Well, the long-anticipated event has finally occurred. There is no more guessing on the rules as the SEC has set forth new proxy access guidelines with a split vote and some interesting speeches on August 25th.  I am pretty sure it will not go down as a “Day of Infamy” or even get some fancy handle like “Bloody Corporate Wednesday.”  We’ve been waiting and talking about this so long that it is almost anti-climactic. The fact is, many institutional investors, corporate directors, activist hedge funds, and CEOs don’t know whether to celebrate or cry foul. Let’s take a logical look at two scenarios where both corporate directors and self-interested shareholder groups could either be happy or sad.

#1. The Happy Scenario:
Activist shareholders –This group is very happy to finally have some clout and the ability to nominate new directors without having to go into their own pocket to fund a proxy battle against a company’s slate of directors. Therefore, companies that are poorly governed and have equally dismal bottom-line performance are now on notice that while it will still be a challenge to meet the proxy access guidelines, shareholders have a tool to be better represented on the board. This tool isn’t perfect though, because while it may be easier to nominate a candidate, shareholders will still need to go out and round up the votes for that person to be elected. This could be no small task at times, especially when the company will pull out all the stops by hiring a proxy solicitor for their slate. But even so, activist shareholders, you are happily in the game.

Corporate boards and management – You are likely to be happy as well, because simply put: In the grand scheme of things, with these rather lofty thresholds, we may not see many shareholders or even groups able to garner the required 3% of stock and have held it for 3 years.  But what really should make you excited is what didn’t end up in the Dodd-Frank Reform Act.  No mandatory majority voting, no discretionary votes on areas other than the election of directors, and no nonbinding advisory votes on critical decisions except say on pay. So unless you have completely overpaid management or taken the company in a strategic direction that has resulted in a death spiral, you’re still in control of your company even if you do have to hire that proxy solicitor to make sure you get out the vote.  You are likely also delighted that some smart folks out there feel that there are aspects of the rulemaking that still can be legally challenged.

#2. The Sad Scenario:
Corporate boards and management – Just the fact that the camel got its nose under the tent is a downer.  If we now mandate proxy access and say on pay, what is next?  Some may say that, in a way, we only have ourselves (or a few public companies) to blame.  The fact is, this could get ugly.  We’ve seen publicity that CalSTRS and Relational Investors are building a war chest of directors who could be viable shareholder nominees under these new rules. The bright light on boards has just gotten brighter.

Activist shareholders – Even though you are in the game, you have to feel a little sad about what might have been.  Whoever struck the deal that resulted in keeping proxy access but walking away from the other potential shareholder election and oversight tools has left some key issues on the table.  There has never been a better or more vulnerable time in the corporate world for shareholders to push for enhanced powers and, while they got a few, I honestly expected more influence to have swung your way. The final proxy access rules certainly narrowed the field of those who are in the game, and we’ll have to see if your investors prove to be good aggregators of those who are disgruntled, long-invested shareholders.

I recognize that there could be more scenarios where members of one party might be celebrating a victory and the other licking their wounds, but it was by stepping back and considering the perceptions of all the different interested parties that suggested to me that people’s views are all over the place, and that only time will tell how tell how Wednesday, August 25, 2010 will be will be remembered in the business school textbooks of the next decade. 

My perception is that there is no question that the corporate world has given up some valuable ground that will never be returned. The real question is, will the Dodd-Frank Act’s corporate governance section and the added power to shareholders truly help in holding directors accountable and improve performance? Or have we just added more disclosure and distraction, which focuses directors on things other than some good old strategic planning.  I actually have faith in the capital markets and the desire of board members to be successful boards.  My glass is half full.

Well once again Hewlett-Packard’s board is in the hot seat as they try and put the CEO Hurd debacle behind them and move on with their search for a new chief executive. There is no question their directors have had their share of the limelight in the last several years and I suspect many of them have developed some pretty thick skin. That may be helpful, because this could be a media issue that won’t go away until the all the intimate details are revealed and the reporters who cover “lifestyles of the rich and famous” refocus on the latest exploits of Lindsay Lohan.

Everybody likes to read the bawdy details of a business bigwig getting influenced by a sultry “consultant,” but let me start with one important fact. Even though we don’t know the actual relationship with consultant Jodie Fisher and whether her sexual harassment suit was fabricated as the internal investigation seemed to confirm, Mark Hurd did file false expense reports to the tune of a reported $20,000 and it wouldn’t matter what other allegations are associated with his bizarre behavior, that is enough for the board to terminate his employment…maybe even for cause. Can you imagine the culture of an organization where it’s OK for the CEO to fudge his or her expense reports? Was there anyone out there that felt that this incident alone wasn’t enough for the board’s actions? I don’t know what went on inside the boardroom, but I certainly won’t criticize the board for disclosing what they felt was relevant and why Mr. Hurd was asked to resign. Also, when the facts presented themselves, I can’t criticize the board for hiring a damage control consultant to address certain organizational and media repercussions. They certainly didn’t need the PR consultant to establish what the right step with Mr. Hurd was in this case.

Columnist James Stewart, in the Common Sense section of the Wall Street Journal (8/11/10), chastised the H-P board for not disclosing all the relevant facts. The column was actually a very interesting read except for what seemed like a strong push to hear all the details on the relationship with Ms. Fisher. He closed the column by saying “it is hard to have any confidence in the judgment of H-P’s board” and goes on to say that as an investor, he’d avoid the stock. (Actually if you bought close to the bottom of the last debacle you would have made some good money, but I get his point.) Not being in the boardroom and not knowing the truth, there are plenty of reasons to not disclose the details of the relationship. Many times it makes perfect sense to totally clear the air and put things behind you, but there are exceptions, and since we haven’t been privy to any of the board’s conversations we can’t criticize its thought process. Personally, I think the board disclosed enough, and I support its handling of this situation and feel its members have improved their governance process significantly after going through the board leak issue.

Unfortunately for H-P, as I’m writing this blog, up pops a related story that a pension fund shareholder is suing Mr. Hurd and the board of directors claiming disclosures surrounding the CEO’s resignation led to a drop in the shares. It’s no big surprise that someone sued, but I’m amused at how one might suggest the board could have made this announcement without the stock being affected. H-P, so far you have my approval of your efforts to handle this unfortunate incident after having some welcomed performance success over the last couple years. My advice is, don’t look up. I think you’ll see a black cloud that just might take a little more time to shake.

What a time for me to be on vacation, missing the signing of the infamous Dodd –Frank Reform Bill.  First let me apologize to any readers or faithful followers for the lapse in blog content.  You know how it is when you finally go on that family vacation and innocently go to the computer to do a little work and you get the evil eye from the rest of the family.  But now I’m back, mulling through the bill and its interpretations, and armed with great fodder for many blogs to come.

Since I’m rested and feeling somewhat spunky, I thought I’d address an issue that quickly came to light while I was paging through the bill. 
“Whistleblowers”
Now I must confess I was never much of a fan of our first venture into protecting whistleblowers as part of Sarbanes-Oxley legislation of 2002. Under this regulation, employees could submit incidents to the board or a third party and be protected from retaliation (including keeping their jobs no matter what a slug they might be) under the SARBOX legal statues.
 
Actually I am a fan of the general benefits of Sarbanes-Oxley (minus 404) but my concerns over the whistleblower challenges were demonstrated when the magazine received a call about a company whose board had received a whistleblower alert that management was doing something associated with cooking the books.  As they should, the board hired outside counsel and advisors to investigate.  In the course of their rigorous interrogation, management didn’t like the tone of the investigators and hired independent counsel to represent them.  Bottom line was there was ultimately no substance to the whistleblower’s claim.  Turns out, the claim was submitted by a suspect employee who was on the verge of being fired but was now protected, and the company ended up with two expensive outside counsels dealing with each other and the board and management not talking.  This is what I call an unintended consequence and a provision of a bill that needs more thought on how best it might work.  While this might be classified as an extreme case as far as cost expense goes, it is representative of how convoluted even the best-intended whistleblower fraud detection program can be.

Now this is the time in most of my blogs where I let the readers know that I’m not some whack-job that doesn’t understand what is trying to be accomplished here and appreciates how the threat of one’s employees having an outlet to report fraudulent actions by officers of the company can be a very powerful deterrent.  And on paper it might sound good but I don’t sense that anyone feels it has been worth the expense or time to the public companies. True, I haven’t heard any feedback from the SEC so I’ll leave the debate on Whistleblower #1 open for the time being.

Now we enter a new whistleblower era that we will call “Return of the Whistleblower” or “Son of Whistleblower” and as usual with movies, this feature of the bill is worse than the original.  How can I bash this piece of the bill already? Because as best I can understand, now we are going to protect and reward whistleblowers–rewards to the tune of 10% to 30% of the monetary sanction imposed by the SEC.  (Those of you that want the gory details, see section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.)

Now there are rules of how and when a whistleblower can be paid but it is easy to see where an employee who identifies possible fraud is incented to skip his internal compliance and ethical process and go straight to the SEC.  In fact, if they report the occurrence internally and the company decides it is an offense it should self-report to the SEC or Justice Department, they lose their windfall.  In retrospect have we just instituted another whistleblower regulation that has even more tenuous unintended circumstances than Sarbanes-Oxley.  Time will tell.

One thing is for sure for directors and C-suite teams.  You will have to analyze your current internal reporting programs and corporate culture.  You can imagine the risks and expense related to this program not counting just the reputational risk for the company.  As I reflect back it seems interesting to me that with all the provisions of the new Act that whistleblowers is the place I chose to start offering guidance.  I’m all for bringing people who knowingly commit fraud to justice and I hate that people can destroy so many lives by trashing companies and not get stiff sentences.  But maybe we can just cap the incentives to whistleblowers or provide equal incentive to have them report things up the normal chain of command.

As a final note we may have a real life example to watch.  At the end of last week the Justice Department joined a whistle-blower in accusing Oracle, the business software giant, of defrauding the federal government by overcharging for software.  If it’s true, find the perpetrator and prosecute, but I hope for everyone’s sake that some whistleblower doesn’t walk away with $50 million dollars.

Well, Congress didn’t meet its goal of getting the financial reform legislation to President Obama prior to the country’s Independence Day, but it doesn’t look like it will miss it by much. Current plans are for the Senate to address and vote on the bill July 12-13, (the house has already voted and approved the D-F Act) and current indications are that it could land on the president’s desk soon after. This bill has become my source for cheap excitement as I watched the televised committee process take place merging the Senate and House versions and then watching the lobbyists and special interest groups water down many portions of both versions. (It is a little sad that committee watching is a form of entertainment for me, but it is something I live almost every day.)

I’ve actually enjoyed reading experts’ synopses of the 2,300-plus page proposed document and hearing specialists prognosticate how certain sections of the act will affect different companies. Two summaries I read this morning that are decent recaps are PricewaterhouseCoopers’ “Special Edition on Financial Services Regulatory Highlights” and Paul Weiss Rifkind, Wharton & Garrison’s “Corporate Governance and Executive Compensation Provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act.”

As far as fun facts go that I’ve learned from those sources, one is that the new law will require more than 60 studies be conducted on a wide range of issues and, under the title of “investor protection,” there will be 20 separate studies alone. And if you are into acronyms, this act is the mother lode of all documents. See how many you can figure out that will be required to adopt new regulations in the next 180 days: FRB, FDIC, OCC, SEC, CFTC, FTC, FERC, NCUA, HUD, CFPB, FSOC. (Scroll down for the correct answers.)

This strongly suggests that the regulators will have a major say into how practical and beneficial this bill will actually be. Because the regulators will possess the final say on many of the law’s actual parameters, how they make final decisions on those guidelines and then choose to administer them will have a significant impact on many public companies and boards. To me, it will help me decide exactly how far the pendulum has swung, and whether I give more credence to those who are complaining about too much government intervention or to those who say the Dodd-Frank Act will be one of the most important pieces of legislation since the Securities Act of 1933.

If you have any “fun” facts that I missed, let’s hear them. Once the bill is signed, watch for me to take a look at its components—particularly those that are directly related to you as a board member. You can also tune into www.boardmember.com where “This Week in the Boardroom” looks at the nongovernance issues in Dodd-Frank that will still affect a lot of public companies. It’s 2,300+ pages… so you’d better get reading right away!


Acronym answers:
Federal Reserve Board
Federal Deposit Insurance Corp.
Office of the Comptroller of the Currency
Securities and Exchange Commission
Commodities Futures Trading Commission
Federal Trade Commission
Federal Energy Regulatory Commission
National Credit Union Association
Department of Housing and Urban Development
Consumer Financial Protection Board
Financial Stability Oversight Council

I can think of multiple examples over the past years where I thought to myself, “Boy, I’m glad I don’t serve on that board today.” One of those early memories was HealthSouth (still one of the best articles to come out of our magazine), when I found out that its directors ended up having 52 board meetings over the course of a year during the height of its accounting troubles in 2003. I had the same thoughts in 2009 when it seemed Bank of America couldn’t do anything right in the media’s eyes. In that case, although we actually didn’t know what was going on in the boardroom, we saw signs BofA followed some less-than-stellar best practices concerning fundamental board duties that likely contributed to its rocky journey out of the limelight.

