The Right Word

That’s what we editors strive to deliver to our readers.


In trying to think of a good story to tie in with this occasion, I remembered an anecdote I always liked about one of my favorite authors (of both fiction and nonfiction), Truman Capote.

This is a story told by the late San Francisco Chronicle columnist Herb Caen to George Plimpton for Plimpton’s oral history of Capote (“Truman Capote: In Which Various Friends, Enemies, Acquaintances, and Detractors Recall His Turbulent Career,” published in 1997 by the Nan A. Talese imprint of Doubleday).

Caen recounted that Capote was vacationing in Spain at the same time as Robert Ruark, a prolific writer of adventure books and a big game hunter. The anecdote in Caen’s words:

Bob Ruark had a huge house across the road. Truman and Ruark got along very well, even though they were opposites, Ruark being hairy-chested and the poor man’s Hemingway. Both were working on their books. Ruark prided himself on writing thousands of words a day. He really pounded it out on the typewriter. He had sort of an assembly line. A secretary retyped it as soon as he got through with one page, somebody was there for the research . . . he had three or four people in the same room. The house was kind of a factory where he wrote.

So, anyway, we got together one night. Truman had been sitting at his writing desk, writing in longhand as he always did. And Ruark said, “I wrote five thousand words today, Truman, and I bet you sat there at that desk with your quill pen and wrote one word.” Truman said, “Yes, Robert, but it was the right word.”

Why do I like that story? Because that is what we editors try to deliver to our readers — the right word . . . in the right article . . . on the right topic . . . by the right author . . . at the right time . . . in short, the all-around right stuff to make a difference in our readers’ lives. In the case of Directors & Boards readers, in their lives in the boardroom and C-suite.

Speaking of anniversaries, Directors & Boards will celebrate its 40th year of publication in 2016. The team here is planning a very special issue for this milestone achievement — chock full of, dare I say, the right words. Get your subscription in now so you don’t miss it! 

As always, I welcome your comments at


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Article of the Month

Activists at the Gate of Executive Pay



Activists have become prominent and often divisive figures in corporate boardrooms and in the public eye. Activist campaigns are on the rise — a pace of increase of 35% from 2014 alone and 60% since 2013. Their impact is profound: over 15% of campaigns since 2013 have resulted in board seats for activist designees.

Among activist areas of focus, executive pay has not escaped unscathed; in fact, we predict activism will be one of the key influencers of the executive compensation dialogue in the near future. Activism will magnify pay and performance conversations, spotlighting the alignment of pay design and decisions with activist business theses, and using new information from the soon-to-be-released Dodd-Frank requirements to further reinforce their views.

So, is this good news or bad news, or maybe a little of both? This article explores the targets and impact of shareholder activism and reflects on what can be learned and applied by companies that want to forge an executive pay program that drives results and speaks to all stakeholders.

Dramatists vs. Constructivists

There are claims for and against the impact of activists on company performance. But it is unfair to clump all activists together. Shareholder activism comes in many forms and agendas. Some, such as public pensions and labor unions, focus on promoting social, political and environmental causes. The most significant rise in activist activity, however, has come from the class of investment managers concerned with shareholder value creation.

The modus operandi can vary even among the shareholder value focused group. On one end of the spectrum is the “dramatist,” or overtly public campaign. Such activists specialize in the public forum and target management or board members directly, or use populist issues like executive pay to draw in other shareholders for support. These campaigns are replete with headlines and seemingly personal charges against incumbents.

But there are also constructive activists who seek a low profile and approach companies with the intent of avoiding a public fracas. The “constructivists” hold strong views on corporate actions that should be taken, but, at least initially, they will seek collaboration and only escalate publicly if unsuccessful.

Why Activists Are Concerned

While executive pay is frequently a prominent theme in activist campaigns, it is often not the central reason for activist involvement. Activists are concerned with executive pay for two primary reasons: to highlight weak governance or to cite an impediment to the financial and strategic decisions they think should be considered.

