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Directors & Boards
Robert H. Rock
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James Kristie
Editor
Lisa
Cody
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David Shaw
Publishing Director
Scott Chase
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From Jim Kristie | Article of the
Month | Columnist
Reader Profile |
Research | News |
Koz on
the Cover
A closing of the circle on a governance success story that wasn’t.
Ten years ago this month, for the Spring 2000 edition of Directors & Boards, I ran a
photo on the cover of Dennis Kozlowski, then the high-flying chief of
high-flyer Tyco International. It is not something I am ashamed of, nor
is it something that I am particularly happy to be reminded of.
Those were certainly
palmier days for Kozlowski and Tyco. It may be hard to believe now, but
there was a period when he was considered a paragon of good corporate
governance. Not to hide in a crowd, but our cover story — a Q&A
interview conducted by our lead columnist Hoffer Kaback (sorry, Hoffer,
if you are not inclined to be reminded either) — joined many other
laudatory reports at the time on the dynamic growth of Tyco and the
leadership qualities of its CEO.
Not only did we do this particular cover story, but five years earlier
we ran an article authored by Kozlowski himself, titled “The Vitals of
Accountability.” As he stated in this article, “The key issue for our
board, and for every board in America today, is how to ensure
accountability.” In light of subsequent events, how sad it is to
remember him composing (and us publishing) a line like this. If he
believed it then, he was right to express such an observation. He would
be right to say so again today — were he not an inmate at a New York
correctional facility.
My intention is not to beat up on this past author, with whom we
enjoyed a good relationship. (I even had him do a book review for us of
a biography of Bob Monks, A Traitor to His Class; Monks served
on the Tyco board under Kozlowski for nine years . . . so, thinking
like an editor, who better to opine on this 1998 bio of the famed
governance activist?)
No, what has happened is that I just got a big reminder of our
Kozlowski coverage when it was cited in a new book by John Gillespie
and David Zweig, Money for Nothing
[Free Press, 2010]. At first I didn't know whether to be appalled or
flattered.
But the book is a good one. For a book on corporate governance, not the
most cash register-ringing of topics for a mainstream book publisher
aiming for a general audience, it has actually gained impressive
traction, including admiring reviews in the New
York Times and Wall Street Journal and good pickups
elsewhere, such as this cheeky piece in Fortune.
The book’s subtitle pulls no punches —
How the Failure of Corporate Boards Is Ruining American Business and
Costing Us Trillions. I know there are compelling
counterarguments to that thesis that I could and perhaps should muster
based on our journal’s close coverage of boards for almost 35 years.
Nothing is that stark, or
one-sided.
For this unsettled moment in governance, the book deserves its
opportunity to channel debate about the role and effectiveness of
boards. I ran an excerpt in the First Quarter edition of Directors & Boards, just coming
off press as this e-Briefing
is landing in your email inbox. The authors called our Kozlowski
material that they cited in their book "fascinating," and I am happy to
return the compliment with the passage I published — their jailhouse
interview with Kozlowski, which yielded some fascinating reflections on
how it all went wrong between a CEO and his board.
In a way, this latest piece in Directors
& Boards closes the loop on our 15 years of Kozlowski
coverage — from the grand days of his being a governance success story
to the astounding fall from all that is graceful and good about the
leadership of boards and corporations.
But there is a bigger picture to all of this. I believe it, as should
you, when book authors Gillespie and Zweig state that this is just not
a failure of governance at Tyco: “It’s clear that Kozlowski and his
directors shared the same flawed relationships that have plagued many
other boards.”
I welcome your comments at jkristie@directorsandboards.com.
Jim
Kristie is the editor and
associate publisher of Directors
& Boards.
****
Please join my
colleagues at Family Business
Magazine at the upcoming Transitions:
The Changing Environment for Family Companies conference, April
15-15 in Celebration, Florida. Click
here for more details, and to register.
Thinking about Getting
Active in Washington?Open an office? Hire a lobbyist? Five rules for companies wanting to advance their interests on Capitol Hill.
By John Endean
“How does it feel to live in the new financial and commercial center of the world?” a Wall Street friend of mine recently asked me. He was talking about Washington, D.C.
His joking description of Washington contained some truth. From corporate governance, to compensation policy, to labor relations, to increased financial oversight to that old stand-by, business taxation, the federal government has been wielding a big stick. And, while it is possible to overstate this development, companies would be wise to consider whether they ought to be doing a more effective job communicating their views on the direction of those public policies affecting their future.
The question is: how to go about making that decision? At the very least, companies should keep these five rules in mind: To read more, click the link below.
[Click
Here to Read
the Entire Article]
A Ready Resource for the Board
Just as with access to the independent auditors and compensation consultants, maybe a board could benefit from its own independent advisers on matters of business strategy.
By Robert H. Rock
At a recent director roundtable, one in a series on “boardroom challenges” presented by Directors & Boards and the Debevoise & Plimpton law firm, the question arose as to whether independent directors should hire outside counsel to evaluate a transformational acquisition opportunity.
