In corporate governance, all shareholders compete for directors’ attention. Being an intelligent listener in this noisy environment is what the directors of the Directorship 100 do best. The dispersion of shareholder interests means the board has to weigh priorities and make some unpopular choices. In doing so, it looks to those fellow directors who are best at bringing about desired outcomes. People with an unerring instinct for savvy business decisions are wired differently—part investment guru, part business maven, part organizational psychologist.
So begins part of the NACD program. I suppose everyone is wired differently. Those honored by being named to the NACD 100 are likely to be above average on many dimensions and the recent workshops around the dinner honoring the Directorship 100 were undoubtedly enhanced by their participation. I found it well worth attending, primarily for networking opportunities but also for the well planned and executed program.
After a brief welcome by Jeff Cunningham, Managing Director and Senior Advisor of the NACD, we moved directly into an interview of Bob Greifeld by Cunningham.
The Global Economy and US Market
Bob Greifeld, Chief Executive Officer, NASDAQ OMX Group
Moderator: Jeff Cunningham, Managing Director and Senior Advisor, NACD
Exchanges have done well for large caps but not so well for smaller companies. They have enough computer power to do all the trades in the world at their NJ center. What hasn’t worked so well are revenue synergies. The credit crisis seems to have been the first time directors took the blame front and center. Risk is evolving to be managed on a holistic basis. Risk committees have to be balanced in their mission. Some organizational units already have an army of dedicated staff but others may still fall to the board committee to monitor. Boards must tailor to need.
Large banks have increased their leveraged risk with derivatives. Greifeld believes more should be traded through the market. Trading through a clearinghouse brings discipline.
Over regulated? Yes, changes to SOX are needed but he sees it as a net benefit. Most markets have followed our lead, except for section 404. Maybe that should be a two year process and applying to billion dollar companies.
China. Hong Kong has tougher listing standards than NASDAQ. We were successful in letting unproven companies come to market but required they have good accounting…. adding more rigor to the process. EU, too big to flail. Game of chicken. Depends on the will of the strong members and their will get there.
Either insider trading is on the rise or enforcement is. It is now easier to track every trade. There is a record in the digital world with consolidated audit trades in real time. The willingness to do evil continues. It is now just easier to get caught.
Turnaround: Dealing with Distress
Gary Fernandes, Director, Blockbuster
Jenne K. Britell, Chairman, United Rentals, Director, Crown Holdings Inc., Qwest Diagnostics
Richard S. Levick, Esq., President and CEO, Levick Strategic Communications
Moderator: Brad Karp, Chairman, Paul Weiss
There is leadership vacuum during the economic crisis. That’s what Jenne K. Britell walked into at United Rentals. She worked quickly to develop a plan and hired the intermin CEO as the permanent CEO. They did a self-assessment of the board. Hard times help a board coalesce. Retail, technology and logistics are skills they needed to increase. The full board reviewed potential candidates. That opened the process and when they made decisions they had broad consensus. They now have a very diverse board with a broad base of skills. The third challenge was getting morale up among employees. She took a very open and transparent approach to that task as well.
Gary Fernandes joined soon before the CEO, CFO and general counsel went to jail. He thought he knew the company well but found a major investigation on revenue recognition soon after he got there. Fernandes was the industry expert on the board so he was able to ask the tough questions of the CEO, CFO and general counsel. He fired them and many others. Appointed a CEO from the board and they went with a non-executive chairman. If there is ever a time when you don’t want to consolidate roles on a board, a time of crisis is it. They needed everyone’s full engagement and transparency. There was an imbalance. The board was too inclined to nod and say yes. Now the board is much stronger. Says they are the first in their industry to adopt a risk and compliance committee… stayed with split chair and CEO.
Richard S. Levick. The way you get through a crisis is to prepare in advance. How many of you in enterprise risk management are checking google? Joke: Never kick a man when he’s up, its too much trouble. You have to make sure the board and CEO share fundamental values. Agreement on who does what, communication, where information can and cannot be shared. Need to know is a difficult concept… To the extent possible, as open as possible. Asked for questions from employees. Open candid discussions led to their reassurance. Enron had a rock-star quality board but something obviously went wrong. Levick places a value on industry specific skills. What was lacking was revenue recognition. Having the right skill sets with industry specific knowledge is critical. Entire industries can face obsolescence quickly. Real distress was being chair of the compensation committee with Carl Ichan as the only other members. Ask tough questions until you get the right answer.
