Blog Alert 2013-2

Posted : January 28, 2014 4:17:34

by William Beer and Tom Kellermann, Alvarez & Marsal’s Global Forensics and Disputes Practice

A significant amount of our time is spent helping senior business executives understand the risks their organizations face from cyber attacks.  There are many surveys, statistics and war stories that can be used to help raise awareness, but perhaps the most significant event of 2013 that triggered a positive change in the way that many organizations deal with cyber security was when Lloyds of London released their 2013 Risk Index .  

In this report, cyber risk rose from position 12 in 2011 to the world’s number three risk overall. Rating cyber risk at number three created a lot of concern and even uneasiness amongst leaders and has helped to place it as a new risk that many board members are now beginning to confront.

However, many board members still feel out of their comfort zone when the discussion turns to cyber security.  There is a natural assumption that cyber security is only about technology and many leaders prefer to delegate the problem to their CIO or CISO.  This is a dangerous step to take, as cyber threats are evolving with far reaching implications that need board level visibility and support to ensure that they are being correctly managed.

Cyber threats can broken down into five categories:

1. Financial Crime - This involves organized criminals, using advanced methods and technology to steal money 

2. Espionage- Theft of intellectual property is a constant threat, and very frequently organizations are not even aware that it has occurred

3. Activism - Attacks are undertaken by proponents of an idealistic cause and aim to disrupt online business

4. Warfare - This involves countries attacking private sector organizations, in particular the critical national infrastructure e.g. Telecommunications, Financial Services

5. Terrorism - This overlaps with warfare but is undertaken by terrorist groups, attacking either state or private assets and could also be combined with traditional terrorism

Each of these categories requires specific skills, technologies and processes to properly protect one’s organization.  However, leaders must realize that in 2014, it is not a question of “if we will get attacked” but about “when we will get attacked” and it is critical to challenge and probe how their organization is approaching Cyber Security.

Five probing questions that can help:

1. Is the threat of cyber attacks on your corporate risk register, and covered in your Annual Report?

2. Do you have a cyber security strategy that is aligned with your business strategy and is it updated according to evolving needs?

3. Do you know how many security incidents you have suffered in the past year, and the cause of these incidents?

4. How much would a cyber security breach impact the organization, and can management demonstrate the rationale behind that assessment?

5. Where and what are the most critical assets? How does management determine which assets are critical?

For any organization with online interactions – which today effectively means all organizations – the upside business opportunities presented by operating in cyber space are clear, present and growing. Unfortunately, so are the downside threats.

Cyber Security is an investment needed to protect and maintain sensitive data, valuable IP and of course reputation.  Executives and boards need to be involved.

William Beer is a Managing Director based in Sao Paulo and leads the Cyber Protection practice in South America. Tom Kellermann is a former presidential advisor on cyber security and is a Managing Director based in New York and Washington, D.C.  

Alvarez & Marsal is a leading global professional services firm that delivers business performance improvement, turnaround management and advisory services to organizations seeking to transform operations, catapult growth and accelerate results through decisive action.  

Posted : January 8, 2014 10:30:34

by Anna T. Pinedo, Morrison & Foerster LLP

Almost three and one-half years after the enactment of the Dodd-Frank Act, the various federal agencies charged with implementation have made measurable progress and have, in the last several months, taken on the major regulatory actions in earnest.  In retrospect, 2013 may 
prove to be a watershed year for financial reform.  And the year is certainly ending off with a bang, in the form of the final Volcker Rule.  In 2013 alone, we have seen the final bank regulatory capital rules come together, as well as various proposals related to bank capital, such as a supplementary leverage requirement and the liquidity coverage ratio.  On the derivatives front, most of the rules implementing Title VII of the Act have been promulgated.  Of course, many of the details of the extraterritorial application of Title VII have only just been clarified through the Commodity Futures Trading Commission’s determinations regarding substituted compliance.  The risk retention rules relating to securitizations were recently reproposed and are expected to be finalized in early 2014.  Most of the regulatory framework applicable to mortgages has now been finalized.  This is not to say that there aren’t significant areas of regulation still to be addressed in 2014.

Since 2010, financial services clients have had to confront the challenges of addressing Dodd-Frank compliance.  We have worked closely with many clients since the promulgation of the Act, helping to organize their internal teams and orient them on compliance and implementation activities.  We have provided regular rulemaking updates to the in-house teams following discrete regulatory areas, or to the institution as a whole.  However, as each new final rule has gotten promulgated, it has only seemed to add to the complexity, rather than bringing with it any clarity or regulatory certainty.  In small part, just the sheer volume of regulatory change experienced in the last few years has been overwhelming, and with each new rule has come a series of new terms or acronyms.  
As with any foreign language having a dictionary to guide the way helps.  We have produced a Regulatory Reform Glossary to provide some insight as financial institutions try to make their way through the new U.S. and the European regulations.

A sampling of terms you’ll find in the glossary:

ADC Loans      
1-4 family acquisition, development and construction loans.  ADC loans are considered the riskiest type of commercial real estate (CRE) lending.  During the financial crisis, FDIC analysis shows that failed institutions had concentrations of ADC loans to total assets that were roughly three times the average of concentrations of non-failed institutions.

Chief Compliance Officer.  The CFTC’s business conduct rules require SDs (and MSPs) to appoint a CCO.  The SEC requires registered investment advisers, registered funds and registered BDs to appoint a CCO.  The CCO’s responsibilities differ depending upon the regulatory regime under which an entity operates, but they may include, among others, designing and maintaining a program to ensure compliance with applicable statutory and regulatory requirements; conducting periodic reviews of such compliance program; preparing periodic reports (which may be provided to a regulator, an SRO or a board of directors), and assessing the extent of the entity’s compliance with such requirements. 

Capital Requirements Directive IV.  CRD IV introduces significant reforms to the EU’s capital requirements regime for credit institutions and investment firms.  CRD IV will replace the existing Capital Requirements Directive (consisting of directive 2006/48/EC and directive 2006/49/EC) with a new directive and regulation: the CRD IV Directive (2013/36/EU) and the Capital Requirements Regulation (or the CRR) (Regulation 575/2013).  CRD IV aims, in conjunction with the CRR, to implement the key Basel III reforms including amendments to the definition of capital and counterparty credit risk and the introduction of a leverage ratio and liquidity requirements.  Member states must transpose the CRD IV Directive and apply its provisions from December 31, 2013.

Financial Transaction Tax. The FTT is a controversial tax that is proposed to be levied by certain EEA member states against transactions on the secondary markets. The FTT was proposed by the EU Commission in 2011. However, failing the cooperation of all EU member states, at present 11 member states (Austria, Belgium, Estonia, France, Germany, Greece, Italy, Portugal, Slovenia, Slovakia and Spain), through an enhanced cooperation scheme, have been authorized by the Council of the EU to adopt an FTT amongst themselves, which will be implemented by a means of a directive. The proposed FTT will involve a minimum 0.1% tax rate for transactions in all types of financial instruments except derivatives (0.01% rate).

Multilateral trading facility.  For the purposes of the Markets in Financial Instruments Directive, a multilateral system, operated by an investment firm or a market operator which brings together multiple third-party buying and selling interests in financial instruments in the system and in accordance with non-discretionary rules.

Single point of contact.  Under national mortgage servicing standards (NSS), mortgage loan servicers are required to provide borrowers with a single contact for addressing servicing questions and problems.   

View the complete glossary.

Anna Pinedo has concentrated her practice on securities and derivatives. She represents issuers, investment banks/financial intermediaries, and investors in financing transactions, including public offerings and private placements of equity and debt securities, as well as structured notes and other hybrid and structured products.

Posted : December 12, 2013 11:21:57

by Karen Kane, managing principal, Board Performance Specialists

Activists are changing the boardroom and the world of the director.  By attracting record numbers of investors and delivering returns, activist investors are bringing about a boardroom transformation and what it means to be a director.

Consider these facts: activist funds attracted $7.2 billion through September 2013, more than double last year's rate.  More important, they've delivered returns. An index of 17 prominent activist hedge funds shows a 19 percent return since 2009 versus 12 percent return for the S&P 500 and 7.5 percent return for all hedge fund strategies, according to a Citigroup report. Individual activists have fared even better.  Ralph Whitworth of Relational Investors is up 34 percent this year, and Icahn Capital was up 26 percent through September.

No company is immune.  Directors of iconic companies like Apple, Hess and Proctor & Gamble have learned the hard way that too much cash, a lagging stock price or even a board that appears unresponsive to shareholders can attract the activist investor. At the same time, the winning activists investors demonstrate a  constructive approach in coaxing  more value out of a stock that has drifted downward.

Take Microsoft.  Who would have guessed an activist fund would take a stake in a company as large or as revered as Microsoft?  ValueAct Capital got a board seat for its $2 billion  investment in Microsoft, less than one percent of the company, obviating any need for a regulatory filing. Jeff Ubben's strategy for investing in "world-class companies with tremendous long-term potential" goes back to points Ubben made in an earlier interview: "We focus on finding the jewel of a company that has lost its way, stopped growing or innovating.  We're constructive.  We talk to the board, tell them we have ideas and we'd like to help."  As a result of its investments and conversations with the board, ValueAct president G. Mason Morfit will join the Microsoft board in early 2014.

