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Directors & Boards
Robert H. Rock,
Publisher
James Kristie,
Editor
Martin D. Porter,
Associate Editor
Lisa
Cody,
Chief Financial Officer
David Shaw,
Publishing Director
Scott Chase,
Advertising Sales
1845 Walnut Street
Suite 900
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The Directors & Boards e-Briefing is produced by GRID Media LLC.
From Jim Kristie | Article of the
Month | Columnist
Reader Profile |
Research | News | Forum
Playing with OPM
As regularly as spring
cleaning comes spring
howling about executive pay.
We’ve just gone through a proxy and annual meeting season in which executive compensation was yet again a flashpoint for controversy. Nothing new about that. As regularly as spring cleaning comes spring howling about executive pay.
Shareholders are unhappy. Regulators are unhappy. Journalists who have to report on CEO pay are unhappy (green with envy, I would say). Even board members are unhappy: A recent McKinsey report finds that 39% of surveyed directors feel that executive compensation is “too high” and 13% describe it as “far too high,” while 43% describe it as “about right,” and -- perhaps for a bit of comic relief -- the remaining 5% weigh in with an evaluation of “too low.” The only party that does not seem to be unhappy is the recipient of the attention-getting compensation.
The aggrieved want solutions to a problem they see as a spiraling out of the realm of sanity. The solution they often have in mind is some sort of new regulatory initiative. The place to look for the best solution is the boardroom.
But the reality is that directors of a public company play with other people’s money. The “OPM factor” is what makes it easy for directors to award pay that they admittedly agree is too high. How different would the pay decisions be if the board members were the true owners, and management compensation were awarded each year out of the directors’ invested capital and share of the profit pool? One answer is: Our 1982 article title might still be usable if revisited today.
I recommend you read closely what Vice Chancellor Leo E. Strine Jr. of the Delaware Court of Chancery says about the board’s role in compensating management. You’ll find that in the Third Quarter edition of Directors & Boards, which comes off press at the end of July. When the Delaware Court of Chancery opines, one does well to pay heed. His article is titled, “Warning -- Potential Danger Ahead.” And that’s not a title with a question mark in it. If you're not a subscriber to our print edition, please sign up now, so that you don't miss this important article.
What are your thoughts on CEO
compensation? E-mail
me your comments and we’ll publish them in the next issue of
the e-Briefing. For some of the response to last issue's question
on director term limits, see below.
Jim Kristie is the editor and associate publisher of Directors & Boards.
Board meetings have few rivals as optimal settings for an executive to project authority, credibility, and character. In presenting to the board, make sure you are sized up as a leader. Tips from Ronald Reagan's personal debate advisor.
A few months ago, a new client, a senior executive of a Fortune 100
firm, showed me the first presentation he had recently made to his
board of directors. Although he struck me as bright, articulate, and
well-educated, his presentation was a verbatim manuscript. Why, I
asked, did he not take a more extemporaneous approach, using an outline
instead? He responded that the firm's chairman and CEO insisted on the
manuscript, regarding it as a way to keep each executive "on message"—the message the chairman had approved.
This
anecdote prompts two broad questions:
1. How does increased director accountability influence the way boards
should regard presentations and Q&A?
2. Should increased accountability influence how executives prepare for
presentations and field questions?
Is the Hard D&O
Market Softening?
What goes around comes
around: Important signs are pointing to a softening in the D&O
insurance market.
By all key measures, the hard market is softening. This observation is based on negotiating nearly 50 D&O insurance policies in recent months and is consistent with the views of experienced brokers interviewed for this column.
While 50 policies may not constitute a statistically significant sample, this report on our experience has the virtue of being current, which is very important. Why is timeliness important? Ask any risk manager going into renewal negotiations in the next few weeks. He needs current information to better judge the terms of the quotes presented by the company’s brokers, particularly premium rates. Such information also allows him to more accurately guide top management’s expectations about the cost of the company’s D&O program for the coming policy year.
What signs identify a softening D&O insurance market? Flat or decreasing premiums are key. Other signs are higher policy limits being offered to individual companies and insurers’ willingness to negotiate coverage enhancing endorsements.
