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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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David Shaw
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Scott Chase
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From Jim Kristie | Article of the
Month | Columnist
Reader Profile |
Research | News |
It Was a Vintage Year
Governance 2006 was certainly full of character (and characters), with
its Enron trials, M&A mania, option backdating scandals, boardroom
hijinks, record CEO turnover, and taste for going private.
What a year in governance! Each year I keep a running clip file called
“Board News.” This year’s file is the thickest of the past several
years, and almost equals the Sarbanes-Oxley stuffed file of 2002. It
may exceed it by year’s end.
A few cherry-picked highlights: The year began with the January start
date of the Enron trial of Jeffrey Skilling and Kenneth Lay and an SEC
proposal to overhaul disclosure rules on executive pay. In March,
AT&T’s proposal to buy BellSouth for $67 billion was an early
indicator of a huge year for M&A to come. The stock option
backdating scandal broke open in April and May. June brought final
resolution in the Disney case regarding Michael Ovitz’s termination,
resulting in an important reaffirmation by the Delaware court of the
business judgment rule.
The proposed $21 billion (plus debt) buyout of HCA Inc. in July riveted
all on the true sweep of private equity funds and kicked up 2006 as a
year of going-private. September was a month preoccupied with the
Hewlett-Packard boardroom spying hijinks. A bit of cheer on Wall Street
and in boardrooms as the Dow set a record close above 12,000 in
October. And last month brought this news: With a total of 1,347 CEO
changes announced through November, this year officially becomes the
largest CEO turnover year on record, surpassing the 2005 year-end total
of 1,322, according to global outplacement consultancy Challenger, Gray
& Christmas Inc. (With due modesty, I should add to this list Directors & Boards celebrating
its 30th year of publication.)
This quickie review only skims the panoply of developments in
government regulation, law, finance, boardroom maneuvers and, of
course, pure business strategy moves that has made 2006 such a vintage
governance year.
Where do we go from here? It’s hard to imagine creating a thicker clip
file in 2007. It could happen if this year’s developments and trends
have an afterburner effect that propel the state of governance to new
heights — and perhaps to even some new low-water marks.
Both our article of the month author and columnist featured below offer
forward-looking commentaries. Another indicator of action spots ahead
comes from our e-Briefing readers. For our November Question of the
Month, we asked, “In 2007, what oversight areas are likely to be the
hottest issues for boards?” Your responses (multiple responses were
allowed):
• Executive Compensation: 68%
• Board Composition and Recruitment: 36%
• Performance Evaluation of Management: 28%
• Board Independence: 24%
• Financial Oversight and Reporting: 20%
• CEO Succession: 17%
• Risk Identification: 16%
• Company Strategy: 16%
• Director Liability: 15%
• Global Competition: 12%
• Shareholder Relations: 4%
• Acquisitions and Growth: 0%
Submitted comments illuminated the data points. Click
here for a sample of those comments.
I’m retiring the Question of the Month as a regular feature of the
e-Briefing, but we will activate it on opportune occasions in issues to
come — perhaps when a new addition to the “Board News” clip file
compels your considered opinion.
New
Directors & Boards Webinar
Directors & Boards is pleased to
announce its second webinar, on the topic of Mergers &
Acquisitions: Best Practices for Directors. The webinar is
scheduled for Wedensday January 24, 2007 at 1 pm EST. Attendance
is absolutely free of charge, and you're welcome to have multiple
colleagues listen in. To register, please click here,
or call Scott Chase at +1 301 879 1613.
Jim
Kristie is the editor and
associate publisher of Directors
& Boards.
D&O
Insurance 2007: Hot Topics, New TwistsThere have been changes in D&O coverage terms and in D&O coverage interpretation that warrant a fresh look.
By Susanne Murray
(Editor's note: Our first Boardroom
Briefing of 2007, to be published in February, will cover the issue of
D&O insurance in depth.)
The D&O liability climate and D&O insurance marketplace
continue to evolve, and revolve, with new topics being presented and
old issues being revisited again.