The first reason can be critical for the public campaigns. Executive pay has been characterized as a litmus test for corporate governance and can illustrate governance shortcomings, particularly where pay is high but performance is poor or mediocre. As such, executive pay deficiencies can be used to draw in other investors. 

The largest institutional voting blocks may be less compelled to sign on for strategic or balance-sheet oriented actions that activists seek, but they may more readily resonate with a case for corporate governance failure and the need for fresh perspectives. Executive pay also resonates with individual shareholders. It has become more conspicuous in public discourse since “say on pay” and can be a convenient lever to get the attention of retail investors.

The case against incumbent pay programs will typically focus on one or more of these three areas:

  • Pay for performance deficiencies. By definition, the public campaign makes a case that performance has been weak and strategies are available to make it substantially better (potentially with fresh leadership). Odds are the campaign will also highlight generous pay doled out over the course of this weak performance. Like any PR campaign, the facts may be aligned conveniently to the case being made. For example, the campaign may pull pay figures from the proxy’s Summary Compensation Table, which can be wildly divergent from what executives actually earn. Likewise, pay comparisons may be made to a single peer or select peer group that the company does not agree is representative.

  • Pay-related governance issues include concerns over low "say on pay" outcomes or poor grades from proxy advisors. The activists may suggest these votes and recommendations highlight legitimate concerns and indicate that directors’ lack accountability.

  • Peripheral issues can include criticisms of peer groups, non-direct pay elements (such as supplemental retirement), stock ownership and stock sales. Some activists say companies “cherry pick” peers to defend pay increases. Others protest executives’ lack of “skin in the game” due to limited share ownership, or question when CEOs have sold stock. 

Management Complacency

The second reason for activist focus on executive pay is its impact in either blocking or promoting management decision making. Activists may rightly diagnose a stable compensation program as one that is encouraging management complacency. Looking from the outside in, activists may surmise that a management team’s failure to jettison declining businesses or make other hard choices is enabled by a pay system with few negative consequences. Or they may criticize pay designs as too operationally oriented, with little focus on the capitalization decisions they support such as returning excess capital through buybacks or special dividends.

Activists may seek to have significant influence on pay if they are successful in getting themselves installed on the board or otherwise gain the ear of the company’s leaders. Here, the activist point of view may begin to separate from the views of the larger institutional share voting blocks. For example, an activist strategy may be to enact a highly leveraged, front-loaded “mega grant” which is an approach generally viewed unfavorably by institutional investors.

Incumbent boards should either welcome this dialogue with activists or have already considered and thoughtfully rejected the activist position. Constructive dialogue where activists are pushing for rationalized business lines, strategic combinations or divestitures, disciplined spending and investment and efficient capital strategies can — and has — resulted in meaningful shareholder wealth creation in many cases. Incentive compensation may not always be central to these strategies, but it can certainly play a role in encouraging or discouraging their adoption.

What Boards Should Be Doing Now

Across the spectrum of board responsibility, much has been written about “thinking like an activist” in order to pre-empt an activist campaign. With respect to activists using pay program criticisms to build a voting coalition, it certainly behooves a board compensation committee to indeed “think like an activist.”

Relevant to the three areas we noted above, committees should be taking stock of:

  1. Whether pay for performance holds up: is the rationale for the rewards both durable and appropriate and is it clear in the CD&A?

  2. Whether the relative security or risk in the program is appropriate for the type of company and its strategy.

  3. Whether governance-related issues “have legs” or can be legitimately refuted. For example, if proxy advisors have recommended “Against” say on pay, do they have a point? Or did their methods miss a bigger picture that investors should recognize?

  4. Whether peripheral issues are buttoned up, e.g., are peer groups appropriately selected; do stock ownership guidelines have the right teeth; and do buy/sell/exercise patterns for officers and directors show appropriate confidence?