Premiums. Instead of the heart stopping increases of the past few years, we have been seeing decreases in the amount of renewal premiums on primary policies, in some cases between 10% and 30% less than a year ago. [Read the Full Article]
President and Chief Executive Officer
Barbara Franklin Enterprises
Editor's note:
Each month, we ask a Directors & Boards reader to comment on
critical issues facing directors today. This month, Barbara
Franklin
discusses the costs and benefits of new corporate governance
requirements.
In the 1970s, I served for nearly seven years as one of the original commissioners of the US Consumer Product Safety Commission. At that time, the concept of cost-benefit analysis was rather new and agencies across the government struggled with it. The identification of benefits and costs of a proposed regulation is relatively straightforward; the hard part lies in attaching dollar estimates and determining probabilities. And quite often, unintended consequences are never factored in at all.
At the Commission, we found that one of the most difficult things to quantify was the value of a human life. No matter what set of estimates we used, the outcomes always seemed unfair as one age group or class of adults was valued over another. Similarly, it is a challenge to quantify the benefits and costs of governance with such diverse constituents as shareholders, employees, customers, communities, regulators, the media, and the public.
What I found most useful at the end of the day was the discipline of using a cost-benefit approach as a framework for decision-making. The simple exercise of making two columns—benefits and costs—is illuminating, and I continue to use it.
If we apply this approach to implementing SOX, the stock exchange requirements, and the new SEC regulations, here is what it looks like. [Read the Full Article]
24% think the CEO should
be
only insider on the Board
A poll of 226 global senior executives reveals that 61 percent believe that a company’s board of directors should include the CEO and a minority of other company insiders. An additional 24 percent say the CEO should be the only insider on the board. The Association of Executive Search Consultants, www.aesc.org, the worldwide professional association for retained executive search firms, conducted the poll from June 1-9, 2004.
The full results from the poll were “Regarding the composition of ‘insiders’ and ‘outsiders’ on company boards, do you think that it is best for a board to have - ”
Only the CEO as an insider – 24%
A minority of insiders, but more than just the CEO – 61%
A majority of insiders – 12%
Only outsiders – 3%
According to Peter Felix, president of the Association of Executive Search Consultants, “These results show that while executives remain focused strongly on the need for a majority of independent directors on the board, they recognize that having a minority of insiders with extensive knowledge of the business is highly important as well. The corporate scandals in both the U.S. and Europe, and the legislative and regulatory remedies that followed – such as Sarbanes-Oxley – have made it more essential than ever for companies to find qualified, independent people to serve as directors. This is not an easy thing to do. Because the responsibilities and time commitments of directors have increased so much, the pool of qualified people who are willing to serve has not grown. More and more, companies are relying on professional search firms to help them identify directors who make a real contribution to the success of the organization.”
August
25-27, 2004
The Directors' Consortium, a joint offering by the University of
Chicago Graduate School of Business, Stanford Law School, and the
Wharton School of the University of Pennsylvania, presents an intensive
program exploring the fundamentals of corporate governance and board
service. The program will be held in Philadelphia at Wharton's Aresty
Institute of Executive Education.
September
15-16, 2004
On Board Bootcamp Seminar is a program designed to be an "insider's
guide" to getting on a corporate board and succeeding as a director. It
is co-directed by Susan Stautberg, president of PartnerCom Corp., which
creates and manages advisory boards, and Carolyn Chin, chairman and CEO
of Cebiz, a consulting and investment management firm. The program will
be held in New York.
October
6-8, 2004
INSEAD hosts its third International Directors' Forum in Fontainebleau,
France. This unique event brings together a select group of Chairmen
and Board Members from across Europe and the world who seek to improve
their Board's effectiveness, deepen their understanding of how other
top Boards operate, and exchange views on the implications of the
changing corporate governance context. The program is ISS-accredited.
Information on the event can be found at
October
17-19, 2004
The National Association of Corporate Directors (NACD) presents its
2004 Annual Corporate Governance Conference at the Renaissance
Mayflower Hotel in Washington, DC. To register, visit
November
14-15, 2004
BoardSource, formerly the National Center for Nonprofit Boards,
presents its Leadership Forum, themed "Challenge Your Board Practices."
