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Directors & Boards
Robert H. Rock
Publisher
James Kristie
Editor
Lisa
Cody
Chief Financial Officer
David Shaw
Publishing Director
Scott Chase
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Barbara Wenger
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From Jim Kristie | Article of the
Month | Columnist
Reader Profile |
Research | News |
Director,
Educate Thyself
Despite RiskMetrics’s move away from accrediting director education, I
am with the late and great Jean Head Sisco on this: ‘Continuing
education for directors — we need it now more than ever.’
The job of a corporate director will be as complex in 2010 as it ever
has been. So much new and enhanced activity is barreling down on board
members — on the enterprise risk management front and on the regulatory
front, just to cite two big pressure points. Later this month a whole
slew of new SEC disclosure requirements go into effect.
You would think that if there ever was a time when director education
would be considered essential, if not mandatory, this is it.
So it is a curious, and seemingly counterintuitive, development that
RiskMetrics Group (RMG), the 800-pound gorilla in the governance
ratings game, is about to stop giving credit in its governance ratings
for director education. In late January RMG announced that it will
cease reviewing director education programs or tracking director
attendance at what had been accredited programs, and will no longer
include director education in its Governance Risk Indicators — the
successor to its Corporate Governance Quotient (CGQ) scoring system for
rating a company's governance.
This is a significant development for all the purveyors of governance
programming — think of all of the director institutes and centers for
corporate governance and all their conferences and events, plus all the
programming put on by service firms for a director crowd. The
programmers all benefited from RMG’s blessing of the importance of
director education.
This kind of environment we’re in now is when you want to encourage
directors to avail themselves of educational opportunities to get
better up to speed. The last thing we want to see is the taking away of
any form of incentive to growing a board member's knowledge base and
competencies. Thus my bemusement with RMG proceeding down this path of
no longer giving its imprimatur to director education.
Ten years ago I published a piece by a remarkable woman in governance
named Jean Head Sisco. Over the course of a distinguished career in the
retailing industry as an executive and consultant she served on 22
corporate boards, including Chiquita Brands International, Neiman
Marcus Group, and Textron. She received the Director of the Year Award
from the National Association of Corporate Directors in 1999
(fortunately she got this honor before she died in early 2000). In her
remarks on receiving the award — which I adapted into an article
titled, you guessed it, “Director, Educate Thyself” [Summer 2000] — she
spoke of the importance of director education. Her words then:
Those words still apply today, with or without the impetus supplied by
any governance ratings agency.
I like to think that a subscription to Directors
& Boards and your readership of these monthly e-Briefings help fill the
continuing education requirement. As always, I welcome your comments on
this topic.
And if you would like a copy of Jean Head Sisco’s article, email me at jkristie@directorsandboards.com.
Jim
Kristie is the editor and
associate publisher of Directors
& Boards.
*****
Special Note: On January 20, I
moderated a special Directors &
Boards Webinar on
the topic of "Enterprise Reinvention: How Directors Can
Elevate and Sustain Corporate Performance Through Enterprise Risk
Management." My speakers were Jack Bergstrand, the
author of Reinvent Your Enterprise,
and the founder of Brand Velocity, Inc., and John A. Wheeler, the
managing principal of Weelhouse Advisors LLC, and the former senior
vice president and senior risk offier within the corporate risk
management division of SunTrust banks, Inc. You
can view
a replay of the webinar here.
KPMG’s Audit Committee Institute offers its annual advisory to directors, highlighting issues that should be top of mind.
“Corporate audit committee members know they have a sizeable task in 2010 as they confront high shareholder expectations, new regulations and legislative reform, and a tenuous economic recovery,” states Mary Pat McCarthy, executive director of the Audit Committee Institute (ACI) and a vice chair of KPMG LLP, the U.S. audit, tax and advisory firm.
“The year ahead is sure to test virtually every audit committee, and these to-do’s can be a great catalyst for shaping the audit committee’s agenda and focusing its discussions,” McCarthy says.
When considering and carrying out their 2010 agendas, audit committees should:
1. Regain control of the audit committee agenda.
The challenges of the economic crisis—access to capital, cash flow, counterparty risks, impairments, etc.—have dominated audit committee agendas. As signs of recovery emerge, take the opportunity to develop more focused (yet flexible) agendas, with an eye on the company’s key financial reporting risks.
