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Directors & Boards
Robert H. Rock
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James Kristie
Editor
Lisa
Cody
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David Shaw
Publishing Director
Scott Chase
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From Jim Kristie | Article of the
Month | Columnist
Reader Profile |
Research | News |
‘Poorly Advised and Poorly Served’
Yes, Robert Nardelli resigned, but where are the directors’
resignations?
Governance 2007 was only into its third day when the first bombshell
dropped — the resignation of Robert Nardelli as Home Depot chairman and
CEO. Whatever intense criticism he has come under, the board deserves
an even more punishing visit to the woodshed.
The board failed Nardelli and the Home Depot shareholders. Of the
fundamental principles of being a corporate director, one is paramount:
Never leave yourself open to the charge that your CEO was poorly
advised and poorly served.
For that commandment, I draw upon the words of Milton Rock, who
acquired Directors & Boards
in 1980 and served as its publisher until 1988 (and continues today to
chair the journal’s parent company). In our pages in 1987, he made this
observation:
The Tower Commission report on
the secret arms sales to Iran brought into critical focus the role of
the advisers to the President. Said former Sen. John Tower upon the
release of his investigation into the Iran-contra White House
activities, “I believe that the President was poorly advised and poorly
served.” This examination of the advisory systems and people supporting
the President has some timely parallels to events in the corporate
sector. One fundamental is forever: As a director, never leave yourself
open to the charge that your CEO “was poorly advised and poorly
served.”
Home Depot’s annual meeting fiasco last year can be laid squarely at
the board’s feet. Surely one or more of the directors recognized
Nardelli’s plan for the meeting as boneheaded governance backsliding
and a train wreck waiting to happen. Why didn’t someone on the board
quietly pull Nardelli aside and say, “Bob, let’s rethink this” — not as
a suggestion but as an order? (The CEO serves at the pleasure of the
board, right?) Not doing so just greased the wheels for the ultimate
slide into iniquity over the compensation package that the board
blessed.
Before we go any further into 2007, let this be seared into the brain
and backbone of every director: Never let the charge be leveled against
you that your CEO was poorly advised and poorly served.
Directors
& Boards M&A Webcast
A replay of Directors
& Boards' recent webcast on the topic of Mergers &
Acquisitions: Best Practices for Directors, is
available by clicking here. You can also download the slides
from the webcast.
Jim
Kristie is the editor and
associate publisher of Directors
& Boards.
Continue Sharpening Your Risk
AssessmentWith new SEC and PCAOB guidance on the table, here are suggested next steps for performing your annual assessment of Internal Controls over Financial Reporting.
By Lynn Bruneau
Just in time for the holidays, the SEC proposed for public comment draft guidance to assist management in planning and performing its annual assessment of Internal Controls over Financial Reporting (ICFR) as required by Section 404 of the Sarbanes-Oxley Act of 2002 (SOX 404).
A week later, the PCAOB proposed for public comment a new standard — Auditing Standard 5 (AS5) to replace Auditing Standard 2 (AS2) — for the audit (by the external auditors) of ICFR.
Key aspects of these draft documents are highlighted below, followed by a number of suggestions for management “next steps.”
Draft SEC Guidance: Highlights
— If a company follows the SEC guidance, it would satisfy the annual SOX 404 internal control evaluation requirements.
— An audit opinion will no longer be required regarding management’s ICFR assessment.
— Guidance supports a top-down, risk-based approach to identification and assessment of internal controls needed to prevent or detect a material misstatement in the financial statements.
— Nature and extent of evaluation process should be closely aligned with risk assessment: increased risk, increased focus on controls.
— Top-down, risk-based approach should result in greater efficiency, with custom-tailored approach, fitting each company’s “facts and circumstances.”
— Assess risk based on a standard of providing “reasonable assurance” regarding the reliability of financial reporting.
