. From 1990-2004 served as Eli Lilly &
Co., where he was CIO and was responsible for sales and operations in
Africa, the Middle East, Asia, Latin America and the Caribbean. EDS provides information technology services. Revenues are $21 billion. MasterCard is a credit card services company. Revenues are $2 billion.
Flowers Foods
Manuel A. Fernandez, Managing Director, SI Ventures
Has 35
years of experience as a venture capital investor and senior operating
executive in the information technology and semiconductor industries.
Co-founded SI Ventures in 1996. From 1995-2001 was chairman of Gartner
Inc., and had earlier served as its president and CEO. Formerly was
president and CEO at Dataquest Inc., Gavilan Computer Corp., and
Zilog Inc. Also is a director of Brunswick Corp and Black & Decker
Corp. Age 57. Flower Foods is a packaged bakery foods company. Revenues are $1.5 billion. SI is a venture capital company that focuses on information technology and communications infrastructure companies.
Red Hat Inc.
Edward Kozel
From
1991-2002 was chief technology officer and head of business development
at Cisco Systems. Previously held executive technical positions at
Boeing, McDonnell Douglas and SRI International. Red Hat provides operating system software. Revenues are $126 million.
D&B Sponsors Executive Compensation Conference
Designing & Implementing a Rebalanced Executive Pay Package
January 11- 12, 2005 * The Harvard Club * New York City
• Navigate competitive data and ascertain how to use peer group information to establish what constitutes appropriate executive pay
• Analyze the current trend of moving away from stock options toward restricted stock
• Identify best practices for implementing performance-based pay and uncover what you must do to make it work
• Develop a compensation program geared to attract and retain talented executives
• Address institutional investor concerns about dilution, governance and excessive executive compensation
• Employ tactics to rebalance annual and long-term incentive compensation
• Assess legal and regulatory developments in executive compensation and the implications for executives, board of directors and compensation committees
Deloitte & Touche
Johnson Associates, Inc
Watson Wyatt Worldwide
Hewitt Associates
Directors and Boards
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• Explore recent deferred compensation legislation and what requirements must be met by deferred compensation arrangements
• Master effective strategies for implementing innovations in executive compensation planning and design
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• Directors of HR
• Vice Presidents of HR
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• VPs or Directors of HR/Employee Benefits
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• VPs or Directors of Global/Worldwide Rewards
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• Assess methods for analyzing existing compensation packages and whether they meet the criteria of excessive compensation
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• Learn actionable steps for addressing shareholder concern over executive pay
• Network with industry experts and learn ways to implement performance-based executive compensation
Last issue, Jim Kristie asked whether boards need a 'devil's advocate' to be an accepted dissenting voice.
While an interesting and novel approach, I have to give it a thumbs down.
I'm not certain a "programmed dissenter" could work effectively in any type of meeting. Those prone to sleep would only sleep deeper knowing someone else will challenge the issue. Also, human nature is to "tune-out nay-sayers," which can force the issue back to the CEO's camp without much discussion.
I am fortunate to sit on boards where the majority of directors get in the game and suggest alternative paths to the same goal line. Every board needs this approach. As a retired CEO, I managed from alternatives and boards need to do the same. Management needs to present cases for action and multiple alternatives actually studied, and the reasons for the selected path. No alternatives, table it until there are some. Boards need to review and discuss the alternatives and add their own. For some directors that's easy, but for those directors that struggle here, the lead director/non-executive chair must get them engaged and pull them in to the debate. If they are not "engageable" then it's time for a discussion about the director's future with the head of the governance committee.
The issue you surface is all about running an effective meeting and those skills must be present and practiced by the lead director/non-executive chair. If the tools aren't there or attainable then it's time for a change.
Bob LeBlanc
BIG thumbs up.
Different views force people to think issues through. Thinking often equates to better decisions. Better decisions, better board. Yes or no to dissenting board members? Yes! And the vote shouldn't even be close.
I will concede, however, that the best devil's advocate is one who does not personalize dissent. Hence, there are dissenters that do not help, and instead erode an otherwise functional group.
Dale Rose, Ph.D
Depends on your exact definition of devil's advocate. I view Ted Turner as one who will disagree because that's who he is. On the surface this has little if any value.
Having said that, all board members need to challenge other alternatives to make sure they have been given adequate consideration.
Bob Hopson
Directors & Boards e-Briefing is a monthly service of Directors & Boards. All contents copyright 2004, MLR Holdings LLC.