Volume 5, Number 2 • February 2008
1845 Walnut Street
Jim Kristie is the editor and associate publisher of Directors & Boards.
A New Fairness in Fairness Opinions
FINRA Rule 2290 is a long-overdue step in the right direction to address the transparency problems with fairness opinions.
By Matthew Wirgau and Michael B. Rizik Jr.
Since the Smith v Van Gorkom case was decided over 20 years ago, fairness opinions have been derided as being unfair or an expensive waste of time. Things have finally changed...and in a very big way.
The SEC has approved Financial Industry Regulatory Authority (FINRA, formerly the NASD) new rule 2290 that effectively requires an expanded fairness opinion. Critically, it addresses conflicts of interest and procedures surrounding the issuance of fairness opinions.
First, the new rule applies to a FINRA member who issues a fairness opinion or serves as an advisor to a transaction. However, if the business community’s reaction to Sarbanes-Oxley is any indication, it probably will be followed voluntarily by non-members.
The new disclosure and procedure requirements are designed to prevent fraudulent and manipulative acts and practices, promote fair and equitable trade, and protect the public’s and investors’ interest without burdening competition.
When You Descend for the ‘Royal Visit’
A few leadership tips for interacting with your global teams.
By Omar Khan
Business leaders who oversee global enterprises often do not reflect adequately on what real value-addition would look and feel like from the perspective of their teams overseas.
For example, many businesses have placed a high percentage of their growth bets in Asia. That being the case, global leaders insist on convening numerous meetings with their overseas senior teams and/or making numerous visits themselves each year.
At the overseas end, all business grinds to a halt when senior directors or the global managing director descends for the “royal visit.” Rather than concentrating on serving the market, engaging customers or building a robust leadership pipeline, local leaders call a halt to important work and, instead, gear up for presentations, field trips, and staged interactions with employees.
As one senior CEO said to me, “Given how pristine the paint jobs always are, how beautifully manicured the gardens, you’d think we spend all our time as interior decorators and landscape artists.”
Although we can blame our local leaders for pandering in this way, the pandering implies adapting to someone else’s expectations. If we weren’t flattered by this almost whimsical attention, we’d send a clear message that such “ring kissing” and diffidence isn’t what we’re after.
[Click Here to Read the Entire Article]
Douglas M. Bean, Esq.
Vice President & General Manager, Records, Compliance & Legal Solutions
Océ Business Services
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
You’ve mentioned that organizations are grappling with a number of challenges in order to deal with electronic discovery. What are these issues and why should board directors be aware of them?
We recently issued a comprehensive survey report, “Dawn of the Discovery-Ready Enterprise,” which uncovered nine critical challenges that corporate and law firm attorneys are facing in order to deal with the growing tide of electronic discovery. Over 100 surveys were completed by legal professionals highly experienced in legal discovery and records management.
The critical challenges examined in the report span a range of issues that include inadequate records management programs, changes to the Federal Rules of Civil Procedure, escalating costs of electronic discovery, effective outsourcing strategies, and more.
In the last year a growing number of courts have doled out serious punishment to litigants who didn’t follow the new Federal Rules of Civil Procedure as they relate to electronically-stored information (ESI). Corrective action ranged from sanctions to directed verdicts. The public discovers these reprimands because they are reported in the media, which erodes public confidence in the organization at fault. Consequently, the damage goes far beyond the monetary.
When public confidence is eroded, shareholder value ultimately suffers.
[Click Here to Read the Entire Article]
Executives Fall Short When Leading For Innovation: Survey
Leaders Fail to Set a Clear Vision, Recognize and Reward Innovation
Employees at some of the world’s more prominent companies don’t feel that innovation is well managed or even encouraged by their senior leaders, and it turns out their bosses agree with them. According to a new study, three out of four global executives believe an innovation strategy is critical to their company’s success, yet fewer than half are creating an organizational climate that fosters innovative thinking and leads to innovation success. In fact, approximately 65 percent still don’t have an innovation strategy in place.