From the ongoing conversation: What is our social media policy within the company? When we limit our employees we limit our most powerful resource. The best example of thinking differently was BofA facing allegations by WikiLeaks by getting all the experts in the room. In the Taco Bell situation they controlled the narrative. When faced with lack of meat, they got together and in 48 hours they thanked the lawsuit, which gave them an opportunity to market their ads and their products. Plaintiffs dropped the case. It isn’t about spin. It is about controlling the narrative. Act rather than react.
What keeps you up at night? Do we have on our board the right people to anticipate what needs to be done to address all the stakeholders, including shareowners? The right information? Right people means they recognize the obligation of doing their homework and raising the key questions. Ten years ago, oversight was much different. Do we have the next CEO in our sights. Insiders do better. Crisis management- transparency, action and leadership. Chesley Sullenberger touching down on the Hudson quickly switched from saving the plane to saving the 150 lives on board. The ability to switch goals is critical.
We have to be active and proactive. The reason why google bought youtube was to optimize what people search first. We need to be thinking what’s next… controlling for the spoken word… video is critical for our brand. Once the crisis subsides, return to normalcy can be difficult for the board. New leaders will demand clarity of roles. Post-crisis is a powerful opportunity in which to regain market share. A crisis is a terrible thing to waste.
Uncertainty, Volatility, and the Risk Agenda
Patricia F. Russo, Lead Independent Director, General Motors Co, Independent Director, Alcoa Inc., Merck & Co. Inc, Director, Hewlett-Packard Company, KKR & Co. L.P.
Ann C. Berzin, Audit Committee, Constellation Energy Group Inc.; Director Ingersoll-Rand PLC, Kindred Healthcare, Inc.
W. Neil Eggleston, Partner, Debevoise & Plimpton, LLC
Moderator: Mary Pat McCarthy, Executive Director, KPMG’s Audit Committee Institute; U.S. Vice Chair, KPMG LLP
Who in management is talking about risk? If it is the risk officer, you don’t really know as a director. If it becomes engrained in the conversation, you need to weigh the risk reward balance. More discussion and dialogue around the larger economic picture, as well as the regulatory environment. Risk committee? Risk oversight is key to what boards do, perhaps the hardest to do meaningfully. What is really important is to have a discussion about where the critical risks are and discussion about how those risks should be allocated to committees. It matters less if it is a risk committee than it does that various risks are being addressed. Oil services companies and others that deal a lot in foreign markets should have a Foreign Corrupt Practices Act (FCPA) committee.
The models that work effectively depend on operating people being responsible for overseeing various risks. Board should see these people on a regular basis. Less than a 1/3 of directors sense enough discussion of risk in boards. Crisis can turn a company into a leader. Risk assessment needs to be fully integrated into every segment of the business, with the proper tools.
Major business sectors present to the board annually. Enables the board to take on additional risk with confidence. Much better than hearing from chief risk officer with displays of the heat map. You can do your job if you have the information. You need to penetrate deeper in the organization than at the highest levels. Find out about issues the “got resolved.” What issues have been raised on the ethics hotline? How fast are we clearing them out?What allegations of financial integrity have risen? Site visits can be useful, although most often staged. You’ll show employees they are responsible to directors. Have employees explain what happened. Not unlike, csome to the principal’s office. We care and we’re ready to hear from you further.
Every company is a technology company. How do you tackle IT? Two paths for boards. IT systems that support running of the business. More global, more virtual, more mobile… protect. Technology disruption side: risk as disrupters, more personalized. 800 million Facebook users. No two smart phones are the same, with all their apps. Need to look at marketing, distribution strategies. Boards need people with a technology perspective that is different from the company’s core IT skills. Different perspective is key. Technology provocateurs are needed on corporate boards. Better to have at least two, so they have support.
