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Directors & Boards
Robert H. Rock
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James Kristie
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Cody
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Scott Chase
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From Jim Kristie | Article of the
Month | Columnist
Reader Profile |
Research | News |
Of Slippery Slopes and Punch Bowls
The shareholder as owner? You bet. A
massive excess of capital? Better hedge your bets.
February was a short month, so here are a couple of brief observations
as this past month came and went in a flash.
A longtime colleague and close reader of my scribblings has gently
upbraided me on my terminology. In a note, he counseled me to “be
extremely prudent in referring to shareholders as ‘owners’ of the
company. It is one of the misleading myths perpetrated largely by the
press.”
My response: CEOs and board members would be extremely imprudent not to
think of their shareholders as owners of the company.
I empathize with the inclination to think of the shareholder more as a
share renter. The frenetic portfolio turnover rate — 86 percent for the
average fund, according to Morningstar — would lead any chieftain to
think of his shareholders as share flippers.
But I venture to say that for whatever period of time — six days or six
years — those shares have been paid for with good money and are under
an individual’s performance monitoring, there is an owner mentality
that rules. Once you stop believing that your shareholders are not
owners you are entering a slippery slope — one that could whoosh you
right out the door.
On a second front, is it just me or is anyone else getting jumpy when
they hear someone trumpet “excess liquidity in the market?” The last
time someone told me, in these exact words, “The world is awash in
liquidity” was circa 1988, uttered by a jaunty investment banker in a
New York conference room. Within what now seems like a few short months
we went into the deep contraction of the late ‘80s and early ‘90s — and
that vaunted liquidity went bye-bye.
So imagine my shudder when I see Sam Zell quoted in a recent Alan
Murray column in the Wall Street Journal saying of the market, “We have
a massive excess of capital.” So what is Zell doing? He’s selling into
it (his Equities Office Property Trust for $39 billion, including
debt). What does that say? To me, it suggests this message to boards:
Keep a riveted eye on the corporate punch bowl. Don’t let the party get
out of hand, at least within your own walls.
Jim Kristie is the editor and associate publisher of Directors & Boards.
LBOs: Questions for the BoardDirectors have some explaining to do about all these public companies going private.
By Robert F. Bruner
Leveraged buyouts are booming again. While the improved performance of companies that have gone private commends this wave of activity, it leaves unanswered one enduring and important question: Why can’t CEOs of these firms simply deliver this improvement for public investors?
The answers are as troubling as they are unsatisfying, not least for corporate directors and the private equity industry itself.
There is a small mountain of evidence that private equity investing and LBOs in particular, “pay” — in the sense of enhanced economic efficiency and large risk-adjusted returns. Cash flows increase, asset utilization rises, returns rise. Some have feared that these gains derive from cuts in advertising, maintenance, capital spending, or R&D, but the research does not support this. Kiss a private equity investor today: Our economy is better off as a result of this improvement in efficiency.
In the context of 2006’s heady going-private activity, the big question assumes some urgency
[Click
Here to Read
the Entire Article]
Editor's Note: A replay of Directors & Boards' recent webcast on the topic of Mergers & Acquisitions: Best Practices for Directors, is available by clicking here. You can also download the slides from the webcast.
Indicators of Trouble
Here are a few of mine as I seek to ascertain the tone at the top.
Google the phrase “backdated options” and try, just try, to find an article written before 2005.
Tough, eh?
As a director back then, you didn’t list “backdated options” among your top 10 worries, or even in the top 100. Neither did your auditors. There were all these other things, like SOX and recognizing revenues and capitalizing expenses that created way too many known opportunities for humiliation. Besides, backdating options simply was not and is not illegal, as long as they are disclosed and properly expensed as compensation.
You cannot hope to anticipate every abusive tactic that an ethically challenged CEO may conceive. Sorry. He’s full-time and you’re part-time. He, hopefully, understands the details way better than you anyway. So the odds favor him.
You can, however, sense ethical lapses in the way many other things get handled. Then you quietly resign from the board. But let the other directors and this CEO know why you’re quitting.
[Click Here to Read the Entire Article]
Litigation Partner
Skadden, Arps, Slate, Meagher & Flom 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.
