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Directors & Boards
Robert H. Rock
Publisher
James Kristie
Editor
Lisa
Cody
Chief Financial Officer
David Shaw
Publishing Director
Scott Chase
Advertising Sales Director
Nancy Maynard
Account Executive
Barbara Wenger
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From Jim Kristie | Article of the
Month | Columnist
Reader Profile |
Research | News |
Who Knows Best?
Here is what you might ask yourself — in a quiet moment of soulful
reflection — when an investor questions your strategy.
Back in 1999, when the old AT&T Corp. was a huge operation and
growing even more expansive (with cable acquisitions) under then-CEO
Mike Armstrong, I asked him this question in an interview for a Directors & Boards cover story:
“Can companies grow so large and complex that they could become almost
unmanageable?”
That question bothered me then in analyzing AT&T, and bothers me
today in analyzing Citigroup and other companies that seem to be
unwieldy in size and scope.
Mr. Armstrong gave me a reasoned answer: “Yes, that could become a
problem. Not so much due to size, although that is one element of the
complexity. It is when companies lose their focus, when they try to be
more things than they truly can be, that it is a risk … Manageability
is more parallel to focus than it is just to size.”
Fair enough. But still, looking at Citigroup et al, the question nags:
Can a company become too big and complex for any one individual to lead
— and for a board to oversee? (I’ve been joined in this question by the
Wall Street Journal,
which critiqued Citigroup in an editorial in January titled “Too Big to
Succeed?” — a play on the “too big to fail” philosophy of the domestic
banking system regulators.)
Investors who have advocated the breakup of Citigroup over the past few
years may have been more right than have the successive CEOs and board
members in recognizing the unmanageability — and “ungovernability” — of
this behemoth.
It’s not heresy to think that investors may actually know more than the
board about the company, its industry, and, crucially, its likely
destiny. Outsiders haven’t “drunk the Kool Aid.” They are not steeped
in the “group think” that comes from seeing the world from inside the
corporate walls.
Here from a Reuters report last month on former SEC Chairman Richard
Breeden’s activist initiatives:
“Large stockholders … can have vastly more resources to analyze
corporate strategies than a part-time board member without an
investment staff. ‘I can put eight MBAs on studying a company’s
problems,’ said Breeden.”
In a note last month to clients and colleagues, top PR counselor Davia
Temin recounts this exchange: “An older corporate board member once
said to me, ‘Do you know when we directors know it is time to step
down? When the things we believe to be undeniably, incontrovertibly
true — aren’t any more.’ ”
If an activist shows up on your doorstep this year, ask yourself: Could
this investor be better at seeing around corners for our company and
its destiny than we as a management team and board are doing? Are the
things we believe about our company, its capabilities, and its place in
the universe incontrovertibly true — or maybe not?
And it shouldn’t take an activist knocking on the boardroom door. Take
the initiative to get involved in a shareholder forum, like the kind investment banker Gary
Lutin organizes and that the SEC is now encouraging, to test your
incontrovertible theories about your business.
As a postscript, the circa 1999 AT&T that Mike Armstrong and I
talked about was soon thereafter to be no more. It was restructured and
acquired. Mr. Armstrong, no longer running the new AT&T but
continuing now as then to serve as a board member of Citigroup, is
likely confronting the question I asked him nine years ago: “Can
companies grow so large and complex that they could become almost
unmanageable?”
Jim Kristie is the editor and associate publisher of Directors & Boards.
A New Fairness in Fairness OpinionsFINRA 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.
[Click
Here to Read
the Entire Article]
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]
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
Chase.
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]
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:
- Maintaining discipline in the innovation process (82%)
- Recognizing innovation (73%)
- Taking an outside-in perspective (71%)
- Facilitating idea generation (68%)
“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.
February
20-21, 2008
The Tax Council Policy Institute will hold its 9th Annual Tax Policy
and Practice Symposium at The Ritz-Carlton Hotel in Washington, D.C.
The program is titled "Future Shock? Impact of U.S. Fiscal Policy on
Corporate Taxation in an Increasingly Competitive Global Marketplace."
The symposium will bring together leading professionals and
policymakers from government, industry, and academia to take an
in-depth look at critical tax issues facing U.S. businesses today.
Roger LeMaster, executive director of TCPI, warns that "Tax executives
will face a variety of challenges bound to make 2009 a potential
watershed year for the structure of the U.S. tax system." KPMG LLP, the
audit, tax, and advisory firm, will serve as program manager for the
2008 event. For additional information, visit
February
26-29, 2008
Stanford Directors' Forum, a program jointly offered by Stanford
Graduate School of Business and Stanford Law School, will be offered on
the Stanford University campus. The cross-disciplinary program focuses
on the role of directors in guiding and overseeing corporate success.
