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Directors & Boards
Robert H. Rock
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James Kristie
Editor
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Cody
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From Jim Kristie | Article of the
Month | Columnist
Reader Profile |
Research | News |
He Didn’t
Just Say That, Did He?
Here is one clue to needed reform in the financial services industry.
Now that we have the Senate passing a major piece of legislation last
month aimed at reforming the financial services industry, here is a
story that you might find amusing. Or appalling. You be the judge.
Vicky
Ward shares this anecdote in her new book, “The
Devil's Casino” (John Wiley & Sons), about the collapse of
Lehman Brothers. This tale goes back to the days when Lehman was first
being spun out of American Express Co. Harvey Golub, then-chairman of
American Express, was giving the AmEx board a presentation about the
benefits of the spinoff of the investment banking firm.
Ward writes: "The presentation — a basic rundown of the businesses
within Lehman, and what the economics looked like going forward — went
over well, and the board signed off on the deal. Two memorable moments
occurred.
"First, when former Secretary of State Henry Kissinger, then on the
American Express board, opened a sweetener packet, emptied it into his
iced tea, then stirred the beverage with his pencil — eraser end first.
"The second was when another board member, former U.S. President Gerald
Ford, asked Golub if he could please explain the difference between equity and revenue.
“There was an awkward moment of silence as everyone digested this.
"One person in the room recalls that Golub 'did a very skillful job. I
was very impressed. It's a very basic concept, and he explained it to
the former president without making it sound like he was talking down
to him.' "
The Dr. K anecdote is amusing. The Jerry Ford anecdote? Not so amusing.
It explains a lot about the ability of some financial institution
boards to oversee the complex wheelings and dealings of their firms. We
saw this being especially true — and especially ironic, considering the
above anecdote — in the abject failure of the Lehman board to head off
the firm's annihilation.
The new reform bill passed in May is called the Restoring American
Financial Stability Act. It reportedly runs 1,500 pages. Vicky Ward’s
boardroom tale runs 150 words. It probably says as much about restoring
stability to the system as what our legislators, God help us, just
pounded together.
If we’re intent on reforming the financial services industry, let’s
have boards of directors lead the way by restoring their own ability to
provide expert leadership to the companies in this industry.
As always, I welcome your comments at jkristie@directorsandboards.com.
Jim
Kristie is the editor and
associate publisher of Directors
& Boards.
Selecting an Independent Compensation
ConsultantHere are the important criteria boards should apply.
By Robin A. Ferracone and Todd M. Gershkowitz
The need for independent third-party advisors to boards of directors became starkly evident in the wake of spectacular corporate implosions like Enron, WorldCom, and Arthur Andersen, culminating in the passage of the Sarbanes-Oxley Act in 2002. Following these scandals, accounting firms were prohibited from providing consulting and other advisory services to their audit clients so as not to compromise their independence.
Similarly, as public concern over executive compensation has intensified, shareholders increasingly have become concerned about the independence of compensation consultants who advise board compensation committees.
In December 2009, the SEC issued a new rule that requires companies to disclose to shareholders whether their board compensation consulting firm also provides services to management that exceed $120,000 in annual fees.
In response to these changes, the compensation consulting industry has been restructuring, with most multiline firms spinning off their executive compensation units, and several compensation consulting leaders launching new boutique consultancies. To read more, click the link below.
[Click
Here to Read
the Entire Article]
Whimsies, Fads, and Lipstick on Pigs
Stay focused, and stick with what’s important.
By Gary Sutton
Comp committee chairmen: You’re now the most likely to be sued. And proxies will be withheld for your re-election if ISS doesn’t like your decisions. Audit was the hot seat yesterday. Today it’s you in the crosshairs.
Just like sales commissions, there’s never been a perfect executive comp plan. Penalties and rewards will never be absolutely fair. And so, executive comp plans are always fluid and subject to the fads du jour.
Restricted stock units are the latest fad. RSUs are in vogue for three reasons:
- Execs like them because they get rewarded by RSUs even if the stock price drops. That’s great . . . but only if you believe your top people should be free from the pain that your shareholders suffer.
- Boards like RSUs because they can be made to vest over time, like options. That’s great . . . but only if you want to retain disgruntled managers who might otherwise bail out.
- Many like them because the cost to the company is more straightforward than today’s requirements for expensing stock options. That’s a reasonable but underwhelming advantage.
To read more, click the link below.
[Click Here to Read the Entire Article]
Henry Essert
Executive Advisor, Financial Services Office
Ernst & Young LLP
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.
Risk appetite is often described as a company’s propensity to take on risk, but it’s really so much more than that. How would you describe risk appetite?
Yes, it’s much more. If properly done, it’s the link that connects risk management to the company’s strategy and to its day to day business decisions. “Properly done” means that the appetite statement is connected to operating risk tolerances and limits. A board-level statement might be “maintain our current debt rating with 95% certainty.” For a financial institution, for example, this can be configured as “maintain our solvency ratio at its current level with 95% certainty.” That statement then would establish risk taking tolerances by type of risk and business unit (for example, “no more than $X of our capital at risk from credit losses.”) Each of those in turn would establish limits at the operating level that, taken together, keep risks within the defined appetite. Without this top to bottom connectivity, the appetite statement is aspirational at best. In fact, some would argue that an unsubstantiated statement is actually hazardous because it creates a false sense of security.