With all that is going on today with BP, I’ve conjured up some of those same feelings, but wanted to take my thoughts a step further and ask myself what I or others might learn from what we’ve witnessed so far. Truth is, we don’t know much about what is going on among the BP directors, so it is tough to be too critical without first-hand knowledge. This would be a hard time for any board to deal with what BP is experiencing. Shareholders and related activists are calling for the CEO’s head, while there is huge political pressure for the company to cut its dividend and just stop the leak. The media is on a feeding frenzy looking for any sound bites to sell publications or TV advertising. Throw in environmentalists, damaged businesses and employees, and municipalities who have lost tourism dollars and you have quite a mess. So with all that going on and, unfortunately, no good solution in sight, what might we director types learn as we watch this experience from afar?

Even without knowing what is going on in the boardroom we can understand the importance of having a crisis management plan. Early responses to the oil leak were not well organized, and spending money on ads that touted what a good company BP was could have been used much more effectively. I like what BP is doing with its claims program, but it took almost two months to have anything organized—not to mention a plan to stop a leak that we all know now can turn into an environmental and economic disaster.

Another foundational duty that you can hope has been addressed by the BP board is its CEO succession plan. No board wants to get caught flat-footed like Bank of America, where it was pretty apparent that no plan was in place even though Ken Lewis (who is a very good banker in my eyes) was under extreme outside pressure for months and eventually ended up leaving the bank. With all the pressure on BP and its CEO Hayward, it, too, will have some tough decisions on the best course of action for the company going forward. Notice how all these duties interact. Crisis management, CEO succession, board leadership, etc.

But maybe the most important lesson that board members can learn from the BP situation is one that is rarely talked about till well after any crisis: the importance of a company’s culture. If I were to investigate any issue that might have prevented this disaster, I would dig deeper and understand the culture developed and supported by BP’s management and board. Was there an internal corporate environment where problems had a path that led up the organization? If workers knew and tried to communicate the risk of poor drilling equipment did those concerns rise to an investigation level? Another way to ask that same question is… was there so much pressure (and/or incentive) to meet profit targets that the risk of colossal environmental accidents was increased? If so, it might be said that a bad strategic plan was instituted from the start. This type of faulty culture just isn’t restricted to those that present an energy or environmental risk. These same cultural dynamics can be tracked to the financial crisis and to any company that is exposed to Foreign Corrupt Practices Act (FCPA) risk.

So, even without knowing how the BP board has performed under this intense scrutiny, we have much to learn. I am very sympathetic to its directors’ plight, but would encourage everyone to take the related lessons to come out of BP’s situation quite seriously.

If you are a corporate director you shouldn’t really be surprised, but it looks like the final shoe is about to drop in what I suspect is the biggest corporate governance power shift in the history of the modern American company. That’s right, the Financial Reform Bill is out of the Senate and is up for review with what the House had passed in December of last year. While I’m sure there will be banter and lobbying of epic proportion, I sense that we will end up with a bill that, even though its focus is financial reform, will also address multiple governance issues. Most important, the SEC will likely end up with proxy access regulatory authority that eliminates, or at least reduces, any previously anticipated legal challenges.

What all this change will really mean to today’s public companies remains to be seen, but it can hardly be described as insignificant. I will admit that I thought the implementation of Proxy 452, which restricts the brokerage houses from voting discretionary or street shares without shareholder instructions, as well as the fact that many companies had previously installed majority voting (which means the only votes that count are those actually cast), would result in some directors not being reelected. However, sitting here today, I have not heard of one case where a company-recommended board member has been blindsided and not been reelected due to withhold votes, Proxy 452, and/or majority voting. (It doesn’t mean it hasn’t happened, but it certainly hasn’t been close to the effect that some thought was likely to occur.) Part of the reason we have not seen an increase in incumbent director turnover is that many companies that felt the heat stepped up their proxy solicitation efforts to ensure their candidate’s vote totals had good reelection chances. (Maybe Corporate Board Member should get into the proxy solicitation business. It sounds like those folks will be busy for many years to come.)

I tend to think that the proxy access aspect of the Financial Reform Bill is the biggest elephant in the room to today’s boardrooms just because the early SEC version had so many unanswered questions. I must admit I still don’t understand how the first come-first serve selection process of shareholder-nominated director slates will be handled. It sounds to me a little like getting a Southwest Airlines seat. Imagine something like “first request received 24 hours ahead of the proxy deadline date gets their slate listed in the proxy.” Actually, how many new board slates will be selected for the proxy is probably a small issue compared to the concern some experts have with its effect on boardrooms of the future.

Marty Lipton, one of the grandfathers of board governance, provided little doubt about the fears that he had for tomorrow’s companies. In a Wachtell Lipton whitepaper, he and his colleagues had this to say about the SEC’s proxy access process: “We believe that proxy access has the potential to wreak havoc with American business and that the SEC’s adoption of proxy access rules is dangerous and unwise.” Hmmm, I wonder how they really felt?

So to sum up, continuing with our air travel metaphor: “Ladies and gentlemen, this is your governance compliance attendant informing you to fasten your seatbelts because it may be a little bumpy ahead before we hit any clear or smooth sailing. The current report calls for an accumulation of newly proposed directors, coupled with a heavy dose of both mandated majority voting and say-on-pay. Also, indications are that there is a 99% chance of selected SEC decisions defining just what are significant discretionary voting matters as well as seasonal clawbacks timed with the release of restated financials. Your captain for this experience will be Representative Barney Frank and your estimated date for takeoff will be July 2010. We’re happy you agreed to serve as a corporate director, and we’ll look forward to having this experience again after the next crisis that politicians believe board members had the power to avoid.”

OK, after all that ranting, how do I really feel? One word: CAUTIOUS! My experiences are that Congressional and regulatory corrections that follow crises are never as bad as people think they are going to be, and there are so many questions left unanswered at this point that it is hard to be critical of something that is still so undefined. In fact, most of us won’t be around to experience whether this watershed shift in shareholder power ended up to be a good decision or not over the long term. But even so, for now, I am buckled up! 

Meet Your Peers

For the last several blogs I have discussed the issues of board leadership and splitting the titles of CEO and chairman, so it only seems fitting to pass along some information that is a real-world application of what I’ve been talking about. On June 22-23, Corporate Board Member and the New York Stock Exchange will conduct the first annual Chairman & CEO Peer Forum at the NYSE headquarters on Wall Street. Designed to bring together chief executives, board chairs—or in cases where the CEO holds both titles, lead directors—the Chairman & CEO Peer Forum presents the opportunity to a select group of people to get together and share ideas on what has worked well, and what has challenged them, in their CEO/chairman relationship.

Those who take time from their busy schedules to attend, will hear from the likes of these formidable leaders: Harvey Golub, the former CEO of American Express and current chairman of AIG; Duncan Niederauer, CEO of the NYSE Euronext; Tom Pritzker, executive chairman of Hyatt Hotels; the CEO/lead director team from Reynolds American; and finally, one of America’s leading legal governance spokespersons, Marty Lipton. And while all these speakers will help put board leadership in the proper perspective, it is the opportunity to participate in the peer exchange—where small groups of CEOs, chairmen, and lead directors can confidentially discuss their challenges and solutions—that will make the Forum uniquely successful. No matter how you feel about titles, this event is about helping board leadership handle difficult situations and, most importantly, fostering more effective boards.

I personally wish Board Member Inc. was a public company so I could participate in the peer portion of this event. There is no better learning experience than sitting and sharing issues that are not usually aired among your peers. Some of the topics I know will be discussed include the chairman and board’s role in strategic planning and setting direction, the best board process for handling oversight of enterprise risk management, and determining the lead director or outside chairman’s role when building effective communications with the CEO and management. If anyone can go into these peer groups and not take something constructive back to their own company, just let me know after the Forum. I’ll make sure the conference folks give your money back. Our annual October Board Committee Peer Exchange has grown to more than 240 board committee chairs who come from mostly Fortune 500 companies. I am sure you’ll discover the same thing they have—that this is a great format to either validate or bolster your board skill set.

One last point on something you can expect from me at the Forum. If you’ve read my previous blog (“Guiding the Board…The Unspoken CEO Skill”), you will know that I support the unspoken tenet that holds that no matter how much authority or independence you want to give to the board, the CEO needs to provide guidance in a way that doesn’t feel like he or she is dictating, but does make sure everyone is pulling the oars in the same direction of where the business is going. This is a critical CEO skill set, but it isn’t something that is evaluated during the interview process. Hmmm… I wonder how that will be received by the independent chairs and lead directors at the Forum? 

Apologies to all for not bringing closure to my prognostications on splitting of the CEO and chairman roles prior to having to board a plane last week, but if you had the chance to read my last blog post, I was making a case for what I’m about to espouse as my prediction for the future of the dual title and role of CEO/chairman.

It should come as no surprise, for all the reasons previously offered, that we will see companies splitting these roles as early as the opportunity presents itself, and some won’t even have the luxury of waiting until a logical time. Certain companies will have withhold votes issued on them in the current proxy season for their reluctance to split the roles and for failing to address the board leadership issue through a lead or presiding director position. Yes, as I look at this year’s proxies, there are companies and boards that have chosen not to address the board leadership issue regardless of what governance reforms or disclosures swirl around them. It’s hard to believe they would want that attention in the increasingly transparent boardroom environment, but nonetheless it is true.

The remaining companies that haven’t split the roles but that have addressed the lead director/board leadership issue will gradually feel pressure from Congress, regulators, shareholder groups, etc. to make a role-splitting change at one of the following opportune times:

1. When the current CEO comes forward and recommends that the company make the change at the next reorganization or as soon as possible.
2. When the current CEO retires, or is replaced, and the board can exercise the split without disrupting the current CEO/board relationship.
3. When there is an M&A or similar transaction that results in a meshing of management teams and boards.

There may be other opportune times that I can’t recall right now that would expedite the splitting of the roles, but you get the picture.

I’m on record (several times now) stating that I don’t think the splitting of the chairman and CEO roles is all it’s cracked up to be and that I’m much more concerned about how a board views and orchestrates leadership, whether that is through an independent chair or lead director. However, I won’t argue that there aren’t benefits to having separate CEO and chairman roles, because in certain companies I think that visual title support helps some boards foster additional courage and independence. Remember, however, that Enron and WorldCom had split roles, so it doesn’t guarantee good governance.

For those accounting or legal types who want something more definitive in a prediction, I offer the following: If several years ago 50% of U.S. public companies had already split the CEO and chairman roles, my prediction is that by the end of 2012 that number will be near 70% and by 2014 it will reach 85% (assuming regulators don't mandate it earlier).

There you go… my crystal ball has provided great wisdom and hopefully given you the chance to reflect on your board leadership issue in the years ahead. Just be sure to focus on the steak, and don’t get caught up in the sizzle!

There is no topic we deal with at Corporate Board Member that has been more sensitive to our readers and viewers than the splitting of the roles and titles of the CEO and chairman. There really doesn’t appear to be much grey about this issue—it’s mostly black and white. But actually, I’m somewhat grey about it because, as I have said before, I actually think many kinds of leadership structures can work, and while the splitting of these roles does have some possible advantages, there are plenty of cases where such a split has failed to perform effectively, as well. Board leadership is a people issue more than a structure issue, and no title solves the leader issue.

All that being said (again) leads me to what I really wanted to cover in this blog: “What do I think will happen to the splitting of the roles in the future as I gaze into my crystal ball?” Some may not like what I see, but here goes.

First, I am surprised by how strong this movement has become. Organizations like RiskMetrics and CalPERS, who previously seemed comfortable with a lead director structure, have gotten more vocal about the viability of splitting roles. Former CEOs, like those who are active in Yale University’s Chairmen’s Forum, are making an appeal to their former peers that an outside chair is important in order to have a good corporate governance balance in a public company. Also, there is the SEC’s new requirement to disclose the structure of board leadership (i.e., their new code word for splitting the roles) in the proxy. Furthermore, every piece of legislation coming out of Congress has a portion of the bill requiring public companies to split the roles of chairman and Chief Executive Officer. This is now more than just one group of activists looking to wrestle power away from selected imperial CEOs. This is a real, live movement.

Second, from what I’ve seen in the early proxy writeups on board leadership, neither the SEC nor the organizations that carefully read and follow proxy disclosures will be happy with how the issue is being addressed. What that means is that many boards might need to respond to SEC comment letters they’ll receive, and RiskMetrics will either put out guidance about how this needs to improve, or it likely will withhold votes on some poorly thought through explanations, particularly in cases where a board hasn’t even addressed the lead director alternative structure. Because this is the first year of disclosure and it comes right on top of proxy season, there is the possibility that RiskMetrics may use this year to school some boards that have at least addressed the lead director concept, after which it will send a more meaningful warning shot across the bow of the nonresponders.

We’ll have to wait and see how that all plays out, but no matter what, you can count on 2011 being much tougher. When all is said and done, who knows what regulation may eventually pass, and what rules will be in place that directly deal with the splitting of roles.

So when I look into the crystal ball, what does all this mean to current CEOs and boards charged with explaining their philosophy on board leadership… oops, there’s my boarding call for my plane. I’m very sorry… it looks like you’ll just have to wait until the next blog to hear what I predict will happen. By the way, I am surprised that I haven’t heard from Warren Buffett yet about his views on the last blog. Anyone have his cell phone number? 

When a board takes part in unacceptable actions or makes bad decisions, how do we ultimately determine the appropriate penalty?