ValueAct is not confrontational, does not say bad things about management or the board but takes time to get to know the company.  Without a public agenda, ValueAct  gets a seat on the board as it did with Microsoft with the goal of working with other directors and management to improve company performance and thereby shareholder returns. ValueAct's recent investment in Microsoft will play out over time but Microsoft shareholders are optimistic.

What ValueAct Capital, Relational Investors and other constructive hedge funds have done is to bring new focus to the role of the board and how good governance and good strategy can improve company performance.

Ubben has observed that most boards make decisions based on emotion or supporting the status quo, because their view of the company is limited by the information that the CEO provides. "We put an analyst focus on the company, digging through filings to get information on competitors," he said.  It gives the ValueAct board member the information and insight to challenge the CEO and his decisions, not to be difficult but to improve strategy and business decisions.

Even boards that do not have activists investing should take notice.  The bar has been raised. Not only are directors being asked to provide stewardship, but to help management improve performance. 

That's the message: good boards enhance the value of the company and thereby the return to shareholders.

Boards need the budget and independence to remake themselves into powerful work groups of dedicated advisers to help the CEO think through the many challenges of running a complex global business. It means they have to know enough and invest the time and resources to be strategic.

Smart directors see the shift and are taking action.

Karen Kane, former senior officer and board secretary for the Federal Reserve Bank of Chicago, is managing principal of Board Performance Specialists, a consultancy to help CEOs and boards improve board effectiveness.


Posted : November 26, 2013 1:45:20

by Jeff Hilk, EVP and Director of Client Services, Diligent Board Member Services
The proliferation of technology tools in recent years – tablets, apps, social networking and the cloud – has led to a shift in communication, governance and management across the enterprise. This includes the board of directors, who are under more pressure than ever to help companies thrive while embracing new, efficient technologies. Companies can now use Twitter or Facebook to disclose material information, board portals are enabling better communication and cloud computing allows board members to perform their duties anytime, anywhere. However, some boards remain hesitant to fully commit to new technology tools, often inconveniently straddling between the paper-based and digital worlds. Is unfamiliar technology to blame? Or are there other factors to consider?
There’s no denying that every board has a distinct personality and culture.  It’s that unique mix of professional and personal experience that can make a great board tick, but for those looking to successfully implement new technology, they need not be full of social media whiz kids or digital programming experts.  In fact, according to IBM’s 2012 Digital Consumer report, which surveyed 3,800 adult consumers in the U.S., United Kingdom, China, France, Germany and Japan, 65 percent of “early adopters” of new technologies were adults aged 55-64 – not overwhelmingly younger as would be predicted. Boards of directors, regardless of the level of their technological prowess or capability, can implement new technology tools with ease if the right roadmap is in place from the get-go.
First, it is critical to understand and acknowledge each director’s level of comfort with new devices and new software.  Organizations should be careful not to force directors to use new tools, as this strategy may backfire, leading to serious setbacks toward the organization’s goal of seamless integration of new technology with the board’s activities. Rather, a more effective solution is to provide custom training and support so that when a director is ready to make the transition, a dedicated team is there to ease his or her entry into the digital realm.
This support could come in a range of options: it could mean a series of personalized, one-on-one training sessions, where each user receives the attention and time needed to embrace a new technology. This could be done as a demonstration via the web. Or it could mean being available to answer routine questions – over the phone or on-site before a board meeting. In addition to the variety of training types, it is also important to provide limitless sessions to ensure the director is comfortable.
For organizations with board members resisting even the initial training, there is good news:  boards with respectful working relationships will listen to each other and work off each other to be successful. If one or some board members start using a new technology tool, the others will be increasingly more open to using it in the future or learning more.
A successful implementation of new technology does not mean that every single director becomes a fully digital director on day one, although there are some instances when this does happen. Boards should measure their technology capabilities on a monthly, quarterly and even yearly basis. If, over time, an increasing number of directors adopt these technology tools for routine board business, then that implementation is a success.

Posted : November 6, 2013 10:35:38


by Michael W. Peregrine, partner, McDermott Will & Emery

Who would have thought that the most influential governance seminar of the year came courtesy of C-Span?  That Congressional hearings involving complex information technology concerns could have boardroom implications?  That the troubled rollout of a governmental initiative could prompt serious board member introspection?  But that’s the collateral reality of the HealthCare.gov controversy.

Because when you strip away all the noise, this isn’t a “that’s the government for you” snafu.  It’s not endemic to the Washington, D.C. way of doing business.  At its core, it’s about the damage to the organizational agenda and reputation that can occur when project management goes bad.  That it can happen to any business, large or small, when the reigns of a major corporate initiative are not held tightly by the board.  You know, this is not so funny—it can happen to us if we’re not careful.  And the perceptive board member will recognize the connection pretty quickly.

That’s why the televised drama of the last two weeks has been so instructive, and relevant.  Fairly or unfairly, both vendors and government officials are portrayed in a manner that makes them appear uncoordinated, uncommunicative, unwilling or incapable of assuming responsibility and unable to combine the disparate parts of a major policy initiative into a cohesive process with a high likelihood of success.  What a way to run a railroad.

In that respect, it’s a timely and inexpensive reminder to the board that on critical “bet the farm” initiatives, when so much is at stake—the board must be firmly at the front lines.  Not necessarily interfering with the normal responsibilities of management, and certainly not to suggest any lack of confidence in management’s ability.  But rather, as an extra pair of eyes; as an extra set of hands.  It is a recognition that on those very limited matters where project management is essential to success, the board must be more aggressively engaged than in the normal course.  In these special situations, traditional informed reliance on management won’t be sufficient.

And that means taking the necessary steps to confirm that, indeed, the project is being successfully managed; that there is proper communication amongst the advisors and management; that issues and opportunities are both being recognized and responded to; that the timetable is realistic and not unreasonably compressed; that ideas (as well as concerns) are properly communicated up the corporate ladder in a timely manner.  That silos are deconstructed, there is “end to end” testing and there is centralized command-and-control.

By its very nature, this special obligation involves a tricky dance with executive management, who rightfully interprets project management as within the scope of their collective job descriptions; an extension of their competency and expertise.  And in the vast majority of circumstances, it is—and the board can afford to take a back seat, and wait for issues to come to them. 

But it’s a different deal in those rare situations involving signature corporate initiatives; those that are intended to be organizational “game changers.”  In those special circumstances, the board must be especially pro-active, making sure that the level of organizational efficiency, coordination and communication is consistent with the enormity of the assignment.  Extra board oversight, in conjunction with management’s efforts, is necessary to reduce the risk of presidential dysfunction or breakdown.  Project management can’t be left to chance.

That’s where the HealthCare.gov situation offers such a valuable governance lesson.  Because it’s not about the fundamental incompetence of governance.  After all, these were all smart and well intentioned people.  Rather, it’s about the enormous challenges involved whenever an organization, public or private, seeks to implement an initiative of magnitude and importance.  In those situations, the board will be expected to respond with a heightened degree of oversight and constructive skepticism.

Michael W. Peregrine, a partner in the law firm of McDermott Will & Emery LLP, advises corporations, officers, and directors on issues related to corporate governance, fiduciary duties and internal investigations.



Posted : October 15, 2013 3:56:33

by Todd Thibodeaux, president and CEO, CompTIA

As cloud computing has swept through the IT landscape, mass adoption has led to entirely new business models. End-user businesses are either experimenting with it or going over to the cloud entirely, with 90 percent of businesses now claiming some form of cloud usage. But, as with any transition, there are pitfalls to avoid here. The following are four proven best practices of businesses successful in either increasing their usage of cloud or venturing into it for the first time:

1. They Take Their Time
Few companies beyond those born in the cloud are working in a complete cloud infrastructure, since this takes considerable re-architecting of workflow, but they’ll get there. It’s inevitable. But such a re-architecting involves considerable investment, which explains why even early adopters take their time with such a move. Not rushing onto cloud ensures a smooth transition.

2. They Realize It Gets Better
The longer companies spend in the cloud, the more benefit they realize. Among companies who list cloud as a better IT option for a wide variety of reasons, early adopters outpace later adopters nearly two-to-one.

3. They Adapt Their Policies
After initial cloud transitions where integration is a top challenge, companies with more experience are seeing changes to IT policy become their primary concern. These changes could involve the way that technology is procured throughout the organization or the functions within the IT department as they interact with lines of business, both of which are steps towards a fully cloud-enabled business.

4. They Find the Right Mix
Sixty percent of companies have made some sort of secondary move after their initial migration, shifting infrastructure or applications between public clouds, into a private cloud, or back into an on-premise system. Finding the optimal mix and managing the range of solutions are the types of disciplines that early adopters are perfecting as they progress in their cloud usage.

There are still many problems to solve as cloud computing enters an adolescent stage. Discussions are becoming broader as later entrants continue to seek out basic information and leading-edge companies explore new territory. Ultimately, the discussion will tend more towards business processes and services enabled by the cloud and the structural parts of cloud computing will fade into the background.

For more information on the latest trends in this space, CompTIA members can access the Fourth Annual Trends in Cloud Computing report. If you are interested in becoming a CompTIA member to access this research along with a full range of education, community discussions and other member benefits, please contact our membership team.


Posted : October 9, 2013 1:51:12

by Karen Kane, managing principal, Board Performance Specialists

With Say on Pay approval trending favorably in its third year, I was heartened  to see a group of 15 independent directors from as many different corporate boards gather at 7:30 a.m. on a Monday morning  in a Grant Thornton conference room to discuss the challenges that directors continue to face in determining executive compensation.