The discussion among the 30 directors focused on a hypothetical company whose CEO was proposing to diversify away from a “dying business” by acquiring a large company with “an attractive future,” though in a distantly related field. As one roundtable participant commented, the acquisition opportunity represented “a strategic right turn.”
Although the participants held mixed views regarding whether a board should directly and independently hire strategic consultants, some thought that such a hire could help the board make a more objective assessment of fundamental strategic alternatives. To read more, click the link below.
[Click Here to Read the Entire Article]
Terry Fleming
President
Risk and Insurance Management Society, Inc.
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.
From the Enron scandal to the downfall of AIG and to the product recall disaster facing Toyota, we have seen time and again how much risk management is part of board-level decision-making. And yet, it seems that boards can lose sight of this. When it comes to managing risk, what are the most crucial things board members and directors need to keep in mind?
We really are in a new frontier when it comes to board responsibilities for the recognition of exposures and opportunities associated with risk. It is apparent to most experts that the internal audit method of managing risk failed on a colossal scale. The rating agencies are amending their processes to ensure that risk management is being practiced enterprise wide, and that boards have a fiduciary responsibility to ensure that the organization has a risk management identification and mitigation program in place. I believe the most crucial item for boards to keep in mind is to recognize that there are risks outside the processes, procedures and guidelines that are part of an organizations structure, and it is incumbent upon the board to try to identify and manage those risks.
Executive liability concerns have been at a very high level in recent years, and the fallout from the Wall Street meltdown seems unlikely to abate this any time soon. What do you see as being the greatest executive liability risks at present, and what are some important risks you feel are on the rise?
I believe the lawsuit fallout from the financial meltdown has not really begun in earnest. To read more, click the link below.
[Click Here to Read the Entire Article]
A new report from The Corporate Library, an independent corporate governance research firm, suggests that the interests of CEOs and shareholders have become increasingly misaligned due to a shift in CEO pay delivery systems from stock options to full value stock between 2006 and 2008. Full value stock awards—whether tied to performance targets or not—are far less sensitive to market downturns than stock options because they continue to hold some value even as stock prices drop.
“While some of this shift may be a result of the collapse in stock prices during 2008, leaving many stock options underwater, the very substantial increase in the dollar amount of full value stock awards is a significant factor,” said Senior Research Associate Paul Hodgson, author of the report. “In 2009, we predict that fixed elements of pay as well as those elements of variable pay that are less sensitive to poor performance will continue to gain ground as pay delivery systems.”
In addition to changes in option gains and full value stock awards, the report also examines changes in cash bonuses.
The report, titled “Proxy Season Foresights #4: Shifting Pay Delivery,” is available for $15 from The Corporate Library’s online store.
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16-18, 2010 May
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Integral Advisors, LLC and Board Advisor, LLC recently released a white paper identifying top concerns of investors relating to CEO succession planning. The research was based on interviews over the last three months with investment analysts, institutional investors, investment banks, activist investment funds, private equity investors and rating agencies. Seven key areas of succession concerns were identified that impact valuation and credit ratings. A Succession Risk Index© was established that can be used by boards or investors in analyzing a company’s exposure.
Click here for the full report.
On Hiring a New CEO: Once an Outsider, Always an Outsider?
When a company wants to appoint a new CEO for strategic changes, they would be better off in the long term by promoting someone from inside the company rather than hiring someone from the outside, according to a new study from Rice University’s Jones Graduate School of Business.
The study, “Once an Outsider, Always an Outsider? CEO Origin, Strategic Change and Firm Performance,” is co-authored by Anthea Zhang, the Jesse H. Jones Distinguished Associate Professor of Management at Rice and Nandini Rajagopalan, professor of management and organization at the Marshall School of Business at the University of Southern California in Los Angeles.
The study looked at the tenure and performance history of 193 CEOs in the industrial sector between 1993 and 1998. The researchers found that in the first few years of tenure, there is very little difference between the performances of CEOs promoted from within a company and CEOs hired from the outside. However, in later years, internally promoted CEOs outperformed externally hired CEOs.
After three years, it’s clear that inside CEOs fare better than outside CEOs, according to Zhang. “When it comes to strategic change, outsiders typically are good at doing the rapid cost cutting and divestment. As tenure increases, obvious opportunities for cost cutting and divestment dry up. Inside CEOs, because of their deep knowledge and root in the firm, are more likely to initiate and implement strategic changes that can build the firm’s long-term competitive advantage,” Zhang says.
Click here to read the complete study.
Director Resources
Institutional Investors: Some active equity fund managers have higher portfolio turnover rates than they themselves claim, a new study finds. The turnover was on average 26% higher than anticipated, with some strategies reporting turnover between 150% and 200% more than expected. The report demonstrates that investment managers themselves underestimate turnover and often do not live up to their stated claims when it comes to the holding periods for the stocks in their portfolio. The study, "Investment Horizons — Do Managers Do What they Say?" was conducted by Mercer and funded by the IRRC Institute, and is available at http://www.mercer.com/ri.