Over the last 18 months I’ve been thinking a lot about that proverbial line in the sand that determines when we should hold public company directors responsible for their actions (or lack thereof) as they represent the shareholders. Moreover, what does holding boards responsible really mean? Recently, we heard some very strong comments from the Oracle of Omaha and the world’s best shareholder, Warren Buffett, on this topic. He said that “CEOs and the boards that hired them should pay a steep price if their companies get into trouble with risky investments.” Does “steep price” mean they should be fined, or lose their jobs, or perhaps be prosecuted for negligence? I’ve also thought about the 200 banks that have recently failed and the additional 400 that are still projected to close their doors in the next 12 months. We’re talking about billions of dollars of shareholder and taxpayer dollars, either lost or used for government bailouts and assistance. What is the right thing to do when everyone says we need to hold directors accountable?

Let’s see if we can make some sense of this. Some things we need to remember as we think this through are:

We currently have a sophisticated legal system, particularly in the Delaware courts, that continually evaluates whether a board’s or individual director’s actions warrant having a lawsuit filed against them, or alternatively, whether they should be given a pass for making a good effort that resulted in the wrong decision (i.e., business judgment rule).

Also, other than the companies that caused the subprime debacle, can we really hold boards of other companies that were wiped out accountable when the economic conditions were beyond what any reasonable director could have anticipated or planned for? So, again I ask, how should we hold directors responsible?

One situation that has a pretty clear answer is when a director has been involved in fraud. Do something illegal or even make decisions for the benefit of yourself over the interests of the shareholders you’ve been elected to represent, and you should do the time or pay for the crime. That’s an easy one. What’s not so easy is determining what level of effort a director or board must demonstrate to be a good board. How do we ultimately judge whether true financial penalties against directors should be involved or if directors should simply be replaced? And who makes that decision? Actually, as I read back through what I’ve said above and consider what might be the best tool for shareholders to hold boards accountable, I may have just made a case for loosening proxy access rules, particularly if you buy into the notion that we don’t want to create an environment of prosecution that dissuades top director talent from serving on a corporate board. If everything except for fraud is too ambiguous to make that determination, then I suppose shareholders should have the ability to replace directors they don’t feel are protecting their investments or adding value.

Interestingly enough, I have never been against proxy access as long as the process around putting candidates up for election is sound and not too cumbersome or time consuming for today’s public companies. My problem with much shareholder activism has always been that once the board is elected, we need to let the directors do the job without having outside scrutiny of every decision or votes (even nonbinding) that serve to second-guess their actions without having access to complete information. Everyone can relate to how hard it is to manage when a supervisor or boss is sitting on your shoulder.

I’m going to have to think about this subject more, because outside of considering the possible merits of expanded, but still controlled, proxy access, I have not been able to answer my own question yet. It sure would help if Warren Buffett could define for me exactly what he means by “pay a steep price.” Maybe he’ll respond when he reads this blog.

So who is to blame for this compensation conundrum? Too bad this is only a blog and not an epic movie where we’d have three or four hours to unwind this complex web of conspicuous contributors. The truth of the matter is almost all related parties have contributed in some way to getting us where we are today with executive compensation. Wall Street, CEOs and boards of directors (past and present), compensation consultants, compensation attorneys, etc, etc, etc. Whether some were greedy, delivered what the client wanted, promoted short-termism with corresponding rewards, or were just ignorant of what they were approving, if you look back and see how we got ourselves in this position it seemed to start with just a few high-profile abuses on annual bonuses and severance payments and has now morphed into a full-range concern of not just what executives are being paid, but maybe more importantly, how are they being motivated to perform their responsibilities. The most recent downturn of the economy has appropriately swung the door wide open for everyone to question the system and that has resulted in major change and transparency. Whether your CEO’s pay multiple is being compared to the average worker or shareholders now expect a non-binding vote on what constitutes their CEO’s compensation package, everyone is having the chance to be a compensation expert.

The fact that executive compensation is such a publicly discussed and debated issue from Congress to the neighborhood card club is unfortunate, because most of the public and private CEOs and their boards have gotten the pay balance right and are not the greedy spendthrifts that the media and activists have made them out to be. There are well-publicized exceptions, but that’s exactly what they are—exceptions—versus the thousands who get fair rewards for efforts and performance given.

Unfortunately this less-than-desirable position is even supported by the corporate directors themselves. In the 2009 Corporate Board Member/PricewaterhouseCoopers “What Directors Think” survey, and in our surveys several years prior, when directors were asked in general if they believe that “U.S. company boards are having trouble controlling CEO compensation levels” the response was “yes” more than 60% of the time. This is a troubling result from the very group that should have control over the process and are in the position to push for change.

We just finished our West Coast Peer Exchange where over 115 board committee chairs met in California to discuss boardroom challenges and possible solutions. One of the things that became apparent was that more than a few compensation committee chairs and members felt that compensation consultants were still part of the problem and that a lot could be corrected if they wouldn’t keep escalating pay packages. Some felt the size of salaries and pay packages was exacerbated by information and recommendations supplied by the comp consultant. Now, as stated above, I’m reasonably sure that compensation consultants, particularly in past times when they were selected by and reported to the CEOs, contributed to some of the abuses in companies where escalating pay packages were designed to meet the 75th percentile of their peer or industry group. It shouldn’t come as a surprise to anyone that this familiar formula will grow pay packages each year. But that was in the past, right? In the new, more transparent compensation world, where compensation consultants report to the compensation committees and they know that they need to do a good job or the compensation committee won’t hire them again, I’m having trouble seeing why they wouldn’t deliver what is being asked for from the committee.

Let me state this another way. It was a good governance initiative to make sure that compensation consultants are hired and report to the compensation committee if they are involved in assisting to structure CEO comp—for all of the reasons stated above. It is especially important to the governance of the board because now compensation committees are officially in control of CEO pay. That means if you don’t like the existing plan, then tell the consultant you want to change the structure. Maybe one that pays for performance better or has a more realistic set of peers, or does not pay more than X times the average factory worker’s salary or whatever you think is appropriate for your company to be fair and motivating to your CEO. The point is, if the compensation consultant reports to the comp committee—directors are now in control.

The fact is, I’m not concerned today about who’s to blame for the compensation woes of the past. If I’m chairman of a compensation committee today, I’m going to sit down with my CEO and get his or her input, (yes I really care about their suggestions), ask my compensation consultant to update the committee on what’s going on in executive pay that we should know about, review our pay structure against what kind of behavior we want to solicit, ask the compensation consultant to make any changes necessary to improve its results, and then bask in the glow of a great bottom-line performance and a satisfied senior management, knowing we got it right. 

This week I had the chance to moderate a panel at the Global Ethics Summit hosted by Dow Jones and Ethisphere in NYC. I was very impressed with the number of companies represented and the spirit among the attendees in the room that ethics and compliance are manageable tasks. Having mostly served on small and mid-cap boards, I often wondered how a company and their board members could possibly oversee a holding company that operated 40 different businesses in 40 different countries--especially when a handful of those companies traditionally conduct business by taking bribes. In a time when hitting one’s numbers is such a big corporate deal, ensuring that your culture is a zero-tolerance environment when it comes to competing ethically seems like a yeoman’s task. I have to tip my hat to the managements and boards of multinational corporations that have successfully ingrained that business process into their daily operations. Now, I’m not saying that every company is doing a good job today, but with many Fortune 200 companies represented at the recent summit, it was interesting to hear both compliance and ethics officers talk about their board’s involvement in a zero-tolerance culture. This is in stark contrast to five years ago, when I was asked to moderate a similar panel on ethics and there weren’t that many ethics officers at Fortune 500 companies, and the whole conference was a complaint-fest on how hard it was to get the directors’ attention or carve out any time on board agendas.

My panel session was titled “Tone at the Top,” which turned out to be the most popular phrase for all the presenters discussing ethics and compliance at the summit. Everyone reinforced that if management and the board doesn’t support ethics programs and procedures, any money or time spent on training and operational procedures is a waste. “Do as I do… not as I say” is a phrase that is highly relevant to boards regarding ethics. Truth is, it sounds easy, but its not. The main point of our summit panel and the point I want to make with this blog is that each board will have several watershed events that will test their members’ resolve on having zero tolerance and those events will, perhaps more than anything else, determine one’s ethical culture.

A good example of a watershed moment test for a board of directors was the situation faced by the Walmart board about eight or nine years ago when its vice chairman was caught abusing company gift cards. Now imagine if you will, the challenge to the other board members when one of their own was caught taking a cookie or two out of the cookie jar. In times of old, that would surely be a “slap of the hand and sweep it under the rug” kind of incident. To Walmart board’s credit, they knew they had 1.5 million sets of employee eyes watching how this would be treated. If they let this slide, I’m sure it would have undone millions of man hours and dollars that had been spent to mold their employees and culture into making sure that workers knew that doing the right thing is important at this company and that not doing the right thing will not be tolerated… no matter who you are. That event was Walmart board’s watershed test and the best I can tell, they passed with flying colors.

Throughout my career and while serving on a public company board, I can only remember one such watershed moment in my quest to be a good director. I’m happy to say that I provided a level of leadership that helped us pass that test and I still carry that feeling proudly at my work and when I explain the importance of those decisions to boards today. Don’t let anyone tell you that these moments are easy to identify or are easy decisions to make—because they’re not. It just isn’t always clear at the time how important your decision might be, or who and what it might ultimately impact. If you serve on a board you can pretty well be assured that your time will come. Here's hoping you pass the test with flying colors. Take it from me… it will make you feel good inside for many years to come. 

Traditional Banks Thwarted from Leading Recovery

Things are getting a little testy…

And it’s still pretty dark over the horizon. I recently had an experience that seemed to shine new light on how stress (and in this case I’m talking about the stress of a crippled economy that plunders company bottom lines and stellar reputations) can cause even the most stable of people and industries to get a little frustrated, and sometimes even downright upset.

My experience was at one of our own events called Acquire or Be Acquired, a conference for bank CEOs and directors built around ways to grow your bank. The conference name may sound a little harsh, and perhaps it is, but the reality is that the U.S. has some 7,000 banks serving its population—much more than most other countries. (Canada, for example, boasts eight.) This is the 16th year of the conference, and we had more than 500 attendees eager to discuss how banks could work themselves out of the most dreadful banking environment since the Great Depression. Now, first let me make it clear that the bankers who attend this conference are not from money-center banks that contributed to the subprime debacle, taking what we now know are senseless risks that sent our economy in a nosedive. The bankers who attend this conference are those who serve our local communities—about one-hundredth the size of Goldman, Merrill Lynch, or Citibank. But to the outside world, they are being painted with the same broad brush, as President Obama continually tells the American public what bad people the bankers are. I really wish Mr. President would delineate between the investment or money center banks and community banks. They are totally different animals yet they are getting hammered together.

I apologize for digressing…

What was significant about the conference is that Bank Director magazine, Corporate Board Member’s sister publication, thought it would be useful to bring the banking regulators and the community bankers together with meaningful dialogue to see if they could make some improvements in the turnaround process. Sounds like a good plan for detente, especially if you understand the challenge. Here are the issues, in a nutshell.

1. Community banks have money to lend and would like to do so, to improve their bottom line.

2. President Obama is chastising the banks for not lending more, and he is telling the American people that bankers are selfish bums.

3. The regulators (FDIC, Fed, Comptroller of the Currency) are appointed by the government to oversee the banks safety and soundness. (not investment banks per se)

4. The regulators fear the worst in this economy and won’t let banks make loans without stipulating conditions that are unrealistic, therefore no money goes out the door.

5. So the administration criticizes the banks, while at the same time throwing the wet blanket of regulation over them, and preventing community banks from making progress.

A good end of this story would have been to report that everyone understood the others’ challenges and a lot was accomplished at this conference. Obviously the headline of this blog would be different if that had been the case. Instead, here’s what happened: the bankers ripped in to the regulators and the regulators defended themselves and their actions in these terrible times, which only made the bankers even more upset.

This whole scenario is really a mess, and this session did nothing to benefit the situation. I am doing my best to support President Obama and his administration because he is the president of our country and the people’s choice, but something has got to give if we are going to get commerce moving forward with the banks that really serve our communities. I understand why community bankers are frustrated, and I appreciate how hard the regulators’ job is to solve the entire industry’s problems as the whole country looks on. I hope the best minds in the country will soon recognize the gravity of this situation and take some balancing action. I was once a community bank president and can only imagine the challenge of the job today. At our conference, I saw the problem first-hand and wouldn’t bet there’s a solution is right around the corner. Sorry to be the bearer of bad news, but I think Bernanke just saw his shadow. 

Many of you saw in the paper that RiskMetrics was rumored to be for sale, which might well have some extended ramifications for corporate directors but actually wasn’t the most significant news to impact today’s boardrooms. That news is RiskMetrics’ announcement (formerly known as ISS) that it will stop accrediting board education programs as of March 1, 2010.

This is pretty significant, since RiskMetrics has been accrediting director programs since 2001 making the accreditation a part of its Corporate Governance Quotient (CGQ) rating system. The fact that it had the power to recommend board or director withhold votes to the 1,500-plus institutional investor client organizations it advises when voting shareholder proxy ballots made most boards and directors aware that there was a “premium” that they attend board educational events accredited by RiskMetrics. When ISS (Institutional Shareholder Services) launched the accreditation program, it felt that education that met its guidelines offered exposure to broader debate around corporate governance best practices. As most of you know, Corporate Board Member is a significant provider of boardroom and governance education and welcomed the review of our boardroom programs. We were always happy to report that RiskMetrics and its predecessor, ISS, viewed the quality of our programs in a very favorable light.