As compensation committees confront ongoing shareholder scrutiny, they worry about ISS and Glass Lewis recommendations on their compensation programs. New regulations loom, such as the CEO-pay-ratio disclosure, that is, what the CEO makes as compared to the median pay of the company's employees, including full-time, part-time and temporary workers around the world.  

Clearly, what was appealing to the directors was the chance to engage in discussion with governance experts rather than sit in "listen-only" mode to formal presentations.  Charles Elson and Craig Ferrere of University of Delaware’s John L. Weinberg Center for Corporate Governance discussed their study of peer groups, compensation expert Don Nemerov of Grant Thornton talked about his firm's research on the capital market impacts on equity-based compensation. Given my specialty in board-shareholder communication, I offered advice on developing a plan and training the board for shareholder interactions.  I enjoyed hearing the directors themselves make observations, ask questions and agree and disagree with one another.

Ferrere and Elson are authors of a study of how peer groups can inflate CEO pay, particularly when one CEO has a great year, it tends to boost the pay of the other CEOs in the peer group the following year. Since peer groups start with pay at 50 percent of median, it also has an inflationary or "Lake Wobegon" effect since it posits that every leader is "above average."  Yet peer groups are not just about compensation but offer insight into relative business performance as well.  

Nemerov discussed the Grant Thornton research of more than 300 long-term incentive plans implemented by S&P companies that demonstrates how the shift to performance shares from stock options and stock market appreciation rather than firm performance can ratchet up executive pay. I offered advice about successfully engaging  with shareholders by having a board-shareholder communication plan and effectively telling the story around the board's process on making decisions on compensation.

Elson reminded the group that the CEO pay ratio was a late add-on to Dodd-Frank.  No one asked for it; but it was added by New Jersey Senator Robert Menendez.  The ratio between what a CEO makes and what the average worker makes "is intended to shock and shame," said Elson.  "It serves no purpose; it’s meaningless."

A veteran director and my co-author of governance articles, Fred G. Steingraber advised boards to be mindful of what the CEO makes in relation to his direct reports because it gets to the issue of effective succession planning.  Large disparities could be a signal to shareholders about the way the board is managing succession.  "Not only are internally developed CEOs more successful in delivering value to shareholders but it's less costly than recruiting from the outside," he said, citing a study by the Kelley School of Business at Indiana University, which  tracked all the companies in the S&P 500 over a 20 year period.

Not only were Ferrere and Elson eager to "test-drive" the results of their study with directors in the trenches, but the directors suggested other topics for study to help them do a better job.  One suggestion is to look at the executives other than the CEO, whose pay is benchmarked as well and see how that has affected levels and ratios.  Elson and Ferrere said they would like make it a follow-up to their current study.

This thoughtful group of individual directors demonstrated that they are thinking carefully about compensation and governance issues and striving to serve as effective stewards of the enterprise.

Karen Kane, former senior officer and board secretary for the Federal Reserve Bank of Chicago, is managing principal of
Board Performance Specialists, a consultancy to help CEOs and boards improve board effectiveness.

Posted : September 20, 2013 4:51:11

by David Wise, Vice President, Hay Group

By now you’ve heard all about the SEC’s proposed regulations around the Dodd-Frank Pay Ratio Disclosure. For those of you who haven’t checked email or picked up a newspaper in the last week, this is the one that requires companies to calculate and disclose the ratio of their CEO’s pay to that of their median employee.

Now, I appear to be in the minority in that I don’t feel that Dodd-Frank (or the Dodd-Frank Wall Street Reform and Consumer Protection Act) was all bad. There were some pieces of that landmark legislation that made some sense. But the pay ratio disclosure wasn’t one of them.

Many of the clients I work with get frustrated when the pay program that they worked long and hard to design gets condensed into a single headline in the newspaper. As we all know, that headline is often about “how much,” with no context around company performance, how that amount compares to truly comparable companies, or the detail that goes into the design of incentive plans. All of us put blood, sweat and tears into our incentive plan designs – which shareholders increasingly seem to understand, but newspapers do not.

The pay ratio statistic doesn’t just exacerbate this problem; it takes it to a different stratosphere. Because as far as I can tell, the ratio is designed to use the power of public perception to shame executives and directors about pay, plain and simple. What it doesn’t do is provide one shred of actionable information for compensation committee members, nor one shred of meaningful information for your shareholders. For some companies, it will kick off a wild goose chase to analyze how their company can somehow both be paying at median and still have a "worse" pay ratio than its peers.

To underscore the point, let's pretend for a moment that this statistic really mattered, and explore some things that (in an alternate universe) we would want to consider in order to manage our pay programs to this ratio. Here are four I came up with:

• Outsource your lower-complexity and lower-paying jobs. By taking some of your lower-paid jobs off of the books, your pay ratio will improve. Not because you’re changing the pay of the CEO, but because your median job will be higher paid as a result.

• Change your business model to that of a large investment bank. Yes, banking CEOs tend to make more than other CEOs – and not always in times of strong performance. But what’s nice about this model is that your median worker will probably make over $200,000, which is several multiples above what you’ll see in virtually any other industry. We expect that the large investment banks – despite having highly-paid CEOs – will actually have better-looking pay ratios than most other industries. (Who will be among the worst-looking? Retailers, whose CEOs may be at the lower end of the CEO pay range, but whose ratios will look worse because of all of the sector’s lower-paying jobs.)

•  If worried about comparisons to your peers, then look exactly how they look. The reality is that comparisons to peers are likely to be meaningless, because pay ratios will always be skewed by situational factors like company size, operating model, type of jobs, location of your workforce, and the like. And all of us are different. So, the only way to remove the “noise” in the statistic would be to adopt the same footprint and workforce as your peers.  Only then would the comparison make any sense.

• Significantly raise everybody else’s pay. This one is so obvious that I feel silly for even taking the time to write it. Yes, your cost structure may become bloated. But you’re that much less likely to get the negative headline.

So, maybe we should be glad we're not in that alternate universe. But for some compensation committee members, seeing the headline in the company's local newspaper will become no laughing matter. Disclosures are serious business, even when the information you’re disclosing isn’t all that meaningful.

To that end, here are three more practicable things you can do to prepare for this new requirement:
• Comment. The SEC’s comment period on the proposed rules will last for 60 days once they are published in the Federal Register. This is an opportunity to let the SEC know what the company thinks.

• Calculate. The proposed rule allows companies to choose their own method of selecting the median employee, and companies can use a statistical sampling method that should be representative of the company’s broader population. It’s worth starting to think about what the ratio will look like and which method of selection might best suit the company and its information infrastructure.

• Create. The disclosure can be supported by narrative and/or other analysis that helps shareholders make sense of the ratio.  This is a new area for companies to have to create disclosures around, and like any public disclosure, it’s an opportunity to surround what’s required with context around what makes sense.

You’ve got some time to work this out, as we expect that the earliest the SEC would adopt a final rule would be early in 2014, meaning that the rule wouldn’t be in effect for most of the 2014 proxy season.  But no matter what we think of the provision itself, preparing for its implementation – and the resulting disclosure – is perhaps the one element of this rule that should make sense to everybody.


Posted : September 5, 2013 2:50:51

by Michael W. Peregrine and William F. Kanzer

A series of recent events combine to increase the fiduciary expectations for the board’s executive search committee.  This heightened scrutiny is the result of significantly increased turnover activity, high profile CEO vacancies, embarrassing public gaps in search diligence, and intra-board battles on specific search processes. 

The Wall Street Journal reports that nearly 20 major companies are currently involved in CEO searches. This is on the heels of what a Challenger Gray & Christmas survey described as a very active summer in terms of CEO-level turnover.  Collectively, these developments shine a very bright light on what has become a crucial governance responsibility.  They also serve as an important reminder for boards to be pro-active in establishing a search committee framework that is responsive to both constituent interests and regulatory principles.

The search committee—whether standing or special—has often been relegated to the backwater of board processes.  Frequently created in haste, committee efforts are regularly hindered by disunity on the search profile; lack of clarity in its charter; questionable qualifications of membership; unrealistic timetable expectations, limited budget and haphazard due diligence of both search consultants and of ultimate candidates.  The presence of any of these can create significant hurdles for the search process; the presence of several can doom the process to mediocrity.

Anecdotal evidence and media articles suggest that these limiting factors occur all too often; certainly with a level of frequency that is intolerable given the stakes at play.  The Business Roundtable’s Principles of Corporate Governance lists the selection of a chief executive officer as the “primary” task of the corporate board.  It is certainly not alone in expressing that view. Also, there is increasing acceptance in governance conversations that some board tasks/committees are of such importance that they require the commitment of additional board member time and effort (e.g., audit, and risk/compliance management).  Thus it’s fair to expect that the standard of fiduciary conduct to which the search committee will be held in the future will be commensurate with that level of importance.  And it’s equally fair to ask the board whether its established search process is capable of meeting that standard.

Because the chances are increasing that someone or something will call them on it if it isn’t.

So what are we talking about?  What elements of the search committee process are likely to meet a heightened standard of conduct?  Here are a few examples:
• Make it Clear:  Adopt a committee charter that is explicit in terms of the committee’s authority, its composition, its timetable and its direction (e.g., a thoughtful evaluation of the characteristics and experience sought in the new CEO).

• Get Your Act Together:  Nominate directors with specific experience in executive search; folks who’ve actually done the job before on another board, or who have gone through the process as a candidate. It pays to tap people who have “been there."  And service on the compensation committee won’t automatically suffice-those are different skill sets in play.