Collective Scienter
A key question directors are asking themselves these days is, “When can a corporation have the intent to commit securities fraud?” Finding an answer to this is critical as the definition of “intent” seems to be a moving target.
Assume the CFO of ACME Corporation tells a securities analyst ACME expects revenue growth of 10 percent in the next quarter. It has long been understood that both the CFO and ACME itself can face a lawsuit for securities fraud if the CFO knew the statement lacked a reasonable basis when she made it. Now assume the CFO honestly believed the statement when she made it, but was unaware of a recent problem in ACME's production facility that made the projection of 10 percent revenue growth utterly unrealistic. In this case, the CFO would lack the intent necessary to have committed securities fraud. But could ACME still be required to defend itself against a claim of securities fraud because – even though the CFO who spoke on its behalf had no intent to commit fraud – someone at the company's production facility with no responsibility for or knowledge of the projection itself obviously knew facts that made the projection unrealistic. The outcome of a crucial case before a federal appellate court could well settle this vexing question of whether the knowledge of employees who do not speak on behalf of a corporation will be imputed to the corporation for purposes of assessing the corporation's intent in making a statement that proves to be false.
What is this case and when do you expect it to be argued?
The United States Court of Appeals for the Second Circuit has scheduled oral arguments in the case for March. If it rules that corporations can be forced to defend these claims, the result could be a substantial increase in securities litigation and a whole new level of internal monitoring of communications from employees and directors.
[Click Here to Read the Entire Article]
Gartner Inc.'s ten predictions for high tech companies have some relevance for all companies, especially its focus on a hieghtened priority for vorporate social responsibility (CSR) at the board and executive levels (see below).
• Through 2009, market share for the top 10 IT outsourcers will decline to 40 percent (from 43.5 percent now), equalling a revenue shift of US$5.4 billion. As market share declines, some key outsourcing vendors will cease to exist in their current named form. The reduced number of large contracts, increased amount of competition and reduction in contract sizes have placed great pressure on outsourcers, which will have to "sink or swim" based on support for selective outsourcing and disciplined multisourcing competencies.
• Only one Asia/Pacific-based service provider will make the global top 20 through 2010. The number of global players in consulting that come from Asia is relatively small. This will limit the ability of the Asian juggernaut to grow revenue streams rapidly and become global leaders.
• Blogging and community contributors will peak in the first half of 2007. Given the trend in the average life span of a blogger and the current growth rate of blogs, there are already more than 200 million ex-bloggers. Consequently, the peak number of bloggers will be around 100 million at some point in the first half of 2007.
• By 2009, corporate social responsibility (CSR) will be a higher board- and executive-level priority than regulatory compliance. Regulation has become a key issue for government and the corporate world, with the aim of ensuring more-responsible behaviour. However, the need for companies to be socially responsible to their employees, customers and shareholders is growing as well. The future will see corporate boards and executives make this social dynamic a more critical priority.
• By the end of 2007, 75 percent of enterprises will be infected with undetected, financially motivated, targeted malware that evaded their traditional perimeter and host defences. The threat environment is changing — financially motivated, targeted attacks are increasing, and automated malware-generation kits allow simple creation of thousands of variants quickly — but our security processes and technologies haven't kept up.
• Vista will be the last major release of Microsoft Windows. The next generation of operating environments will be more modular and will be updated incrementally. The era of monolithic deployments of software releases is nearing an end. Microsoft will be a visible player in this movement, and the result will be more-flexible updates to Windows and a new focus on quality overall.
• By 2010, the average total cost of ownership (TCO) of new PCs will fall by 50 percent. The growing importance and focus on manageability, automation and reliability will provide a welcome means of differentiating PCs in a market that is increasingly commoditised. Many of the manageability and support tools will be broadly available across multiple vendors. However, vendors that can leverage these tools further and can graduate from claims of "goodness" to concrete examples of cost savings will have a market advantage.
• By 2010, 60 percent of the worldwide cellular population will be "trackable" via an emerging "follow-me internet". Local regulations have arisen to protect users' privacy, but growing demands for national safety and civil protection are relaxing some of the initial privacy limitations. Marketing incentives will also push users to forgo privacy concerns, and many other scenarios will enable outsiders to track their users.