For individual directors and officers, the tightrope that they walk
between focusing on the job at hand and watching their back can be
tiring, though many would say that they don’t need to watch their back
when “doing the right thing” is part of the job at hand. Protection to
directors and officers for the job at hand comes from the companies
they serve and from directors and officers liability insurance.
However, there have been changes in D&O coverage terms, and in
D&O coverage interpretation, that warrant a second look.
Some new issues involving D&O insurance include whistleblower
coverage, non-rescindable policies (non-rescindable for the entire
policy rather than just for Side A or non-indemnifiable loss only),
excess policy language including language that the coverage is never
triggered if any underlying carrier fails or refuses to pay its entire
limits, and certain fines and penalties coverage.
In addition to these newer issues, several “old” issues are new again
due to slight language modifications or coverage interpretations by
insurers.
[Click
Here to Read
the Entire Article]
Boards have to be tougher and smarter to operate in the new activist environment.
After half a decade of historic, almost dizzying, changes in corporate governance, companies and boards are understandingly wondering what comes next.
They have worked diligently to restore confidence in the marketplace by generating reforms ranging from greater board independence to more transparency and improved shareholder communications. This sea change has benefited companies and investors.
Unfortunately, as we look ahead, there is a real danger that the shareholder activism that helped move those reforms forward will move beyond fixing what is wrong to changing what is right.
That activism was initially fueled by scandals and supported by responsible corporate leaders who wanted to demonstrate integrity and accountability. A certain level of activism is always needed, of course, because it can spark constructive dialogue.
Stoked Appetites
But the desire to continue to push for change--without stepping back and first gauging the effectiveness of the already dramatic reforms--seem to have stoked appetites for new, worrisome kinds of changes.
[Click Here to Read the Entire Article]
Managing Partner
Azimuth Partners LLC
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’ve served on more than 20 public and private boards over the last several years. What would you say are the key insights you’ve derived from that experience?
I have two key insights that I believe need to be addressed at the board governance level. Board directors make decisions and provide guidance in the context of the information that is presented. I believe strongly that the issues with corporate governance in America will not be adequately addressed unless there is a fundamental change in the attitude and approach directors take with respect to the information they receive The separation of Board Chair and CEO or the creation of a Lead Director should result in the request of broad and unbiased information by a non-management director and not reliance on management to “lead” the directors to a conclusion based upon the information they have chosen to present. This may require a greater time commitment for the lead director and thus they should be compensated accordingly.
Secondly, a significant amount of Private Equity Capital is going into Leveraged Buyouts of many of our country’s major corporations and Exchanges. At some point the exits will occur and the boards previously dominated by Private Equity financiers must transition back to Independent Directors. Some do and many don’t for quite some time even after these funds have liquidated their positions. Choosing the right time, phasing and selection of Directors for these firms will also involve a carefully thought out strategy. Who is responsible for taking the lead on that?
[Click Here to Read the Entire Article]
Reader Profile Updates
Directors & Boards occasionally looks back to past reader profiles for updates and further thoughts.
Sharon AllenChairman of the Board
Deloitte & Touche USA LLP
[Interview appeared in the August e-Briefing]
The corporate boardroom of 2036 will be a vastly different place than it is today. Boardroom diversity, as we now define it, will evolve and adapt to multi-national market forces. And I suspect future governance will rely more heavily on experiential diversity, with many more segments of the C-suite represented -- from chief marketing officers to technology leaders to corporate risk/security experts.
We’re already breaking down barriers that discourage a free and frank exchange of ideas from a wider spectrum of boardroom voices. I’m convinced boards of directors will embrace and embody the dissolution of corporate, cultural and national constraints.
Sharon L. Allen is the Chairman of the Board of Deloitte & Touche USA LLP, an $8.8 billion organization, and chairman of the Risk Management Committee of the Board for Deloitte Touche Tohmatsu, a nearly $20 billion dollar global organization.