• Get the Right Team:  Provide the committee with a budget that allows it to hire truly qualified external advisors.  Make sure both the general counsel and the SVP/HR serve as staff-the committee must have access to both areas of expertise.  And resist the temptation for one-stop shopping by tapping the compensation consultant to direct the search; the lack of independence alone will sabotage the process.

• Do Your Homework:  Dig until you hit bedrock.  Most every recent search debacle features some embarrassing background fact that escaped the consultant’s review. The credibility of both the selected candidate and the board itself will be severely compromised by material diligence failures.

This is not fiduciary rocket science.  Virtually every board has the capability to formulate a search process that incorporates these and similar standards.  What is amazing is that, as the newspaper’s business section tells us on a weekly basis, many fail to do so.  So much is at stake—a fact that those whose responsibility or proclivity it is to challenge board actions readily understand.

Michael W. Peregrine, a partner in the law firm of McDermott Will & Emery LLP, advises corporations, officers and directors on matters relating to corporate governance, fiduciary duties, and officer-director liability issues.  He can be reached at mperegrine@mwe.com.

William F. Kanzer is President/Owner of Kanzer Associates, Inc., a retained executive search firm in Chicago, Illinois that coaches clients through today’s challenges and identifies senior C-Suite executives and Board directors who can create optimum culture to drive commercial success.  Kanzer Associates, Inc. works with Fortune 500 companies, small innovative companies as well as not-for-profit corporations on a national basis.  He can be reached at

Posted : August 27, 2013 1:46:44

by Karen Kane, managing principal, Board Performance Specialists 

Who has been mysteriously absent from the current corporate governance discussions?

It would appear that the CEO has been relegated to a minor position in governance leadership. True, many governance changes of the past decade have transferred power from the CEO to the board. Even shareholders have gained power, reviewing and approving the CEO's pay. Most of the company's  independent directors predate the CEO and the role of recruiting new directors has moved to the Nomination Committee.  It's not the CEO's board anymore.

One of the unintended consequences of this power shift is the fact that boards have become more entrenched: Directors themselves can decide whether or not they should keep their jobs.  Given the pay and prestige, most directors opt to stay.  In addition, the collegiality of the boardroom minimizes the prospect of fellow board members ousting ineffective members.

Yet CEOs who want the best strategic help on their boards take action on multiple fronts. 

They use the bully pulpit. They embrace governance as a business imperative.  By acknowledging shareholders and stakeholders when addressing key audiences, they demonstrate respect for the board and the role it plays. Many CEOs now see the value of getting their direct reports and potential successors on boards of other companies to help them become stronger executives. It also enables them to see first-hand the importance of governance and experience the difference between managing and providing oversight. 

They communicate the need for strategic strength on the board to the board. What is the competition doing?  Have competitors recruited directors who can give the company a strategic edge?  Who has a talent the company needs? What skills and expertise in a director would enhance the organization's leadership  and competitive position?  This is not to be confused with the exercise of compiling attributes for the director competency section for the proxy, but rather a best-of-the-best recruiting brainstorm  to identify the talent in the advisors needed to take the company to the next level.  

They respect shareholders. In words and actions, smart CEOs recognize the importance of shareholders through real engagement. They're committed to strong governance and transparency. They help directors serve as effective representatives of shareholders by providing resources for director training and support.  

They cultivate mutual respect and dedication to the success of the enterprise. This is the foundation for tone at the top and respect for the role that each group plays. CEOs who model the behavior that they want to see in the board members and employees prove their commitment. 

They take steps to fix boardroom dynamics. Without a doubt, boardroom discussions that are robust and informative help the CEO to make better decisions.  When such dialogue is lacking, smart CEOs lead a strategic discussion with the board about making improvements.  At the same time, the CEO puts his or herself in the position of learning about his/her own shortcomings with a commitment to make improvements. Such steps send a strong signal to all present that board meetings are not just an instrument of oversight but of strategic value to the company.  A board position is not a lifetime achievement award, but an important job. 

CEOs can do a lot to improve the board of directors and the success of the enterprise in this ever evolving governance environment.

Karen Kane, former senior officer and board secretary for the Federal Reserve Bank of Chicago, is managing principal of Board Performance Specialists, a consultancy to help CEOs and boards improve board effectiveness.

Posted : August 13, 2013 2:39:21

by Steve Barth, partner and chair, Foley & Lardner’s National Directors Institute

Manufacturing is experiencing a renaissance.  Though the common wisdom since the 1990s has held that manufacturing is inexorably moving away from developed economies and in many instances was shrinking altogether, manufacturing companies are now discovering new ways to reinvigorate and even expand their operations. These fundamental changes are the result of company responses to tectonic shifts in the global economy, including an explosion in customer-focused technology, rapid improvements in the areas of logistics and project management, and a growing pool of human capital made possible through changes in technology and global education.

Executives and directors in the manufacturing industry are finding that this paradigm shift deeply impacts the strategic vision and direction of their organizations.  Increasingly, directors are being asked to weigh in on detailed strategies aimed at improving customer-focused innovation (including outward- and inward-facing social media strategy); the engagement, development and retention of human capital; continuous process improvement; supply-chain management and collaboration; business and industry sustainability (including waste and energy-use reduction); and global engagement (having partnerships and systems in place to engage global markets and talents better than the competition); as well as myriad other issues related to the next generation of manufacturing.

To keep up with the opportunities and risks associated with this next generation of manufacturers, boards of directors of manufacturing companies need to better understand this quickly evolving environment so that they may quickly assess the strategic opportunities and the associated risks.  Advice and guidance from next-generation manufacturing experts will be more and more necessary so that boards can keep pace with their fiduciary duties relating to this new and ever-changing dynamic.  To start, directors in the manufacturing industry would be wise to familiarize themselves with the literature on next-generation manufacturing, beginning with the 2011 Next Generation Manufacturing Study prepared by the Manufacturing Performance Institute in collaboration with the American Small Manufacturers Coalition.

Whether or not the renaissance of U.S. manufacturing continues at its current rapid pace, the broadened duties of executives and directors overseeing the growth of manufacturing companies are real and here to stay.  Because companies, industries and economies are increasingly interconnected (often on a real-time basis, via JIT supply chain management, customer-focused innovation enabled by social media, and world-wide telecommunications capabilities), a failure to respond to the issues in a timely manner can not only slow a company’s growth, but can also leave a company lagging far behind its global competitors.  To survive, a company needs its directors and executives to be fully engaged.

In part to identify those directors best responding to the 21st-century global business environment, Foley & Lardner LLP has created a new Director of the Year award.  The award, which is not limited to any particular industry, is intended to recognize outstanding directors who have demonstrated exceptional value to a board, management team, and company. (View the one-page nomination form for more information and to nominate a director by August 26, 2013.) By acknowledging these exceptional individuals and their paths to success, this award can help inspire and encourage other directors to strive for similar greatness and raise the corporate governance bar for other directors and boards.
Steve Barth is a partner and chair of Foley’s National Directors Institute (NDI), a forum for business leaders looking to explore best practices and the latest trends impacting the corporate finance and governance landscape. The award winners will be announced during the NDI Executive Exchange in November 2013.

Posted : July 11, 2013 10:22:21

by Vinny Jindal, CEO and Co-Founder of Stockr

Many companies remain frozen, uncertain of the frontier ahead, but the number of companies who already use social media to communicate to stakeholder—safely and with great success—suggest that these fears are generally unwarranted. Social media is the most powerful mass communications technology ever invented. It has helped overthrow governments, turn unknowns into rock stars, and has forever changed the fabric of the Internet.

While Boards and investor relations executives have focused on the potential hurdles and pitfalls of using social media, its obvious power and prevalence guarantee that it will become part of every corporate communications program.

Companies failing to embrace social media look outdated and, more importantly, are in danger of ceding an important new battleground in the war for investors’ attention. Because the era of social media for investor relations isn’t on the way. It’s here.

What Is “Social Media” Anyway?
The words “social media” mean different things to different people, so let’s put some definition around this loaded term. To me, a social medium is simply a website or mobile app that enables users to connect and share with one another. The more customized technologies—follow buttons, personalized news feeds, a wall for each user—a site has, and the more it lets you replicate the nuances of offline human interaction, and the more social it is.

Facebook, Twitter, and LinkedIn proved that people would rather interact with each other than sit alone at a static website. Increasingly, social tools are being integrated at more and more websites. For example, embedded videos existed at only a small number of websites five years ago, and now they’re everywhere. Similarly, all websites will be “social networks” because they’ll enable interactions and the ability to curate who you hear from, just in the same way that Facebook, Twitter, and LinkedIn operate now.

The Internet is becoming one big social medium, so if you want to use the Internet to interface with investors, you need to get good at social.

Compliance: Actually, There’s Nothing All That New Here
Planning for this new reality makes many companies nervous. But without knowing it, companies already have accumulated decades of experience and put the necessary safeguards in place. That’s because they’ve been using a digital tool to interact with investors for years: email.

CEOs, CFOs, and IROs have all interacted with investors through email, answering questions, sharing information, and always keeping RegFD in mind.  Executives don’t need a lawyer looking over their shoulder when using social media any more than they need one when responding to an investor’s question via email. The same rules apply, except that social media helps educate a larger number of investors who become more deeply connected to the company.

