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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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From Jim Kristie | Article of the
Month | Columnist
Reader Profile |
Research | News |
Which ‘Centric’ Is It to Be?
We may be at the end of an era
in the oversight of public corporations.
“The End of Wall Street” is how The
Wall Street Journal titled a lead editorial last month in
addressing how, as a result of the institutional life-threatening
credit crisis, “Goldman and Morgan Stanley end the investment banking
era” by converting back into bank holding companies.
With respect to corporate governance, the capital markets nightmare
we’re living through may end an era of board oversight that, like the
split up of commercial banking from investment banking, traces back to
regulatory actions in the 1930s.
Martin Lipton, partner at the Wachtell
Lipton law firm, provides the springboard for the following set of
observations. Lipton has been a key player in the board arena over the
past 25 years, during which he has offered guidance on governance that
is always a worthy addition to the marketplace of ideas, whether one
agrees with him or not. This past June he delivered an important
keynote address at the University of Minnesota Law School that posited
a “board-centric” vs. “shareholder-centric” clash in governance
ideologies.
Here is the heart of his analysis: “The pressures exerted by new and
stronger governance and compliance duties have been pervasively eroding
the centrality of the board and transforming its role in the governance
structure of public companies, with the end game being a new conception
of the corporate organization … The crux of the issue today is whether
the institution of the corporate board, the members of which exercise
their business judgment in the management of the corporation, can cope
with shareholder activism and survive as the vital governing organ of
the public corporation. Or, will a forced migration from
director-centric governance to shareholder-centric governance, along
with a concomitant transformation of the role of the board from guiding
and advising management to ensuring compliance and performing due
diligence, simply overwhelm American business corporations.”
He concludes his advisory: “At its core, the board-centric model of
governance is premised on the notion that boards merit the vote of
confidence of shareholders and the public markets, and notwithstanding
the strong current of distrust that runs through many corporate
governance reforms, history has proven this vote of confidence to be
well deserved.”
Now, the big question: Will this financial crisis doom the appeal of
maintaining the board-centric model?
It’s become clear in the crisis containment so far — think Bear, Fannie
and Freddie, and Lehman — that the official policy of the government is
that it’s perfectly acceptable to punish shareholders for the sins of
management and the board. In fact, it’s a desired outcome that the
shareholders’ investment be driven to zero if need be.
You’ve all read iterations of the following. Here from a Wall Street Journal article in
mid-September: “It began with Bear Stearns. Treasury officials in March
pushed for a paltry $2 a share price in the government-induced
acquisition of the brokerage house by J.P. Morgan Chase to ensure
shareholders, among others, were punished….” In a report on the
collapse of Lehman Brothers, the WSJ
noted, “Unlike those government-sponsored entities [Fannie
Mae and Freddie Mac], Lehman is a purely shareholder-owned firm.
Neither stockholders nor debt holders should be expected to be looked
after.”
As each day goes — and I write this as Washington Mutual is being
seized by federal regulators in the biggest banking collapse in U.S.
history — the evidence grows that, contrary to Lipton’s defense, many
boards are not meriting the confidence of government, public markets,
or shareholders that would provide cover for a board-centric model of
governance.
Bankruptcy courts always existed to be the kiss of death for
shareholders when boards faltered in their oversight. But now we have a
corporate governance regulatory superstructure solidifying around an
avowed policy to wipe out shareholders as just punishment when boards
fail to ensure a going enterprise.
What conclusion can one draw other than that shareholders must push for
a more shareholder-centric model of governance? The human organism does
what it has to do to survive. The follow-on conclusion is equally
compelling: Boards must be accepting of this new model of governance.
Thus, one foresees that in the battle to restore a fully functioning
credit market we are likely closing out the era of board-centric
governance and ramping up for an era of shareholder-centric governance.
It’s an historic time.
In fact, shareholder-centric governance may be one of the ways out of
this financial crisis, widely thought to be the worst since the Great
Depression. But that’s a discussion for another day.
I welcome your comments at jkristie@directorsandboards.com.
Jim
Kristie is the editor and
associate publisher of Directors
& Boards.
The Missing Link: Measuring How People
Drive Enterprise ValueSimply put, the board and the CEO want a clear, credible, and simple picture of how much bang the organization’s getting for the money it invests in people and human resource programs.
By Frank DiBernardino
Boards and C-suite executives take great pains to measure and monitor returns on their company’s investments. And they share a common frustration: how to measure the financial impact of human resource investments — people and programs. Controlling the money going into human capital is one thing; measuring and maximizing the value coming out is quite another.
Even though people costs far surpass financial capital costs in the majority of American businesses, many continue to manage human capital as a necessary expense rather than the hefty monetary investment it really is. Directors are hungry to know how human capital outlays add value to the enterprise; but, with traditional HR metrics, this level of understanding is elusive.
