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Directors & Boards
Robert H. Rock
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James Kristie
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From Jim Kristie | Article of the
Month | Columnist
Reader Profile |
Research | News |
A Special Breed
As hundreds of directors get ready to descend on Washington for the
NACD conference, should we be celebrating our ethic of service … or
listening to H.L. Mencken?
When writer William Saroyan asked famed editor and journalist H.L.
Mencken how to become a magazine editor, Mencken responded: "I notice
what you say about your aspiration to edit a magazine. I am sending you
by this mail a six-chambered revolver. Load it and fire every one into
your head. You will thank me when you get to hell and learn from other
editors there how dreadful their job was on earth."
Ouch! I am mindful of that anecdote every year at this time, when I
celebrate an anniversary milestone. In September I marked my 28th year
as editor of Directors & Boards.
I haven’t loaded up the chamber yet.
This Mencken sentiment could well be directed to someone aspiring to a
seat on a corporate board. Can’t you just picture a grizzled board
curmudgeon taking a wide-eyed up-and-comer aside and saying, “What are
you thinking!?” We all know someone who has said, “No way would I go on
a public board.” Or someone who can’t wait to get off of a board they
are now on.
Yes, there are days when the job of corporate director has to be
dreadful. How must it feel right now to be a Bank of America director
on the receiving end of a subpoena by New York Attorney General Andrew
Cuomo? Or to have been a director of Enron? Or AIG? Or GM? Or … you
name it — any company facing bankruptcy, scandal, extended litigation,
leadership turmoil, strategic disaster, or other heart-stopping
distresses?
This leads me to remark on something else that was celebrated in
September — a declared (by President Obama) National Volunteer Day of
Service, on 9/11. This was an opportune occasion to recognize a special
breed of volunteer who is vital to the workings of free market
capitalism. I'm referring to, yes, the corporate director.
Rabid criticism has been leveled at corporate directors for coming up
short during the financial meltdown and resulting recession — in
assessing risk and exercising sufficiently diligent oversight.
Deserved? In many cases, yes.
But what we don't ever want to lose sight of is the voluntary nature of
the corporate governance system we have in this country. Congress, the
SEC, the NYSE, the Delaware courts, RiskMetrics, CalPERS ... all these
bodies and more come up with their directives and notions on how a
board should conduct itself. However, none of these regulators and
sundry protectors of the system conscript individuals to carry out the
complex duties of directorship. It is up to the corporation to find
individuals who will volunteer to join its board.
Companies need smart, accomplished people who have a sense of duty,
honor and commitment, of interest and desire, of noblesse oblige even, to willingly
take on the immense accountabilities involved in corporate oversight.
This is no inconsequential bit of volunteerism. Nor is it an
insignificant recruiting challenge.
Our governance system has its weaknesses, which were mightily exposed
by the financial crisis starting in 2007. But for a system that depends
largely on an army of volunteers, it is remarkable how well it
functions and how much good work has emanated from the collective
intelligence and integrity of the men and women who have stepped up to
the role of corporate director.
As Barbara Franklin alludes to in her Article of the Month below, as we
start fielding new regulatory salvos aimed at corporate boardrooms,
let's be mindful of the voluntary nature of serving as a corporate
director. These volunteers make the governance system work ... and will
make it work even better in times to come.
So, sorry, Mr. Mencken. If there is one thing I have learned over all
these years, it's this: the joy of finding your calling in life — be it
as an editor or as a corporate director.
As always, I welcome your comments at jkristie@directorsandboards.com.
Jim
Kristie is the editor and
associate publisher of Directors
& Boards.
Restoring Public Trust in American
Capitalism:What Should Boards of Directors Do Now?
Another realignment of boardroom power is coming. Step up to the challenge of increasing your effectiveness.
By Barbara Hackman Franklin
Editor’s Note: The National Association of Corporate Directors will be holding its annual conference in Washington, D.C., on Oct. 18-20. Barbara Hackman Franklin, a longtime board member of the NACD, assumed the chairmanship of the organization on March 31st of this year. The following is a condensed version of a major address on corporate governance that she delivered in July 2009 to the Chautauqua Institution.
Let me begin by saying first and foremost that I believe in the American system of entrepreneurial capitalism. It is this system, coupled with our democracy and rule of law, which has made the U.S. economy the largest and most dynamic in the world and brought our country unprecedented prosperity. It is this system which makes the American dream a reality.
But is our capitalist system perfect? No. No economic system is.
At various times in our history, the U.S. capitalistic system has been attacked or questioned, and generally out of this questioning has emerged new ideas and fixes to remedy what went wrong. We Americans seem to believe that old adage, “Trouble is only opportunity in work clothes.” We are good at recognizing problems and then acting to solve them. This is one of our greatest strengths. We want to make our capitalistic system work better and more equitably.