One question that surfaces frequently is “But, what if we get a negative question on social media?” Do what you already do in email: If you get a dumb question or a negative comment, ignore it. If you get a smart question, answer it. There’s no obligation to address every comment, query, and question you receive, and no one (including the SEC) expects you to. You’re not responsible for everyone’s comments, only your own.

Many companies drive their consumers to social sites like Facebook and Twitter, knowing that some negative comments will be made, but they have the opportunity to address these comments and gain a “win” with their followers.

Why You Should Be Using Social Media
According to research from Marketwired and Rivel Research, institutional investors are increasingly using social media for research, giving you a new outlet for reaching this key audience. And though it’s impossible to give all shareholders the time and attention your largest shareholders get, social platforms like Twitter, Google Plus, and Stockr give IROs a way to interface with their entire universe of current and prospective shareholders.

Will there be challenges? Of course. As with your institutional investors, all valuable relationships are formed over time, and are nurtured by trust and consistent interaction.

People are accustomed to voicing their concerns directly to the companies they support, and those people will inevitably expect the same as shareholders. Knowing that, “watching-and-waiting” only gives your competitors a head start at talking to your shareholders.

With more and more institutional dollars being allocated by algorithms and machines, it pays to reach every shareholder that you can tell your company’s story to. The opportunity to bring thousands of investors and potentially millions of shares into the fold is worth exploring, especially when companies like CBS, Zillow, Google, and Shell Oil have paved the way.

Vinny Jindal is CEO and Co-Founder of Stockr (stockr.com) — a social network that is transforming the way individual investors, industry experts, and public companies connect and discuss what’s moving the stock market. An entrepreneur, bioscientist and former equities research analyst, Vinny co-founded Stockr in 2010 with the support of leading financial and technology advisors from Yahoo! Finance, Facebook, Thomson Reuters, E*TRADE and the Wall Street Journal, among others.  Launched at the 2012 Finovate Conference in New York, Stockr is now active in a public beta. Prior to Stockr, Vinny held various senior roles in venture capital and equity research, most recently as a Principal at Boston Millenia Partners. Vinny and the Stockr team are headquartered in Santa Monica ("Silicon Beach"), California. You can follow Vinny on Stockr at www.stockr.com/vinny.jindal. Connect with Stockr on Twitter (@Stockr) and Facebook.


Posted : July 5, 2013 5:51:12

by Nicole Palmer, Babson College

As citizens of the Unites States, we are well-versed in the idea of the American Dream. While the definition of the ethos has renovated and metamorphosed over the years, the true meaning has not faltered. We reach to fulfill the opportunity for success through hard work, and we believe that our efforts will pay off in upward movement in regards to achievement. The same is true for businesses and for board members as shepherds of those businesses.

At the 2013 Chairman & CEO Peer Forum, I had the pleasure of hearing from Clifton Lambreth, former Ford Motor Company Executive and Author.  The forum was designed specifically for CEOs, independent chairmen, and lead directors and provided an opportunity for discussion of critical board and management issues. As keynote speaker, Lambreth discussed the American Dream, and, citing the high percentage of workers connected to the automobile industry, he captured the connection between Ford and our national ideal, linking how company success equals employee’s success.

After Ford lost 12.75 billion dollars in 2006, Lambreth drafted his first book, Ford and The American Dream - Founded On Right Decisions, which detailed the events that brought the company to the edge of bankruptcy. As a 100+ year old company, he thought the company management would never change. After penning the book and talking with Ford’s CEO Allan Mullaley, the suggestions and lessons embedded in Lambreth’s book were implemented in an attempt to fuel Ford’s turnaround. Lambreth’s suggestions to the CEO stemmed from the belief that most problems come from a lack of inspiration or lack of information. With this trend prevalent at Ford, Lambreth made the case for creating passionate and engaged talent at all levels and doing so by rewarding special efforts and paying for performance. Engaging passionate employees is essential because, despite popular belief, a company’s greatest assets are not their fixed assets, but their people. While processes and structure provide consistency, it is the people within the company that drive results. When Ford’s leaders came to realize this fact, the work environment was positively affected.

During his keynote, Lambreth connected the messages he learned from Ford to leadership lessons that can be applied to all businesses big and small and to life as a whole, such as putting common sense into practice and taking caution against C.A.V.E people: “Collectively Against Virtually Everything.” In Lambreth’s presentation, Ford took the role of the disabled American Dream that was rejuvenated through simplification, inspiration, and recognition. Ford’s 2006 struggle epitomizes the struggle encountered when necessary elements of leadership are neglected and talent goes unrewarded. By focusing on the positive, providing an environment for accountability, and listening to the voices of the customer, employee, competition, and environment, Ford was able to reclaim its position in the automobile industry and redeem its reputation as the American automobile maker.

Lambreth’s presentation did not center around a specific topic like compensation or board evaluation, as is typical at the Chairman & CEO Forum. Instead, he used an anecdotal approach to executive and director education. Attendees were able to take away lessons in how to most effectively lead their boards by applying the recommendations that saved Ford from collapse. For instance, if you find abundant confusion as a result of too much complexity, the first step is to simplify the areas affected by that intricacy. Furthermore, you must create an environment under which your greatest assets will thrive and empower those around you by recognizing them for doing the right thing and getting the right results. Finally, the best practices of the past may not be the best practices for the present. Ford had seen unrivaled success throughout its early years, but staying with its obsolete model proved detrimental to its bottom line. Board members and C-level executives must operate with open minds and be receptive to changes in company norms. This ability to adapt to an evolving world connects back to the idea of the American Dream. As our country has reshaped and shifted, we have had to adjust our sails to catch the right winds and succeed through hard work, seizing our opportunities for self-actualization. Whether inside or outside of the boardroom, maintaining the mindset of a leader and ensuring a positive environment sets the stage for triumph.

Nicole Palmer is a marketing major interning at Corporate Board Member.

Posted : June 25, 2013 3:33:40

by Jon Feigelson, TIAA-CREF

Anyone who has been near a picket line knows that activists are passionate and vocal. What’s more, depending on the parties involved in the issue, the battles often play out in the press. But there is another school of activism you rarely hear about, one carried out behind the scenes every day, beyond the noise and public debate. This “quiet” approach to advocating on behalf of clients and participants can be both responsible and effective.

Active Owner, Quiet Diplomat
The repeated corporate crises of the last decade have reinforced the need for market participants to re-commit to practices and behaviors that promote the sustainable health of our economy. Companies that demonstrate strong governance practices may reduce their risk and achieve strong financial performance over the long term. TIAA-CREF routinely monitors the governance of our portfolio companies and seeks changes when concerns arise about management’s stewardship of shareholder resources. It’s a process that includes active dialogue with portfolio companies on issues that may affect their long-term, sustainable profits.

Our brand of involvement and activism has been widespread. We’ve opposed abusive antitakeover provisions and addressed issues such as automotive safety and human rights issues. We’ve also influenced companies to adopt best-in-class governance practices and disclosures for director elections, board structure and compensation. But we do not dictate practices to companies or prescribe which issues they should focus on. We prefer to engage privately with companies to ensure their policies and practices are in the best interests of our participants.

This strategy of “quiet diplomacy” reflects our belief and past experience that informed dialogue with board members and senior executives, rather than public confrontation, will more likely lead to a mutually productive outcome. This approach may not make the headlines, but it can contribute to superior long-term results.

How And When To Engage
Every investor needs to evaluate and focus on the issues that will have the most impact on the long-term value of an investment. Investors must consider:
• the risk each issue poses to the market;
• its relevance to company strategy and performance; and
• the likelihood that companies will be able to meaningfully resolve shareholder concerns about the issues.
For TIAA-CREF, for example, those include issues such as executive compensation, board composition, or climate change risk.

To assist in our evaluation we consult with internal experts, including our asset managers, and with our Trustees—especially our dedicated Committees on Corporate Governance and Social Responsibility—who provide essential insight into our policies and activities. We also may communicate with other institutional investors, clients, non-governmental organizations and industry trade associations. We augment our internal expertise with external experts and third-party research.

Each year we vote several thousand proxy ballots and talk to more than 500 companies in our offices for hours at a time, emphasizing our priority issues. Often, we can achieve effective results in just one meeting when a company is focused on a particular issue in advance of a proxy ballot. For instance, we have met with many companies to review and suggest improvements before they launch their sustainability disclosures. In having such meetings on an issue with hundreds of companies, we can influence the direction of the market as a whole.

When Quiet Diplomacy Is Effective
Over the years, TIAA-CREF has been an effective advocate for good corporate governance practices. We were, for example, a leading proponent of the “say on pay” vote on executive compensation, now required of all public companies, and have successfully used this vote to influence companies to better align pay with long-term performance. We’ve pushed companies to adopt a standard requiring that directors receive majority shareholder support in order to be seated on the board.

We have engaged with numerous companies, asking them to report on their strategy for reducing their impact on the global climate. Every year, more companies report that they are adopting strategies to mitigate their impact on the climate, which we believe is an important long-term economic issue for companies and investors.

Producing Headlines … Or Results?
In our experience, media pressure does not always help to produce results for shareholders and spur change at a company. That is one of the reasons why we do not disclose the names of corporations we engage with, preferring a direct connection with the company to a dialogue through the media. We also believe that divestment is rarely an effective means of improving corporate behavior. By relinquishing ownership in companies, we lose the ability to influence them. Retaining the relationship is the more effective means of bringing about change, even if progress is slow for a period of time.