• Through 2011, enterprises will waste US$100 billion buying the wrong networking technologies and services. Enterprises are missing out on opportunities to build a network that would put them at a competitive advantage. Instead, they follow outdated design practices and collectively will waste at least US$100 billion in the next five years.
• By 2008, nearly 50 percent of data centres worldwide will lack the necessary power and cooling capacity to support high-density equipment. With higher densities of processors proliferating, problems in this area continue to grow. Although the power and cooling challenge of high-density computer equipment will persist in the short term, a convergence of innovative technologies will begin to mitigate the problem by 2010.
February 27-March 2, 2007
Stanford Business School and Stanford Law School present the Stanford Directors' Forum, a three-day program to learn new management strategies, leadership skills, and the best practices from the distinguished faculty of the two schools and key business leaders to become a more effective board member. Visit
March 7-10, 2007
Harvard Business School Executive Education presents a West Coast program on "Making Corporate Boards More Effective," designed to prepare participants for the increasing demands that are being placed on boards of leading-edge companies by their constituents. Faculty chair for the program is Professor Jay Lorsch. It will be held at the prestigious resort Estancia La Jolla Hotel & Spa. For more information, visit
The Conference Board Directors' Institute holds a one-day program in Chicago hosted by McGuire Woods to address in intensive interactive sessions the evolving fiduciary duties of directors and other key topics and red flags in corporate governance. Speakers will include corporate directors Susan Boren, Robert Burrus Jr., and Olivia Kirtley, along with representatives from PricewaterhouseCoopers, Chubb Specialty Insurance, Frederic W. Cook & Co., and McKinsey & Co. Register at
March
12-14, 2007
Wharton Executive Education conducts "Corporate Governance Essentials
for New Directors," a program designed to promote the leadership and
effectiveness of newly inducted board members. The program was designed
jointly by Wharton and Spencer Stuart. Facilitated by Wharton faculty
members from accounting, finance, law, public policy, and strategic
management, this program will help new directors formulate a
best-practice framework in their new board positions. For more
information, call 1-215-898-1776, or visit
March 14,
2007
The Department of Homeland Security and the Kauffman Foundation are
sponsoring "IT Security Entrepreneurs' Forum," a program designed for
founders, leaders, or potential founders of a startup or emerging
company in the IT security field. They will be joined by a select group
of government, industry, and venture capital leaders who fund, build,
deploy and purchase innovative IT security solutions. Among the
co-sponsors of this event are Levensohn Venture Partners (headed by
Pascal Levensohn, a longtime Directors & Boards author), Stanford
University (where the event will be held), and Kleiner Perkins Caufield
& Byers. For more information, visit
March 21,
2007
The New York Society of Security Analysts presents a program on
"Joining a Corporate Board - The Risks and Rewards." It will be held at
the offices of The Practising Law Institute from 5:45-8 p.m. Speakers
include Richard Lannamann, vice chairman and head of the financial
services practice, Spencer Stuart; Tina Posey, founding chair and
executive director, International Women's Entrepreneurial Network; Tim
Rosta, SVP of integrated marketing, MTV/MTV2/mtvU/MTV.com; and Mark
Sickles, president and CEO, New Jersey Chapter of the National
Association of Corporate Directors. To register online or to see a
listing of other NYSSA events, visit
March
21-22, 2007
Outstanding Directors Exchange (ODX) and Columbia Business School hold
an ODX San Francisco session to honor several directors for their board
work and to hold a series of sessions on key issues in corporate
governance, including executive compensation, CEO succession, and
regulatory updates. For information, visit
March
22-23, 2007
The 2nd Annual USC Corporate Governance Summit will be held on the USC
University Park campus in Los Angeles. This is a forum for exploration
of the complex roles and responsibilities of corporate directors.