Joseph R. RichPresident
Pearl Meyer & Partners
[Interview appeared in the March 2006 e-Briefing]
I encourage Board members to think of the executive talent market more like Sotheby’s and less like Wal-Mart – where value is in the “eye of the beholder” and outweighs price alone. Traditionally, when determining executive pay, companies have relied too heavily on industry compensation comparisons when greater consideration should instead be given to the particular executive’s work and performance, relative to how that executive fits into the company’s environment, team and business strategy. The appropriate level and form of compensation needed to attract, retain, and motivate the right executive isn’t a function of data alone, so don’t be a slave to the data.
Joseph R. Rich is President of Pearl Meyer & Partners, where he consults in the areas of executive, sales, and employee compensation. Before joining the firm, Rich was a co-founder and managing partner of Executive Alliance, a leading compensation-consulting boutique that was acquired by Clark Consulting in 2001.
New investor opinion research demonstrates that U.S. public companies are increasingly free to choose the audit firm best matching their specific needs.
In a survey conducted by Harris Interactive on behalf of Grant Thornton, the majority (67 percent) of investors expressing a clear opinion said a company's decision to change from a Big Four audit firm to another global or national firm outside of the Big Four would not make a difference, and 13 percent said they would view it as a positive decision. These statistics exclude the 38 percent of investors who said they were not sure how they would react.
"Over the past four years, more and more companies are changing audit firms for a variety of positive business reasons, yet some people still hold a misperception - a fear - that changing firms could be seen as a 'red flag' among investors," said Cono Fusco, Grant Thornton managing partner of strategic relationships. "As a result, Grant Thornton believed it was time to counter this fear with some real facts, and that is exactly what we have done."
The majority of investors (57 percent) in the survey conducted by Harris Interactive said they believe most companies change audit firms for business reasons - such as expectations of specialized expertise, better service, better value or a corporate policy requiring periodic firm rotation - and not as the result of a disagreement between the company and its auditors.
The majority of investors (58 percent) also said it is important companies provide detailed information to investors when they make such changes, and only 14 percent of investors believe companies currently provide enough information.
This online survey was conducted by Harris Interactive on behalf of Grant Thornton between May 24 and May 26, 2006, among 2,038 U.S. adults 18 years of age or older, of whom 1,085 are investors. The data were weighted to be representative of the total U.S. adult population on the basis of region, age within gender, education, household income, race/ethnicity and propensity to be online.
About Grant Thornton LLP
Grant Thornton LLP is the U.S. member firm of Grant Thornton International, a global accounting, tax and business advisory organization. Through member firms in 112 countries, including 49 offices in the United States, the partners and employees of Grant Thornton member firms provide personalized attention and the highest quality service to public and private clients around the globe. Visit Grant Thornton LLP at www.GrantThornton.com.
December
14-15, 2006
The Yale CEO Leadership Summit will be held in Manhattan at the
Waldorf-Astoria Hotel. Under the direction of Prof. Jeffrey Sonnenfeld,
founder and CEO of The Chief Executive Leadership Institute of Yale
University, the institute, which calls itself the nation's first "CEO
College," brings together CEOs and other business and market leaders
for peer-driven educational programs. For more information, visit
January
17, 2007
The Practicing Law Institute conducts "Corporate Governance 2007:
Counseling Your Clients for the 2007 Proxy Season," a program that will
review developments affecting directors, the audit committee and
compensation committee, hedge funds and activist shareholders, and
hot-button accounting and internal control issues, among other matters,
and how to respond to these developmnts. To register, visit
February
14-16, 2007
The University of Chicago Graduate School of Business hosts The
Directors' Consortium, a three-day intensive program exploring the
fundamentals of corporate governance and board service. Leading faculty
members from five world-class institutions designed The Directors'
Consortium to provide the latest thinking in governance and will
present a comprehensive approach to the complex decisions that board
members must make. Visit
February
27-March 2, 2007
Stanford Business School and Stanford Law School present the Stanford
Directors' Forum, a three-day program to learn new management
strategies, leadership skills, and the best practices from the
distinguished faculty of the two schools and key business leaders to
become a more effective board member. Visit
Harvard Business School Executive Education presents a West Coast program on "Making Corporate Boards More Effective," designed to prepare participants for the increasing demands that are being placed on boards of leading-edge companies by their constituents. Faculty chair for the program is Professor Jay Lorsch. It will be held at the prestigious resort Estancia La Jolla Hotel & Spa. For more information, visit
Directors &
Boards' latest Boardroom Briefing, on the topic of Corporate
Social Responsibility, is now in the mail. Featuring exclusive
research on director attitudes toward CSR programs, this Boardroom
Briefing also contains a variety of perspectives on the value of CSr
programs, and how to implement these programs at the board level. To
preview of this Briefing, in pdf format, click here. Survey of Governance Practices at the 100 Largest Companies
Shearman & Sterling LLP has released its fourth annual survey examining the corporate governance practices of the 100 largest U.S. public companies. This year’s survey highlights significant trends as companies continue to evolve their practices to meet applicable stock exchange listing requirements and SEC regulations, as well as conform to best practice standards and respond to increased shareholder activism. For instance:
• Poison pills and classified boards continue to decline. The number of companies with poison pills fell by nearly 50% over the past two years and the number of companies with classified boards fell by over 30% in that same period.