The missing link? Human capital metrics that are tied to the income statement and balance sheet.
For decades, turnover rates, costs per hire....
[Click
Here to Read
the Entire Article]
Now Everyone Wants to Be the COO
Recent events refute speculation that need for COOs is in decline. Just what is it about the COO role that makes it so attractive?
By Nate Bennett and Stephen Miles
Over the past several years we have been involved in a series of research efforts geared at better understanding what we view as arguably the most critical of the C-suite positions: that of the chief operating officer (COO). Among our conclusions is that the COO role is unlike other C-suite roles because of myriad nuances related to how that individual must complement the CEO.
Finding the right partner, creating the right chemistry, bringing the right person on board and maintaining the right balance between the two executives is a very complicated process. Not all companies invest properly to get it right at the start, while others fail to recognize that it isn’t a “one and done” process – it requires constant attention to produce the positive results seen in companies like Microsoft, Adobe, and others.
The reader may note that we have carefully used the word role to refer to the COO. This is intentional and illustrates our suggestion that the role be recognized as unlike other c-suite level positions. A role is understood to be a part that someone plays, whereas a position denotes a specific “place” on a team where an individual performs a job.
The difference we intend to highlight is that positions are typically well-understood and fairly static....
[Click Here to Read the Entire Article]
Founder and Principal
The Dilenschneider Group
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.
You have a new book out titled “Power & Influence: The Rules Have Changed.” What developments have triggered this change and what are their real significance?
To simplify a complex issue, the technology revolution of the past several decades is the principal driver of today’s era of new power and influence. In a very real sense, technology has become a great leveler, opening the door to power and influence to many previously excluded. The monopoly heretofore enjoyed by elites is under assault and rapidly declining. A playing field, once heavily tilted towards those with special expertise or wealth or birth or the right education, is over. If you are not tech savvy, your career may be ended.
What have some of those changes been?
Technology has changed everything -- especially in the arena of global business -- from essential knowledge bases to strategic thinking and business development. The rarified world of power and influence -- the so-called establishment -- is becoming increasingly flat. This technology-driven, more democratic universe of power and influence is also more Darwinian than ever.
Technology is such an all-embracing term. Can you be more specific?
The global Internet is, of course, at the head of the list. The statistical data about the size, reach, and array of data now readily accessible on the web is truly astronomic, ranging from the 2.7 billion searches conducted daily on Google alone to the billions of text messages exchanged every day....
[Click Here to Read the Entire Article]
Banks’ Risk Management Practices Seen As Main Factor In Current Economic Climate, But; Most Finance Leaders Say Downturn Will Not Hamper Their Firms’ Financial Results
The financial crisis gripping the United States has senior finance executives more concerned about their firms’ risk management practices (72%) than they are about such issues as accessing both long-term debt financing (65%) and short-term financing (61%), relationships with their financial institutions (59%), pension plan asset allocation (40%) and their ability to secure equity financing (40%), according to a CFO Research Services study conducted in conjunction with professional services firm Towers Perrin.
“The clear message here is that even though this crisis is a financial crisis, it exposes risk management gaps as possibly – and probably – existing within the executives’ own organizations,” said Prakash Shimpi, Towers Perrin Principal and head of the firm’s Enterprise Risk Management practice. “We’re all looking at the liquidity squeeze – and it’s real, and its impact on business means companies will need to retool their risk management practices.”
Further, the economic woes have 55% of respondents saying their companies are likely to change risk management practices at their companies at either the board or the employee level, or both.
Additionally, while the majority (62%) acknowledged that the crisis would dampen profit expectations and leave a potentially lasting dent in the world economy, only 4% said they feared a major negative impact on their financial results according to the survey, which coincided with Secretary of the Treasury Henry Paulson’s announcement of a proposed $700 billion financial services industry rescue package.
Banks’ Risk Management Practices Main Factor In Current Crisis
When asked which items contributed to the current financial crisis, respondents as a whole blame risk management practices at banks (62%), followed by the increased complexity of financial instruments (59%) and financial market speculators (57%). Additionally, 24% said that fair-value accounting requirements were a major contributor to the crisis.
However, when broken out by sector (financial services versus non-financial services companies), the findings tell a somewhat split story:
- Among CFOs at financial services, 78% cite the complexity of financial instruments as being responsible for the current economic environment, while 53% viewed banks’ risk management practices as a reason for the downturn – the same percentage that viewed financial market speculators and irresponsible homebuyers as contributors to the crisis.
- Turning to non-financial
services firms, 66% of their CFOs saw the banks’ risk management
practices as a chief cause of the current economic situation, followed
by financial market speculators (58%) and the increased complexity of
financial instruments (53%).