Why the RiskMetrics change you may ask? Well here is their stated reason:
“Over the past several years, we have seen tremendous improvements in the quality and quantity of such programs. Director education programs are also becoming more specialized, looking at finance, risk oversight and other aspects of the director's job in addition to corporate governance. Recent changes in disclosure requirements will provide investors with more detailed information about the qualifications and backgrounds of board members. In light of the increased professionalism and specialization in Director Education, we have decided that there is no longer a need for us to accredit such programs.”


RiskMetrics went on to say that it will soon be introducing the successor to CGQ, titled Governance Risk Indicators™. Governance Risk indicators presents a new, transparent global methodology for rating corporate issuers on their corporate governance structures, based on best practices as encapsulated in RiskMetrics’ benchmark policies. Market participants will also be able to identify and suggest improvements to the methodology, which will be evaluated annually in parallel with RiskMetrics’ policy updates. As it is closely aligned with the organization’s proxy voting policies, the new rating methodology does not include a factor related to director education. Find more information on Governance Risk Indicators.

So what does all this mean and should we be happy, sad, or indifferent? Well, I assume if you’re a corporate director then you are mostly happy. None of us like being told we have to do something, so obtaining some relief from the CGQ is liberating. At the same time, none of us really knows what to expect from the SEC’s new qualifications and experiences disclosure, which might eventually evolve into a similar emotional weight. Some directors, who really value the focus that ISS brought to getting educated in the boardroom will feel like I do—a little sad.

With all the things that RiskMetrics/ISS did that got on companies’ nerves, their focus on education was a good and important thing they championed. This may sound selfish, being in the board education business, but I will miss its commitment to quality education. I have a fear that every opportunistic provider will now hang his or her shingle out as an expert board trainer or, worse yet, we will see numerous groups creating certification programs that lack merit and/or muscle. Frankly I hope the stock exchanges or the SEC will consider how best to fill this void.

To RiskMetrics and ISS, its predecessor, I say thanks for the moving the snowball down the hill for the last nine years and we’ll do our best to take it from here. At the same time, I know you’re not just walking away from the importance of board education, even if it is not a direct part of your new Governance Risk Indicators. Good or bad… you just weren’t created to act that way! 

One of the areas of focus that was part of the SEC’s recently expanded Governance and Executive Compensation Disclosure Rules that go into effect on February 28, 2010 (http://www.sec.gov/rules/final/2009/33-9089.pdf) was the requirement for companies to disclose whether, and how, the nominating and governance committee considers diversity in its board composition. I must admit that while I wasn’t surprised that there was some kind of disclosure related to board composition, I think what we will see in this year’s proxies will be very interesting.

First let me lay some groundwork that the issue of board diversity is not new to us. Last May, Corporate Board Member hosted a Boardroom Diversity Symposium designed to educate diverse (gender and ethnicity) board candidates about what it takes to serve as a corporate director from the perspective of existing board members. In addition, we invited U.S. publicly held companies’ nominating and governance committee chairs to come and network with these diverse candidates in the hope that those who felt there was a shortage of qualified minority or women directors could be able to network among this talent pool. We ended up with an audience of approximately 130 attendees—the majority of whom were candidates and existing diverse board members. We had very few nominating and governance chairs in attendance, even though Corporate Board Member’s annual What Directors Think research conducted jointly with PricewaterhouseCoopers shows that almost 40% of current board members feel there is a shortage of qualified diverse candidates. This lack of standing committee chairs was unfortunate, because it created a missed recruiting opportunity for many boards who feel challenged to find the right diverse candidates. To complete my background on this topic you may want to scroll down the The Board Blog sequence to May 2009 and read about the event and some companies that gave eye-opening presentations to a very receptive audience.

So with all that background and some serious efforts on Corporate Board Member’s part (including forming a Diversity Council in 2009) to bring a bright light to this important topic, why do I think that this disclosure will be so interesting this year? First, there is no SEC-mandated definition about what board diversity is or isn’t. The SEC mentions factors that boards can consider such as: professional experience, education, race, gender, or national origin. Most of us link ethnicity and gender to the term “board diversity,” but the expanded SEC rules should create some creative board diversity proxy disclosures.

Second, I wonder, after reading the disclosure language, if it wouldn’t be better for boards to have a formal policy on diversity going into this exercise. I say that because if you do, you will need to describe how the nominating and governance committee implements and assesses the effectiveness of that policy. It seems to me, if you aren’t very effective that it would just be better to have a statement on how the nominating committee looks at diversity in board composition and save being scrutinized on its effectiveness. The point here is that you will have to define it, and if a formal policy exists, you will have to defend it.

All that being said, and knowing the background of Corporate Board Member’s support of diverse boards, I feel it’s important to reiterate my stance of how diversity contributes to being an effective board. A simple answer might be to review the experience of Denny’s Restaurant chain. A recent book (The Denny's Story: How a Company in Crisis Resurrected Its Good Name and Reputation by Jim Adamson) written about its experience of being insensitive to diversity throughout the organization, outlines how their lack of understanding about the importance of diversity led to well-publicized lawsuits. Denny’s remarkable turnaround and current insight into why a diverse board is important and how it revitalized the company and staff tops any lecture or research we could offer on this topic.

I like to look at board diversity this way… One of the most important attributes I want from my collection of board members is diversity of thought. Diversity of thought at the board level will mean that there is more sensitivity to a variety of risks; that there is a better understanding of markets, employees, and suppliers; and it positions the board to be more helpful in a multitude of situations that many management teams might not be familiar with (a la Denny’s). I support the SEC in the sense of agreeing that how we get there and how we define diversity can and should be different for every company, but just the mix of markets/customers, employees, and suppliers suggests that board composition should translate into gender, race, and national origin representation.

In closing, diversity, particularly on the board level when inviting someone into the “club,” is still a very difficult topic for many directors and companies to discuss openly. Yet, we have made progress over the years, and it seems that this disclosure rule will push the envelope further. Good luck with your disclosure statements and quest for diversity of thought. As I said… this proxy season will be interesting! 

Just as we are debating the merits of the SEC proposed disclosure of director and nominee qualifications for board service in the blog below, the SEC formally adopted its expanded governance and executive compensation disclosure rules on December 16.  The bad news is that abuses by those who embellish their bios as well as the tendency for those reading resumes to overanalyze what is written will continue. So we’d first better prepare ourselves to overcome those challenges. The good news is, even though I still view the formality of the qualifications exercise as a waste of human assets, time, and money, the act of requiring boards to give careful thought to who serves and what skill sets they bring to the board can only be a positive to improving boards overall.  

I would have preferred that director qualifications not be regulated, but I understand that too many outside groups felt that with all that has occurred, director selection and board composition must be flawed—so much so, that the withholding of votes and board evaluations would not be demonstrative enough to provide the kind of change the public and Congress demanded. So we find ourselves with a bunch of new disclosure rules that it appears will be in affect for the 2010 proxy season.  I plan to address these piece by piece or disclosure by disclosure over the next several blogs.  We will also be covering them in our “This Week in the Boardroom” show as well on www.boardmember.com.  If you can’t wait and the excitement is just too much, you can go to the SEC website and read it for yourself.  For now, here is one excerpt I wish to address further:

“Under the proposed amendments, a company would be required to disclose for each director and any nominee for director the particular experience, qualifications, attributes or skills that qualified that person to serve as a director of the company, and as a member of any committee that the person serves on or is chosen to serve on, in light of the company’s business. In addition to the expanded narrative disclosure regarding director and nominee qualifications, the proposed amendments would require disclosure of any directorships held by each director and nominee at any time during the past five years at public companies and registered investment companies, and would lengthen the time during which disclosure of legal proceedings involving directors, director nominees and executive officers is required from five to ten years. As proposed, this expanded disclosure would apply to incumbent directors, to nominees for director who are selected by a company’s nominating committee, and to any nominees put forward by another proponent in its proxy materials.”

One of the things that you get to do on the SEC’s website is to read the rationale that went into the final regulations.  I’ll never be swayed that this final announcement isn’t a case of the pendulum swinging too far, but once again I’m bolstered by the meaningful thought process that the SEC exercises in having to weigh the various interests of Congress, American businesses, and outside investors.  It’s a difficult position. The SEC did not rule on the early proxy access proposals, which tells me that even more thought is being given to that issue, to make sure those delicate rule changes don’t have unintended consequences that could be damaging to our corporate structure over the long term.  In the end, I wish that the final announcements might have been different, but now it’s time for each company management and board to take the regulations and make prudent disclosures.  Let’s hope my fears are not founded and the end result just creates a more thoughtful nominating and governance committee.  Investors have made a big step forward in getting heard and prompting action.  Let’s see what happens next.

One of the published SEC board of director proposals titled “Proxy Disclosure and Solicitation Enhancements” put out for comment this fall has a section labeled “Enhanced Director and Nominee Disclosure,” which is crafted to improve investors’ ability to evaluate an existing board’s composition and outlines qualifications disclosure requirements for new board nominees (http://www.sec.gov/rules/proposed/2009/33-9052.pdf). Specifically the proposal states:

"We are proposing that, for each director or nominee, disclosure be included that discusses the specific experience, qualifications or skills that qualify that person to serve as a director and committee member. The types of information that may be disclosed include, for example, information about a director's or nominee’s risk assessment skills [emphasis added] and any specific past experience that would be useful to the company, as well as information about a director's or nominee’s particular area of expertise and why the director's or nominee’s service as a director would benefit the company at the time at which the relevant filing with the Commission is made. This expanded disclosure would apply to incumbent directors, to nominees for director who are selected by a company’s nominating committee, and to any nominees put forward by other proponents. Regardless of who has nominated the director, we believe a discussion of why the particular person is qualified to serve on the company’s board would be useful to investors."

There are several more paragraphs outlining the look-back time period and how to disclose any legal proceedings but I spared you because I am sure you get the picture. Personally, I think this governance or investor improvement exercise is a waste of time and has the potential to be grossly misunderstood or abused.
But to support my theory, I first must ask you to buy into the following assumptions. If you can’t concur with these assumptions, I suspect that you will not agree with my hypothesis. 

1. History tells us that there is no direct (or indirect) correlation between who is a great director behind the boardroom doors and who is not a contributor at board meetings based on how meaty their bio looks or how accomplished they might be in their profession.
2. If my company goes as far in this qualifying process as to identify me as a key contributor to the audit committee with superior accounting and risk management skills (as asked), and then I choose to leave the board, might one surmise that the audit committee is weaker by my departure unless an equal or better qualified audit candidate takes my place.
3. Any corporate secretary, well-versed securities or proxy lawyer, proxy solicitor expert, or good public relations guru will be able to make a director bio or qualifications paragraph look fairly impressive. Especially if you add in the board education one attends coupled with the professional accolades that probably contributed to getting them the board seat invitation in the first place, then no one should be surprised that corporate spin doctors will make most directors appear infinitely qualified. (whether they are or not)

So assuming the above, where does that leave us if this coming January when we find ourselves with the SEC requirement to disclose director qualifications starting with the 2011 proxy season? The truth is, I’m not really sure. If I look at the potential extremes, it either leaves us with a further* costly proxy disclosure exercise that neither the retail or institutional investors take seriously or bother to read and hence is rendered somewhat worthless, or at the other extreme, it might be a mass overanalysis of each director on the merits of his or her proxy qualifications bio, which could lead to additional criticism of the nomination process or even to board ineptitude lawsuits.

I don’t want to this blog to sound like I am so pro-company that I can’t weigh logical arguments on this issue. I am supportive of Mary Schapiro’s efforts in changing the status quo and lord knows there are a lot of boards that need a push to change. But I am very skeptical on what the positive end result will be of this proposal and the subsequent yearly exercise.

Maybe my biggest fear is that this is just another burden to America’s public companies and another deterrent to any private or foreign company wanting to list in the ole USA. Our country’s financial debacle has virtually greased the skids to permit seemingly any pro-shareholder proposal to be advanced and discussed regardless of it long-term merit. If you’ve ever served on a board and witnessed the dynamics of what goes on behind the closed doors of a corporate boardroom, you know the pendulum has swung too far on this proposal.

*(I say further to go along with the thousands or millions of dollars a company might spend on proxy solicitors to ensure the company slate has the best chance to be reelected, because how would you feel as an incumbent director if you know you will have X-number of no votes from RiskMetrics due to a past sin?…Is your company going to sit still and let its current directors get voted off the island because they instituted majority voting and because Proxy 452 will no longer let brokers vote discretionary shares for the election of directors? I Think Not!)

Corporate Board Member just finished hosting its Director Peer Exchange in Washington, D.C., and we came back with some great experiences. After five years of holding peer exchanges in NYC just for committee chairs, this was the first time we held a peer exchange open to all board members who sit on committees, and it proved to be just as beneficial to the committee members as it has been to the chairs. In addition, a new feature at this event was a session for chief executives to discuss CEO/board relations. I facilitated that discussion, and can assure you we had plenty to talk about, starting with everyone’s feelings about the various legislative proposals to mandate the splitting of the CEO and chairman roles. (See my two earlier blogs on this issue: Will Mandating an Outside Chairman Solve Anything? and Mandating Split CEO/Chairman Roles – Part II) 

Actually, most of our time was spent discussing the CEO’s relationship with the chairman or lead director, and during the discussion summary period, probably the most telling thing was that everyone in the room agreed that this relationship was unique to each company, and therefore, didn’t fit into any “cookie-cutter” solution or best practice mandate.

