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Directors & Boards
Robert H. Rock
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James Kristie
Editor
Lisa
Cody
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David Shaw
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Scott Chase
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Barbara Wenger
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From Jim Kristie | Article of the
Month | Columnist
Reader Profile |
Research | News |
Shift
happens
We may have just lived through what history will confirm as the next
big attitudinal reset in the boardroom.
The Directors & Boards special
edition Governance Year in Review will be coming off press in a few
days. This is our fourth year in which we capture a uniquely sweeping
record of who’s new and what’s new in the world of governance. We like
to think that a copy of this one-of-a-kind report belongs in every
C-suite, director’s file, corporate counsel’s office, business library,
investment firm, and board advisor’s bookshelf.
This is especially true of this new issue.
It records what I have dubbed the year that “shift happens.”
Over my three decades as editor of Directors
& Boards I have seen a lot of shifts taking place in
corporate governance. A big one early in my tenure was the shift to a
board composed of a majority of independent directors. It was not
uncommon in the late 1970s and early ’80s to still see many insiders
sitting on boards. Some of you with a bit of gray hair may recall that
it was only in 1978 that Johnson & Johnson was threatened by the
NYSE with delisting unless it added some — its first — independent
directors to its board.
Here are a few other shifts that have taken place over the past 30
years: More women being added to corporate boards . . . the adoption of
executive sessions of the board . . . the embrace of the lead director
concept . . . more frequent splitting of the chairman and CEO positions
. . . greater usage of search firms in recruiting directors . . . the
change in scope of the board nominating committee to a broader-gauge
corporate governance committee . . . a vastly expanded purview of the
audit committee . . . much more box ticking, instigated by court cases
like Van Gorkom and Caremark and legislation like the
Foreign Corrupt Practices Act and Sarbanes-Oxley . . . a reining in of
“overboarded” directors.
I could go on and on. But what I would be going on about are what might
be regarded as process shifts. Much rarer have been attitudinal shifts.
Granted, most process shifts in how a board structures itself and acts
are driven by some degree of attitudinal shift. If a board names a lead
director, it can be doing so because it genuinely feels that it will
make for a better dynamic; or, it can be doing so because it feels
pressure to adopt what it is being told is a “best practice.”
The kind of attitudinal shift I am referring to is a radical revision
of the mental construct of the role of the board. It is a shift that is
revolutionary rather than an evolutionary step.
Here is one such shift. In 2006, at the annual conference of Yale
School of Management's Millstein Center for Corporate Governance and
Performance, former SEC Chairman William Donaldson identified perhaps
the most momentous attitudinal shift taking place in the boardroom in
the past half-century when he remarked: "It used to be said that it's
the CEO's board; now, it's the board's CEO." That represents a huge
reset.
The next momentous attitudinal shift that will drive governance in the
era ahead? I submit it is the one pinpointed by Vanguard Chairman
Emeritus John Brennan, our keynote author in this Governance Year in
Review special edition. What he is witnessing, he writes in his
article, is “a great attitudinal shift in corporate boards away from
what is right for the insiders to what is right for the shareholders.”
That’s big. As I put together this special Year in Review edition —
including my own magnum opus in it, a 35-page (biggest ever)
month-by-month timeline of key developments — I detected this shift
happening in many corners of the governance universe and voiced by many
key players. A close perusal of this recap of record will lead many
directors to think about getting on the right side of history.
I am obviously proud of the contribution this special edition makes to
being the official record of the year in governance. If you are not a
subscriber and want to order a copy (maybe just to see if you or your
company or board are in it!), email Barbara Wenger at bwenger@directorsandboards.com.
Normally our single-copy purchase price on our website is $75, but
e-Briefing readers can purchase a copy for $35, which includes shipping
and handling. (Cost per copy for orders going outside the U.S. is $50.)
The only way to get this special price is to email Barbara.
As always, I welcome your comments at jkristie@directorsandboards.com.
Jim
Kristie is the editor and
associate publisher of Directors
& Boards.