Among some of the other key findings:
- Despite the current concerted lobbying efforts of several U.S. auto manufacturers, a slight majority (52%) said they would be surprised by a large-scale bailout of U.S. auto industry. However, 62% said they would be surprised by a large-scale bailout of one or more U.S. airlines.
- Fifty-nine percent of respondents believe that the consolidation among financial services companies spurred by the current financial crisis will harm U.S. companies.
The survey, “Senior Finance Executives on the Current Financial Turmoil,” was conducted by CFO Research, and launched Friday, Sept. 19, in the immediate aftermath of the developments on Wall Street and a federal bailout of the world's largest insurer, and just days after the government bailout of Fannie Mae and Freddie Mac. In the following days, 125 survey responses from CFOs and other senior finance executives from a wide range of industries across the United States were secured and tabulated. More than half of respondents come from companies with more than $500 million in annual revenue.
October
1-3
The Boardroom Bound Boardology Institute presents their Pipeline
Seminar in New York City. Register online at
October
13-15, 2008
The New York Stock Exchange and Corporate Board Member magazine host
the fifth annual Board Committee Peer Exchange on Oct. 13. The event is
designed for board committee chairs, lead directors, and general
counsel to interact and exchange information with their peers who face
similar challenges in performing their chairmanship duties. It will be
held in New York City at the Grand Hyatt. On Oct. 14-15, the two
organizations will co-host the Annual Boardroom Summit. For more
information on these events, call 615-309-3200 or visit
October
17, 2008
The Business Roundtable Institute for Corporate Ethics, an independent
ethics center established in partnership with Business Roundtable and
leading business schools, will be holding its annual Senior Leadership
Team Ethics Seminar at Business Rountable's offices in Washington, D.C.
This year's seminar, "Developing Enterprise Ethics Within Your
Organization," will be led by William Senhauser, senior vice president
and chief compliance officer at Fannie Mae, and R. Edward Freeman, a
professor at the Darden School and the Institute's academic director.
The half-day session provides a forum for senior executives to engage
in in-depth discussion with academic experts and peers about critical
issues facing today's business environment; and understanding and
establishing stakeholder trust. For additional information, visit
October
19-21, 2008
The National Association of Corporate Directors (NACD) holds its 2008
Annual Corporate Governance Conference. This year's theme is "Building
Balance in the Boardroom: Risk, Reward, and Responsibility." The
program will cover such topics as: Roadmap for Compensation;
Identifying Risk; Effective Chairs and Lead Directors; Oversight of
Corporate Pension Plans; and CEO Succession Planning. The conference,
which also includes the Director of the Year awards banquet, will be
held at the JW Marriott Hotel in Washington, D.C. For registration and
hotel information call 202-775-0509, or visit
October
21-22, 2008
CompensationStandards.com will conduct two consecutive conferences -
"Tackling Your 2009 Compensation Disclosures: The 3rd Annual Proxy
Disclosure Conference" and "5th Annual Executive Compensation
Conference." The programs provide practical guidance on how to
implement responsible executive compensation practices and the latest
developments regarding executive compensation disclosures. The event
will be held in New Orleans and via video webcast. For information,
visit
October
29-30, 2008
The Forbes Family Business Forum will be held in New York. The theme of
the event is "Family Dynamics in Dynamic Families: Navigating the
Perils of the Present and Building the Promise of the Future." This is
the third annual gathering of family business leaders for peer-driven
discussion and analysis of the challenges and trends of today's family
businesses. Carol Lavin Bernick, executive chairman of Alberto-Culver
Co., and John Tyson, chairman of Tyson Foods Inc., are among the
outstanding lineup of speakers. For more information visit
November
10, 2008
Denver Women on Boards holds a session at the Grand Hyatt Denver. The
program is designed to educate and prepare women for board service.
Panelists include Kate Paul, CEO and president of Delta Dental of
Colorado, and Steffie Allen, principal of The Aetna Group. For more
information, visit
November
13-14
The Boardroom Bound Boardology Institute presents their Pipeline
Seminar in Los Angeles, CA. Register online at
December
2, 2008
Twin Cities Women on Boards holds a session at the Metropolitan
Ballroom in Golden Valley, Minn. The program is designed to educate and
prepare women for board service. Panelists include Lois Martin, SVP and
CFO of Capella Education Co., and Robin Engelson, managing director of
Lazard Middle Market. For more information, visit
December
2, 2008
The Directorhip 100 one-day conference will be held at the Metropolitan
Club in New York City. The D100 Recognition Dinner will be part of this
event. Major topics included will be compensation strategies,
management dynamics, risk management and D&O, and a capital markets
symposium. To register, visit
The ICGN Mid-Year Conference will be held in Wilmington, Del. Hosted by the International Corporate Governance Network, sessions will include "A View From the Bench" in which members of the Delaware judiciary will participate in discussions of key governance matters. Other topics to be discussed include regulatory and market issues such as shareholder access, say on pay, proxy system reform, director dialogue with shareholders, transparency of stock ownership by institutions, proxy contest reimbursement, and more. For more information, go to
Institutional investors have, once again, topped their previous record ownership levels in the largest 1,000 U.S. corporations, the Conference Board reported last month when it released its “2008 Institutional Investment Report: Trends in Institutional Investor Assets and Equity Ownership of U.S. Corporations.”