For example, we discussed founders who initially served as CEO/chairs who later moved to just chair but still remained very active. There were other situations where the existing CEO requested that the previous CEO sit on the board even though he or she had retired. We also discussed family situations, where the family members still owned a majority of the stock and one or several members still served on the board. We even heard about an entrepreneur who, after holding the various executive chairs, finally had to move his office out of the headquarters to emphatically demonstrate that he had officially handed the reins over to the CEO. We heard about difficult cases where retired CEOs were disruptive to the board governance process when they still occupied a board seat after officially leaving the company, as well as positive stories where those subsequent relationships were very productive.

I went into the peer discussions with the strong feeling that some legislation will be enacted regarding the CEO/chairman roles and contemplating how really onerous it would be if the role split was actually mandated. During the course of the morning, I must say that my eyes were opened wider.

The more I take the time to step back and really look at the ramifications of the proposed bills by Congressmen Schumer, Frank, and Dodd, the more frustrated I become that the governance and boardroom changes that are being proposed are not strategic, but are, unfortunately, simply political. What is particularly sad about that is we have seen signs of a much different and improved governance tone in the boardroom today. A majority of corporate directors are engaged and we have some previous regulatory and legislative changes to thank for that. The fear is that some of the proposed legislative changes will swing the pendulum too far. I understand that this is on the heels of a terrible financial debacle that happened right under the noses of some of our most visible companies and their boards, but it won’t help the country to recover if we create a corporate board system where the best candidates won’t want to serve and tomorrow’s new public companies won’t want to list in the U.S.

Memo to Schumer, Frank, Dodd and Schapiro: A one-size-fits-all governance solution may create more problems than it solves. We all believe some change is in order...so let’s make sure it addresses the true problems with our system and isn’t just a way to appease the angry mob for the moment. 

It has been an interesting several weeks for anyone who is curious like me about the inner workings of corporate law and its effect on the boardroom and governance as a whole. First, we had Stephen Lamb as our knowledge partner on “This Week in the Boardroom” discussing the liability of serving as a director on one of today’s public company boards. Stephen is the former Vice Chancellor of the Delaware Court of Chancery and is now a partner with the law firm of Paul, Weiss, Rifkind, Wharton & Garrison LLP. Then yesterday, I had the pleasure of partaking in some governance banter with William Allen, the former Chancellor of the Delaware Court of Chancery and Director of the Center for Law and Business at NYU. Bill serves on Corporate Board Member’s Academic Council and visited This Week in the Boardroom as a guest on our education segment.

In the past, Bill and I have had what might be described as some emotionally charged discussions about when boards should seek outside advisors if they are facing a critical board decision that could significantly affect a company’s performance and shareholder value. Now I’m not talking about an M&A transaction or a FCPA lawsuit, where outside counsel and/or forensic investigators are a must. But say there is a billion-dollar capital expense that involves technology that forms the basis for a new company direction, or a proposed $100 million off-balance-sheet transaction that is not standard in the industry. In this very litigious and ever more transparent bubble in which directors must govern, is there any guideline, both “liability-wise” and “health of the company wise,” that says “our board doesn’t have the expertise in this area even to ask the right questions, so should we get professional help?” And even if you forget the personal liability issue, many fear the company or director reputational blemish more than the remote chance that you would be personally liable.

Actually, Bill and I agree on most of the foundations from which to make that decision. Those are:

1) Start with selecting and trusting the right management. If you are on solid ground with trusting the CEO and key officers, you can feel very confident with the background that they provide for important decisions.
2) You can’t hire outside advisors for every decision the board doesn’t feel comfortable with. Yes, you have the duty as a director to be informed and ask questions, but the law does provide for a board to make mistakes if it makes an honest effort to be informed. (Again, that may not help a reputational disaster, but many of those are hard to predict anyway and you just can’t tiptoe around the boardroom and expect to be a good board.)
3) You are on the board, at least partially, because of your good judgment. Not much these days is really black and white, so using one’s experience and listening to your gut is often required.

Despite our agreement on the above, we had trouble pinning down when the risk magnitude of the decision requires a board member to ensure (even past management’s information) that he or she is supporting the right recommendation or direction and not potentially putting the company in financial or reputational peril. After 20 minutes of debate we jointly acknowledged that while those situations do occur, there is no way to create a standard or guideline that covers when to seek paid professional advice to help with board decision making.

Furthermore, as we all know, hiring outside advisors is no guarantee that you will have solved your informational gap and will blissfully walk away fat, dumb, and happy. As stated above, you would be equally foolish not to use professional advisors in many governance and operation scenarios, but deciding when it makes sense is not something on which this blog will be able to give you absolute guidance. My best advice is to recount a discussion a director had with me in my bank leadership days after we recommended to the board that we truncate customers’ checks and then just send them an electronic listing without the actual checks. His words were, “This sounds like a giant dissatisfier for our customers, but I trust that your team has thought this through.” Fortunately, for us, we had!

I’m doing my best to understand what is evolving in front of our very eyes with respect to controlling compensation or, in some cases, controlling the risk of excessive executive or incentive compensation. The Federal Reserve has just put a new proposal out for comment that would mandate guidelines for all banks on what is “sound” incentive compensation policies. We’re also recently seen the Obama administration through its Pay Czar Kenneth Feinberg cut base salaries of executives from seven companies’ that have benefited from our tax dollars’ rescue program. And while I’m sure the general public is applauding this hard stance, I sit here very worried about what the long-term ramifications will be by either of those actions.

Immediate questions are: 

• Will this mean the very companies that need the best minds will now lose their top talent, particularly talent that has been cultivated for many of the corporation’s key top jobs?
• Are we putting any of these companies at a disadvantage versus their competitors at just the wrong time and, in essence, sending them into a dreaded death spiral?
• What about a company, or worse, a foreign company that was giving consideration to listing or going public on one of our esteemed U.S. exchanges? Does Sarbanes-Oxley and the new compensation rules drive valuable listings away from the U.S. business environment?

I honestly don’t know the answers to the above questions but they are real concerns. A crystal ball would certainly be helpful so that we could eliminate all us “Chicken Littles” who are warning that the sky is falling. Or maybe the best we can hope for is that when we see signs this might have been a long-term mistake, that we are confident enough to man-up and make the appropriate changes to make things right. The true growth of the U.S. economy may depend on it!

Now, as promised in an earlier blog, here are the responses to the questions asked during the Mike Halloran/Harvey Pitt session at Corporate Board Member’s Annual Boardroom Summit earlier this month. We only have Mike’s answers so far due to Harvey’s busy schedule but we want to get those to you as quickly as possible. Enjoy!

Q: When do compensation programs cause "material risks" to a company?

Mike Halloran: When they are structured to produce short-term performance(e.g., immediate revenues, fees, bookings) in a business whose performance is properly measured in terms of longer term performance(bookings of loans to go bad over five years, fees on deals that result in liabilities in connection with the deals over a few years,etc.). American business should ask itself over what period of time its performance should be properly measured and should structure its compensation, particularly the incentive component, to match that.

Q: NYSE said that biggest challenge today is to rebuild trust in our capitalistic system. They (NYSE CEO Neiderauer) also said that trust takes a lifetime to build up but it can be destroyed in a day. In the wake of Madoff... how can the SEC build up trust again?

Halloran: This is of course, a personal issue for me, because I was at the SEC during 2006-2008 and never even heard the name Madoff even though the entire Division of Enforcement reported up to me for the chairman. The SEC in my opinion is already building back up its reputation under Mary Schapiro; the Enforcement Division is ever so aggressive. However, to be credible, the SEC needs to figure out a way to bring in more experienced hands at various levels in various offices—even by bringing in retired people from the Street. If you read the Inspector General Report on Madoff, you will see one of the major problems is that the Enforcement Staff in the New York office under Mark Schoenfeld simply did not understand the type of index and derivatives trading in which Madoff was engaged, did not understand the markets in which he traded, and did not know what leads to pursue.

Q: The London Stock Exchange mandates "nominated advisers" (NOMADS) for certain list companies. Does this make sense for U.S. companies?

Halloran: I could be wrong, but I thought it was only the AIM part of the London Stock Exchange that required NOMADS. These are companies that elect to do an IPO on the AIM rather than the LSE—they are usually smaller companies with a limited following. The purpose of the NOMAD is similar to the purpose of having an underwriter in the U.S. to underwrite your IPO—that underwriter is responsible for due diligence obligations on the company under Section 11 of the Securities Act of 1933. My understanding is that the NOMAD system is designed to be, in effect, a substitute for that. But so far, I am just talking about IPOs. If the asker of this question is saying that AIM or even the LSE requires NOMads on an ongoing basis for listed companies, even after the IPO, I was unaware of that and really would like to learn more about it. I would think that if it were required on an ongoing basis, that it could be similar to a market maker for U.S. over-the-counter companies, but I am not sure.

First, I want to thank all of you who took the time to comment on the previous blog, by writing, calling, or approaching me at our Annual Boardroom Summit in NYC. Obviously, this is a much-debated issue and your feedback was very interesting and appreciated. In light of that, I felt compelled not to abandon this topic yet, since there were several folks that might have misunderstood my position.

The title of the last blog was “Will Mandating an Outside Chairman Solve Anything?” My comments were mainly directed toward the issue of mandating this decision, as well as the important point that title changes alone won’t provide the moxie a board needs to properly perform its duties.

What I perhaps wasn’t clear on is that I don’t oppose splitting the titles—and in fact, I support the separating of the positions when the opportunity presents itself and when there is at least majority agreement among the board members that it will be a positive move for the company. That’s not to say it’s the right decision for all companies, but I do believe in the long run that the presence of a outside independent chairman who doesn’t abuse the position (i.e., no company headquarters office or permanent staff) will provide a better corporate governance environment in which the company can be successful. However, as stated in the previous blog, if you think it is the short-term answer to a board’s problems, then you’re just kidding yourself.

In the course of doing research for statistical or bottom-line evidence that would support either side of this argument (you may recall none was found), I did come across an “educational campaign” organized by the Yale Millstein Center made up of over 50 corporate leaders, investors, and governance specialists whose charge it is to urge companies to bolster board oversight of management by splitting the roles in today’s corporations. It is called the “Chairmen’s Forum” and is headed by the retired vice chairman of General Motors, Harry Pearce, who currently chairs the boards of Nortel Networks and MDU Resources. There are several former CEOs like Harry Golub (American Express) and Stephen Wolf (UAL Corp.) who would be interesting to hear from on this issue, knowing their experiences on both sides of the table. My plan is to reach out to Harry Pearce or the Chairmen’s Forum and invite them to comment on splitting the roles in this blog. Like my experience of being in both roles, I value their opinions, and all interested parties should listen to why their experiences have led them to feel so strongly about this issue.

The reality is that corporations will continue to move toward splitting the roles, so no matter how you feel about it, it won’t be long before 90% of the Fortune 500 companies will have separate CEOs and chairpersons, even if it isn’t legislated or regulated. So don’t fight too hard for the right to choose whether the title will be lead director or chairperson, because there are more important issues pending and on the horizon. Like, say… proxy access and the election of directors for one!

And last, for anyone who was looking for the answers to the questions that Harvey Pitt and Mike Halloran didn’t have time to address at the Annual Boardroom Summit last week, I want to report that we hope to post some of their responses in the next Board Blog. And by the way, if you missed their session at Corporate Board Member’s Boardroom Summit in NYC, you missed one of the best panels we have ever heard on regulatory issues that affect the boardroom. Thanks Mike and Harvey for a great show.

The quick answer to this blog’s headline is “Yes.” It will satisfy the interested parties who feel that this is a big issue that will improve board governance. There are governance issues… and then there are meaningful governance issues. Mandating the split of the roles of CEO and board chair is just a governance issue.

On this topic, there is plenty of rhetoric, both pro and con, to help us get a good night’s sleep for months to come. The Corporate Library, a compensation and governance research firm in Maine, says dual-titled CEO/chairmen “tend to have less shareholder-friendly governance practices.” Likewise, folks at the Millstein Center at Yale are using their voice to encourage NYSE and Nasdaq to alter their listing requirements to mandate that when a dual-titled CEO leaves that post through retirement or other means, the roles must be split. From the other end of the spectrum, the Wharton Center for Leadership and Change Management states that after reviewing available studies separating the CEO and chairperson roles, it believes the split “has no bearing on corporate financial performance.” What’s a prudent capital markets investor suppose to believe? The fact is, investors really don’t care about who holds what titles as long as the company achieves long-term (or sometimes short-term) shareholder value growth. If splitting the titles means better performance and a higher stock price, than split away! Will it prevent fraud or mismanagement… right now I don’t think so, since two of our most storied corporate debacles, Enron and WorldCom, had separate CEO and chairman roles.

So as not to be left out of this so-far baseless debate, I too have an opinion to add to the fray. My less-than-expert opinion comes from my service as a president and director of a public company as well as my years of conducting director retreats and board evaluations for many various-sized corporations. It is as follows:

Do whatever you want with the splitting of the CEO and board chair roles, because it technically won’t change a thing.