The message from senior-level executives is that innovation, an important driver of business growth, isn’t getting the attention that it needs. The results of the study by Oliver Wyman - Delta Organization & Leadership in conjunction with the Economist Intelligence Unit indicate that without leaders who establish a culture of innovation from the top and an organizational structure that supports innovation, companies will falter and look elsewhere for growth.
These and other significant findings are part of the second report in the Global Leadership Imperative series, an annual in-depth look at the challenges of leading in today’s complex, global marketplace. 293 senior executives from large, global corporations participated in the survey representing 17 industrial sectors worldwide. The survey was supplemented with a number of personal interviews.
Executives agree that creating an organizational climate that fosters innovative thinking is the greatest challenge to their leadership and to delivering business results. One major obstacle is a shortage of leaders who demonstrate through their behavior that innovation is essential to their business success. Over half of respondents said leaders in their companies fail to establish a clear purpose and direction for their innovation efforts or create an open and supportive environment. Furthermore, executives believe they are failing in the following areas:
“Global organizations are realizing that innovation is no longer just about investing in the next big product, nor does it have to begin in R&D,” said Carole France, a Partner at Oliver Wyman - Delta Executive Learning Center. “Senior leadership plays a critical role in fostering the right climate for innovation. A company’s culture, values and organizational structure all contribute to the DNA that supports innovative thinking.”
Respondents are aware that it is essential to establish business processes that translate new ideas into action. However, they state that their companies, for the most part, are not structured to support generation and execution of new ideas.
Companies with Innovation Strategy Report Less Bureaucracy, More Productivity
Approximately 35 percent of executives said their innovation strategies are “well-established.” Companies with well-established innovation strategies are less likely to say that their bureaucracy slows down decision making and hinders innovation, than their counterparts, according to the study.
Respondents with well-established innovation strategies were three times as likely to say that their companies were skilled at both creativity/idea generation and at transforming new concepts into commercial processes or products.
Commenting on who owns innovation at Whirlpool, Nancy Snyder, corporate vice president of strategy and competency creation said, “We do have a corporate-wide innovation strategy; it’s part of our overall strategy for the company. It’s created by our top ten leaders, but it’s owned at different levels.”
Innovation Is Not Yet Part of the Culture
The survey findings show employees at approximately half of all companies do not believe that innovation is a business priority or that they are expected and encouraged to develop new ideas. According to survey respondents, changes to the corporate culture may be necessary in order to improve a company’s innovation capacity. “We don’t think of culture and competencies separately,” said Neal Kulick, McDonald’s vice president of global talent management. “Talent initiatives are tied to, and integrated with, the corporate strategy.”
Companies that believe they are successful in this area believe in hard-wiring the importance of innovation and the critical role every employee plays into the company’s culture.
About the Global Leadership Imperative: Building An Innovation Engine
Oliver Wyman – Delta Organization & Leadership in cooperation with the Economist Intelligence Unit conducted a survey including 293 senior executives situated in Asia, Europe, and North America, with companies engaged in 17 different industrial sectors. Company annual revenues range from approximately $1 billion to more than $10 billion. Just under 40 percent of the respondents held C-Level positions or their equivalents, including CEO, CFO, and CIO, while more than 30 percent were Vice Presidents or Directors, and 30 percent were heads of business units or departments. The remainder were board members.
30-April 3, 2008
The Boardroom Bound Boardology Institute presents their Pipeline Seminar in Chicago. Register at
May 29-31, 2008
Océ Business Services has launched a brief survey that invites C-level executives to take a penetrating look at how organizations are leveraging advanced document management to improve business performance. The resulting survey data will help executives better understand how effective document processes can drive business benefits such as enhanced regulatory compliance, improved operational efficiency, increased competitive advantage, and reduced costs. Survey participants will receive a free copy of the research report. To take the survey, click here.
Subprime Crisis Cranks Up Class Action Filings
The Stanford University Law School Securities Class Action Clearinghouse, in cooperation with Cornerstone Research, released its 2007 Year in Review Securities Fraud Class Action Filings Report.