• Of the 24 top 100 companies at which separate individuals serve as chairman and CEO, six have adopted policies requiring separation of the two functions.
• A majority of companies continue to exceed the minimum independent director requirements of the NYSE and NASDAQ. Independent directors continue to comprise 75% or more of the boards of the majority of companies.
• The number of board and committee meetings continues to increase. Given this increased time commitment, investors have focused on the number of boards on which directors serve.
The survey is now available on Shearman & Sterling’s website at: http://www.shearman.com.
Board Resources and Information Documents
• AlixPartners, the broad-gauged consulting firm widely credited with inventing the corporate-turnaround industry a quarter-century ago in America, announced plans to open an office in India in 2007. The firm has 12 offices around the world, including six in the United States, five in Europe, and one in Japan (http://www.alixpartners.com).
• CEO Compensation: According to an analysis of the largest 1,000 companies in the U.S. by executive compensation consultants Steven Hall & Partners (http://www.shallpartners.com), median 2005 total compensation was $16.8 million for the CEOs at the 27 largest companies, where annual revenues exceed $50 billion. This compensation was five times greater than the median of $3.2 million for the CEOs in the bottom quintile of the study, who lead 251 companies with revenues under $2.5 billion. For all 1,000 companies, median CEO pay was $5.0 million. The Steven Hall & Partners study is among the most comprehensive of its kind. Contact Nora McCord at the firm (212-488-5400, nmccord@shallpartners.com) for further information on the study.
• The National Association of Corporate Directors (http://www.nacdonline.org) has released three benchmarking tools: The Public Company Governance Survey, The Private Company Governance Survey, and the Not-For-Profit Governance Survey.
• Spotlight on Audit Committees: Huron Consulting Group, a leading provider of financial and operational consulting services (http://huronconsultinggroup.com), released on Nov. 28 its Audit Committee Research report based on a sample of more than 700 audit committee members at 178 public companies from the NASDAQ 100 and Fortune 100 listings. Among the manifold findings, the report reveals the number of accountants on audit committees has doubled over the last four years, yet six out of 10 companies sampled did not have at least one accountant on their audit committee in 2005. Click here for a copy of the report.
• Wondering what’s appropriate in termination fees? Houlihan Lokey (http://www.hlhz.com) has released its 2005 Transaction Termination Fee Study. The study considers termination fees relative to transaction size, consideration form, acquisition technique, and the existence of reverse termination fees, and includes analysis of current court cases where the termination fees were disputed. Click here for a copy of the study, or call Michelle O'Brien at 212-497-7802 for additional information.
• Window on China: Xinhua Finance Ltd. and the Milken Institute released on Nov. 15 the first three of eight new economic indicators tracking China’s financial markets. The three indicators are aimed at providing investors, analysts, and financial professionals with deeper insight into China’s money and capital markets. The first three of the Xinhua Finance/Milken Institute China Indicators series objectively evaluate three important facets of China’s economy: the currency market, the equity capital market, and the debt capital market. They are: Renminbi Pressure Indicator, Chinese Initial Public Offering Indicator, and Market-Adjusted Debt Indicator. To view the indicators, go to http://www.milkeninstitute.org/chinaindicators.