Succession Planning At Its Ugliest‘Hangers on,’ ‘slow leakers,’ and other disgraces that I witnessed.
By Donald Frey
Ed. Note: Donald Frey was the rare corporate director who was willing to speak candidly about the good, bad, and just plain ugly doings inside the boardroom. He penned an article, “Reminiscences on Succession Planning,” for Directors & Boards in 1995, which was a few years after he had retired as chairman and CEO of Bell and Howell Co. (Earlier in his career as an engineer with Ford Motor Co. he was instrumental in the design of the Mustang.) He stayed active as a professor of industrial engineering and management science at Northwestern University. He died on March 5, 2010 at the age of 86.
With a cumulative total of over 80 years of service as an outside director for various Fortune 500 companies, I have seen many styles of succession planning, everything from brilliant to stupid, from successful (say, for the employees and shareholders) to abysmal failure, and from thoughtfully planned to abruptly forced.
I have observed cases of CEOs trying to stay on (perhaps better said, “hang on”) after normal retirement. Various reasons are offered, one being that his or her successor is not yet ready and needs more mentoring by the CEO.
In one case, a hidden reason was that the retiring CEO did not make any money on his stock options. In another case, no logical successor could be identified because the CEO in earlier years systematically destroyed potential successors, so that no one is perceived by the CEO as threatening or perceived by the board to be ready at his normal retirement. (Boards almost never hear both sides of a dismissal or demotion). Lack of self-confidence or paranoia are surprisingly not unknown, even with successful CEOs.
For whatever reason, the sitting CEO is kept on year to year by a supine board, sometimes until the roof totally caves in. To read more, click the link below.
[Click
Here to Read
the Entire Article]
Board of Directors Must Serve as ‘Keeper’ of Corporate Culture
Many believe that senior management commands responsibility for a company’s culture. Not so.
By Lawrence M. Adelman
Here’s a prediction. When the BP PLC drilling disaster settles down, the oil giant’s directors will dismiss CEO Tony Hayward and make other significant board changes.
Why? Because any way you look at it, BP’s board neglected its responsibilities. It either didn’t serve as “keeper” of BP’s corporate culture — which is increasingly critical as a board duty — or it failed to ensure the right culture for its management to operate in, especially when it involves the risk related to environmental safety. As a result, the lax culture permitted employees to take myriad shortcuts and unacceptable risks, all of which contributed to the massive Gulf of Mexico oil spill.
Corporate culture is a profound driver of any business. That’s why in practically any corporate scandal that allows malfeasance or misguided judgments to happen, the question arises, “Where was the board?” In BP’s case, corporate culture was so poorly managed that personnel felt they could take unacceptable risks or disregard others on the offshore oil rig.
The fallout isn’t entirely environmental. BP stock has lost a big hunk of its value and the company has been rumored to be a takeover target. With the right risk-prevention measures, personnel wouldn’t have made the decisions to take shortcuts. They wouldn’t have bet the farm — in this case, the company’s future — that a disaster wouldn’t occur. To read more, click the link below.
[Click Here to Read the Entire Article]
Damian Brew, Managing DirectorKate Golden, Managing Director
Marsh FINPRO
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.
TAPPING THE EXPERTISE OF D&O INSURANCE BROKERS
The legal issues surrounding the liability of directors and officers of publicly traded companies have never been more intricate. The current climate is a culmination of many factors, including the recent financial crisis and persistent global economic recession. Directors and officers confront increased scrutiny from shareholders and media, the task of navigating numerous, complex laws and regulations, and operating in the glare of intensifying regulatory oversight.
These factors have fostered a multifaceted and high stakes claims environment for directors and officers. Securities class action litigation, certainly bad news in and of itself, often is accompanied today by an ERISA tagalong lawsuit, a state law derivative claim, opt-out claims, and actions taken by regulators. With regard to the latter, a regulatory investigation into a perceived issue at a single company may then generate investigations of entire industries. In this difficult environment, directors and officers confront enormous challenges bringing closure to litigation involving overlapping issues, and face the potential of much higher total settlement values.