In total, the number of companies sued in securities fraud class action litigation rose 43 percent between 2006 and 2007, from 116 in 2006 to 166. Although litigation activity for 2007 as a whole was 14 percent below the 10-year historical average (covering 1997–2006) of 194 companies sued per year, activity jumped in the second half of the year as the subprime mortgage crisis unfolded and stock market price volatility increased.
The full report is available to view online and can be downloaded at http://securities.stanford.edu or http://www.cornerstone.com.
Strong Link Between CEO Realizable Pay and Performance
Executives at high-performing companies are realizing greater compensation than their counterparts at underperforming companies, suggesting that corporate America’s executive pay-for-performance model is working, according to a new study by Watson Wyatt Worldwide, a leading global consulting firm. Separately, the study also found that a growing number of workers are forfeiting “in-the-money” stock options and companies are continuing to pull back on broad-based stock options.
Copies of the Watson Wyatt 2007/2008 Report on Executive Pay are available at http://www.watsonwyatt.com/execpay. Watson Wyatt compensation experts Ira Kay and Steven Van Putten explore this topic in an article in the First Quarter 2008 issue of Directors & Boards.
Conference Board Executive Compensation and Corporate Reputation Reports: The Conference Board’s new executive compensation report sheds light on CEO holdings relative to compensation. Another of the research organization’s recently released reports, Reputation Risk: A Corporate Governance Perspective, provides recommendations on how corporate boards can ensure companies develop a robust reputational risk management process integrated within their enterprise-wide risk management (ERM) program.
KPMG Fraud Alert Survey: When corporate fraud occurs, it usually is an inside job made easier because the company had an insufficient prevention program, according to an executive survey by the audit, tax and advisory firm KPMG LLP. Some 42 percent of survey respondents said inadequate internal control was the primary contributor in the previous year to a fraud incident against their company.
Change in Control Benefit Provisions: According to a survey by Mercer, the majority of participating companies (60 percent) made changes to their program in the last two years, and those changes are in response to shareholder concerns that the programs provide an expensive windfall to executives. For more information about the study, click here or visit www.imercer.com and go to the U.S. home page. The survey report includes information on eligibility, cash severance levels, treatment of equity and gross-up provisions for golden parachute taxes, plus reports on the types of changes that companies have recently made to their programs.
Compensation Manual: The CFA Institute Centre for Financial Market Integrity has released its global manual, The Compensation of Senior Executives at Listed Companies: A Manual for Investors, which provides a comprehensive, in-depth examination of how executive compensation is determined, the elements of compensation, governance practices, and associated risks for investors. The CFA Institute Centre is the arm of CFA Institute dedicated to promoting fair and open markets on behalf of its more than 92,000 members, investment professionals who practice in 135 countries. It acts as an advocate for investor protection and high professional standards. The Manual complements the CFA Institute Centre’s The Governance of Listed Companies: A Manual for Investors, which is part of the Level I CFA exam curriculum.
Thomas H. Bentz Jr. has been made a partner at Holland & Knight LLP. He practices insurance law in the firm’s Washington, D.C., office, where he focuses on negotiating directors and officers and other management liability insurance policies for policyholders. He has been a longtime contributor to Directors & Boards of D&O insurance advisories.
The Millstein Center for Corporate Governance and Performance conducted a roundtable on “Independent Leadership of Mutual Fund Boards,” the first effort to examine independent leadership since the U.S. Securities and Exchange Commission adopted regulation in 2004 requiring mutual fund boards to appoint an independent chairman. The regulation, which was designed to address conflicts of interest and abuses, is in limbo after court rejection; the SEC has promised to restore it. Since the regulation passed, more than 60% of U.S. mutual funds have acted to install independent chairs in anticipation of the rule becoming formalized. Stephen Davis, project director of the Millstein Center, heads the initiative. For additional information about the mutual fund boards project, contact Davis at 203-432-8070.
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