Our policy of quiet diplomacy helps us to build trust with companies and makes us more effective advocates of good corporate governance. While we support the right of other activists to do otherwise, what has been most effective for us is to engage our portfolio companies constructively in quiet dialogue on the issues that matter most in producing long-term, sustainable shareholder value.

Jon Feigelson is a Senior Vice President, General Counsel and Head of Corporate Governance, with TIAA-CREF.

Posted : June 20, 2013 1:11:34

by James R. Copland, Manhattan Institute

As the end of June approaches, proxy season is drawing to a close: 210 of America's 250 largest publicly traded companies had filed proxy documents for their annual meetings with the Securities and Exchange Commission (SEC) by June 4. Aside from well-publicized corporate-governance disputes at a handful of companies-including a threatened proxy fight at Hess and significant shareholder votes at companies like JPMorgan Chase, Occidental, and Navistar-what can we say about the 2013 proxy season?

On average, shareholders filed more proposals this year: 1.27 per Fortune 250 company, versus 1.22 in 2012 and 1.18 in 2011. (Shareholder activism through the introduction of resolutions remains significantly below the level witnessed prior to 2011, when the Dodd-Frank Act's creation of mandatory executive compensation advisory votes changed the focus of some of these shareholder activists.) Even as more proposals have been introduced, fewer have been receiving the support of a majority of shareholders. Among shareholder proposals voted on by the equity owners of the 191 Fortune 250 companies holding annual meetings by May 29, only seven percent received majority votes-the lowest level seen in the years covered by the Manhattan Institute's Proxy Monitor database, dating back to 2006.

One reason why fewer shareholder proposals have been passing at America's largest companies is that the types of proposals most likely to attract majority support-those seeking to declassify boards and elect all directors annually, and those seeking to require that nominated directors receive a majority of votes cast to be elected-have become less relevant at large publicly held companies, many of which have already adopted these corporate-governance practices. Indeed, among the 16 shareholder proposals to receive majority support at Fortune 250 companies in 2013, six have involved majority voting for directors and another six board declassification.

In contrast, the most commonly introduced corporate-governance-related proposal in 2013-representing some 12 percent of all proposals-called for separating the company's chairman and chief-executive-officer positions, a proposition for which there is decidedly mixed empirical evidence associating this governance structure with higher share returns. Only one of these chairman-CEO proposals has passed at a Fortune 250 company this year (at Kohl's), in keeping with historic norms: since 2006, only four percent of chairman-CEO proposals have received majority support, usually at companies that had been underperforming.

In addition to the shifting composition of corporate-governance-related shareholder  proposals, the declining percentage of majority-backed proposals in 2013 is partly attributable to the increased share of proposals relating to social or political concerns, rather than corporate governance rules or executive compensation. 42 percent of shareholder proposals in 2013 have involved social or policy issues, as compared to 37 percent dating back to 2006. Since only three such proposals have received majority support at a Fortune 250 company since 2006-and two of those with board backing-the shift toward "social policy" proposals this year naturally has led to a fall in the percentage of proposals winning majority votes.

As was the case in 2012, the most-introduced type of social policy proposal-and a plurality of all proposals overall (21 percent in 2013)-concerned corporate political spending or lobbying. Although the focus of these proposals shifted-more concerned lobbying in 2013, whereas more involved political spending in 2012-their average support remained essentially constant, at 18 percent. This level of support is somewhat depressed by outlier proposals: Northstar Asset Management's proposals seeking shareholder votes on political spending in 2012 and reports on corporate values and political contributions in 2013, and proposals seeking to prohibit corporate political spending in both years. However, support for more general political-spending-disclosure proposals, including close variants of the "model proposal" backed by Bruce Freed's Center for Political Accountability-has remained mired in the low 20s, essentially unchanged year over year.

As has been the case historically, the overwhelming majority of shareholder proposals in 2013 were introduced by a small group of individual "corporate gadflies," pension funds affiliated with organized labor, and investors with a "socially responsible" investing focus or express religious or public policy focus. 42 percent of all proposals were backed by individuals; most of these-and 25 percent of all proposals-came from only two individuals and their family members and family trusts: John Chevedden and William Steiner. 32 percent came from labor pension funds, and 25 percent from social-investment vehicles. In keeping with historic norms, only one percent of proposals were backed by institutional investors without a social or policy purpose or an affiliation with organized labor.

Finally, even as "say on pay" votes continued to consume much investor focus and management attention, companies continued to win majority support for their pay packages except in outlier situations. Some 83 percent of shareholders rejected management pay at Navistar, which had been underperforming and attracted the attention of activist investors including Carl Icahn. In addition, at its May 16 annual meeting, Apache Corporation narrowly missed majority support for its pay package, with 49.82 percent of the vote. The Apache vote was doubtless influenced by the "Against" recommendation of the proxy advisory firm Institutional Shareholder Services (ISS). (Apache filed an amendment to its proxy objecting to ISS's recommendation, in part on the grounds that ISS's peer group selection was inappropriate: half of the companies ISS selected as Apache's peers were not, like Apache, in the oil and gas sector, and many of them had a significantly smaller market capitalization-as little as 10 percent Apache's size.) Apart from Navistar and Apache, to date in 2013, seven Fortune 250 companies received between 50 and 60 percent shareholder support for their executive compensation packages, and another eight received between 60 and 70 percent. Given that ISS recommends a corporate response when over 70 percent of shareholders oppose pay plans, directors of these companies would be well-advised to engage on the issue in the coming year.

Overall, the 2013 record confirms that shareholder activism through the introduction of shareholder proposals remains a significant issue for directors, though the success rate of such activism is largely limited to a small subset of proposals, such as those calling for board declassification or majority voting. That said, companies should continue to engage with major shareholders. The emerging norm of electing all directors annually, and requiring majority votes for director election, has increased the power of shareholders to influence boards without launching traditional proxy fights, as shown this year when Occidental's shareholders voted out their chairman of the board and JPMorgan's shareholders almost voted out the members of the bank's risk oversight committee.

James R. Copland is the director of the Manhattan Institute's Center for Legal Policy, which sponsors ProxyMonitor.org, a publicly available database of shareholder proposals and executive compensation advisory votes at America's 250 largest public companies. His latest finding on the 2013 proxy season is available at proxymonitor.org.


Posted : May 9, 2013 9:48:33

by Suzanne Oaks, Managing Director, Temin and Company

One of the first things Paul Polman did when he became CEO of Unilever was to get rid of quarterly earnings reports. He reasoned that “if I did it the first day they hired me, they weren’t going to fire me.” While the share price took an initial hit of an 8% drop, it recovered to record heights and, most important to Polman, the company was able to shift its investor base away from the short-termers. “I had to create an environment where people could think differently,” Polman says, in order to attract a shareholder base more aligned with the company’s strategy: creating a long-term, sustainable organization.

This kind of resilient thinking was the theme of this year’s WomenCorporateDirectors Global Institute, held last week in NYC. More than 250 women board directors from across the globe – as well as a few men such as Polman, whose company collected a WCD Visionary Award for its positive impact – converged at the JPMorgan headquarters in midtown to discuss and debate the governance challenges in a world focused on quarterly results.

In the kick-off panel to the Global Institute, H&R Block director Christy Wood was one of several directors calling for long-term strategic thinking to counterbalance the fixation on quarterly earnings. Wood lay part of the responsibility for this with business schools, which “should teach how non-financial factors need to be incorporated into reporting.” Otherwise, she cautioned, you wind up with situations like the BP oil spill disaster, where a thorough analysis and reporting of their reduction in safety controls might have revealed something earlier about the risks this huge corporation was taking.

This is not to say that companies should not, at times, “think small” – or at least think differently about how various global consumer markets behave. In a discussion of “What Directors Need to Know about Technology” at the Global Institute, Philippines telecom industry CEO Myla Villanueva explained stark differences in how Asia’s emerging markets consume and distribute technology. Rather than the typical 2-year cellular contracts and dominance of mega-carriers like Verizon in the U.S., the prepaid model of very small units is the norm across Asia. There are 750,000 “loading stations” – actually individual people – in Villanueva’s market, creating a whole economy of tiny neighborhood shops that buy and sell mobile phone services.

The individual citizens making up the global “connected” sphere can also have a bottom-up impact far beyond what political and business leaders may expect. Dr. Andrea J. Dew of the Naval War College raised the point that insurgents’ use of Skype and YouTube was instrumental in overthrowing the Gaddafi regime. At the same time, individual consumers can harness their online connections to reclaim some of their purchasing power. “Customers use online tools to research companies and reduce risk in their purchasing decision-making process,” said Hearsay Social CEO and Starbucks director Clara Shih. And with the SEC’s recent sanctioning of social media as an “official” investor relations channel, companies are being steered toward the channel –whether they like it or not. “It doesn’t matter if you want to be on social media,” said Shih. “If your customer wants to be on, you have to be on.”

How boards respond to both predictable and unpredictable disruptions was the topic of much discussion. “Crisis *will* happen to you, so make sure you have a crisis management plan,” said panelist Hilda Pinnix-Ragland, VP of Corporate Affairs at Duke Energy. Deborah Hicks-Midanek, who served as the de facto lead director for Drexel Burnham Lambert during the firm’s bankruptcy crisis in the early ‘90s – representing thousands of former Drexel employee shareholders – sees crisis as opportunity for boards. “Never waste a good crisis,” Midanek said. “It’s a time when people are most ‘plastic’ and able to change and learn.”