D&O Insurance: Zurich, a leading property and casualty insurance provider globally and in North America, introduced Zurich Pro Plus®, an enhanced Errors & Omissions (E&O) coverage to address the needs of a broad range of business professionals. In addition to providing limits of up to $10 million, Zurich’s Pro Plus E&O liability policy offers numerous advantages, including: media liability coverage; the ability to cover professional liability and security and privacy exposures together under a single limit; defense costs for privacy-related regulatory proceedings; other coverage provisions. For more information, visit http://www.zurichna.com.
Climate Risk: Now that the SEC has decided that climate-related risks are material information that publicly traded companies must disclose to investors, the ICCR/Trucost "climate risk profiles" are one way for investors to get information before mandated disclosure begins. The Interfaith Center on Corporate Responsibility is a coalition of approximately 300 faith-based institutional investors, representing well over $100 billion in invested capital. Trucost is an independent environmental data company with offices in London, New York, and Boston. These "climate risk profiles" on more than 150 major companies, with a particular focus on companies facing proxy resolutions from religious shareholders, are available at http://www.iccr.org/shareholder/trucost/index.php.
Ethics: What can officers and directors do to avoid being blindsided? Zethics.com announces an online information service that gives leaders of U.S. publicly traded companies extended visibility into the organization on such matters as litigation/indictment avoidance; regulatory freedom; investor confidence; public acceptance of ethics and corporate governance programs; as well as extended visibility into customers, suppliers, and competitors to assess business risks and qualify business opportunities. For more information, visit http://www.zethics.com.
Disclosure: New proxy disclosure rules by the SEC present chief audit executives with opportunities to demonstrate internal auditing’s vital role in supporting effective governance and risk management practices, says a recent Flash Alert from The Institute of Internal Auditors (IIA) — the internal audit profession’s guiding body and standard setter. Click here for a copy of the Alert.
Author Notes
Daylight Forensic & Advisory LLC Chief Operating Officer Joseph Spinelli has been appointed to the New York State Commission on Public Integrity by Gov. David Paterson. The appointment came on the recommendation of New York State Attorney General Andrew Cuomo. During Gov. Mario Cuomo's administration, Spinelli was appointed the state's first inspector general, where he spent eight years leading fraud, abuse, waste and corruption investigations for all New York State agencies and authorities. The New York State Commission on Public Integrity administers the state's ethics and lobbying laws pertaining to political activities and improper influence. Spinelli joins the commission as a leading authority on white-collar crime, corruption and fraud. In 2006, he co-founded Daylight Forensic and is a member of the senior leadership team.
Executive search firm Boyden has named Tom Flannery, managing director of Boyden’s Pittsburgh office, as leader of the firm’s North American Board Services Practice. He will continue as managing director of Boyden’s Pittsburgh operations. Flannery will steward the expansion of Boyden’s Board Services Practice, which has been increasingly active as companies recruit a new generation of directors to meet enhanced requirements and new disclosure rules. Highly coveted director skills include executive compensation, risk management, and financial experience. He has served Boyden for more than a decade and has executed numerous CEO, CFO and other C-level assignments in the industrial, life sciences and financial services sectors. In addition to his work recruiting corporate directors, he initiated Boyden’s board assessment tool, the Model Board, in the United States.
Catalyst has announced that initiatives from Campbell Soup Co,, Deloitte LLP, Royal Bank of Canada, and Telstra Corporation Ltd. are the recipients of the 2010 Catalyst Award, the annual award that honors exceptional initiatives from companies and firms that support and advance women in business. For information about the 2010 Catalyst Awards conference and dinner, contact Michael Chamberlain at mchamberlain@catalyst.org.
Governance for Owners USA Chairman Peter Clapman has been honored with a lifetime achievement award at the Corporate Secretary Awards 2009. Among the laudatory citations: “As senior vice president and chief investment officer at TIAA-CREF, Clapman was responsible for one of the most influential activist investor programs in the country until his retirement in 2005. Despite his openly activist stance and his role in pressuring boards to make important structural changes — or perhaps because of this — he is a highly sought-after adviser to many corporate boards.” According to one member of the Corporate Secretary Magazine awards judging panel, Clapman “was thinking and talking about good governance long before almost anyone else had even heard of the term.”
The Forum for Corporate Directors, based in Newport Beach, Cal., recognized its 2010 Director of the Year Honorees at an awards dinner at the Ritz-Carlton, Laguna Niguel, on Feb. 17. Scott Garrett, president and CEO of Beckman Coulter Inc., was one of the honorees, cited for “Enhancement of Economic Value.” Information on the other awardees can be found on the Forum’s website.
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Directors & Boards e-Briefing is a monthly service of Directors & Boards. All contents copyright 2010, MLR Holdings LLC.