Here’s why. If you as a board didn’t take command of your duties before you had an outside chair, then why would you think a mere title change is going to make things better? The reality is that the CEO and/or GC/corporate secretary completes most of the agenda, addressing what needs to be covered at the next meeting. Someone in the position of board leadership (titled or nontitled) should review the agenda and ensure that appropriate issues are on that list. As a director, I don’t need to be the board chair or lead director to make sure my board reviews the agenda and performs its other duties correctly. Furthermore, don’t ask me, or any other competent director candidate for that matter, to serve on a board if it isn’t going to fully perform its function of representing the shareholders—whether that entails requesting (or sometimes telling) the CEO what needs to be on the agenda, or exercising any other right I have as a corporate director overseeing the company’s operations. Hello…..this is not about titles… this is about action. So if your lead director couldn’t do it before, what makes you think this new title will provide him or her a new suit of courage to become more involved? So go ahead, mandate the split of the CEO/chairman roles and see what it truly gets you. Maybe I’ll be surprised and this whole scenario will mimic the Wizard of Oz when the cowardly lion was given a badge of courage and off he went to rule the forest. Come to think of it, forget mandating the title split—maybe we should just follow the yellow brick road.

One last point that sticks in my craw. These debates seem to promote a “we” versus “they” mentality, often pitting management against the board in a struggle over control. In my mind, both parties need to look at any governance challenge as an “us” issue. The best boards at the best-performing companies have directors and managements that work well together, pulling in the same direction. Too many times, outside activists paint CEOs as greedy and controlling. I’m not naïve enough to think those CEOs don’t exist, but they are clearly a minority. If both sides respect each others’ duties and roles, I think some amazing things can happen to the company’s bottom line and stock price.

As we prepared for the next “This Week in the Boardroom” program (thanks to everyone who has tuned in, we’ve had great feedback), we debated several topics on which to focus, one of which was CEO succession. If you buy into the theory that one of the most important and foundational duties of the board is to select and retain a highly competent CEO to lead the company, then CEO succession is one of the most critical tasks of the board. Yet if you look at the board research that Corporate Board Member (in conjunction with PWC) and other governance groups have done, it consistently ranks as the duty directors say they fail at the most. And I’m not talking about a handful of disappointed directors—for the last 5+ years, almost 45% of corporate directors have said they are unsatisfied with their management succession plan. No other important governance function gets a lower grade than succession.

Why do directors beat themselves up year after year without showing any statistical signs of improving the process? Well, I’m not 100% sure, but I do have theories that are supported when we specifically asked directors why. First, no CEO, including me, wants to accept their mortality or thinks that they are going to fail or get hit by a bus. So it’s not on their radar. Second it is an awkward topic to bring up to the CEO, especially if you just brought a new one on board. Most directors I’ve talked to say it’s not a meeting agenda item or a planning retreat topic, and many feel that they’ll handle it “when the time comes,” most specifically, when the CEO is nearing retirement. Nice idea, but most of us recognize that it doesn’t always work that way, and if you’ve ever personally witnessed the difference between an organization that has a succession plan versus one that just wings it, please let my stock holdings be in the one’s that have a plan, because the shareholder value result from unexpectedly losing a CEO can be very hard on a company and its operations.

One company that can be the gold standard for why CEO succession planning by the board is important is the global burger giant McDonalds. In 2004 its directors were faced with the sudden death of then-CEO Jim Cantalupo and they immediately appointed insider and COO Charlie Bell as chief executive. Just 16 days after that appointment, Bell was diagnosed with cancer and within months was replaced by insider Jim Skinner. All this happened without a hitch and McDonalds’s board won the respect of a lot of board watchers and investors around the globe.

So it’s an uncomfortable and yet critical task for a company and its governing board, yet it is one in which a self-confident CEO can step in and take charge. Now I’m not going to propose that the CEO take ownership of selecting the next chief executive because I truly think that is the board’s job. But CEOs, if you want to help the company, let the directors know at one of the next board meetings or at the annual planning retreat that a viable succession plan is needed and that you’re ready to help. I assure you this gesture will be much appreciated and well received by the board. Boards that plan for succession will find themselves not only with the ability to make quick and sound succession decisions but in many cases, they will find they spend a lot less on CEO compensation packages than in situations where they conduct a harried search for a new leader.

So CEOs: Help the board feel less awkward and do what is good for the company and shareholders. Directors and boards: Follow what Nike has told us for years… Just do it!

I have been hearing from a lot of people after my last blog who have thanked me for simplifying the mystique around the business value proposition of social networking. Well, now that I have your attention on the boardroom technology revolution, I’ll take it one step further and talk about digital publications. First, though, I must make another admission that shows I am not terribly techno-savvy, namely that I do not own a Kindle (the digital gadget that is striving to replace hard-copy books and magazines). I’m amazed, however, at the number of people in their 50s and over that do use the device. I see people all over using these hand-held screens to read newspapers, books, magazines, and just about everything that currently comes in print.

So using that as a segue, I’m happy to report that Corporate Board Member magazine is now available in digital form. Currently we send the digital edition to about a third of our readership who receive the digital issue as a bonus, in case they want to read or reference an article when the hardcopy may not be available. If you haven’t seen this digital version yet, you should—if for no other reason than just out of curiosity. If you haven’t checked it out yet, just drop us a note with your email and we’ll gladly send one your way.

The bottom line is that even for a tech-challenged 59-year-old, the digital edition is very cool. You can turn the pages just like a physical issue and even click on links or answer poll questions. While I don’t see the publishing industry changing overnight to pure digital, seeing this edition gives a decent glimpse into the future of publishing. Right now, I’m not ready to give up my hardcopy altogether, but digital is a great tool when I’m on the road.

Another digital venue that Corporate Board Member is jumping into with both feet is on-demand webcast programming. For busy executives who find it hard to view television or want something that narrowly focuses on their existing need, (like board information) on-demand programming is the ticket. Starting Friday, September 11th Corporate Board Member will be launching “This Week in the Boardroom,” a weekly on-demand webcast series designed to change the way that directors receive information and prepare for their next board or committee meeting. That’s right, we are now providing a free, weekly program that will cover legislative and regulatory changes, boardroom events, and other governance issues that impact the strategic and operational decisions that boards and C-suite executives face every day. The weekly webcast is being offered in conjunction with NYSE Euronext and with the assistance of PricewaterhouseCoopers, our knowledge partner for the program. We just successfully finished our trial run and starting this Friday (September 11) you will be able to go to www.boardmember.com and click on The Boardroom Channel to view This Week in the Boardroom.

In addition to current events, my first guest on This Week in the Boardroom is scheduled to be Duncan Niederaurer, CEO of NYSE Euronext. I promise you, these 20 minutes will be well worth your time to be better prepared for your next board meeting.

Digital magazines and on-demand web TV focused on a specific niche—what’s next? Maybe a wristwatch that will buzz for directors when their companies are taking undue risk. You never know. Stay tuned!

Let me start this blog with a full disclosure. I have Twitter on my Blackberry, but have no Facebook or LinkedIn personal account. I have at least considered LinkedIn, but was scared off by knowing that I couldn’t keep up with any other new communication task beyond what I currently have today, so why set myself up to disappoint or be rude? The only reason I have Twitter is because my tech guy put it on my PDA so I could see who was re-tweeting this blog. (More on that in a moment) Personally, I have never tweeted and find the Twitter home page question “What are you doing?” to be just bizarre. I know people really get a charge out of following a celebrity or friend who lets them know that they’re going to the movies or just bought a new car, but I just don’t have time to be cool. So for those of you that have found personal and professional value in the art of social networking, I applaud you. As for me, I’m a slow learner and have not found the holy networking grail yet. (Although some might argue this blog is just one massive tweet!)

Now, all that aside, there is something very enlightening about how social networks can push content and information out to millions of people that you truly want to reach and who are actually interested in what you are doing professionally. Example: People have signed up to follow Corporate Board Member by clicking on Twitter, Facebook, and LinkedIn on our website. (www.boardmember.com) Every time I write a blog or we post a new interview on the site, a “tweet” or a Facebook posting goes out to our followers so they can click through to view that new content. Just think about that for a moment. Every business should be happy as a clam to have followers. And to make matters more interesting, let’s say I quote that the most recent legal research Corporate Board Member does with FTI Consulting shows that regulatory compliance is clearly one of the biggest issues concerning boards and general counsels in the next 12 months. Not only do we tweet that information to our followers, but FTI Consulting now has the opportunity to “re-tweet” this information so all their followers can gain access to the content as well. Networking is indeed a great term for this phenomenon… although it’s dubious how “social” it is, because it’s anything but social when you consider these distribution capabilities.

I joked about Twitter/Facebook/LinkedIn in the opening but what I’m about to say is very serious. Every director needs to know about the impact that these networks will have on their business. And this impact can be positive or negative. It may well become a major reason why boards will need to make sure they have a blend of skill sets and are diverse about knowing how our world is evolving and their strategic initiatives need to change along with it.

Really want to know what I’m doing right now?...... I’m learning something new that will make me a more effective CEO and board member.

It’s actions that count, not simply policies.

I haven’t hit the topic of compensation for several weeks, and if someone related to the media doesn’t write about compensation every once in a while they get the “shakes.” In fact, I feel better already, just thinking how I could continue to fan the flames and get investors and the general public into a feeding frenzy about executive pay. Maybe I’ll be like one of those local newspapers and find a performance-to-pay calculation that makes every CEO in America look lame and then the headline can read, “No CEO in America is worth what they are being paid.” Sorry readers, I just lost it there for a second, daydreaming what it would be like to have that much unbridled power.

I do have something of value to say about compensation, and it has to do with making sure that the board provides oversight by “staying above the trees or viewing from 30,000 feet.” One lesson I learned coming up through the corporate ranks that I tried not to forget as president was that it really doesn’t matter what you say about your compensation structure, if you ultimately reward people for doing something different. Let me offer two examples that describe what I mean.

Scenario #1
This scenario is very important for directors of global companies that have to worry about the Foreign Corrupt Practices Act (FCPA). If your company operates globally, it has a high probability of doing business in a third-world country that offers contracts by receiving bribes. Your company, however, has a strict policy that it does not pay bribes to obtain or retain business (and we know there are many good legal reasons for that, along with all the ethical justifications).

But consider this: One of the top division heads ends up with the year’s best performance and receives a huge bonus and promotion. Turns out he/she achieved that through payments under the table—a fact other division heads are aware of. What are the chances that one of those other sales heads will resort to similar methods to get ahead?

Scenario #2
A bank president has repeatedly gone in front of his branch managers and expressed how important it is for them to get out of the branch and develop new business. In fact, new business development in their market area is their No. 1 goal. Yet at the end of the year, those managers who were praised, rewarded, and promoted were those who had a good branch audit and didn’t have any compliance violations. How long do you think it will take the other branch managers to limit their calls and start focusing on having a good audit review?

 The bottom line is that compensation plans mold corporate behavior, and it doesn’t really matter what the CEO or board says if performers are rewarded by playing outside the rules. I promise you that the “actual” rules will be communicated and adopted much faster than any written or communicated policies once employees see how people get promoted or become wealthy. Directors should take the time to ensure that a compensation plan is structured to pay for desired performance, as well as making sure that it is administered correctly. This task is not easy, but it is still a critical duty for the board and comp committee. Remember: You are what you reward!

The proxy advisory firm wants your feedback. Go ahead, speak up!


You can’t do what RiskMetrics Group does as a proxy advisory firm and not ruffle a few feathers. Okay, okay, often it ruffles more than a few feathers, but it’s not like it’s going to disappear anytime soon, so it’s best to pay at least some attention to it if for no other reason than because blatantly ignoring its guidelines just may get you a withhold vote on your next annual meeting and election of directors. And with brokerage firms not being able to vote their “street name” shares without instructions (Proxy 452) and the proposed SEC election of director changes putting more power in the hands of institution investors, a withhold vote by a proxy advisory firm may well become a much bigger deal.

While all of the above is true and worth taking note of, this blog is letting you know that RiskMetrics wants your opinion on just what should be in its proxy guidelines next year. You heard me right… they want your input. If you go to www.riskmetrics.com you will see a survey called the Governance Policy Survey that lets you (corporate issuers) share your opinions about the 2009/2010 RiskMetrics guidelines. While visiting the website, you may be surprised to find all the other resources that are available to corporate directors. Its knowledge center, research, blogs, and other resources are chock full of relevant information for the interested board member.

I encourage you to take the time to complete the survey. It’s important that RiskMetrics gets feedback from sitting board members and senior officers. Now in doing so, I’m not promising there will be sweeping changes in next year’s guidelines, but I have had discussions with several of its powers that be who are genuinely interested in creating a better process for companies to be successful long term. Several years ago we (Corporate Board Member) wrote about how Institutional Shareholders Services (now RiskMetrics) was the 900-pound gorilla that, on occasion, seemed to bully companies into governance and boardroom changes. Today, I still see examples of where RiskMetrics’ policies take on a one-size-fits-all approach, penalizing companies that are truly trying to do the right and logical thing. (This one-size-fits-all challenge is a question on the survey.)

The facts are, you need to stand up and talk when you know you are right, and, equally important, you also need to reflect on RiskMetrics’ position, and try to appreciate that often companies and boards don’t realize the message they are sending shareholders and investors by their actions.

I hope this blog is not too wishy-washy because I hate to sound that way. My main point is to encourage you to give some serious thought to both completing the survey and embracing what RiskMetrics has to offer to make you a better director. Together we can work to ensure that logic will prevail as the proxy advisers develop new policies in these tumultuous times.