Ultimately, could women be better at handling crises than their male counterparts? “Women are the disruptive innovation of the next century,” said Usha Rao-Monari, Director of Sustainable Business Advisory at the International Finance Corporation, part of the World Bank. “We are the ones who bring up issues that others may not be thinking of.” Perhaps so.

Suzanne Oaks is a Managing Director with Temin and Company, a New York-based management consultancy that advises organizations on marketing strategy as well as reputation and crisis management.


Posted : May 6, 2013 12:41:45

by Patrick R. Dailey, Partner, BoardQuest.com

“I realize my first consideration should be guiding the direction of the company, but all too often my first consideration is my fellow directors. Can I trust them? Can I rely upon the abilities and intentions of my colleagues?  With my personal reputation at stake—trust is always on my mind. I imagine they worry about me, too” -mid-cap director.

Trust is bedrock for the performance of any board of director.
Most directors sense when trusts exists, know when it was not effectively built, and they can zero-in on episodes which triggered rancor and led to dysfunction. Most intuitively believe that good things happen when trust is sound. They are wary when it is not, slower to commit and take action. While most directors keenly have matters of trust on their radar due to their maturity and experience, they are largely untrained in assessing, building, and repairing trust—the key building block for board effectiveness.

It is argued that a better understanding of trust enables a chair or committee leadership to more quickly spot and more confidently remedy emerging issues while they are small and manageable.

Accurately assessing trust requires that a director make an analytical and an emotional ‘read’ of contextual signs and colleague behavior to determine if trust is sound, shaky, or broken.  Cues for reading the level of trust operating within a Board can be deduced from these situations.
• The degree a ‘safe to say’ environment exists among directors;
• Level of showmanship and disruptive behavior which is allowed to occur;
• Degree to which conflict plays out as personal, is unresolved, and leaks from the boardroom;
• Absence of full disclosure of material information to all board members;
• “Pre-shopped” decisions occur prior to full board meeting deliberation;
• Absence of corrective action and constructive challenge from the Chair or Lead Director;
• The frequency when cordiality overwhelms candor in board decision-making.

Trust is easily defined.
Trust is both an analytic and emotional judgment. Trust is the choice to relinquish [some level of] control to another person, or institution.  A person chooses to make oneself reliant or vulnerable on another’s competency, resources, and/or commitments. The risk is being disappointed or betrayed by the other person.

Trust is easily misunderstood.
Personal and business relationships have always depended upon trust. But today, the velocity of transactions in a diverse global marketplace requires directors to trust “strangers” inside and outside the board room much more.

The condition of trust has a continuum. At one end, blind trust operates at an emotional level. It is our most basic level of trust and has grown and developed throughout our lives. It is extended in an unconscious, unquestioned, and untested manner. The possibility of disappointment is most likely not considered. When directors operate on this end of the trust continuum, dialogue about trust is not brought into the open. When blind trust operates, it would be considered an insult to raise the topic with a board candidate or a long tenured director. This brand of trust is naïve and dangerous.

At the other end is authentic trust. It is more complex; it is assessed more analytically. It involves conscious assessment of past experiences against future scenarios.  In its early stage of development, trust is often extended in a provisional manner and verification follows. Authentic trust presumes that disappointment is a possible outcome. This is “eyes wide open” trust.

Authentic trust is analytically and emotionally assessed.
Authentic trust is defined by four components. Understanding these components equips directors to more accurately assess trust and openly discuss this component as a determent of board culture and performance.

Trust is built between individuals. It is also built with institutions. It typically begins with a small degree of exposure or risk between individuals. Then as relationships strengthen, the scope of trust is enlarged. Across the full board, an iterative process occurs between directors—planned or haphazardly—producing a range of ‘trust assessment’ outcomes which can range from nascent, to sound, to shaky, to distrust. During the process, each director exposes his/her vulnerabilities, be they knowledge, experience or skill voids, in varying degrees of disclosure. Probabilities for loss or gain are calculated. Directors assess how much they are willing to risk and how certain they believe that the other director will deliver. If a director operates with ‘blind trust’, he/she will be fully trusting from the outset; perform no analytic assessment, and have no plans for monitoring or verification—a rather alarming approach to board service and deliberation. Yet, some directors seem hard-wired in this way due to their unflagging allegiance to the concept of collegiality.

• Capacity for trusting is a self-assessment—it’s about your need for control and tolerance for risk. While we like to believe that optimism, in contrast to extreme skepticism or cynicism is the foundation for this assessment, an individual determines a particular level of risk or vulnerability he or she is willing to accept from another or an institution. This decision has a range—from none, to some, to full exposure. A director can choose to mitigate risk by requiring degrees of inquiry, monitoring, imposing constraint, or even a formal contract.
• Perception of competence is as assessment of another individual or an institution. It is the assessment of another’s competency—their knowledge, skills and demonstrated abilities to work competently in a particular situation. The focus is on ‘’can do” factors. Assessment determines if the individual…
-Accurately represents his/her level of skill, doesn’t exaggerate or embellish, tells the whole truth
-Understands the challenge, likely obstacles, and risks of failure; doesn’t guess.
-Does his/her homework, stays fresh and up-to-date, thinks clearly.
• Perception of reliability is assessment of another’s predictability or dependability. The focus is on “will do” factors and involves consideration of resource availability including time. Assessment determines if the individual…
-Makes commitments and delivers on them
-Takes blame, appropriately
• Perception of intentions is the assessment of another’s likelihood to make choices and behave in ways which are motivated by mutually-serving versus self-serving motives. Is there alignment around vision and mission? Do common values exist? Are these respected and enforced? Do the vision and values set the parameters for behavior and the judgment of results? Assessment determines if the individual…
-Communicates clearly, with little nuance or equivocation
-Demonstrates honesty and integrity
-Has the same ‘end-state’ in mind
-Abides by statutes, rules and expectations

Never extinguish board tension.
Disparate views and constructive conflict energize board deliberation and ultimately work to sharpen decisions and directions. Diversity of perspective is one of the primary contribution boards make. Some level of tension is a necessary and valuable by-product of deliberation. It becomes destructive when tension prevents issues from being aired and resolved, or when individual directors retreat without resolution or submitting to the collective decision of the board. Board leadership should be vigilant and skilled to prevent tension from crossing the line into acute interpersonal acrimony or board dysfunction. For sure, tension is a dynamic which should be expected by all directors in a modern board room, and an element to be harnessed, not doused, by board leadership.

Tension only depletes trust when conflict becomes personal and uncertainly remains unresolved.

Actions to build and perpetuate trust.
Building trust is about providing information to another. Information about rationale, background facts and opinions, and thought processes which back up decisions and actions. It also about determining how another person has learned his/her lessons of experience, i.e., what learning and personal change has been gathered from successful and less successful experiences. Several activities for building trust are discussed below.

• Engage directors in selection and assimilation of new directors. All directors should be involved in some phase of the recruitment and selection process from reviewing candidate specifications, interviewing candidates and during assimilation. Opening up relationships with newly-appointed directors begins during the vetting process while individuals are candidates. Certainly, assessing credentials and experiences are crucial. Assessing trustworthiness is also. Does the candidate uniquely contribute and fit—not necessarily conform—within the culture of the board? Can you dialogue with the candidate’s about his/her vision and values? Are you able to help a newly-appointed director connect interpersonally with fellow directors and keenly see how his/her skills and perspectives are valued by the board? Few candidates are perfect, but will the newly appointed director be approachable, genuine and authentic?
• Repair or rework communication policy and channels. Trust can be depleted when the quality and timely delivery of information varies from director to director. A board caste system can inadvertently be conveyed: the inner circle and the “second ring.” Distrust can arise simply by the way board matters are communicated and distributed. Trust may be bolstered if an explicit policy is approved which details matters that can be emailed or not, the off limits content email, when telephonic meeting should occur versus face to face. And, the use of cc on emails. Many boards are deciding not to use email communications due the relaxed nature of disclosure and the risk of evidentiary discovery.
• Have a Coffee. Relationships are the currency by which deals and decisions are made. These encounters present opportunities for the capacity of trust to be enlarged, common ground to be found, and “olive branches” to extended and accepted. Have a coffee without a pressing agenda.
• Revisit mission and values. Reconnecting with the company’s mission and values refreshes understanding and recommitment among sitting directors and is an important onboarding experience for newly-appointed directors. These discussions serve to drive personal agendas to the sit lines and bolter business strategies which the full board must guide, drive, and oversee. These discussions prove important in showcasing each director’s competency skill set and perceptions of intension. Trust finds fertile ground.
• Ask director(s) to leave. Trust may never have been adequately built, competency diminished over time or as the direction of the company has shifted, or common goals diverge. Trust may have been irreparably damaged due to matters of reliability or integrity. Rather than force acrimony underground and risk diminishing the ability of the board to fully function, Board leadership must step forward with empathy but conviction to relieve the unproductive tension and ask a board member whom has lost his/her trustworthiness to leave the board.
• Train board leadership. Corralling and herding part-time contributors with disparate outside interests, and distinguished track records of success is no small chore for a chair or lead director. Some will endeavor to “guide” boards with an authoritarian hand. Others slip away from board leadership into administrative roles which foster management by consensus.  Better board leadership understands formal and informal trade routes for steering the board through risk and uncertainty to constructive deliberation and productive outcomes for themselves and their owners. Building trust, using trust and protecting trust are the bedrock of a healthy and successful board. Board leadership needs periodic training and refreshment about their roles, about emerging regulation and sound strategic and oversight skills.
• Take action on board evaluation feedback. Boards in trouble tend to seek out help and often stress-laden board evaluations are used. High-performing boards want to reach higher levels of excellence and often these high-performing boards use board evaluations as input to developing further. Regrettably, it’s the boards in the middle of the range which seem not to take board evaluations seriously—a just good enough mentality encourages them along a just good enough path without the benefit of a good crisis to shock their culture and board trust or without development feedback to pinpoint areas for improvement.