Lessons from the financial crisis and resulting regulatory imperatives have put development and adoption of risk appetite front and center. Do you think that boards of financial institutions see the critical role that risk appetite plays in effective governance today?
Yes, I think many do and the rest are on their way. But what boards need to understand better is the need for completeness in coverage. To read more, click the link below.
[Click Here to Read the Entire Article]
Investment Performance
Uncovering Agency Problems Can Contribute to Alpha Generation
A study of investment applications for corporate governance ratings produced by The Corporate Library, an independent corporate governance research firm, showed outperformance of 275 annualized basis points in 2003-2010 for a hypothetical portfolio constructed using governance screens. Commissioned by The Corporate Library and conducted by Quantitative Services Group, the study backtested a model portfolio benchmarked to the Russell 1000 that excluded companies The Corporate Library rated “high” or “very high” risk in board, compensation and/or overall governance.
“Previous research on the relationship of governance ratings systems to investment performance has shown mixed results, and the significance of particular governance features to equity returns is widely debated,” said Kimberly Gladman, Director of Research and Risk Analytics at The Corporate Library. “This study, however, suggests that The Corporate Library’s ratings system—focused on the identification of agency problems rather than supposed best practices—can contribute significantly to alpha generation.”
Forty-four percent (121 bps) of the 275 bps of annualized outperformance was stock-specific and thus directly attributable to The Corporate Library’s governance risk ratings. Another 74 annualized bps resulted from differential industry weights arising from the application of ratings standards to each company on an absolute (not “best-in-class”) basis. The portfolio outperformed in over 60 percent of test months, had a tracking error of 3.3 percent and an information ratio exceeding 0.8.
The study, titled “The Corporate Library’s Governance Ratings and Equity Returns” is available as a free download from The Corporate Library’s website.
| CTPartners Board Consultants is presenting the 8th Annual Institute on Board Independence and Effectiveness. To be held in New York City at the New York Yacht Club, this year's program will focus on "Building Better Boards." Topics include "Preserving and Growing the Enterprise," "Where Boards Have Failed and Why," "Working with Washington," and "Boards Must Do Better." Hosted by the firm's vice chairman, Roger Kenny, featured speakers will include author Ram Charan, Yale leadership expert Jeffrey Sonnenfeld, comp expert Pearl Meyer, and Ball Corp. Chairman and CEO R. David Hoover. For more information, visit June
6-9, 2010 June
7-9, 2010 June
8-9, 2010 June
9-10, 2010
|
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The number of chief executives forced from office in 2009 fell in nearly every region and industry, according to Booz & Company’s 10th annual CEO Succession Study. The report finds three converging trends are reshaping the life of the CEO in the 21st century:
• A trend toward appointing insiders. Boards have picked insiders over outsiders to lead their companies 80% of the time since 2000, not surprising in light of an average 2.5% in market-adjusted shareholder returns, compared with an anemic 1.8% for outsider CEOs over the past seven years. “Companies that choose an outsider to lead may expect to pay a price in performance,” said Gary Neilson, senior partner at Booz & Company. “The allies and contacts that an insider brings to the post make a difference to the bottom line. Boards looking to bring in an outsider’s perspective have to seriously consider whether the price is worth the tradeoff.”
• A separate chairman. In 2000, roughly half of North American and European CEOs held the dual roles of CEO and chairman. At decade’s end, that number fell to 16.5% and 7.1% for these regions, respectively.
• CEOs must do more, and faster. In just the past decade, boards have shaved nearly two years off the average CEO’s tenure, from 8.1 years to 6.3 years. And while they are leaving office at about the same age as they have historically, today’s departing CEOs were older when they entered office: 53.2 years for those who exited in 2009 versus 50.2 for those who exited in 2000.
Of the 357 succession events that occurred in 2009, 228 were planned (retirement, illness, long-expected changes), constituting the bulk of departures, particularly in Japan (84%) and North America (71%). There were 83 forced departures (where a board removes a CEO for poor financial performance, ethical lapses, or irreconcilable differences), and 46 were driven by mergers.
Click here to access the study.
Director Resources
Risk Oversight: Protiviti, a global business consulting and internal audit firm, is partnering with the Committee of Sponsoring Organizations of the Treadway Commission (COSO) to conduct a survey regarding risk oversight responsibilities of the board of directors. The objective of this study is to develop deeper knowledge of the risk oversight process as it is applied by boards, with an emphasis on understanding both the current state and desired future state of board risk oversight as viewed by directors. The survey will be conducted in June, with results released in September of 2010. A link to the survey will be available on the Directors & Boards homepage at mid-month.
Compensation Committees: Pearl Meyer & Partners has released a new whitepaper, “Top 10 Compensation Committee Agenda Items for 2010.” This whitepaper examines some of the most critical executive pay and governance issues and suggests approaches to accommodate the interests of companies and their shareholders and employees. Click here for a copy. The firm has also issued a report, “PM&P On Point: 2010 Executive Pay-for-Performance Survey,” which provides a wealth of detailed, actionable data about the selection and setting of long- and short-term performance standards among 630 employees and outside directors across a wide range of company sizes and industries.