With respect to the second concern of activists — the constructive linking of a thoughtful strategy with appropriate pay programs — this is the ongoing responsibility of both the board (affirming strategy) and compensation committee (supporting said strategy through pay). If companies can benefit from thinking like an activist in this respect, compensation committees may benefit from encouraging conversations apart from the standing calendar. Specifically, committees may consider engaging management in a “blank page” review of programs over one or two separate meetings.

When Activists Are Already at the Gate

Where activists have already commenced campaigns, consider: Is the investor willing to work behind the scenes to effect meaningful strategic change? Or, is the investor more interested in loud and public agitation for major transformation?

Additionally, identify why compensation is being cited. Is it to grab headlines? Or is it due to genuine concerns with design or practices?

  • If it’s to grab headlines: consider changes where the charges have merit; plan an active engagement with shareholders to explain the rationale for what’s being retained and acknowledge what’s being changed.

  • And if it’s out of genuine concerns with design or practices: listen and engage. We have found that the experience, although perhaps not welcome, can, and often has, prompted decisions that needed a spark.

In summary, incumbent directors and management shouldn’t confuse claims made against executive pay in an activist campaign as just a war of words. Before activists are at the gate, pre-empt these arguments with strong pay-for-performance relationships, clear rationale for defining what performance means (i.e., relative or absolute TSR and/or the financial and operational drivers that underpin them), an ongoing commitment to shareholder communication and strong pay program governance.

That’s always been the job of the board and its compensation committee, but even more so in this environment.


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The CEO Pay Ratio Rule: What Next?


[Ed. Note: The Securities and Exchange Commission issued on Aug. 5 its final rules on CEO pay ratio disclosure, mandated in the Dodd-Frank legislation. In anticipation of the SEC’s action, the authors wrote an article a year ago for Directors & Boards that advised boards on how they should be thinking strategically about changing their compensation programs and disclosures. The following is an excerpt from that article. To receive a copy of the full article, which is titled, “The Pay Ratio Rule: Get Ready, Get Going,” email James Kristie.]

Today, most boards justify their decision-making process for setting executive pay by referencing the pay of other “peer” company executives. In compensation disclosures most companies will use this “peer group” to explain that their particular executive is paid commensurately with others and that therefore the board has acted reasonably in setting compensation figures.

However, now that they must publish the corresponding figure for median worker pay, companies will be forced to explain executive compensation decisions in a very different context. Rather than looking externally, to other executives, they will have to address the relation of pay to internal compensation dynamics. 

Fodder for Discontent

Besides investors, a company’s own employees are the most important consumer of proxy statements and annual reports. The information that is conveyed and the impression that is imparted have the potential to greatly affect how employees — whether middle management or assembly-line workers — view the company’s mission, purpose and integrity.

An employee’s perception of these reports will affect their confidence in the enterprise long term. Done well, an annual report can help solidify employee commitment and facilitate a highly functioning organization. Done poorly, however, the reporting and the substance can become fodder for discontent and disillusion, creating broad-based dissension.

Employees will pay particular attention to this antagonistic pay-disparity ratio. Moreover, pay comparisons to other executives will not provide an adequate justification of board decision making as far as this important constituency is concerned. Such explanations will only inflame the pre-existing broad-based concerns about preferential treatment and meritless reward for executives. Peer group references to other executives will only serve to reinforce the common notion of a clubby and back-scratching boardroom culture.

Rather, boards and compensation committees will have to work closely with their human resources professionals to design and explain executive pay around internal company compensation system protocol.

No, It’s Not ‘Political’

All employees understand that as one is successful and promoted within the enterprise, pay goes up concurrently. It must be communicated that executive pay, and the CEO-to-median-worker ratio, are ultimately the result of this dynamic internal incentive structure and not of “political” or unfair treatment. This, instead of simple reference to other executives, will make executive pay disclosures relatable and palpable to more employees.

Additionally, if done correctly, by communicating the character of the incentive structure of the organization, and valorizing the potential rewards to long-serving and successful employees, this disclosure may in fact provide positive benefits.

A company’s response to this rule needs to involve more than just a change of approach with regards to proxy disclosures.