Electronic records key for meeting regulatory burden but companies don’t want to develop out-dated Betamax systems. Enormous amount of loyalty to company. Clear crisp leadership is needed to allow people to be accountable.
Risk reward measures should allow people to be rewarded. Make sticking it out during difficult times worthwhile. Did we meet succession plan candidates during the year? Every table at an annual event has a director and the right mix of top talent. We get a blurb about what they’re working on so that we can learn and share with the most promising employees in the company.
Compliance. How do you ensure ethical tone? We really mean it. We all do what’s rewarded. There has to be consequences. Need to convey that there is followup. If nothing happens, it sends a message about what is taken seriously. Penetration by board to lower levels conveys importance. In response to question from me, apparently, there is no experience with organizational ombudsmen in the companies represented. Might be worth exploring. See The Governance Ombuds: SVNACD & Stanford’s Rock Center.
Natural bias to risk aversion but key is doing risk evaluation within the context of growth strategies. Use risk to drive return. Board’s role is to focus to increase value. Pat: punctuate that it isn’t in addition to. It is what we do in our daily lives.
Compensation: Establishing Metrics and Planning for the Unknown
Steven E. Hall, Managing Director, Steven Hall and Partners
Leo I. Higdon, Chairman, Compensation Committee, HealthSouth, Director, Eaton Vance Corp.
Beth L. Bronner, Former Compensation Chair, Assurant Inc. and Hain Celestial, Director Jamba Inc., and Syms Corporation
Moderator: Jon Lukomnik, Executive Director, Investor Responsibility Research Center Institute, Managing Partner, Sinclair Capital L.L.C
With SEC investigation it took effort to retain talent. Hain Board and management team did without equity compensation for two years to get through an investigation that went no where. Assurant documented lessons learned and developed strategic objective — focusing on risk. Need to retain head of HR at Assurant… postponed her retirement. Comp committee paid to use your judgement… you need to be able to explain to shareholders.
Questions asked by shareholders – dialogue is good. Send messages internally and externally. Outreach, outreach, outreach to shareowners. Nothing better. When you do that, they will listen. Strategy based compensation. Starts with strategy and board buying in, cascading to business plan, rigorous conversation around the plan. You should feel good about you management team hitting the ball out of the park. (yes, you need to touch back with ISS and sharowners when it happens)
SOX pushed formalistic thinking but now using discretion. Relative performance, competition. Flexibility is critical. Short-term plans range around a target. Requires trust. Moved away from big bets into the future. Committees having strength to say these are things ISS doesn’t care for but we’re going for it. Good calendar is important. Trends update at every meeting… chance to adjust. Keeping up to date. Looking at where we stand re performance metrics. Looking at comparative group and what they do re measures. Performance. Different for different companies and same company at different times. Go back to business planning process both short and long-term. More rigorous target setting. Too often, we’re approving the pay plan before the business plan… now flipped.
Challenge as advisor to the comp committee is walking the line between ISS and maybe a negative vote as director vs right thing to do. Toss out plan… no payment under the formula but we should make a payout. Look at the headwinds. Try not to think too much about looking bad. Should be paid like audit committee… toughest committee to be on at this point. Two shareowners insisting on share buyback. Nothing to do with say on pay but impacting. New ISS proposals. Transparency lacking at ISS and Glass Lewis. Golden parachutes. How much severance, equity…damage done when signed contract not when leaving. Based on pressures, double triggers are now in vogue. We’re getting more conservative. Put in excise tax grossups for a reason but now taking out. Fortune 100 base is 9-11%; the rest is perfomance based.
2004 excessive leverage at Health South. Today very successful. Stabilize company by keeping talent in place, focus on strategic plan, put the plans in place by balancing accountability with discretion. We were looking at qualitative metrics once thresholds met. Accountability and transparency CD&A told the story, made the linkage. Mindful of rewarding management for effort as opposed to results.