Data on institutional investor ownership in the largest 1,000 U.S. corporations show that institutions have substantially and consistently increased their holdings from 1987 with an average of 46.6% of total stock to an average of 61.4% of total stock by 2000 and then rising to an unprecedented 76.4% of corporations by year-end 2007.
Concentration of ownership also tops all previous data when measured by the numbers of companies that have the largest institutional ownership. For example, in 1985 no company had institutional ownership of 60% or above, whereas by 2007 17 companies had institutional ownership of 60% or above, including six with institutional ownership of 70% or above.
The equity market value of total institutional equity holdings increased from $571.2 billion in 1980 (or 37.2% of total U.S. equity markets) to $12.9 trillion (or 66.3% of total U.S. equity markets) in 2006. "This represents a historic all-time high in the amount of total U.S. equities controlled by these institutional investors," says Dr. Carolyn Kay Brancato, director of the Conference Board's Governance Center and author, together with Stephan Rabimov, of the report. Click here for access to the report.
Director Resources
Financial Management: “When CFOs Debate” is the title of a new book released in September from Deloitte. It is designed to help chief financial officers as they think through some of the most pressing issues they face. Issues covered in the book include: automating financial systems, providing earnings guidance, offshoring, investing in going “green,” adopting International Financial Reporting Standards, and attracting and retaining the best talent. The book is co-authored by Deloitte Consulting principals Sam Silvers and Steven Ehrenhalt. “When CFOs Debate” is available as a PDF download at http://www.deloitte.com/CFOdebates.
Board Recruiting: Board Recruiting, a service of Nasdaq OMX Group Inc,. has created a strategic alliance with executive search firm Heidrick & Struggles to provide companies with enhanced services in board recruiting. The new offering will integrate the leadership assessment expertise of Heidrick & Struggles with Board Recruiting's online matching system to provide clients with a broader array of choices in how they identify and recruit director candidates. Using the current online self-service model of Board Recruiting, companies can search the Board Recruiting database with complete control of their recruiting process. Heidrick & Struggles' involvement brings two additional benefits: it creates a deeper pool of candidates and, when companies prefer more hands-on expertise, the firm can offer support services such as helping to create job specifications, handling third-party phone and video interviews, and delivering candidate assessments.
Board Evaluations: The Board Institute (TBI), which provides comprehensive, independent, web-based tools for conducting board, committee, and individual director evaluations, has had its evaluation tools accredited by RiskMetrics/Institutional Shareholder Services as satisfying director corporate governance education requirements.
Risk Management: LRN, a company that helps businesses develop ethical corporate cultures, has released its “2008 LRN Ethics and Compliance Risk Management Practices Report.” The report provides companies with insights into how others are progressing in their ethics and compliance risk management programs and allows them to assess where they are on the curve towards mastering best practices and creating corporate-wide ethical cultures. Click here for a copy of the report.
Lawsuit Prevention: The Chubb Group of Insurance Companies will offer companies and not-for-profit organizations a free 60-day trial of online tools that help manage rising employment practices liability exposures. Available through the ChubbWorks website, the loss prevention tools include model employment policies; procedures and forms; best practices training modules addressing sexual harassment, discrimination, investigations, termination, and creating an ethical workplace; checklists; and articles. ChubbWorks also includes two industry-specific zones that address the employment practices, and directors and officers and fiduciary liability exposures, of health care and not-for-profit organizations. To sign up for the 60-day free trial contact a local Chubb independent agent http://www.chubb.com/findagent/findagent_form.html.
Author Notes
Mary Pat McCarthy, KPMG LLP vice chair, has been named executive director of KPMG’s Audit Committee Institute (ACI). KPMG, the audit, tax and advisory firm, created the ACI in 1999 to serve as a resource for audit committee members and senior management. Its primary mission is to communicate with audit committee members and enhance their awareness, commitment, and ability to implement effective audit committee processes. In her new role, McCarthy will be responsible for the development of ACI programs and thought leadership. She succeeds Edward F. Smith, a retired KPMG partner who has led ACI as interim executive director.
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