Under the label of celebrity business stories, many of you might have read that the SEC had brought insider trading charges against sports entrepreneur Mark Cuban. When he is not “Dancing with the Stars,” Cuban is known for roaming the sidelines yelling at opposing players and pumping up the crowd as owner of the National Basketball Association’s Dallas Mavericks. Well this story has a happy ending (for Cuban) so far, in that his lawyers have convinced the federal trial court in Dallas that he really didn’t do anything wrong with seemingly privileged information. Thus, pending any appeal, all charges are dismissed. While nobody should feel good about the facts that led to the charges, and you might call his escape “a technical loophole,” this insider trading spotlight does give me the window to discuss the topic.

When I’m addressing boards and, particularly, recently appointed directors, I always seem to get this look of confusion when I bring up the topic of insider trading. Oh I’m not suggesting that directors don’t know it’s wrong and that it is a punishable crime, but I do think that more than just a handful of public directors don’t fully get the connection that once you have privileged information that has not been released to the entire investing public, then you have “insider” information. That should be your trigger not to buy or sell the company stock. Insider information could come in the form of monthly financials (when your company only reports quarterly), knowledge of an acquisition, the company is being investigated for a fraud, or the fact that you’re about to have a poor earnings announcement. There isn’t enough space on this site to list all the particular issues that might constitute insider information. Hence the header to this blog: If you have to ask… don’t do it.

Most companies spend time with directors or set up internal rules with the general counsel so as to ensure that a board member doesn’t slip and get the company on the front page of the Wall Street Journal. There is also the option of setting up a 10b-5 pre-existing buy/sell plan, in which you predetermine dates where you will buy or sell the company stock regardless of its price at the time. Mark Cuban has the best lawyers that money can buy and loves the spotlight, particularly when he can “beat the government.” You on the other hand, should appreciate a low profile and not have great expectations of getting rich off the stock of the company on which you serve as a director. If it happens… good for you. If you push to hard for it too happen, then I might be writing about you next time!

We can officially put to rest any rumor that SEC Chairman Mary Schapiro will not be aggressive enough or was only appointed as a placeholder. “Big wheel keep on turning. Proud Mary keep on burning,” might be the SEC theme song of 2009, as the commission proposed another set of measures intended to better empower investors and improve public company corporate governance through increased proxy disclosure. Truthfully, I commend Mary Schapiro and support her mission to promote change in a system that is far from perfect. As I’ve stated before, though, I worry about the speed of the change and the unintended consequences that might result if the long-term aspects of these changes are not fully considered or if the result only leads to the realistic empowerment of institutional and activist investors. Moreover, if these proposed events result in significant board membership changes over the next few years, particularly within audit committees, then I am justified in being a concerned investor.

All of you who read the last board blog about making your voices heard should consider that advice repeated on this announcement: You have 60 days to view and submit comments on the commission’s proposals. As you consider your response, I’ll offer my perspective on one section of the rule revisions that affects companies’ proxy disclosures, specifically, the disclosure of the qualifications of directors, executive officers, and board nominees.

I understand why shareholders want more information on who they are electing to represent them in the boardroom and to provide oversight to their investment. I’ve often wondered why directors don’t play a significant role in annual meetings so shareholders can judge their competencies by how they handle themselves and answer questions under pressure. That is starting to change, but still, a majority of companies keep their board under wraps at public meetings versus showcasing their skills for all to judge. It will be interesting to see what the public’s reaction to the push for published director mini-resumes and justifications on why a nominee is the right fit for a particular board at a particular time. I dare say some of the country’s best directors don’t look good on paper yet they are superstars in the boardroom. And I’m sure if a nominating/governance chair wrote, “Joe Smith is the best director on the board because he asks management the tough questions,” it wouldn’t be well received by the members of the unofficial proxy review contingent made up of the few investors or governance gadflies who actually do read the entire proxy. In fact, I suspect every nominee will sound like a great choice when the lawyers put their finishing touches on the proxy.

So if you’re worried that future proxies will be so large they are printed as Volumes 1 & 2, I share your concern. If you think this rule change will inspire boards to give extra thought to why a new director nominee is the right person for the job, I am not sure that will happen, past what already is being done. If you think the scripted board qualifications disclosure more than balances the additional corporate dollars—and time—that will be spent on experts crafting substantive director and nominee qualification descriptions, then I have to respectfully disagree. And finally, looking at the bigger picture, if you think Proud Mary is giving it the good old college try, I’m with you 100%.

I’ve had several people and companies respond to my blogs that have addressed either the Schumer Shareholder Bill of Rights plan or the more recent SEC proposals centered on the election of directors. Specifically, people have asked, “What should we be doing to express our opinions, and where should correspondence be directed” What I’m going to pass along is not terribly enlightening, and you may have already figured out for yourself, but it will at least point you in the right direction if you need assistance.

First and most important is responding to the SEC on its election of directors proposal. The SEC has a formal process for comment, and I’m enclosing the link that will explain the proposal and how you should go about commenting. I view it as very important to respond as a director on behalf of a public company. Everything about responding is important. The volume of responses, the tone of concern, the logic for or against a proposal that might not been thought about…etc. The link is http://www.sec.gov/news/press/2009/2009-116.htm

The second and equally important step you can take is let your congressional representatives hear from you, starting with Rep. Schumer. You will see a list of organizations that support his bill on his site, and it might be argued that if you or your business is not from New York then your energies are best spent influencing your own state’s elected politicians or members of the respective committees that are dealing with the Schumer bill. Here are links to Rep. Schumer’s site and the bill and also a U.S. Chamber of Commerce website that you can get the names and contact information for your congressional representatives.
http://schumer.senate.gov/new_website/record.cfm?id=313468
http://schumer.senate.gov/new_website/contact.cfm

U.S Chamber Action Center (be sure to look down the page to find officials)
http://capwiz.com/chamber/home/

Other suggestions would be to contact the Business Roundtable and see how its members are responding to this important company issue. The Business Roundtable is an association of chief executive officers of leading U.S. companies with more than $5 trillion in annual revenues and nearly 10 million employees collectively. Member companies comprise nearly a third of the total value of the U.S. stock markets and pay nearly half of all corporate income taxes paid to the federal government. This is an organization that picks its battles carefully, but this could certainly be one of those battles to fight in Washington, D.C.
www.businessroundtable.org

Just to be clear, I’m not opposed to some of the proposed changes that are included in the SEC’s proposal or in Schumer’s bill, but for the most part, I don’t think they are well enough thought through at this point to be enacted and will result in 2009 being the year of unintended consequences for American corporate boardrooms. Good luck with your communications and please let me, as well as our readers and online followers, know if you have other meaningful suggestions. Most importantly “let your opinions be known both positive and negative.” It’s the American way!

Under the title of “Be careful what you wish for” I wanted to reflect just a moment on the issue of mandatory stock ownership for non-executive board members of public companies. Years ago, most of us supported a movement that corporate directors needed to have their interests aligned with those of company shareholders to make sure boards would not pass up opportunities to increase short-term shareholder value. This most often came in the form of selling the company for a premium, where directors would benefit along with shareholders because they would be less entrenched and fearful of losing their board directorship. Investors, particularly institutional investors and activists, gave kudos to managements and boards that were significantly invested in their own company in this way.

This concept was widely propagated and advanced by issuing non-executive directors stock options and often by instituting a mandatory stock ownership plan where directors were required to own a flat number of shares or a percentage of their annual board fees. Over the years, we’ve seen some directors’ share values grow well into the millions (though decrease significantly in the last year), in addition to receiving an annual retainer. Recently, these stock options have been replaced by restricted stock so the joy (or pain as the case may be) of ownership would be more deeply felt, which I believe has happened. While there’s a good argument that the increase and decrease in value portion of this compensation plan is working as planned, I worry about the ever-mentioned unintended consequence of putting board members in such an upside risk/reward situation, and what kind of behavior, mostly by the result of human nature, we are incentivizing.

As often happens we may have pushed the pendulum a little too far, and I’m worried that this alignment of interests has skewed board members’ risk tolerance and taken their eye off risk—or at least made their vision a little blurry. This thought was bolstered when I read an interesting contributed article in Corporate Board Member’s Weighing In section by Fran Stoller, a corporate and securities attorney at Loeb & Loeb titled The Case Against Stock Ownership Requirements for Directors. It is definitely worth a read. In recalling her own experiences, Fran makes a real insider’s case for rethinking ownership requirements for boards.

Here’s the bottom line. When the subprime companies were generating revenue hand over fist, I wonder whether directors were focused on the stock price rising (arguably a good thing for shareholders and themselves in this case) when they really should have been asking the tough questions about long-term impact of subprime. Again, human nature has proven that if you incent me to look at something that affects me personally—I will. And I don’t buy the notion that board members are already wealthy and money doesn’t matter. No one ever has enough, and we most often are measured by how much we can collect, even if we are also good at giving it away. Fran makes another argument for how it affects the diversity of boards that I don’t have the space to discuss in this blog.

In conclusion, let me offer this. I think there is a good chance that we are out of balance with director compensation programs. Yes, I think board members are underpaid for the risk and exposure inherent with the position, but I’d like to see more money in either retainer or meeting fees and less concentration in stock. We need to focus boards at the task at hand of ensuring good management and overseeing risk. I agree that too much incentive can lead people to misprioritze their foundational duties.

I just recently spent a day moderating some very interesting panels on enterprise risk management (ERM) with around 70 officers and directors at the New York Stock Exchange. The occasion was an educational event entitled Challenges and Solutions of Managing Risk: A Return to Enhancing Shareholder Value. During the course of that day we had the normal discussions about how difficult a task it is to manage ERM and who should have ownership of the process (since many feel it is broader than just an audit committee function). But beyond that, several panelists reminded us that risk is not always a bad word—in fact, most of our businesses are built on some type of risk/reward basis, and therefore, managing risks correctly can make for a very successful company and happy shareholders.

These sessions provided many intellectual discussions on risk—probably more thought-provoking than most board risk monitoring discussions I have participated in recently—and while I could write about any number of interesting discussions, I wanted to talk about one in particular that seemed to resonate with me well after the meeting adjourned.

I am a skeptic (a pleasant skeptic, but a skeptic nonetheless) that a board member of a larger company can possibly get his or her arms around monitoring risks and processes to manage risk when you have hundreds of different business or divisions of a company often operating in multitudes of different countries. A corporate director’s responsibility for just managing the Foreign Corrupt Practices Act (FCPA) portion of that risk seems impossible, and we’re just talking about one compliance act with probably a 1000 risks to monitor. So during the NYSE panel discussions, I asked the question: “What’s a board member to do?”

Much to my surprise, more than one director and adviser provided a plan of action that made real sense to me and therefore, is worth passing on. “Yes,” they all said, when looked at it in its simplest form, it is difficult for any director to monitor all of a company’s risk, so the solution involves taking the time to identify those risks that could cause a catastrophic loss and spend time talking about them. The board and management should have an understanding about which risks might just make the patient sick for awhile and which ones could truly kill or severely cripple the patient. This dialogue, together with some meaningful discussion on how to mitigate some of this risk and whether the level of risk is acceptable to the board, as representatives of the shareholders, is a very valuable discussion. And this point was made to me: While you’re listing the 15 most critical risks to your company, take the time to follow the same process with the 15 best opportunities from which your company can prosper. Several directors and officers professed that this exercise is cathartic and provides a strong foundation for risk management and the strategic planning process. 

Risk management is the second most important task of the board next to making sure you have the right management in place to lead the company. We all can learn from others—particularly if it will help us sleep at night and keep us off the front page of the newspaper.

In my April 1 blog, I cautioned current public boards to “Be aware… be very aware,” based on what I thought could evolve if both political and regulatory bodies decided it was time to revamp our current method of electing directors of public companies. At the time, even I didn’t think it could be upon us so fast, but guess what? With Sen. Schumer’s Shareholders Bill of Rights and the recent proposed changes by the SEC to federal proxy rules, on top of the proposed Proxy 452 voting changes, I’d say the perfect storm may well be just on the horizon. I confess I do not know all the ins and outs of every legal ramification of what has been proposed, but I do know the result could (and I repeat could) be quite ugly.

Here’s what we do know. The general public is upset with the subprime debacle, the apparent lack of leadership at the top of some of America’s most respected companies, the resulting economic downturn that has cost jobs and millions of dollars of people’s retirement funds, and finally the executive compensation that some of these CEOs make even when their company value takes a deep dive south. The general public is saying enough is enough, and telling their politicians to do something about this mess. In response, Congress does what it does best, and holds meetings to get to the root of the problem. The root of the problem is so complex that they do the next best thing, and that is, to tell the new SEC chair that they expect action and they want it now. Chairperson Schapiro, who was appointed to the SEC leadership position under speculation (somewhat unfairly) that she may not be tough enough for the cleanup job (which is like waving a red flag in front of a bull) says, “I’ll show you… action… and—boom!!! We have changes proposed to the federal proxy rules to get new representation on the board. What we end up with is proposals to revamp the election system coming from Congress (Schumer) and the SEC designed to give the “average Joe” shareholder more say in who represents his or her investor interests on the boards of today’s public companies.