To improve the efficiency of committee meetings, insist on quality pre-meeting materials, spend less time on low-value or checklist activities, and engage in discussions rather than listening to presentations. Don’t let compliance activities crowd out substantive discussion. To read more, click the link below.
[Click
Here to Read
the Entire Article]
An Effete Corps of Governance Snobs
Test your board savvy à la the late Spiro Agnew speechwriter and New York Times columnist William Safire.
By Hoffer Kaback
Every so often, the late William Safire, a speechwriter for President Nixon and Vice President Agnew and, thereafter, an important presence on The New York Times op-ed page, wrote a column comprising multiple-choice questions about policy, politics, prognostication, and personalities. Here is a variation:
1. Who, for many years, was invariably described in the business press as a “raider” and “greenmailer”; later, as a “financier”; but, more recently, has been adorned with the Homeric epithet “shareholder activist”?
a. Ivan F. Boesky
b. George Soros
c. Pat McGurn
d. Carl Sandburg
e. Carl Icahn
2. Who was a giant among men in matters corporate?
a. Milton Berle
b. Adolf Berle
c. Og Melech Bashan
d. Og Ogleby
e. Grady Sutton
To read more, click the link below.
[Click Here to Read the Entire Article]
Thomas A. Basilo, CPA
Chairman and CEO, WithumSmith+Brown Global Assurance, LLC, a division of WithumSmith+Brown, PC
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.
What is your opinion about the most recent delay in compliance with Section 404(b) of SOX for smaller public companies?
I have long been disappointed with the SEC for delaying full compliance and implementation of SOX for non-accelerated filers numerous times because I believe that all companies that solicit and accept funds in the public market need to have an effective system of internal accounting control in place. This delay, however, is the most disappointing insofar as it establishes how Mary Schapiro will discharge her responsibilities as Commissioner.
As recently as June 2009, the SEC indicated that no further delay would be granted to smaller public companies and urged these companies to get ready for compliance. In reality, few small public companies reacted to this edict because of the past history of delays provided by the SEC. True to form, in early October 2009, the SEC announced that another delay was being granted to smaller public companies simply because the report on the effectiveness of Section 404 of SOX was only issued in September, thus reducing the time needed for the smaller companies to be ready. Are they serious? To read more, click the link below.
[Click Here to Read the Entire Article]
A new type of leader is emerging from the meltdown.
“Finding the right person to take over when a CEO leaves is no longer just a ‘good idea’ but a regulatory priority for boards,” says Stephen Miles, Vice Chairman and head of leadership advisory services at Heidrick & Struggles . “Given the grim statistics on succession planning, this is a weak point for many companies and they will need to address it in short order.”
“Business has been talking the talk about succession planning for the past 10 years, but this new decade will be about walking the walk,” says Mr. Miles, who forecasts five dominant trends – and opportunities – in leadership succession for the next decade:
1. Increased regulatory and investor scrutiny – “The SEC bulletin on succession planning issued last October provided activist shareholders a conduit to investigate and interrogate a corporation’s succession planning processes – and they will use it. And it will not just be the Carl Icahns of the world, but also pension funds and unions as well as more traditional investors and analysts.”
The opportunity: Investor premium. Companies that are prepared for CEO transitions will be more attractive to the investment community. “According to a McKinsey study, institutional shareholders are willing to pay a premium of 15-20% for well-governed companies, and succession planning is going to be a part of their calculus.”
2. “Operationalizing” of succession plans – “Simply having a succession plan in place doesn’t mean that it will produce viable candidates,” he says. “Over the past 18 months, we’ve seen company after company that would have talked confidently about their succession plans fail to orchestrate a smooth CEO turnover.”
The opportunity: Growing HR role. “The person in the organization who will really have to step up is the head of HR. Operationalizing the CEO succession process will be delegated to them, and the qualifications of HR leaders will become more critical.”
3. Demand for more qualified succession planners on the board – “Boards would never hire or appoint someone to be chair of the audit or risk committee without specific qualifications, but this has not been true for those that chair the succession process for the company. We will see greater scrutiny of those who serve on this succession committee, and see boards recruiting more ‘experts’ who have led these processes at other firms, be they CEOs or HR chiefs or other consultants.”
The opportunity: New blood in the boardroom. “This demand for specific expertise opens up a new pool of potential board candidates beyond the traditional pool of CEOs to also include succession experts and a broader array of HR leaders.”