Program topics will include executive compensation, business ethics,
board dynamics, crisis management and Sarbanes-Oxley. SEC Chairman
Christopher Cox will keynote. To register, call 1-213-740-8990 or visit
April 17,
2007
Women on Boards, an annual panel discussion focused on providing the
necessary tools and knowledge for serving as a director, holds its 2007
event at the Ritz-Carlton St. Louis. The program is designed for women
who are interested in getting on a board or making the transition from
nonprofit to corporate boards, as well as women who are currently on a
board and want to network with other women board members and hear about
best practices. Panelists include Maxine Clark, founder and chair of
Build-a-Bear Workshop, Juanita Hinshaw, president of H&H Advisors,
and Madeleine Condit, senior partner of Korn/Ferry International. For
more information, visit
April
23-25, 2007
The Milken Institute holds its 2007 Global Conference in Los Angeles,
the 10th anniversary of this distinguished gathering of leaders from
diverse sectors and international regions. Last year's conference sold
out early. To register, visit
The UCLA Director Training and Certification Program will be held to increase the expertise of new and experienced directors. Foundational topics include fundamental duties of directors, current SOX requirements, corporate reporting and disclosure issues, and protection mechanisms for directors. Faculty co-directors are Alfred E. Osborne Jr., senior associate dean, and Carla Hayn, associate professor of accounting, UCLA Anderson School of Management. The program will be held again on Oct. 8-11, 2007. Visit
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Directors & Boards newest
Boardroom Briefing, on the topic of D&O Liability Insurance, is at
the printer and should be in subscriber mailboxes in a few weeks.
We'll post a full .pdf of this issue soon. In the
meantime, please browse through our past Boardroom Briefings here.Boardroom Briefings are special publications which focus intensely on a single topic of interest to board members.
Federal Shareholder Class Action Filings Plummet
Despite a surge in lawsuits alleging options backdating, shareholder class action filings were down dramatically in 2006, even as settlements of existing cases soared past last year’s record levels, according to NERA Economic Consulting’s annual benchmark study, “Recent Trends In Shareholder Class Action Litigation: Filings Plummet, Settlements Soar.”
Two interesting findings among the wealth of data: With the drop in filings, the average corporation now faces less than an 8% probability of being the target of at least one such suit over a five-year period; and chances are also greater that shareholder class action cases will be dismissed — more than 38% of class action cases filed between 1999 and 2004 were dismissed. Dismissal rates have nearly doubled since the Public Securities Litigation Reform Act was passed. The study may be accessed on the NERA Web site at http://www.nera.com/recenttrends.
Governance and Performance: The Correlation
With four full years of ratings and 10 distinct ratings cycles completed, Governance Metrics International (http://www.gmiratings.com) looks back at its ratings and what has happened to the companies it covered. One section of the 21-page report focuses on low-rated companies that have recently been in the news and whose problems were not already well known when first rated by GMI. These companies all had significant governance issues that were highlighted in their rating reports, demonstrating how poor governance practices can translate into risk for investors. Contact the firm for a courtesy copy of the report, “GMI Ratings: What’s Happened Since?”
Benchmarking of Corporate Governance in China
Heidrick & Struggles has released findings and recommendations from a Benchmarking Corporate Governance in China study with Fudan University in Shanghai. The study found that patriarchy prevails at the board level as it does in Chinese society, especially in private enterprises. The tendency towards having a “weak board and strong chairman” is common, and boards tend to be tight-knit groups built on business or personal networks.
Other key findings about boards in China include:
• Only 50 percent of boards in China are evaluated.
• Their power to influence stakeholder interests is limited.
• They also have limited influence on CEO selections, particularly since a high percentage of chairmen are also the CEO of the company.
• Except in private enterprises, they have little influence on daily operational matters.
• Native Chinese companies are still resistant to electing foreigners to their boards.
• Independent directors are mostly brought in to fulfill legal requirements and are limited to advisory roles.
The full report is available for downloading at http://www.heidrick.com/IC/APLCS.htm
Emerging Practices in ERM
As the oversight role of the corporate board in enterprise risk management (ERM) expands, companies feel the need to fill a knowledge gap on effective risk governance practices, according to a major new study released last month by The Conference Board (http://www.conference-board.org). A case-study based Research Working Group on Enterprise Risk Management was instituted with select risk and governance officers. Emerging Governance Practices in Enterprise Risk Management presents an overview of this group’s findings, including comments from participants and insights gleaned from five case studies of companies at the forefront of ERM. The report also provides a detailed “road map,” with a discussion of the oversight role of the corporate board in each of the major stages of ERM development and execution. Call 212-339-0347 to order a copy of the report.