At this moment, much blame is being leveled at chief executive officers and boards of directors, as well as the way in which companies are governed — or not. . To read more, click the link below.
[Click
Here to Read
the Entire Article]
Improve the ROI in Your Board
As the financial crisis ebbs but regulatory reform looms, my hope for the future is that boards take this opportunity to improve the dynamic between the directors and management.
By Nicole M. Sandford
While there are a number of regulatory reforms under consideration as we navigate an unprecedented world economy, the change I would most like to see cannot be regulated. It is tough to achieve and even tougher to measure — but, a fundamental change in the dynamic between boards and management is critical to improving our corporate system.
Most CEOs analyze the ROI of major expenditures, particularly those related to projects for which outside advice is sought. Yet, curiously, fewer executives adopt a similar mindset when it comes to the investment the company makes in its board.
Board compensation is at historic highs, and likely to increase if the job requirements continue to expand. Add in meeting fees and expenses, and the cost to the company can be significant. Presumably, board members were selected for their experience and knowledge. But sometimes this expertise isn’t leveraged to maximum advantage.
As a result, management often fails to reap the potential benefits of a well-informed, engaged board. To read more, click the link below.
[Click Here to Read the Entire Article]
Chairman and Founder
National Insurance Partners, 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.
Many pundits are asking “why would anyone want to serve on a public company board today?”
There are many good reasons including providing leadership and vision to maintain the global competitiveness of America’s economy and public companies. So, if you want an important job—be a director because by law you are the ultimate authority of the corporation! And, as the wise adage goes, “necessity is the mother of invention.” Directors’ needs and concerns can be addressed with creative thinking and new solutions.
The threat of securities litigation is lurking behind every significant decision made by a director and board. Even failure to act in certain circumstances creates liability exposure. The responsibility and potential for liability of directors has increased in the face of the well documented corporate financial failures of 2001-2002 [Enron, et.al.] and within the last twelve months with the fall of the giants. What went wrong? Where was the board of directors at each of these failed corporations? Many of the world’s best and brightest minds are focusing a considerable amount of time trying to answer these questions. The financial and reputation losses and disruption to our economy have been staggering. Boards of directors are going to continue to be scrutinized, and directors can expect more scrutiny and more intrusive laws and regulations to further complicate things.
What are some of the critical issues directors need to consider for the foreseeable future?
Some believe that we have a crisis in corporate governance of recent origin, but in reality this “new crisis” has been more than thirty years in the making. To read more, click the link below.
[Click Here to Read the Entire Article]
As the S&P 500 index tumbled more than 37 percent in 2008, CEO compensation barely fell, according to a report from The Corporate Library, an independent corporate governance and executive compensation research firm. Median total annual compensation for the companies included in the study declined by 0.08 percent in 2008, suggesting that the link between CEO pay and firm performance remains very weak. The report includes data from more than 2,700 public companies, more than any other CEO pay study released so far this year.
“While these findings are historic, in that we have never seen a decline in CEO compensation since we began this series of surveys in 2002, if there were ever an argument that pay is fatally divorced from performance then this is surely it,” said Senior Research Associate Paul Hodgson, co-author of the report.
The Corporate Library’s 2009 CEO Pay Survey, also co-authored by Research Associate Greg Ruel, was previewed in a webinar, “Big Pay, Poor Performance,” which is available as a free download. The webinar includes an analysis (not available in the report) of the CEO pay packages of five companies where the pay/performance link was most starkly broken in 2008.
Other key findings from the report include:
- The median decrease in total realized compensation was 6.38 percent, which is still well out of line with the economic downturn. (Total realized compensation includes the value realized on vesting of shares, option value realized, pension/non-qualified deferred compensation earnings and pension pay in the last year.)
- Approximately 75 percent of CEOs included in the study received a base salary increase in 2008, up from 73 percent in 2007.
- More CEOs saw declines in realized compensation in 2008 than in 2007 (just over 56 percent and 40 percent, respectively).
- Oracle CEO Lawrence Ellison is the only CEO to appear in The Corporate Library’s list of the top ten highest paid CEOs in both 2007 and 2008, having earned approximately $750 million in realized compensation over the period.
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The Conference Board Task Force on Executive Compensation has issued recommendations for corporations to restore credibility and increase trust in how they handle their pay practices and oversight.
Convened earlier this year by the Conference Board Governance Center, the Task Force and its Advisory Group are comprised of corporate directors, shareholders, academics, and experts in compensation, governance and law.