Click here for the executive summary.
Executive Pay: DolmatConnell & Partners Inc. has released two studies: The 2009 NYSE v. Nasdaq Study, which provides a comprehensive view of executive pay trends among the top companies in the NYSE and the Nasdaq as these firms contribute to the evolving landscape of executive compensation; and A Retrospective Glance at the 2010 Proxy Season, which shows an increase in correlation between pay and performance.
Fraud: The Network Inc., a provider of governance, risk, and compliance solutions, along with BDO Consulting released the first quarter 2010 findings of its Quarterly Corporate Fraud Index. Fraud incidents have stopped climbing. “Employees are comfortable with and consistently utilizing whistleblower reporting systems and, as a result, we are starting to see more companies successfully implement and communicate their GRC programs," notes Luis Ramos, chief executive officer of The Network. Click here to access a copy of the report.
Board Evaluations: BoardEvals, an El Dorado Hills, Cal., firm, has launched a set of comprehensive online board evaluation tools that help public, private, and nonprofit organizations perform more efficient, effective, and thorough board evaluations. Industry specific evaluation suites are also available for associations, credit unions, school boards, and venture-funded start-ups. This new web-based software service replaces the manual, pen-and-paper board self-evaluation processes used by many organizations with a standardized, automated online tool based on today’s best practices. Click here for more information.
Nonprofit Governance: BoardEffect Inc. has formed a new partnership with Aon Association Services to provide an e-governance solution to the boards of nonprofit organizations around the country. The new partnership provides nonprofits insured through Aon Association Services’ directors’ and officers’ insurance programs the opportunity to receive a 10% discount off the annual cost of BoardEffect’s board portal system as well as free access to the company’s educational materials.
Leadership: The Yale School of Management has launched “Faculty Insights”, an online research newsletter. To subscribe, write to faculty.insights@som.yale.edu.
Board Challenges: The Boyden North American Board Practice has created a new newsletter called “Board Ruminations.” This newsletter focuses on topical issues relating to boards of directors and challenges faced in today’s unique business environment. Click here to read the first issue, which asks the question, “What information do boards really need and what is the best way for them to get it?”
Author Notes
Navigant Consulting Inc. has acquired Daylight Forensic & Advisory LLC, an international regulatory consulting and investigative firm specializing in financial investigations, fraud risk management, and other services. Combining Daylight Forensic’s industry expertise with Navigant’s Disputes and Investigations practice creates a significantly enhanced global investigative service offering, the companies say. “This combination comes at a critical time for our clients who are facing increasing regulatory pressure and risks associated with global business transactions,” says William M. Goodyear, chairman and CEO of Navigant.
Search firm Cornerstone International Group has launched a new division, “Women on Boards,” to reinforce women’s presence on international boards of directors. The new division will be headed by Eva Levy, previously chairman of the FEDEPE (the Spanish Federation of Female Executives and Entrepreneurs), and is based at Cornerstone Madrid, Spain.
Salary.com Inc., a leading provider of on-demand talent management, payroll and compensation solutions, and Hewitt Associates, a global human resources consulting and outsourcing services company, have reached an agreement for Salary.com to provide Web-based survey management and pay analytics software to clients in Hewitt's compensation consulting practice. Hewitt's consultants and clients will use Salary.com's technology platform to analyze pay competitiveness and manage survey data.
The University of Maryland’s Robert H. Smith School of Business will receive a $1 million endowment from the Henry & Elaine Kaufman Foundation to support a fellowship in business history, in affiliation with the school’s Center for Financial Policy. University of Maryland history professor David Sicilia was appointed the first Henry Kaufman Fellow in Business History, effective July 1. Renowned economist Henry Kaufman first became involved with the Center last fall when he spoke to business leaders, policy makers, faculty, and students about the financial crisis and his recent book, “The Road to Financial Reformation: Warnings, Consequences, Reforms”.
Grant Thornton LLP, the U.S. member firm of Grant Thornton International Ltd, has purchased assets of Dallas-based IT consulting and software solutions firm Avalion Consulting LLC. “Avalion is a great fit for Grant Thornton in many ways,” said Paul Kanneman, national managing principal of Grant Thornton’s BAS group. “This transaction not only demonstrates Grant Thornton’s commitment to our GRC and IT consulting practices” — the transaction includes Avalion’s patented GRC software solution ComplianceSet® — “but also shows that we are investing in these important business units to meet the renewed demand in the marketplace.”
Towers Watson has formed a new firm, Pay Governance LLC, to work with clients who wish to retain a separate executive compensation advisor for the compensation committee and board. Pay Governance LLC formally launches on July 1 and will be led by a group of former senior leaders at Towers Watson, including John England, Ira Kay, and Richard Meischeid. Towers Watson is the world’s largest executive compensation consultancy, with more than 350 executive compensation consultants in 16 countries providing advice to over 3,000 clients.
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