Posted April 27, 2011 9:46:04
Less than two weeks ago I had the privilege of hosting both our Risk Oversight in the Boardroom and the Compensation Strategies to Build Shareholder Value conferences held at the New York Stock Exchange on successive days. Both these sessions go right to the heart of the two major challenges facing boards today: risk management oversight and executive compensation. I thought I would share some of the issues and topics that seemed particularly interesting to me during the two days.
If I tweeted, which I don’t, (although we did have a Corporate Board Member staffperson tweeting out some juicy morsels during both events) I would have definitely tweeted about how Constellation Energy Group has organized and handles risk management and the board’s oversight. Interestingly enough, it wasn’t really the board’s duties that struck a chord with me, it was the way they make sure the business unit leaders accept the responsibility for managing risk at the business unit levels. First, let me set the stage. On our panel, we had a board member who serves on the audit committee in addition to the chief risk officer for Constellation Energy and during the session, they discussed how they worked together to manage and oversee risk. While that was fascinating, because I really thought they had their act together, the most telling part of their session was describing how they establish their company’s risk/reward culture. To make a long story short, they make sure that all the business managers understand that they are the front line of managing risk and while senior management and the board are always pushing to grow the company, they make sure that the risk thought-process is part of every business-unit head’s strategic plan and subsequent presentations. I’m sorry that I can’t do the session justice in this blog, but the presentation was very compelling and really gave you comfort that Constellation Energy knows what it is doing with regard to enterprise risk management. When the session was done, I felt the chief risk officer was going to get several new job offers and Ann Berzin, the board member, might receive a few new board seat offers.
And while I’m on the topic of the Risk Oversight conference, I have heard for years now that most people feel the audit committee should not be responsible for the entire risk management process. Most surveys overwhelming say it is a full-board function, or at least a shared responsibility, because we still see very few formal board risk committees outside of financial services. Yet in my own little survey talking to the directors in attendance, it seems like the audit committee is where most of the core risk management still resides in most companies. We did a session on “to have or not have a board risk committee” and while we heard from one company that had and one that hadn’t, I didn’t sense that the session had a definitive conclusion one way or the other. This fact in itself doesn’t surprise me, since we’re all advocates (at least I assume most of us are) of the premise that one size doesn’t fit all.
When it came to the following day with the topic of compensation, I felt even less secure in providing guidance to directors who seek our counsel on this topic at times. I’m comfortable with the basic structure of comp for most executive pay packages but the issue of “how much is enough,” and the discussion about a rising tide benefitting all boats whether you have excelled as a captain or not, was an interesting topic of conversation. Again, in our case study, we put the comp chair for CSX Corp. on stage with the company’s Head of Human Resources and Labor Relations, which gave us a good glimpse at how—when companies structure their inside resources correctly—departments like HR are tremendously valuable to a board’s duties of recruiting, rewarding, and retaining human talent.
What struck me most about the second day was not all the discussion around executive compensation and peer groups but the session on director compensation. I think it is safe to say that many directors struggle on how to give themselves raises, even though almost everyone agree that the job of being a board member has become harder, requires longer hours, and is involves increasing risk all the time. While I was sitting at the conference thinking that there isn’t much question about the need to address director pay in many companies, it struck me that it comes back to the same old concern: optics. This seems to be particularly sensitive when proxy advisory firms have such leverage with majority voting in place at many companies, as well as with new rules around voting discretionary shares for the election of directors in place. Believe me, there was plenty of talk around the frustration with ISS and Glass Lewis but I’ll save any discussion about what’s good and bad about proxy advisory firms until another blog.
My take is directors shouldn’t be shy about giving themselves a raise if their compensation is out of line with markets and peers. In most companies added director compensation is a rounding error. If you are still having problem giving yourself a raise, I suggest you go talk to your congressmen. The country can be a trillion dollars in debt and they seem to have no problem increasing their pay and benefits regardless of the optics. (Sorry Washington, I didn’t mean for it to sound quite that bad!) In the future, I think we’ll see more boards adjusting pay because some are really out of line, and as long as directors are reasonable, it won’t be an issue. So that’s where I ended up at the end of the day at the Compensation conference: Companies that are reasonable have no real worry about “say on pay” or proxy advisory firms. Yes, some greedy people have made it hard for the rest of us to do what’s right without worrying about optics, but in the end, most companies and CEOs themselves are overseeing this function well.
Look for Corporate Board Member to offer these risk and executive compensation events back-to-back again next year. I suspect these will continue to be the two most challenging duties for today’s directors and, hopefully, as 12 months go by, we will have many more positive case studies to choose from. Til then, remember that risk is not a bad four-letter work and it is best used when linked with the word reward!