Norman R. Augustine Chairman of the Executive Committee  Lockheed Martin Corporation

Editor's note:  Each month, we ask a Directors & Boards reader  to comment on critical issues facing directors today.  This month, Norman R. Augustine discusses his top three  corporate governance issues and his advice for new directors.

Top Three Corporate Governance Issues

First, there is ample reason for concern that some of the well-meaning but misguided efforts now being pursued with the intent of strengthening corporate governance may, ironically, lead to a de facto socialization of corporate America and governance by special interests.  The growth of assets controlled (either directly, or indirectly through pressure on Investment Funds) by pension funds, labor unions, and other institutional investors is growing exponentially.  Many such organizations are promulgating their own rules for acceptable executive compensation as a function of a corporation’s financial performance; promising to vote against re-election of the members of any compensation committee which does not comply with their self-prescribed standards.  The coup de gras will occur when and if the proposed “Direct Election” provision becomes a reality—such that the above withheld votes can trigger a gradual replacement of the board with members more favorable to the views of the self-appointed standard-setters, i.e., pension funds, unions and others.  Many of these latter constituencies are likely to be far more concerned about simply preserving jobs (at least in the short-term) than about shareholder returns.  The result could well be that the discipline of the free-market, which has been so critical to the prosperity of American firms, may ultimately be replaced with the same anti-efficiency practices that now handicap companies in certain other countries.

Second, simply stated, executive compensation is out of control.  One can legitimately  argue that highly effective CEOs can be worth a very great deal to shareholders.  Indeed they can.  One can also question why CEOs should be singled out for receiving high compensation and not rock stars, investment bankers, athletes, actors, strike-suit lawyers, et al.  But it is a fact that the disparity between corporate, top-leadership compensation and that of the work force as a whole has grown to such an extent as to be counterproductive.  General Custer once said, “The reward of command is the opportunity to lead, not to have a bigger tent”.  He had that—at least—right. 

There are many reasons the explosion in executive pay has occurred:  burgeoning values of stock options in the late ‘90s, firms setting the 75th percentile of compensation as the basis for nominal performance, issuing fixed numbers of stock options year after year rather than fixed values, lax or—even captive—compensation committees, and more.  Unfortunately, there will be no rapid solution, only a disciplined, slow ratcheting downward.  No board wants to risk losing its company’s best people—or treating them in a manner which might appear to be unfair—by unilaterally imposing precipitous cuts in pay.  As a young engineer I worked for a large company that tried that; it nearly destroyed the company.

Third, the pressures on management for short-term financial results are becoming increasingly counterproductive to the long-term health of firms.  One solution would be to adopt a revenue-neutral, graduated capital gains tax structure wherein the tax rate would be inversely proportional to the amount of time the asset producing the gain were held.

What advice would you offer a new director?

First, your role is governance, not management.  Second, the sine qua non in selecting individuals to fill management positions is character.  Third, be sure you have a strong system of independent checks and balances.  Fourth, don’t be afraid to ask dumb questions . . . and keep asking them until you get an answer.  Fifth, check your D&O insurance.

Norman R. Augustine was raised in Colorado and attended Princeton University where he graduated with a BSE in Aeronautical Engineering, magna cum laude, an MSE and was elected to Phi Beta Kappa, Tau Beta Pi and Sigma Xi.

In 1958 he joined the Douglas Aircraft Company in California where he held titles of Program Manager and Chief Engineer.  Beginning in 1965, he served in the Pentagon in the Office of the Secretary of Defense as an Assistant Director of Defense Research and Engineering.  Joining the LTV Missiles and Space Company in 1970, he served as Vice President, Advanced Programs and Marketing.  In 1973 he returned to government as Assistant Secretary of the Army and in 1975 as Under Secretary of the Army and later as Acting Secretary of the Army.  Joining Martin Marietta Corporation in 1977, he served as Chairman and CEO from 1988 and 1987, respectively, until 1995, having previously been President and Chief Operating Officer.  He served as President of Lockheed Martin Corporation upon the formation of that company in 1995, and became its Chief Executive Officer on January 1, 1996, and later Chairman.  Retiring as an employee of Lockheed Martin in August, 1997, he joined the faculty of the Princeton University School of Engineering and Applied Science where he served as Lecturer with the Rank of Professor until July, 1999.

Mr. Augustine served as Chairman and Principal Officer of the American Red Cross for nine years and as Chairman of the National Academy of Engineering, the Association of the United States Army, the Aerospace Industry Association, and the Defense Science Board.  He is a former President of the American Institute of Aeronautics and Astronautics and the Boy Scouts of America.   He is currently a member of the Board of Directors of ConocoPhillips, Black & Decker, Procter & Gamble and Lockheed Martin and a member of the Board of Trustees of Colonial Williamsburg and Johns Hopkins and a former member of the Board of Trustees of Princeton and MIT.  He is a member of the President’s Council of Advisors on Science and Technology and the Department of Homeland Security Advisory Board and was a member of the Hart/Rudman Commission on National Security.

Mr. Augustine has been presented the National Medal of Technology by the President of the United States and has five times been awarded the Department of Defense's highest civilian decoration, the Distinguished Service Medal. He is co-author of The Defense Revolution and Shakespeare In Charge and author of Augustine's Laws and Augustine’s Travels.  He holds eighteen honorary degrees and was selected by Who’s Who in America and the Library of Congress as one of the Fifty Great Americans on the occasion of Who’s Who’s fiftieth anniversary.  He has traveled in nearly 100 countries and stood on both the North and South Poles.