4. Emergence of a new kind of CEO – “We are entering a new era in corporate leadership,” says Mr. Miles. “The economic meltdown has had the effect of shaking out a lot of dead wood from the top ranks and forcing decisions that companies have been sitting on for 5-10 years. The next generation of CEOs coming in are much better bottom-line leaders than their predecessors, and they truly understand the levers of the business.”
The opportunity: Well-rounded new leaders. “Rigorous succession planning is reinforcing the importance of identifying a leader who is part CEO, part CFO, and part COO – someone who can inspire, who knows how the business makes and loses money, and who understands how the business works on the ground.”
5. Reaching down into the organization for the next generation of leaders – “The next year and beyond will have the board pushing further down into the organization to gain more meaningful exposure to those who are two levels down from the CEO.”
The opportunity: Internal CEO candidates. “The bias in the next decade will definitely be toward internal candidates for the top job versus the external hire. Boards are preparing for succession events 18-24 months out, and are asking CEOs to build bench strength and develop people from within.
“A caveat to this trend,” says Mr. Miles, “is not to automatically assume that the Chief Financial Officer is the ideal successor candidate. Boards often have a false sense of security about a CFO’s ability to run a business. And while of course there are some who can easily step into a CEO’s shoes, many have the right financial acumen without the operational skills to round out the job.”
“The combination of market and regulatory events will drive a new discipline in the area of succession planning. And a striking benefit of this in the coming years will be less turnover at the top. As companies build greater organizational strength in the C-suite, we will see healthier leadership more able to withstand seismic economic change.”
| February
2, 2010 February
4-5, 2010 February
8, 2010 February
28- March 4, 2010 March
3-5, 2010 March
16-18, 2010 March
22-23, 2010 March
24, 2010 March
24-25, 2010 March
30, 2010 April
7-9, 2010 May
16-19, 2010 |
|
Last year, CFA Institute identified the top executive compensation concerns as companies began to rebuild from the market crisis. Its latest update does not reflect much progress, the organization reports. Instead, it says executive compensation practices have grown even more controversial and suspect over the past year and remain a significant governance concern to investors. Here is the CFA Institute 2010 Investors Wish List:
• Disclosure Template: Investors have the right to fully understand compensation plans, managerial incentives, and how the board of directors is protecting shareowner interests. More rules and pages of corporate disclosure will not bring clarity. “We need a new approach to the CDA for better quality disclosure.”
• Pay Benchmarks: Any disclosures should clearly demonstrate whether pay is based on meaningful, performance-based benchmarks tied to shareholder returns. The SEC should not allow firms to hide behind so-called proprietary interests to avoid reasonable disclosure of incentive metrics.
• Quality of Regulations: An overhaul of Item 402 of Regulations S-K and any related compensation disclosure rules is desperately needed because the CD&A has rapidly become legal boilerplate. In only few cases does the CD&A satisfy the basic notion of clear, concise, and understandable disclosure. This leads us to believe that, in large part, the rules are to blame. Today’s 40-pages of elaborate regulations almost guarantee an exhaustive, legalistic outcome.
• Shareholder Access and Board Quality: Are compensation committees listening? It should not be too much to ask for a few visionary directors to meet their fiduciary responsibilities and guard against shoddy compensation practices. Shareholders should have the tools to replace directors (via a shareholder access process) when they fail to properly oversee executive pay.
• Pay for Performance: Incentive compensation should attract and retain key employees and serve as ample reward for excellence in managerial talents. Period. For incentives to be properly aligned, unremarkable performance should not be rewarded. Last year gave us too many examples of abuse. Stock grants that front-run good news or accelerated bonus payouts on the eve of collapse are but a few.
Click here for more information on this CFA Institute report.
Director Resources
Chairman/CEO Separation: The number of companies that have separate executives serving as CEO and chairman of the board continues to rise, increasing from 28 to 31 from 2008 to 2009. This is one of the key findings in the just-released Shearman & Sterling’s seventh annual Corporate Governance Survey of the largest U.S. public companies. While 75 of the Top 100 Companies address the topic of whether the two offices should be separated, only 7 of those companies have adopted an explicit policy of splitting the two offices. And of the Top 100 Companies, 69 still have their CEO also serving as chairman of the board. The survey is available on request from Shearman & Sterling’s website. See also a major article on this topic in the forthcoming First Quarter 2009 edition of Directors & Boards.