[Click
Here to Read
the Entire Article]
Bonus Feature
Corporate Culture: the Ultimate Driver of
Business PerformanceBy Dov L. Seidman
We don’t need to labor over Hewlett-Packard or the hundreds of companies facing backdating accusations to see that business conduct has become front-page news. We have entered an era of values, where a reputation for responsible corporate conduct is the new currency of commerce. Individual character and organizational culture are now the foundation upon which a business reputation is built and maintained over time. The reason for this is unmistakable: human conduct, or how we do things, is much more visible than ever before. We are living in a far more transparent world, where companies must not only appear to have nothing to hide, they must actually have nothing to hide.
As a corporate director, you are likely immersed in talk of your company’s culture. The National Association of Corporate Directors, the Department of Justice, the Securities and Exchange Commission and the United States Sentencing Commission have all zeroed in on culture as the best – and really the only – means of creating an environment where corporate malfeasance cannot thrive. The revised Federal Sentencing Guidelines for Organizations go so far as to require companies to “promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law.” Moreover, the Sentencing Guidelines require you, as the “governing authority,” to be knowledgeable about and exercise reasonable oversight of ethics and compliance programs.
You will undoubtedly ponder your role in guiding and governing culture, how far you should go and what investments of time and money you should make during your service. Ultimately, if you are to responsibly discharge your fiduciary responsibility as directors, you must ask one foundational question: “Are we shaping corporate culture to be the driver of our business performance and success?”
[Click Here to Read the Entire Article]
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5 Myths about D&O insurance
Many directors and officers have misconceptions about their coverage. Here are the facts.
D&O insurance typically is a multimillion-dollar asset intended to protect the treasury of a company and the personal assets of its directors and officers. Despite its importance, many directors and officers have fundamental misconceptions about this risk transfer product.
To help dispel these misconceptions, we compiled a list of the more common myths about D&O insurance and provide you with the facts.
D&O Myth No. 1 — All D&O Policies Are the Same
Facts: D&O policies are not all the same. Unlike some other types of insurance, there is no standard D&O insurance form. More than 30 insurers offer D&O insurance, and each insurer’s form is unique. Some even offer multiple forms, each with a different coverage focus.
Even basic provisions, such as which individuals and what wrongful acts are covered, can vary among forms. For example, some D&O policies cover employees, the entity, and other high-profile individuals within the company, while others do not. Policies also differ in their coverage of criminal acts, employment practices claims, and punitive damages.
To be sure that you have the best policy for your needs, you need to know not only what your policy covers but also what protection is available from other insurers in the D&O marketplace.
D&O Myth No. 2 — D&O Policies Are Non-Negotiable
Facts: D&O policies are highly negotiable. If you are not aggressively negotiating coverage enhancements to your
[Click Here to Read the Entire Article]
President and Chief Executive Officer
The Navigators Group, Inc.
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.
Executing in a Post-Sox World
It’s been shown that robust internal controls and good corporate governance improve operational effectiveness and profitability. What are the core elements of robust internal controls?
I believe it all starts with the “Tone at the Top." The Executive Management of the company needs to be committed to transparency and quality. If the Chief Executive Officer views internal controls as a Sarbanes-Oxley imposed necessary evil and is not committed to quality it won’t happen. A second element is a governance structure to oversee internal controls. We found that a Steering Committee of senior executives not only helps to establish priorities and keep things on track, but reinforces the value of the effort. Third, there needs to be appropriate funding to make the effort meaningful. Fourth, there needs to be a desire to eliminate any deficiencies that are discovered.
How does an outside director and more specifically, a newly elected or appointed director, ascertain that such controls are in place?
I don’t believe there is a more effective approach than talking to people at various levels of a company and asking them direct questions about their practices. If the answers coming back from a mid-level accountant or regional operation don’t mirror those of the senior executives, it’s time to dig deeper. Another approach is to ask what specific deficiencies or weaknesses have been identified in the past and what was done to improve the organization’s performance. The director may want to also speak with the Company’s outside auditors.
[Click Here to Read the Entire Article]
Widespread Use of Nonqualified Retirement Plans
Executive benefits are widely used at America’s most prestigious companies. In fact, regardless of a company’s economic sector, it is highly likely to use numerous supplemental retirement plans and other executive benefits programs to retain and attract a quality executive team. These are two central conclusions from a comprehensive study from The Todd Organization, a leading nationwide executive benefits consulting firm.