Discussions will include: how effective are boards?; what is the future
of nonprofit leadership?; what does it mean to lead?; and, do your
board committees have "static cling"? Register at
What's New
at Directors & Boards
Directors & Boards will publish a new book, "The Art of Corporate Governance," this summer. The book features 10 of the finest articles published in the journal from the past 20 years and focuses on the role of directorship. Authors include Norman Augustine, Chuck Ames, William Miller III, Robert K. Mueller and Murray Weidenbaum. The book will list for $150.
Author Notes
Wanda Wallace's Directors & Boards article, "Auditor Rotation: A Bad Governance Idea," has been submitted by the U.S. Chamber of Commerce as part of a commentary briefing package on the proposed mandatory auditor rotation rules adopted by the Office of Federal Housing Enterprise Oversight. The article was published in the Spring 2004 issue of the journal and also in the June issue of the e-Briefing newsletter.
Directors & Boards author Robert Mittelstaedt, who has been with the Wharton School since 1973 and served as its vice dean and director of executive education since 1990, has been named dean of the W.P. Carey School of Business at Arizona State University. He assumed his new position at the end of June. He co-founded the Wharton/Spencer Stuart Directors' Institute.
Director's Guide to Compliance Software
Directors & Boards Third Quarter issue, which mails in July, features the first in a series of Directors Guides, this one focused on what CEOs and directors need to know about compliance software. What questions should you be asking of your executive and IT team when it comes to compliance software? How can you measure ROI? The Directors Guide to Compliance Software will feature a handy checklist which you can use in your next board meeting.
Last month, Jim Kristie discussed columnist Gary Sutton's statement that "Anybody who has been on a board for more than five years has become an insider. Period." Jim then asked what you thought of term limits for directors. A selection of the response we received:
"Jim Kristie is absolutely
off base when he contends that after 5 years a director is a per se
insider. I'd be glad to debate him on that issue at a time and
place of your choosing!"
Ken West
Senior Consultant for Corporate
Governance
TIAA-CREF
"I can certainly understand
your perspective, but I do not agree as it takes some time (maybe a
year or two) for a director to have a total perspective of a company
and its market, culture, competition, etc. One could therefore
argue that it would take a year or two longer to justify the insider
point of view."
Richard E. Bauer
Chairman & CEO
The Philanthropic Companies
"I read your article with
interest. I currently serve on two boards, one for a Savings and
Loan Bank and the other for a local private school. Both of these
institutions have the same limits—three terms of three years
each. I can tell you that from my perspective, five years is too
short. It takes several years to fully understand the company you
represent, and to make mistakes from which you can learn. Our
most influential and helpful board members are typically in their 2nd
and 3rd terms. It seems to me that the first couple of years are
devoted to listening, learning and offering advice only in areas in
which the board member has vast experience."
Andrew L. Blair
President & CEO
Federal Medical Bank
"I find the notion that
directors become 'insiders after 5 years of board service' simply
absurd."
Randy Thurman
Chairman & CEO
Viasys Healthcare Inc.
"I think Gary Sutton's
article was very good and insightful. However, while term limits
for directors has merit (and is common in nonprofits), five years is
too short. Assuming staggered terms for directors, average tenure
would be 2 1/2 years. This would give management even more
knowledge of the company than directors. I believe that knowing there
are term limits, and perhaps new directors to second-guess prior
directors, would accomplish Sutton's objective that directors not
become captives of management. I would counter with eight- to
ten-year terms, thereby giving directors enough time to 'second guess'
their own decisions, enjoying the reward of good decisions and learning
from any poor ones."
T. J. Reilly, Jr.
"I have served on a lot of
boards during my 40 years in business, and I am currently serving as
chairman of a hospital board—and
I can go either way on your five-year
term limit option. To some extent, you do become an insider after
some length of time—and this
is not good. On the other hand, I
have found that it takes a year or two to get up to speed, so that you
can/will ask the important questions, especially as they relate to good
governance. It has been my observation that new board members,
many times, are reluctant to ask tough or delicate
questions. If I had to choose, I would go with the five-year term
limit—as I feel the
advantages outweigh the disadvantages."
Louis Mapp
Directors & Boards e-Briefing is a monthly service of Directors & Boards. All contents copyright 2004, MLR Holdings LLC.