Accordingly, a global understanding of these emerging exposures and how they can best be addressed in the D&O policy is crucial. While superior corporate governance and savvy legal counsel are often perceived as the best means of tackling the risk of D&O liability and the resulting fallout in the event of litigation, vital assistance is also available through an oft-overlooked service provider—the D&O broker. The value a broker brings to the D&O claims process—in negotiating broad policy terms and conditions and then helping to maximize recovery after a claim is filed—can prove an invaluable asset to directors and officers navigating these turbulent waters.
We asked two D&O experts at insurance broker Marsh to answer some questions about the benefits a D&O broker can provide in the current environment. To read more, click the link below.
[Click Here to Read the Entire Article]
A report from The Corporate Library, an independent corporate governance research firm, found that the largest severance packages from fiscal 2008 and 2009 were paid to CEOs whose tenure ranged from a little more than one year to just six years. The report examined severance paid to CEOs of 125 public companies that filed proxy statements between January 30, 2009, and January 29, 2010.
“The primary justification for multiple millions of dollars of severance pay is to attract and retain top talent,” said Research Associate Greg Ruel, author of the report. “But if an executive is being terminated or has tendered his resignation very early on in his tenure, how successful was the board in attracting the best talent for the company?”
The report also examines in detail several of the top ten highest severance packages in each of 2008 and 2009. Companies featured in the report include General Maritime Corporation, ProLogis, MoneyGram International, infoGROUP Inc., American International Group, Jones Apparel Group, E*TRADE Financial, Sprint Nextel Corporation and Qwest Communications.
The report, titled “Proxy Season Foresights #9: Spotlight on Severance Payments,” is available for $15 from The Corporate Library’s online store.
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More than half of companies today cannot immediately name a successor to their CEO should the need arise, according to new research conducted by leadership advisory firm Heidrick & Struggles and Stanford University’s Rock Center for Corporate Governance.
Key findings from the survey include:
- While 69% of respondents think that a CEO successor needs to be “ready now” to step into the shoes of the departing CEO, only 54% are grooming an executive for this position.
- A full 39% of respondents cited that they have “zero” viable internal candidates.
- On average, boards spend only two hours a year on CEO succession planning.
- Only 50% have a written document detailing the skills required for the next CEO.
- The majority of firms – 65% – have not asked internal candidates whether they want the CEO job, or, if offered, whether they would accept. “Many firms simply assume that their top choices want the job, but that is not always the case,” says Heidrick Vice Chairman Stephen Miles. “More and more, we see executives who don’t want to be in the spotlight as the CEO, given the extreme public scrutiny associated with the position. Making this assumption without checking can cause real problems down the road.”
- Once viable internal candidates for the CEO job are identified, 38% of firms think that the external search should continue at the same pace. “This is a big mistake,” Miles warns. “Companies lose strong candidates when they keep the outside search open too long even though they have perfectly capable internal talent.”
- Only 50% of companies provide on-board or transition support for new CEOs.
“The lack of succession planning at some of the biggest public companies poses a serious threat to corporate health — especially as companies struggle toward a recovery,” Miles says. “Not having a truly operational succession plan can have devastating consequences for companies — from tanking stock prices to serious regulatory and reputational impact.”
Stanford Graduate School of Business Professor David Larcker adds, “We found that this governance lapse stems primarily from a lack of focus: boards of directors just aren’t spending the time that is required to adequately prepare for a succession scenario.” Larcker is a senior faculty member of the Rock Center for Corporate Governance, a joint initiative of Stanford Law School and the Stanford Graduate School of Business.
Director Resources
IPO Boards: KPMG conducted surveys at a series of IPO Bootcamps sponsored by the NYSE and KPMG across the country. The surveys focused on issues companies face in preparing for an IPO — challenges, timing, changes that need to be made, etc. One of the top findings was that financial executives consider corporate governance one of their biggest challenges in preparing for an IPO (64%), compared to just 40% who identified preparing a business plan. Click here for more insight.