The Guiding Principles state that public companies should:
- Establish a clear link between pay, strategy and performance;
- Provide compensation that is fair, affordable and clearly aligned with actual performance;
- Eliminate controversial compensation practices that conflict with the notions of fairness and pay for performance — such as excessive golden parachutes, overly generous severance arrangements, gross-ups of parachute payments or perquisites, and golden coffins — unless specific justification exists;
- Demonstrate credible board oversight of executive compensation; and
- Foster transparency with respect to compensation practices and appropriate dialogue between boards and shareholders.
Click here for a copy of the full report. Also see the third quarter 2009 issue of Directors & Boards which features a cover-story interview with Raj Gupta on this initiative and other matters.
Director Resources
Handbook of Board Practices: In addition to the above initiative, the Conference Board has published a new handbook to help boards of directors navigate the most recent developments in the realm of corporate governance and lead their companies to full recovery from the financial crisis. “Corporate Governance Handbook: Legal Standards and Board Practices (Third Edition)” is an easy-to-use reference manual organized by the variety of functions a director might perform while serving on a board. It is the result of the collaboration with the Conference Board Directors’ Institute, which has met over the years with hundreds of board members of Fortune 1000 companies to identify and disseminate best practices in the performance of directors’ duties. For purchasing information, call Conference Board customer service at 212-339-0345.
Executive Compensation: National law firm Pillsbury has issued a white paper, “Executive Pay Reform Poses Complex Risks for Compensation Committees,” which explores issues facing compensation committees under the proposed Corporate and Financial Institutional Fairness Act of 2009 and other reforms. Co-written with associates Bradley Benedict and Kathleen Bardunias, the white paper, says the firm, “offers the most comprehensive look so far at the complex governance and compensation matters that compensations committees must begin to grapple with.” Click here to download a copy of the paper.
Shareholder Activism: PROXY Governance Inc., a leading proxy advisory firm, released data showing a significant increase in the percentage of director nominees who received high percentages of shareholder votes cast in opposition in director elections during the first eight months of 2009. Although the vast majority of director nominees continue to be elected with little opposition, for companies with director votes available through August 2009, 9.8% of unopposed director nominees had at least 20% of shares voted against them or withheld, up from 5.5% in 2008. Click here for additional data from the report.
Financial Reporting: The Center for Audit Quality (CAQ) has developed a “Guide to International Financial Reporting Standards” (IFRS). “The purpose of the guide is to provide investors, policymakers and other capital market stakeholders a timely, accessible and objective introduction to the current debate over a single set of high quality global accounting standards,” said CAQ Executive Director Cindy Fornelli. Click here to access a copy of the guide.
Risk Oversight: The Committee of Sponsoring Organizations of the Treadway Commission (COSO) — an organization providing thought leadership and guidance on internal controls, enterprise risk management, and fraud deterrence — has released a new thought paper, “Effective Enterprise Risk Oversight: The Role of the Board of Directors.” It is aimed at helping boards of directors strengthen their oversight of enterprise risks. Click here to access a copy of the paper.
Author Notes
Virginia Gambale has been elected to the board of Piper Jaffray Companies. She is the founder and managing partner of Azimuth Partners LLC. She was interviewed for a feature in the December 2006 e-Briefing.
Stanley W. Silverman has been named to the board of Met-Pro Corp., which was recently recognized as one of “America’s Fastest Growing Small Companies” by Fortune Small Business magazine. Silverman is president of Horizon Venture Capital Group LLC and the former president and CEO of PQ Corp. He authored the keynote article, “Thoughts on M&A in the Current Environment,” for the Boardroom Briefing Mergers & Acquisitions 2009 issue published in July.
Brad Wilks has been elected the 2010 chairman of the board of the National Investor Relations Institute. Wilks is managing director of Sard Verbinnen & Co, a leading provider of strategic corporate, financial, and crisis communications counsel and services. He succeeds Bina Thompson, vice president, investor relations, Colgate-Palmolive Co.
Bill George is out with a new book, “7 Lessons for Leading in Crisis” (Jossey-Bass, a Wiley imprint). George is professor of management practice at the Harvard Business School and former chairman and CEO of Medtronic Inc. He is the author of the best-selling books “True North,” “Finding Your True North,” and “Authentic Leadership.” He also has launched http://www.billgeorge.org, his new website.
Tom Anderson has joined Integrity as president and chief executive officer. Anderson comes to Integrity with more than 25 years of experience in senior positions with a variety of leading global organizations, including McKinsey & Company, Upromise, SLM Corp. and Capital One. Integrity is a leading global provider of technology-powered, data-driven services that help global corporations measure, manage and mitigate the risk of compliance failures.
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Directors & Boards e-Briefing is a monthly service of Directors & Boards. All contents copyright 2009, MLR Holdings LLC.