Here’s what I would like to suggest. Everyone associated with the proposals, including those companies and directors that will be affected by the changes, please take a deep breath and take one step back. This is no time to make a knee-jerk decision on such an important change to our public company board election structure. We already see companies debating the merits of going public versus staying private, and I fear that both domestic and foreign companies that would have considered listing on a U.S. exchange in the past now feel that there are better alternatives for capital elsewhere, places without the rigid listing and federal requirements. Right now, I am candidly afraid of the unintended consequences that go with making a decision too quickly on how we fix our perceived problem. And by saying “perceived,” I don’t mean there isn’t a problem, but I’m still not sure the actions of a few aren’t wrongly painting our entire listing of public companies. I’m actually in favor of looking and revamping the current director election system, just not by adding millions of dollars of proxy solicitation expense and a new director election process that will make us yearn for the current system in 18 months. There are a lot of issues here, not the least of which is the federal-versus-state corporate law debate. Let’s hope the unintended consequences don’t outweigh the proposed changes themselves.

Wow, when I got the phone call today that Bill Seidman had passed away, my emotions ran amok. I felt saddened for his family and for all of us that he touched so strongly on a regular basis—he certainly will be missed. But almost instantaneously I smiled, thinking, "What an amazing guy," and began considering how lucky I am to have known and worked closely with this remarkable man. This is a life that shouldn’t be mourned but truly celebrated. If you look up the term "straight shooter" you would most likely find a picture of Bill Seidman. He said exactly what he was thinking, and to many, he was a breath of fresh air, even during his time as a public official.

Best known for his White House, FDIC, and CNBC cable news stints, many people don't know he was the publisher of Bank Director magazine and one of a small group of shareholders owning Board Member Inc., which publishes Corporate Board Member as well as Bank Director magazines. Bill was a regular on our speaker circuit, and to say that he was typically the crowd’s favorite would be an understatement. He had an amazing ability to take a serious subject and somehow make his comments humorous while still delivering an important message.

For me, with all due respect to the thousands of other bright people that have crossed my path, he was hands-down the most knowledgeable person with whom I had the pleasure to spend meaningful time. Whether he was explaining the currency in Turkey or arguing against Greenspan's monetary policy, there wasn't an international business subject on which he wasn't well versed and willing to share his opinion. CNBC didn't put him on the air just to be nice, Bill Seidman had a dedicated following of people who wanted to hear his opinion, and boy he always left his audience wanting more.

For the next couple of weeks, people will talk about how Bill Seidman led Congress and the country through the S&L crisis (that $150 billion seems like pocket change today) or how he put ethics first when he turned down a chance to play golf with Arnold Palmer and Jack Nicklaus because the government played a role in getting an FDIC-owned golf course ready for a Ryder Cup match. But personally, I will remember Bill for teaching me how to sleep soundly at night by remembering how I conduct myself during the day. Time will tell if the lessons will stick, but I feel great comfort in knowing that I have one of the best watching over me.

Bill Seidman, yours is a life to be celebrated, and thank you for just being you.

I just returned from facilitating Corporate Board Member’s first Boardroom Diversity Symposium, and there were so many valuable topics I’m not sure where to begin with what to pass along to other corporate directors—but here goes.

First, the turnout was a pleasant surprise, knowing the challenges existing at many companies with budget cuts and travel moratoriums. Boardroom diversity was an issue we wanted to address after a 2008 CBM survey reflected that almost 38% of current directors felt they had a shortage of “qualified” diversity candidates. Normally I would define diversity candidates to include diversity of thought, but in this case, we’re talking about gender and ethnicity. Frankly, I thought the shortage premise a little bizarre, so we decided to see for ourselves by taking on some new initiatives in this space.

We started by forming a Diversity Council made up of respected diversity associations and sitting directors (like Jack Krol, former CEO of Dupont and a Tyco Nom/Gov Chair, and Bonnie Hill, a well-known Home Depot director) and then proceeded to plan this symposium. Well, I don’t have to tell you what happened with the economy and travel budgets over the last year, but we were encouraged to persevere by our sponsors and selected readers. The result was a very uplifting two days centered on why a diverse board is a good business decision … and yes, this event confirmed there are qualified, diverse board candidates ready to serve if companies are willing to look in the right places.

Highlights of the symposium were an inspirational address from former labor secretary and current MGM and Coca-Cola director Alexis Herman and some lively sitting and prospective director peer exchanges. But the presentation that moved the audience most was the chilling and candid account by a Denny’s restaurants board member and GC about the crippling 1993 discrimination suits brought against the company by employees and customers and how a newly formed, diverse board rescued the company. The session featured a no-holds-barred discussion about why boardroom diversity is important from the very people who have the scars and results to prove it. There has been a book written on the experience that I would recommend to every board member titled The Denny's Story: How a Company in Crisis Resurrected Its Good Name and Reputation. In my mind, the “Grand Slam” is not only Denny’s featured breakfast item but also a fitting description of the chain’s successful recovery efforts, starting with the board having the courage to make changes that would restore its good name and save the company. Very cool stuff.

There are certainly other revelations I could talk about, but I’ll leave you with one last thought. Honestly, I’m not worried about diversifying the boardroom. All I had to do was stand up there on that stage and look out over the people I had met at that conference and know that that there are many people in that audience who will sit on a board sometime in the future. These were smart people who understood that the way to be invited to serve on a board is to bring value, and they are ready. I know boards are going to continue to become more diverse. We see it happening in the C-suite and in the boardroom every day. It may not be happening as fast as some people would like, but compared to the last 100 years, diversity is on a roll. I urge you to be a catalyst in helping your company embrace it and let it work for you.

We knew some kind of governance reform was coming and many of us hoped it wouldn’t be too onerous and/or too hastily developed without prudent thought. From what I’ve seen this morning before boarding a plane to New York, Senator Schumer’s proposed corporate governance bill may ultimately be described as both, particularly when we see simultaneous changes occurring at the SEC as well.

The most benign part of this proposed bill is the nonbinding shareholder vote on pay. “Say on Pay” is in place in other countries, and its impact on companies and boards to operate in the best interests of the corporation and the shareholders is minimal.

The bill’s suggestion of mandating a special committee of the board to oversee risk falls under the category of “developed without prudent thought.” Some of the companies that got in big trouble recently already had risk committees; therefore, mandating the existence of a committee doesn’t mean that a challenge is solved, particularly in an area as complex as enterprise risk management. I see this section of the bill as a knee-jerk reaction to a legitimate public outcry, but honestly, the biggest challenge that boards have today is overseeing risk—a problem that requires more thought behind it than just forming a special committee, which seems to be the answer for many governance challenges every time we have upset investors.

Risk management starts in the strategic planning process with management and boards setting acceptable levels of risk as part of the company’s business plan and then addressing the risk/reward of that plan, coupled the mitigation of catastrophic risk. It is important to remember, however, that boards are supposed to oversee risk, not manage it. Risk management is management’s job, and the last thing I want as an investor is for a group that meets six times a year at board meetings, and about the same amount of time for committee meetings, “managing” the company’s risk.

My biggest worry about the proposed bill is the effect of the mandatory annual director election regulation on corporate boardrooms, particularly in light of the other proxy and director-election initiatives that are bubbling up, such as Proxy 452 and the SEC’s loosening of the ability for shareholders to offer director slates. Taken together, we could find our corporations and shareholders in the perfect storm, rather than with a corporate panacea.

Finally, I’ve never been a fan of people that just criticize without offering solutions, so I’ll try and consider what I would propose if I were a concerned senator to improve the system that has the investor public in such a funk. If you have opinions or advice for me, I’d love to hear it.

I'm not sure that it’s politically correct to talk about a CEO guiding the board in an era where director independence is king, but I, among many others, recognize how important CEO/board relations are to a company’s success. This isn’t to say that the board doesn’t have duties and responsibilities it must administer on behalf of the shareholders, but almost any director I talk to acknowledges that with the complexities of today’s companies, there is no way to stay on top of their oversight responsibilities without the strategic nudging of their CEO and C-suite team. I refer to this as the unspoken CEO skill because it’s rarely discussed in public when a CEO excels at "guiding" a board to be effective, and I practically never hear that skill requirement listed in search criteria when boards look to replace their chief executive. Yet in today’s oversight-laden, corporate environment, the CEO is the board’s most knowledgeable adviser and, more importantly, is the first line of defense and protection over a director's personal liability.

Actually, I embrace the CEO guidance concept because I believe a director’s knowledge of a multibusiness/multinational company is going to be relatively shallow since they meet only four to 12 times each year for board meetings and about the same for the committees on which they serve. Considering most directors also have full-time jobs (often as CEOs of their own companies whose boards they, in turn, have to "guide") this just doesn’t leave a lot of time to oversee the plethora of issues facing public company boards today.

So the challenge is, how do CEOs develop skills for guiding the board without directors feeling they are being manipulated or advised on issues where they are strongly encouraged to be independent by best governance practices? In a future Board Blog we’ll dissect some of these guidance skills. In the interim, I urge you to think about your relationship with your CEO. While we don’t want to return to a past period of imperial CEOs, we do want the board/CEO relationship to be as collaborative as possible. If not, ask yourself why not—and if so, be appreciative and move on to the next critical governance issue.

NYSE Rule 452...It’s not a rule change that is necessarily on the tip of every director’s tongue but one could assume that it will have a much bigger impact than the current publicity that its getting. In a nutshell, currently brokers are given the authority for, and have traditionally voted, "uninstructed shares" (i.e., held in street name, where brokers ask the customers for whom they hold shares how they want to vote the shares, but many don’t provide any guidance) on routine matters at company annual and special meetings. Commonly, these votes are cast in favor of management’s recommendations, which include director elections—one of the matters heretofore designated as routine. Consequentially, director elections were rarely contested and a board’s membership rarely changed outside of the company’s slate.

Don’t look now, but we may be on the verge of a subtle change that could have a major impact on what board membership looks like in tomorrow’s public companies. Rule 452 proposes that director elections should not be considered as routine matters and would prohibit brokers from voting shares without shareholder instructions, which mean votes actually cast could be reduced significantly in many important elections. Now the impact of the rule change, in itself, may not seem that big, but think for a moment about the ramifications of implementing Rule 452 at companies that have adopted majority voting. Even more significant, consider the new SEC Commissioner Schapiro’s desire to open up the proxy director election process, which would allow shareholders easier access to nominate their own slate of directors. Put these corporate reform changes together and you can imagine a watershed type change in how directors get nominated and elected to public boards.

Is all this a bad thing? Well, I’m not sure from a macro sense, since we have witnessed many companies that could have been well served by a more aggressive, or at least better informed board, particularly when it comes to taking risk at the shareholders expense. I won’t argue that cases where the feared activist shareholder has successfully garnered a board seat have often worked out for the good of both company and its shareholders. Personally, I have seen this many times in the banking industry and often the change has resulted in a more savvy board and subsequently, more positive bottom-line results.

The unknown is what is at great risk here, and in its worst-case scenario, is what could get ugly. What happens to the collegiality of the board, and just as important, its relationship with management? I know directors are suppose to remain at arms length and be skeptics of management, but if I’m investing my own money, I want a board that can ask the right questions and not be afraid to say no, but in the end, has a great working and collegial relationship with management. If you look at the best-performing companies over time, that’s what you’ll find in their corporate DNA.

So my final thoughts are Be Aware...Be Very Aware of the implications of what changes are in front of you today. Are we getting to a point where one could see the most qualified board candidates not wanting to serve… or a board made up of directors with single interest agendas all focused on advancing their own governance or environmental views on every important decision? I honestly don’t think this is a Chicken Little warning that has no foundation but rather it is an issue that warrants your review that may be good—or terrible—for many public companies. All eyes should be wide open on what lies ahead!

Before people leap all over me for being flippant, I recognize the problem that corporations and specifically boards are having dealing with executive compensation. This really hits home with me when you look at our annual board research conducted with PricewaterhouseCoopers which reflects that over 65% of current directors feel that U.S. boards are having trouble controlling the size of CEO compensation. My first point today is while executive compensation is a problem in a select (yes, I do mean select) portion of today's companies, it is small potatoes to the challenges that our governance system faces to manage risk for the safety of shareholders. Compensation plans are part of that risk, but I hope that SEC Chairman Schapiro will not follow the route of the media and put pay package options ahead of the critical need to come up with a plan to help companies and their boards mitigate and manage risk. This problem starts with Wall Street's focus on short-term performance and the inherent idea that quality takes a second seat to meeting financial goals so as not to miss the precious whisper number and have your stock price hammered.

The fact is (second point) that executives are rewarded too handsomely when all markets rise and are penalized too much when all markets fall. I dare say that some of the best management performances of the decade are being accomplished as I write this blog, where shareholders are being saved hundreds of millions in value by a good management team making all the right decisions when responding to this crisis. These well-run companies are most likely at the top of their peer or industry group in performance even in a down market, and if I were their director or shareholder, I would be finding some financial way to say thank you. Yes, the shareholders' stock price went down, as did earnings, but that's what will happen when markets cycle. Last I heard there is not a market anywhere in the world that won't go through a cycle of being up... then down... then up. Down doesn't have to be dipping as low as we are today, but we live in a world where we must manage cycles that are unpredictable in length.

I'm standing in line with everyone else ready to pounce on the ridiculous severance packages or backdating fiascos that has made compensation such an easy target, but when I look at the real problem facing us today, it is managing risk. The SEC, along with the boards of today's public companies, play a major role in getting this problem fixed... so let's get on with it.