The Todd Organization reviewed proxies and other financial disclosure documents to determine the prevalence of executive benefits at 276 publicly-held companies which are headquartered in the United States. All of these companies were selected as America’s Most Admired companies by Fortune Magazine in 2006.
Significant findings include:
• 92% of companies offer one or more nonqualified benefit plans;
• 86% of companies offer voluntary deferred compensation programs;
• 81% make at least one company contribution to a nonqualified benefit plan;
• 64% offer one or more supplemental executive retirement plans (SERP);
• The popularity of company match programs is reflected in the fact that 48% of companies offer a 401(k) match restoration program and 28% make a contribution of some other kind to a deferred compensation program; and
• Regardless of economic sector, executive benefits are very popular.
The drive to maintain talented executives has become even more challenging in recent years because of several factors, notably the strong and growing economy and the expensing of stock options. Against this backdrop, executive benefits programs have become increasingly important at many companies.
There are a wide variety of restrictions on the amounts that can be contributed to, and received from, qualified retirement plans (i.e., pension, 401(k) and profit sharing plans). As a result, many companies institute nonqualified retirement plans to help executives receive the same percentage of pre-retirement plans from qualified and nonqualified plans as other employees would receive from qualified plans alone. Today, nonqualified retirement plans are a common benefit for many executives that currently earn more than $125,000 annually.
Founded in 1957, The Todd Organization is a nationwide leader in the design, financing, and administration of nonqualified retirement plans and other executive benefits. With more than 500 plans implemented, The Todd Organization serves executives and companies from all major industries. The Todd Organization’s mission is to help companies retain and attract executives who enhance shareholder value. For additional information, visit http://www.toddorg.com.
January
31 and February 1, 2007
PLUS (Professional Liability Underwriting society) holds its D&O
Symposium in New York. Featured sessions at this major event will
include "Trouble in the Boardroom: The Legal Environment and D&O
Risk," "New Issues in D&O Underwriting," "Global Companies, Global
Risk: Exposure Arising Outside the U.S.," and "Hot Topics: What's New
in D&O Claims." Visit the PLUS website at
February
8, 2007
The New York Society of Security Analysts hosts its 4th Annual
Corporate Governance Conference, themed "Has the Pendulum Swung Back?"
Topics include "The Convergence of Hedge Funds, Private Equity, and
Governance," "Executive Compensation Gone Wild - What Can and Should Be
Done?" and "Shareholder Access and Majority Voting - What's Next?"
Among the long list of speakers will be Wilbur L. Ross, chairman and
CEO of WL Ross & Co. LLC, Cliff Robbins of Blue Harbour Group LLC,
Connecticut Attorney General Richard Blumenthal. Partnering in the
event is the CFA Centre for Financial Market Integrity along with
sponsor Grant & Eisenhofer. For more details, 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
March
12-14, 2007
Wharton Executive Education conducts "Corporate Governance Essentials
for New Directors," a program designed to promote the leadership and
effectiveness of newly inducted board members. The program was designed
jointly by Wharton and Spencer Stuart. Facilitated by Wharton faculty
members from accounting, finance, law, public policy, and strategic
management, this program will help new directors formulate a
best-practice framework in their new board positions. For more
information, call 1-215-898-1776, or visit
March
22-23, 2007
The 2nd Annual USC Corporate Governance Summit will be held on the USC
University Park campus in Los Angeles. This is a forum for exploration
of the complex roles and responsibilities of corporate directors.
Program topics will include executive compensation, business ethics,
board dynamics, crisis management and Sarbanes-Oxley. SEC Chairman
Christopher Cox will keynote. To register, call 1-213-740-8990 or visit
Securities Fraud Class Actions Tumbled to an All-Time Low in 2006
The number of securities fraud class actions filed in 2006 was the lowest ever recorded in a calendar year since the adoption of the Public Securities Litigation Reform Act (PSLRA) of 1995. The Securities Class Action Filings 2006 Year in Review report was released in early January by the Stanford Law School Securities Class Action Clearinghouse, a joint project between Stanford Law School and Cornerstone Research. The study reports securities fraud class actions decreased by 38 percent since 2005, plunging from 178 filings to just 110, making the year’s numbers nearly 43 percent lower than the 10-year historical average of 193.