New Guidance for More Efficient Annual Assessments
The Institute of Internal Auditors (http://www.theiia.org) released in February long-awaited guidance providing executive management, internal and external auditors, regulators, and the IT industry with a method of identifying which IT General Controls (ITGC) should be tested as a part of an annual assessment of internal controls over financial reporting. The guidance — called GAIT, the Guide to the Assessment of IT General Controls Scope Based on Risk — will help organizations and their auditors be more efficient and could possibly result in a reduction of compliance costs, such as those associated with Section 404 of Sarbanes-Oxley. Protiviti Inc., http://www.protiviti.com, played an instrumental role in the development of the new GAIT principles. A presentation on the GAIT principles is available for free viewing until May 4, 2007 at
http://www.visualwebcaster.com/event.asp?id=37575.
Guidance on Options Expensing
Institutional Shareholder Services (ISS) has launched an Options Expensing Alert, what it terms “a comprehensive, impartial source of stock option expensing data and analysis.” With companies now required to account for stock option grants as an expense under FAS 123R, investors face a critical need for a consistent method to evaluate the accuracy of companies' option valuation methods. The Alert is designed to help investors identify aggressive and conservative valuation practices and assess the impact of companies' expensing assumptions on the quality of their disclosed earnings. To learn more, including a white paper outlining preliminary findings and an overview of ISS's valuation methodology, visit http://www.issproxy.com/institutional/oea.jsp.
Author Notes
Pascal Levensohn, managing director of Levensohn Venture Partners (http://www.levp.com), has created a new podcast program called “VC-InsideOut.” It includes a series of episodes dedicated to governance. One such episode is an interview with Pastora Cafferty, a director on the boards of Waste Management, Kimberly Clark, People’s Energy, and Harris Financial. The podcasts can be accessed at http://www.vc-io.com. Look for an excerpt from Levensohn’s new white paper, “A Simple Guide to the Basic Responsibilities of VC-Backed Company Directors” in the Second Quarter 2007 issue of Directors & Boards, mailed in mid-April.
The Segal Group Inc. has announced that it has combined its Sibson human capital consulting division with its Segal corporate benefits consulting and actuarial practice to be known as Sibson Consulting, a Division of Segal. According to Joseph LoCicero, president and CEO of The Segal Group Inc., “Moving to one brand for our corporate clients is the next step in the process that began in 2001 when The Segal Group acquired Sibson … combining the two businesses under one name, allows us to broaden our consulting services in a coordinated way.” Dan Fries, senior vice president and market director, added: “Putting the Sibson Consulting (http://www.sibson.com) name on our corporate business is also recognition that, for more than 40 years, Sibson has been a highly regarded and well-known brand in the consulting world.”
Jefferson Wells, a global provider of internal audit, technology risk management, tax and accounting and finance-related services, has presented Ron Steinkamp with its Internal Audit and Controls Director of the Year Award. The award is given to the individual who demonstrates excellence in client service, employee development, and overall corporate citizenship for Jefferson Wells, which is an independently operating, wholly owned subsidiary of Manpower Inc.(http://www.jeffersonwells.com). The recipient is selected from more than 35 internal audit and controls directors within the firm’s worldwide operations. Steinkamp works in the St. Louis office.
Reef Point Associates has appointed Julia Wort as a managing director for North America focusing on the Midwestern United States. She possesses extensive business development, marketing, and operations management expertise. Reef Point assists companies through periods of significant change and transition (mergers, acquisitions, divestitures, executive resignations, and expansion into new markets) by providing senior and C-level executives for what it terms “ ‘overkill’ client solutions” (http://www.reefpointllp.com).
Houlihan Lokey has been ranked the No. 1 advisor of M&A fairness opinions during 2006 by Mergers & Acquisitions Journal. The results represent the seventh consecutive year that Houlihan Lokey (http://www.hlhz.com) has earned this distinction in Mergers & Acquisitions' annual statistical wrap-up of M&A activity. The firm also ranked the No. 1 M&A advisor for U.S. transactions under $1 billion in 2006, according to Thomson Financial, and was named Investment Bank of the Year for 2006 by M&A Advisor.
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