Global Risks: The World Economic Forum released an annual report highlighting a number of underlying risks that contributed to and were exacerbated by the financial crisis and global economic downturn. Some concerns include: fiscal crises and unemployment, underinvestment in infrastructure, and chronic disease; systemic risks such as transnational crime and corruption, biodiversity loss, and cyber-vulnerability; and the need to combat governance gaps globally “which is greater than ever.” Click here for the report.
Deal Activity: IntraLinks Deal Flow Indicator shows a 12% increase in global deal activity in the fourth quarter of 2009 from the third quarter. This is the third consecutive quarter of double-digit growth. The improvement can be attributed to a dramatic resurgence in financial sponsor activity, the thawing credit market, and continued stability in the equity markets. Click here for the report.
Climate Change Risk: A new Ceres report concludes that a vast majority of the world’s largest investment managers are not factoring climate-related trends into their short- and long-term investment decision making, which could result in significant hidden risks in the trillions of dollars of investment portfolios they are managing. Click here for the full survey report.
Fraud Risks: The Institute of Internal Auditors (IIA) has released two new pieces of guidance to help organizations deal with fraud risks. The first guide — Internal Auditing Fraud — is aimed at increasing internal auditors’ awareness of fraud and provides guidance on how to address fraud risks during internal audit engagements. The second — Fraud Prevention and Detection in an Automated World — is specific to fraud within the technology environment.
Security Class Actions: A total of 169 federal securities class actions were filed in 2009, a sharp decline from 2008, according to the new report, Securities Class Action Filings—2009: A Year In Review, from Cornerstone Research and the Stanford University Law School Securities Class Action Clearinghouse. Securities class actions dropped by 24% in 2009, led by a steep fall in lawsuits emanating from the credit crisis. “Plaintiffs simply ran out of financial firms to sue,” says Prof. Joseph Grundfest of Stanford, a former SEC commissioner. Click here for the report.
Executive Pay: World at Work, a global human resources association, has released a new tool to ensure successful internal communications dealing with executive pay. The Practitioner’s Guide to Executive Rewards Communications is an interactive tool designed to assist executive rewards practitioners, or anyone who has to discuss pay with executives, in preparing for and conducting such complex discussions. It helps users organize their talking points based on various pay elements, including base pay, annual incentives, long-term incentives, nonqualified plans, prerequisites, and proxy data.
Risk Oversight: Protiviti, a global business consulting and internal audit firm, has introduced Board Perspectives: Risk Oversight to help guide board members during this critical time. The monthly newsletter provides ongoing commentary about the risk oversight process as well as practical ideas that will help board members improve and execute their risk oversight responsibilities. Click here to access complimentary copy or to sign up to receive the newsletter via email.
Compensation and Governance Disclosures: Pearl Meyer & Partners summarizes the SEC’s newly finalized rules for expanded disclosure of compensation and corporate governance, which include meaningful and practical changes and clarifications to its original proposal released in July. The amended rules will apply to proxies filed on or after February 28, 2010. For more information, click here.
Author Notes
Korn/Ferry International acquired SENSA Solutions, a McLean, Va.-based firm founded in 1996 that is recognized for its deep U.S. government relationships and specialized human capital solutions, including strategic planning, training and development, executive coaching, change management, and strategic communications. Middle-market investment banker The McLean Group LLC acted as the exclusive financial advisor to SENSA Solutions.
Drexel University’s Center for Corporate Governance is based in the university’s LeBow College of Business. The Drexel board of trustees has approved plans for a new building to house the business school. The building’s initial plans call for the existing 57,000-square-foot Matheson Hall to be incorporated into a new structure that would add 125,000 square feet, bring the total size of the new building to 182,000 square feet.
Cornerstone International Group has opened an office in Milan, its second office in Italy following the opening of an office in Rome last June. The firm now has over 100 offices in major business markets globally.
John Kim, global head of the financial services practice at Heidrick & Struggles, has authored a new white paper, “Rising from the Ashes: Finding the Best Leaders for the Next Phase in Banking.” Says Kim: “The financial crisis wiped out entire levels of executive leadership at banks, and 2010 will see a restructuring of the talent pool to drive organizations into recovery mode.” For a copy of his white paper, contact Davia Temin or Suzanne Oaks of Temin and Company at (212) 588-8788 or email news@teminandco.com.
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Directors & Boards e-Briefing is a monthly service of Directors & Boards. All contents copyright 2010, MLR Holdings LLC.