Additional details on the study are included in this PDF report. The
full text of the 2006 Year in Review report can be found on both the Clearinghouse site at http://securities.stanford.edu and on Cornerstone Research’s website at http://www.cornerstone.com.
CFOs Offered Much-Needed ‘Breathing Lessons’
Offering CFOs practical advice on working smarter, Deloitte & Touche USA LLP has released, Breathing Lessons: How CFOs Can Thrive Under Pressure, the seventh installment in the firm’s Straight Talk book series.
“We know CFOs everywhere are struggling with ever-increasing responsibilities in a pressure-cooker environment,” says Sam Silvers, principal, Deloitte Consulting LLP and Breathing Lessons co-author. “The demand for accountability and performance has never been higher, but there are CFOs who still manage to ‘do it all.’ They’re the ones who decide for themselves what ‘all’ really means. And that’s what Breathing Lessons is all about.”
The book noted that chief financial officers may be the hardest working and most unappreciated members of the C-suite. The annual CFO turnover rate at Fortune 500 companies has reached 17 percent, with three out of four CFOs having five years or less tenure in their current positions as reported by The Corporate Executive Board.
Breathing Lessons is available as a PDF download at http://www.deloitte.com/straighttalk. This book series is dedicated to helping companies perform better. Other titles in the series cover topics such as how to work with consultants, tips for growing customer revenue, and a guide to creating value in the organization. Deloitte & Touche USA also publishes a free Breathing Lessons e-newsletter, available at http://www.deloitte.com/breathinglessons.
Tax Governance Institute Established
KPMG LLP (http://www.us.kpmg.com), the audit, tax and advisory firm, announced in January the establishment of the Tax Governance Institute, an open forum for board members, management, stakeholders, and government representatives to explore and debate aspects of tax oversight and management, including tax risk, control, and reporting.
Through video and audio Web casts, roundtables, other events, and a robust Web site, the Tax Governance Institute’s goal is regularly to bring together interested parties to discuss tax matters of common concern relating to day-to-day and long-term management of corporate tax risk. Hank Gutman, principal in KPMG’s Washington National Tax practice and former chief of staff of the Congressional Joint Committee on Taxation has been named to head the Institute, In his new role, Gutman will work with the Institute team to identify key tax issues and help key stakeholders stay abreast of tax risk and governance issues important to them.
The Institute’s Web site will be a key component of the on-going dialogue that KPMG seeks to foster across many audiences. The site can be reached at http://www.taxgovernanceinstitute.com. Features will include a regularly updated library of thought leadership and relevant business news, links to other sites of interest, and an interactive polling capacity to help gauge the marketplace’s awareness of emerging topics.
Author Notes
J. Phillips L. Johnston, J.D., has been named chairman and chief financial officer of GET Interactive Inc., an e-commerce software company. He has practiced law for the last two years with Nexsen Pruet Adams Kleemeier PLLC. He has also served as CEO of two high-tech public companies and has been a director of five public companies. His Directors & Boards article, “Male, Pale, and Stale,” a critique of board diversity, appeared in the Third Quarter 2005 edition.
FTI Consulting has added former Democratic Majority Leader Dick Gephardt as a consultant for and adviser to the company through an exclusive agreement with his firm, Gephardt & Associates LLC. In addition, he will serve on the advisory board of Financial Dynamics, FTI's strategic and financial communications services subsidiary. With the addition of Rep. Gephardt, FTI states that it has “significantly enhanced its ability to serve clients in the critical areas of government, public policy, employee and labor relations, and international affairs.”
Gephardt & Associates (http://www.gephardtandassociates.com) was founded in 2005 with the purpose of providing strategic business consulting, public policy development, capital acquisition, and labor relations assistance to companies across the world and in multiple industries. FTI (http://www.fticonsulting.com) operates in the areas of forensic analysis, investigation, economic analysis, restructuring, due diligence, strategic communication, financial communication, and technology.
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Directors & Boards e-Briefing is a monthly service of Directors & Boards. All contents copyright 2007, MLR Holdings LLC.