Participants will receive an up-to-date overview of current governance
sentiment and principles and develop a deeper understanding of how to
influence board-level decisions. For information, visit
February
27-29, 2008
The Directors' Consortium, a joint offering of the University of
Chicago Graduate School of Business and Tuck at Dartmouth, will conduct
a three-day intensive program exploring the fundamentals of corporate
governance and board service. Leading faculty from five world-class
institutions will present a comprehensive approach to the complex
decisions that board members must make. The program will be held at
Chicago GSB. For information, visit
February
28-29, 2008
The Center for Political Accountability along with Wharton School's
Center for Business Ethics Research and Baruch College's Zicklin School
of Business present "Money, Politics and Corporate Risk." The
conference will examine the role of corporate governance as a
counterbalance to political pressure and when and how corporations
should participate in politics - and, in particular, the director's
responsibility for establishing policies and overseeing company
political activity. Speakers will include prominent public officials,
scholars, journalists, and business people, among them Leon Panetta,
former OMB director and White House chief of staff; John C. Coffee Jr.,
Adolph A. Berle Professor of Law, Columbia Law School; William C.
Thompson Jr., comptroller, City of New York; Gerald Greenwald, former
CEO of UAL Corp.; and Dan Bross, senior director of corporate
citizenship at Microsoft. To register, visit
March 6,
2008
The Conference Board Directors' Institute will be held at the
Mid-America Club in Chicago. The program topics include how directors
are tackling the latest governance challenges, such as managing
compensation consultant relationships, dealing with hedge funds and
private equity funds, and handling risk management oversight. Visit
March
13-14
The Boardroom Bound Boardology Institute presents their Pipeline
Seminar in St. Louis. Hosted by the John Cook School of Business at St.
Louis University. Register at
March
20-21, 2008
The Marshall School of Business at the University of Southern
California will conduct the Third Annual USC Corporate Governance
Summit. Noted faculty and top governance practitioners will provide
directors and senior business executives insights into leading best
practices in effective governance. Visit
March
26-29, 2008
Harvard Business School's Corporate Governance Series presents "Making
Corporate Boards More Effective," a program that concentrates on
cutting-edge techniques, strategies and action plans for improving
board design, maximizing individual contributions to company boards,
and improving corporate governance. Faculty chair is HBS Professor Jay
Lorsch, and the program will be held in La Jolla, Cal. For further
information, call 1-800-HBS-5577 or visit
March
30-April 3, 2008
The 2nd Annual Corporate Governance Congress will be held at the JW
Marriott Hotel in Dubai. The only established corporate governance
event in the region, the program will address such topics as developing
an innovative governance model tailored to your challenges and needs;
boosting public and minority shareholder confidence in your
organization; and encouraging transparency, sustainability and
disclosure through corporate ethics, CSR and SRI. John J. Ray III,
chairman and CEO of Enron, and strategic governance adviser and Directors & Boards author Mark
Sickles will be among the speakers. For more information, visit
April
2-4, 2008
PricewaterhouseCoopers LLP and The John L. Weinberg Center for
Corporate Governance, University of Delaware, present Directors'
College 2008. The program will address dealing with activist
shareholders, exploring ways to prepare and position a company
successfully. Speakers include David Batchelder, director of Home
Depot; John Biggs, director of Boeing; Charles Elson, director of
HealthSouth and Autozone; and Richard Koppes, director of Apria
Healthcare Group and Valeant Pharmaceuticals International. For more
information, click
here.
The Boardroom Bound Boardology Institute presents their Pipeline Seminar in Chicago. Register at
May 29-31, 2008
The International Policy Governance Association's 5th Annual Conference
will be held in Vail, Colo., at the Vail Marriott Mountain Resort and
Spa. Themed "Together at the Top: Building Peak Performance Boards,"
the event will bring together board members, CEOs, senior management
and board advisers and individuals at any level of Policy Governance
knowledge and experience for workships, plenary sessions and networking
opportunities with Policy Governance practitioners and experts from
around the world. For more information, visit
June 18,
2008
The 12th Annual Wharton Leadership Conference presents "Emerging Trends
in the Search for Leadership." In this intensive one-day program,
presenters draw upon their own and their organizations' experiences in
finding, creating and retaining talent at all levels of the firm.
Speakers will include Colleen Barrett, president of Southwest Airlines;
S.A. Ibrahim, CEO of Radian Group; William Weldon, CEO of Johnson &
Johnson; and Wharton's Peter Cappelli, Habir Singh, and Michael Useem.
The program will be held at the Wharton School. Register at
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.
Director Resources
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.
Author Notes
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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