Board Evaluation: Search firm Russell Reynolds Associates has just released its latest white paper on instituting board evaluation programs. Titled “Who Watches the Watchers,” the paper offers insights on why more and more boards are instituting formal board evaluation programs, essential elements of a quality evaluation program, how findings can support development of a high-performing board, and best practices in board evaluation. Click here for a copy.
SOX Compliance: Attitudes toward Sarbanes-Oxley (SOX) compliance and spending evolve significantly the longer a company is involved with the compliance process, according to new research from Protiviti, a global business consulting and internal audit firm. Protiviti’s 2010 Sarbanes-Oxley Compliance Survey reports that 70% of surveyed executives in year four or beyond of their SOX compliance indicated that the benefits of compliance outweighed its costs, compared to only 39% of surveyed executives in their first-year compliance. This finding is largely attributable to the significant decline in compliance costs as companies gain experience in applying Section 404 of SOX. Click here for a copy of the survey.
Financial Reporting: A survey of more than 210 senior finance executives and board members of public companies shows that finance executives are expected to provide more detailed information to the boards since the economic downturn. How well they are performing in that role depends on who answers the question. The survey, conducted by CFO Research Services and sponsored by Crowe Horwath LLP, shows a perception gap between board members’ favorable assessment of Finance’s performance and finance executives’ own more-critical self-evaluation. While 76% of board members rated their finance group as “excellent” in terms of the accuracy of deliverables, only 50% of finance executives said the accuracy of the information they provide is excellent. Click here for the full survey results.
Human Resources: Executive search firm CTPartners, which recently conducted its 1st Annual Board of Directors Institute on Human Resources, which included sessions on succession planning and talent development for corporate leaders and directors alike, has compiled audio summaries of each panel. Click here to access.
Author Notes
Ketchum PR has established a corporate governance advisory board to enhance the firm’s capabilities in providing counsel to its clients on emerging regulatory issues impacting investor communications. The advisory board is comprised of industry experts in the fields of securities law, academia, and shareholder and investor relations, and is led by Ron Culp, Ketchum partner and director of the firm’s North American Corporate Practice. The advisory board members “represent some of the industry’s leading voices in the rapidly changing shareholder rights landscape,” notes Ketchum Senior Partner and CEO Raymond L. Kotcher.
Raj Gupta, former chairman and CEO of Rohm & Haas Corp., will become chairman of chemicals company Mallinckrodt Baker Inc. (MBI) upon its acquisition by New Mountain Capital LLC. MBI is being sold by parent company Covidien PLC. Gupta joined New Mountain Capital as a senior advisor after completing the sale of Rohm & Haas to Dow Chemical Co. in 2009 — the topic of a cover-story interview in the Third Quarter 2009 edition of Directors & Boards.
Edward Rollins, who served as White House political director for President Reagan, has joined The Dilenschneider Group http://www.dilenschneider.com. He will continue as a senior political contributor to CNN.
Mercer has signed an agreement to acquire ORC Worldwide, which the firm says in a statement will result in it becoming “an unparalleled provider of global human resource intelligence” and will “further strengthen related international consulting, conference and educational services.” Both firms have a significant global presence. The transaction is expected to close in the third quarter of 2010. Terms of the agreement were not disclosed. Click here http://www.mercer.com/acquireorcww for the official announcement of the deal.
The National Association of Corporate Directors (NACD) announced that it is acquiring the assets of Directorship LLC, which include NACD Directorship Magazine, the website www.directorship.com, the Global Boardroom Forum and the Directorship 100 Forum — media properties celebrating the most influential people in the boardroom and board governance. The transaction was expected to be completed by the end of June 2010. Terms of the deal were not disclosed.
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Directors & Boards e-Briefing is a monthly service of Directors & Boards. All contents copyright 2010, MLR Holdings LLC.