The aforementioned peer groups are not just utilized to explain pay but are also heavily relied upon in setting it too. In a mechanistic fashion companies will target the total value of a CEO’s compensation to a specified percentile, or benchmark, almost always at the 50th percentile or above. This process has become a substitute for a careful board consideration of the company’s internal compensation dynamics and, in effect, drives the decision-making process.

Major Disconnect

The result has been executive pay practices that are increasingly disconnected from the internal contextual factors that should otherwise shape and influence their development.

However, in order to respond effectively to this new disclosure in a manner that will be acceptable to employees and avoid dissension, companies will need to incorporate these factors and concerns. Companies will have to move away from the rote application of peer benchmarking and percentile targeting and engage in a more holistic approach to setting pay.

As such, the ratio disclosure could be the impetus for a sea change in compensation practice, one which we have advocated before — see “What Is a CEO Worth? Don’t Look to Peers,” Directors And Boards, Third Quarter 2011. This change will ultimately benefit the compensation area and, through that, corporate America greatly.


Charles M. Elson (at left) is the Edgar S. Woolard Jr. Chair in Corporate Governance and director of the John L. Weinberg Center for Corporate Governance, University of Delaware. He can be contacted at     

Craig K. Ferrere served as the Edgar S. Woolard Jr. Fellow in Corporate Governance at the Weinberg Center from 2010-2014. He is now studying at Harvard Law School.

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Bonus Content

Five Fraud Predictions


[Ed. note: the following excerpt appears in the Directors & Boards Annual Report 2015]

Technology will give fraudsters an edge in 2015, but it will also provide new tools for organizations and investigators, according to experts from the Association of Certified Fraud Examiners, who offer up the following predictions on how the fight against fraud will play out:

1. Technology will increase the sophistication of fraud schemes. This is an existing trend that will accelerate.

2. But technology (like data analytics) will also help catch tomorrow’s frauds. For fraudsters, technology is a double-edge sword, as it will also be leveraged by the professionals tying to catch them. There will be more breakthroughs in the use of technology to detect fraud. Tools that were thought of as cutting edge just a year or two ago will seem ancient in another year or two.

Related: Directors to Watch in 2015.

3. Improving information security will be a major priority. More massive data breaches are still likely to occur. Considering that storage of data continues to grow at an exponential pace, more trouble lies ahead.

4. With protections for whistleblowers increasing, more people will step forward to report fraud. A decade ago, few countries had whistleblower protections. However, increased awareness about the harm caused by major frauds at organizations has led to legislators looking to whistleblowers to prevent or mitigate such crimes.

5. There will be a re-emergence of financial statement fraud. While Enron, WorldCom and other major financial statement frauds are starting to fade from the public consciousness, there may be more such accounting frauds on the way. One indication is the effort being made by the Securities and Exchange Commission to step up enforcement in this area.

Subscribe to Directors & Boards print edition or e-Briefing for much more content dedicated to the topics of leadership and corporate governance.



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Calendar of Events
WomenCorporateDirectors: 2015 Asia Institute

September 10 - 12

WCD’s 2015 Asia Institute will be a gathering of more than 100 women directors from all over Asia and around the world.  This distinguished conference will consist of a reception and dinner on September 10 and a conference on September 11, followed by a choice of three tours on November 12 which give you a backstage pass to Tokyo.  This will be a high-powered idea forum exploring compelling issues on the minds of today’s Asian directors.  This forum will consist of conversations with CEO’s of global companies, panels, roundtable discussion groups, and engagement in a community of trust that brings a diversity of perspectives together.  Keynote speaker: CEO of Sony, Kazuo Hirai


For more information, contact

Washington Conversations in the Boardroom Series

September 14 - 31

Women in the Boardroom presents “Conversations in the Boardroom Series.” Speakers are: Brendan Sheehan, Managing Director at Rivel Research Group; Cynthia Fornelli, Executive Director of the Center for Audit Quality; Patricia McGowan, Partner with Venable LLP; Jan Molino, Managing Partner at Aspire Ascend. The event will take place on Monday, September 14, 2015 at 6 p.m. ET at Venable, LLP, in Washington D.C. The cost is $60 to attend for non-members. Register at