Nightmare when you have to try to recreate your books. Linkage of pay to performance — comp com. report and CD&A is the way to get the story out. Likes guidelines, regardless of say on pay requirements. Look at current and emerging trends re risk and goal setting process. Business conditions change. Critical to design goals around the business plan in such a way that you have input to changing the plan and or changing the compensation incentives. Performance metrics have changed. Early on the focus was on stabilization. Now growth, peer comparisons, return on operating capital, return on assets, top line growth, share price. Great results need built into next year’s business plan. What is stretch? How many times should you be paid out for maximum performance? Mistake.
Mid-point of turnaround, what’s in money and what’s not.. realized CEO underpaid. Tension. We missed stock price performance. Wasn’t achieved, grant and shares taken away. Evolving set of practices. Evolved from time-based to performance-based stock. Economic profitability as a component of bonus… cost of capital (old EVA) & factors like that. Still doesn’t translate to stock price sometimes. Do they really understand? Are we dumbing the process down to make understandable to communicate to shareowners and public? Metrics can encourage destruction of capital if they don’t think about cost of capital.
Corporate Strategy and Sustainability: Driving Long-Term Value
Veronica “Ronee” Hagen, Director, Newmont Mining, Southern Co.; CEO, Polymer Group, Inc. (PGI)
Anne Sheehan, Director of Corporate Governance, CalSTRS
Ron James, Director, Best Buy, RBC Funds, Bremer Financial Corporation; President & CEO, Center for Ethical Business Cultures
Moderator: Mark Preisinger, Director of Corporate Governance, The Coca-Cola Company
Sustainability is not a tradeoff, it is key to building value over the long-term. Not at odds with bottomline. For some, it is like social media; you know it is there and you hope you can retire before you have to deal with it.
What directors need to provide is organizational readiness… turn the topic into value for their company, employees, shareownrs, society…. connect to corporate strategy. Corporate culture is the leading indicator tied to corporate strategy. It must be integrated into business. How, what, and who is reporting on it? Execution has now evolved to management, strategy, tools… now cultural values. What is the culture, that sustaining glue that will create the future? If you know your culture and your values, the rest is easy. Transparency is better if cultural values in place. Bring in the anti-case. Someone with a totally different view to provoke conversation.
Opportunity to proactively engage. Boards asking probing questions to surface themes. Essential for management to directly engage with stakeholders. Best Buy corporation responsibility issues raised by shareowners. Lots of engagement but not brought together centrally. Board supported management efforts to tie the whole story together. Developed ways to stay in touch. Dynamic area… put on website and update more frequently. Board stays in touch with NGOs. Corporate responsibility teams report at least annually to the board re metrics and performance. Eliminating a billion pounds of e-waste. We can refurbish or resell trade-ins. Not just a cost but a business opportunity. Do what fits your core competency and get to win-win. Listening to diverse stakeholders. Voice of customer, employee, community must be aired — stewardship responsibilities of the board. Compensation is a challenge. Comp committees are under enormous pressure… only so much shelf space, compartmentalising dilutes. Ownership is key as to how sustainability ties back to how you achieve goals
Board members setting priorities on behalf of shareowners. Newmont significant issues. Got shareowner proposal… OK, we’ll do it. Independent work group to do assessment. Invited NGOs in to look. NGO, Board, work group. New experience for all… a learning experience. Not window dressing. On website, updated regularly. Rules on the wall and rules in use. If they aren’t the rules in use, boards need to know. Filed sustainability proposals. No two companies operate in same way. Tailor to company supply chain. Make available to stakeholders. Having a dialogue to accomplish common interest of long-term. Both looking for the same thing. Difficult for boards to listen to each other… common agreed upon solution. Moving the ball forward. NGOs, shareowners, and boards need to sit down to find common ground… comp committees might learn from such dialogue.
Each company must decide what works for them. Depends on board members to see what’s coming down the road, trends (both mgt and boards) Getting out and talking to consumers, social media how used, up to company to decide how best to execute. Someone has to play the veritas / contra role re investments etc. Hearing other points of view makes for better decision-making in the end. The challenge is integrating sustainability into compensation. Cultural issue is bigger challenge… the overall sustainability culture. Key trends: focus on carbon intensive industries… low hanging fruit of carbon disclosures. Next steps are broader supply chain issues… asking for reports. Getting more granular, specific to individual business around riskier areas.