• The Network Inc., the leading provider of ethics and compliance hotline programs for nearly 25 years, and the CSO Executive Council, an international professional membership organization for leading senior security executives, completed the 2006 Corporate Governance and Compliance Hotline Benchmarking Report. This is the first ever large-scale hotline study of its kind. The report presents a wide variety of findings, such as 65% of reports received are considered serious enough to warrant an investigation, and 46% of reports resulted in an investigation with some corrective action taken. For more information regarding this benchmarking report, contact The Network via email at benchmarking@reportline.net.
• GovernanceMetrics International has relocated offices to One Exchange Plaza, 55 Broadway, 11th Floor, New York NY, 10006.
The firm’s telephone number is 212-949-1313, and its website is http://www.gmiratings.com.
Yale Renames Its Governance Center in Honor of Ira Millstein
The Yale Center for Corporate Governance and Performance has been renamed The Millstein Center for Corporate Governance and Performance at the Yale School of Management in honor of corporate governance expert Ira M. Millstein. Millstein, a senior partner at the international law firm Weil, Gotshal & Manges, is also senior associate dean for corporate governance at Yale SOM.
"Ira Millstein's reputation in the field of corporate governance is unmatched," said Joel M. Podolny, dean of the school. "He has brought tremendous innovation and real-world insight to the center and it has flourished under his leadership. In recognition of his tireless effort and dedication, Yale University President Richard C. Levin and I agreed that it is only fitting that the center bear his name." Added Levin, "For decades, through his writing and teaching, Ira Millstein has helped to define best practices in corporate governance."
Millstein was integral in launching the center, which was established in June 2006 with the receipt of $20 million in gifts and commitments from individual and corporate donors. For more information on the center, visit http://millstein.som.yale.edu.
Author Notes
• Drinker Biddle & Reath LLP and Gardner Carton & Douglas LLP announced on Nov. 13 their plans to combine. The combined firm would have more than 650 lawyers in 12 offices nationwide. "To best serve clients involved in complex transactions or litigation, you need to have a critical mass of top-notch lawyers spread across the country," said Alfred W. Putnam Jr., who will be chairman of the merged organization, to be known as Drinker Biddle & Reath LLP with operations headquartered in Philadelphia (http://www.drinkerbiddle.com). Doug Raymond, a partner and head of Drinker Biddle & Reath’s Corporate and Securities Group, is the “Legal Brief” columnist for Directors & Boards.
• Robert W. MacDonald, founder and chief executive of LifeUSA and retired chairman and CEO of Allianz Life Insurance Company of North America, through his consulting firm CTW Consulting has been engaged by Allianz of America Inc. to help build and lead a new independent company that targets the emerging retirement income market. MacDonald has just finished his third book on management. His previous book, Cheat to Win: The Honest Way to Break All the Dishonest Rules of Business, was excerpted in the Fourth Quarter 2005 issue of Directors & Boards.
• Daniel Pedrotty was named director of the AFL-CIO Office of Investment on Nov. 20. Pedrotty, an attorney with expertise in securities law and political campaign experience, previously served as the Office's senior strategist. According to AFL-CIO President John Sweeney, "Now more than ever we need to use the power of pensions and stock ownership for the good of working people. I have full confidence in Dan's leadership as the office promotes corporate accountability, retirement security for all Americans and a strong voice for workers in the capital markets." The Office of Investment produces the annual AFL-CIO Key Votes Survey (http://www.aflcio.org/corporatewatch/capital/toolbox.cfm) and the Executive Paywatch website (http://www.aflcio.org/corporatewatch/paywatch/). Sweeney authored a futures-oriented commentary, “The Times and the Job Call for Courage,” in the 30th anniversary issue of Directors & Boards.
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Directors & Boards e-Briefing is a monthly service of Directors & Boards. All contents copyright 2006, MLR Holdings LLC.