NYC 'Conversations in the Boardroom'

September 16 - 31

Join Women in the Boardroom and conversation leaders, Brendan Sheehan, Managing Director at Rivel Research Group; Adam Friedman, Principal of Adam Friedman Associates, LLC; Shelli Ryan, CEO of Ad Hoc Communication Resources; and Tracey Riese, President of TG Riese to discuss the topics of: the importance of your brand for boardroom service and how to establish a platform, which involves being active on social media, speaking opportunities, publishing of articles & a media presence. The event will take place on Wednesday, Sept. 16 at Dorsey & Whitney, 51 W. 52nd St. (between 5th & 6th), NY. For more information on this Women in the Boardroom event, visit here.

See more events of interest to directors »
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Navigating Top 10 Technology Risks:

From battling cyberattacks to protecting customer data, navigating technology risks is a top priority for organizations, and internal auditors are at the forefront of that effort. A global survey of internal audit practitioners suggests organizations understand the importance of recognizing and responding to tech-related risks, but the size of a company or the level of maturity of the internal audit function often can significantly influence how effectively they handle the risks thrown their way.

A new report from The Institute of Internal Auditors Research Foundation (IIARF), Navigating Technology's Top 10 Risks, ranks the biggest tech risks and outlines internal audit’s role in managing them. Read more and download a copy of the report in the attached news release.

Law Firm Suggests Getting Rid of Quarterly Reports:

According to a Wall Street Journal article, the law firm Wachtell, Liption, Rosen & Katz has come up with an idea to end quarterly earnings reports.

Earlier this week Wachtell called on the Securities and Exchange Commission to consider allowing U.S. companies to do away with these obligatory updates, stating that they distract executives from long-term goals.

The idea was sparked by a discussion to combat what Wachtell sees as an excessive focus on short-term performance that is encouraged by activist shareholders.

Smaller Companies Most Likely Review Succession Planning Only When Necessary:

Smaller companies continue to devote fewer resources to and lag behind their larger peers in CEO succession planning, according to a survey by The Conference Board in the latest edition of CEO Succession Practices.

Companies with annual revenue of less than $100 million were the only group to report reviewing succession planning only when circumstances warrant (due to retirement, sudden death or illness, or another emergency), while among all other size groups and across all industry groups, the majority of companies reported that their boards review the CEO succession plan at least annually.

Fastest-Growing Companies Based on Profit, Revenue, Stock Growth:

Fortune recently released its list of fastest-growing companies. The publicly traded companies were ranked based on the criteria of three-year profit, revenue, and stock growth.

Lannett comes in as the top-ranked company, while Facebook rounds out the top 10, making its first appearance on this list.

The top 10 companies are:




1. Lannatt

Philadelphia, Pa.


2. Natural Health Trends

Dallas, Texas

Household & Personal Care

3. Federated National Holding

Sunrise, Fla.

Insurance: Property/Casualty

4. Centene

St. Louis, Mo.

Insurance & Managed Care

5. Noah Holdings

Shanghai, China

Diversified Financial Services

6. Acadia Healthcare

Franklin, Tenn.

Healthcare Services

7. Qihoo 360 Technology

Beijing, China

Internet Service & Retailing

8. Wisdomtree Investments

New York, NY.

Diversified Financial Services

9. Gilead Sciences

Foster City, Calif.


10. Facebook

Menlo Park, Calif.

Internet Services & Retailing

Read the full list here.

CFOs Outpace CEOs in Pay Raises:

CFOs in S&P 500 companies received a median pay increase of 13.9%, compared with a median increase of 6.9% for CEOs, according to a Wall Street Journal article.

The highest-paid financial chief in the United States last year was Google’s Patrick Pichette ($43.8 million). The second-highest earner was Safra Catz of Oracle Corp. ($37.7 million).

Read more news »