Development builds trust. As directors learn, explore new topics, and hone new skills, they interact with each other in different ways. Informality and discovery are fine catalyst for interpersonal risk taking. They don’t just learn “topics,” they learn about one another. This triggers a virtuous cycle of increased perception of competence, intentions and perceptions of commitment and reliability. Capacity for trust grows. Board trust becomes more certain. Verification becomes less pressing but most likely never fully goes away.

Building Board Trust during Crisis.
Certainly trust will be tested during crises, but why rely upon a crisis as a trust building exercise? Rather, take affirmative steps to build trust in advance; and steps to replenish trust after the crisis has past. “What did we learn about our business and what did we learn about ourselves?” is an effective gateway question to open dialogue about competency, reliability, intentions…and trust.

According to Patrick Lencioni, the noted author on the topic of teams, the number one reason why any team fails is the absence of trust. In the scope of board function, trust is typically presumed, rarely developed, often misjudged as sound and dependable. Historically as a consequence of boards formed from existing relationships, trust may have been “prewired.” This is less likely today with directors sourced from more independent, diverse candidate pools. Yet even today, boards rarely practice building authentic trust, probably because it seems too elementary to garner director attention. Consequently, board capability is not fully accessible or effectively leveraged by board leadership.

Trust is an essential counter balance to skepticism. It is a necessary element in discovery, debate, change, and healthy board culture.

Patrick Dailey, an industrial psychologist by training, consults with boards on matters of board structure, governance and dynamics, board recruitment and assessment, and board composition. Dailey serves on the Nominating and Governance Committee of a private company and has earned the Board Governance Fellow certification.


Posted : April 1, 2013 10:19:47

by Guy M. Beaudin, RHR International

The corporate boards of U.S. financial services companies lag significantly behind their peers in other countries when it comes to managing risk.

What do I mean? Well, most directors are trained and experienced in the “hard” disciplines of business—i.e. finance and accounting—and are able to navigate such issues effectively. However, the fact is that all corporate debacles have psychological and social factors, and very few directors are sought out for their ability to understand them. Yet, these are equally, if not more, important in determining how decisions are made, what behaviors are encouraged and which will not be condoned.

Take Yahoo! and their string of struggling CEOs, for example. Former CEO Carol Bartz was fired in 2011 after throwing the VP of sales under the bus during a conference call. Tim Morse was then appointed interim CEO and succeeded his position to Scott Thompson in January 2012. Just five months later, a controversy began when it came to light that Thompson’s academic credentials were embellished and Yahoo!’s board was accused of failing to conduct due diligence in their appointment. In May 2012, Thompson was let go and Ross Levinsohn became interim CEO, until Marissa Mayer was hired in July 2012. That’s a total of five CEOs since 2011, and now, less than a year into her tenure, Mayer is facing criticism for issuing a ban on telecommuting for employees.

The point is that directors will not be able to get a proper picture of how management is dealing with issues until they delve more deeply into both the practical talent and the behavioral profiles of their leaders. The so-called “soft” skills of understanding talent and the social dynamics that create the culture of an effective management team are constantly taking a backseat to their more firm counterparts.

This thought came to me when a U.K.-based financial services client of mine was recently asked by the Financial Services Authority (FSA), an independent non-governmental body regulating the financial services industry, to provide in-depth evaluations of their senior management team, including the perspective of a third party firm specializing in the assessment of senior executives.

With their request, the FSA wanted to ensure that the incumbent team was capable of making the tough calls required to navigate through current choppy waters. No such process exists for American financial services companies. While FINRA oversees monetary operations in the industry, management matters are left in a remarkably primitive state in the U.S.

I wouldn’t argue that certain aspects of governance haven’t taken a great leap forward in the last decade. Driven by some of the more noteworthy lapses in corporate judgment—Enron, Tyco International and WorldCom—financial risk management is now more rigorously scrutinized than ever before. However, like looking through a microscope, such a narrow focus on financial factors will blur other vital governance issues on the board’s agenda, particularly with “soft” issues like leadership.

That concern is well-founded. In an RHR International survey of senior private equity practitioners in the U.S. and Europe, 20 percent of respondents said that the performance assessment for senior teams in their company is almost purely financial.

This is not to say that Enron wouldn’t have happened if governance had included managerial assessments. Yet, it is senior team members’ values and behaviors that shape those of the organization. When candor, transparency and trust are high priorities exhibited by the top team, organizational levels below are more apt to collaborate without the unhealthy politics and bureaucracy that can create risk and ethics issues.

George Santayana once said, “Those who cannot remember the past are condemned to repeat it.” Until board members expand their focus and take a broader view of the non-financial drivers of risk, we will repeat past governance errors as painful memories of the last few years quickly dim. U.S. boards would be wise to follow the lead of their U.K. brethren. Begin incorporating executive assessments for your senior leaders into your agendas now before legislators do it for you.

Dr. Guy Beaudin is a Senior Partner with RHR International. He manages the firm’s international operations, with responsibility for Toronto, London, Brussels and RHR’s European affiliates. His consulting practice focuses on executive assessment and leadership development for his clients including Presidents and CEOs in Canada, the United States, Europe and Australia.


Posted : March 25, 2013 2:24:42

by Jilaine Hummel Bauer

In his Wall Street Journal column, The Intelligent Investor, Jason Zweig recently wrote about a possible new “holy grail” for investors.  Known as “quality” investing, he explained that the investment approach not only appears to provide better downside protection and more consistent returns, but recent research also suggests it is better than other approaches in identifying profitable companies that will make more money in the future.  In contrast with investors who focus on strong balance sheets and attractive financial ratios, “quality” investors look beyond these “bottom line” measures and focus on what a company is doing to generate current and future revenue growth.  They look for companies that are market leaders in growth industries, companies that stand to benefit from demographic, political or economic trends, companies with business models that provide a competitive edge and companies whose governance practices attend as much to talent, accountability and transparency as to financial results. 

For as often as P&L experience is cited as a criteria for serving on a corporate board, one might think it was the “holy grail” of qualifications.  Yet, just as investors can “miss the mark” by focusing on balance sheets and financial ratios, boards and search firms can miss qualified board candidates by using this simplistic screen. High performing boards know that the “holy grail” is not whether or not a board candidate has had direct responsibility for financial management of a business group, but rather his or her substantive business experience helping generate revenues—and reducing operating expenses.
While all companies need capable people creating budgets and managing the finances of their business lines, quite plainly these are not board functions.  Directors of companies requiring stronger skills or more experience in these areas might offer to help identify and recruit appropriate talent, but they should avoid stepping into the breach themselves.  What is important to assess about a potential director is his or her proficiency and experience producing desired outcomes by synthesizing, analyzing and integrating P&L and other information about an organization and its businesses, markets, industries and stakeholders, together with the individual’s knowledge of relevant business practices and economic, political and demographic trends.

Instead of screening director candidates on the basis of P&L experience, boards will have better results by doing what “quality” investors do to identify high performing companies.  They should avoid a “bottom line” approach and evaluate candidates based on the following core attributes and the path taken (rather than the shoes worn) to develop them:

1. A strong command of what contributes to the P&L of a business.
2. A demonstrated ability to inspire, influence and work with others within and outside an organization to capture opportunities, reduce costs, achieve efficiencies,  mitigate risk and solve problems.
3. An open mind and a willingness to listen to others.
4. Curiosity, creative thinking and mental agility necessary to identify new ways to succeed and anticipate and solve problems.
5. Humility, resiliency, and willingness to admit mistakes and learn from failures.
6. A willingness and ability to clearly communicate and explain successes and failures to all stakeholders.

Jilaine Hummel Bauer, founder of Bauer Consulting, specializes in corporate governance, compliance, and business process improvement. Previously, she served as an executive officer, general counsel and compliance officer in the financial services industry.  She serves on the advisory board of BrightStar Care/Madison (healthcare services) and previously served on the Board of Governors of the Investment Advisers Association.  She is active in national and local organizations that seek to advance and support women corporate directors through research, education, and programming, including the InterOrganization Network (ION) and Milwaukee Womeni, inc. She is a regular contributor to publications and blogs on corporate governance topics. She may be reached at http://www.linkedin.com/in/bauerconsulting. © Jilaine Hummel Bauer. All rights reserved 


Posted : March 11, 2013 1:49:05

by James R. Copland, Manhattan Institute

The annual proxy season is fast approaching—most publicly traded American companies hold annual shareholder meetings in the spring and early summer. This year, as in recent years, shareholder activists will play an active role, submitting proposals to change corporate governance and behavior.

The Manhattan Institute’s Proxy Monitor database tracks and analyzes these proposals. In 2012, the average company in the Fortune 250 faced 1.2 shareholder proposals on its proxy ballots, up slightly from 2011. Such shareholder proposal activity was distributed unevenly: 47 percent of companies faced no shareholder proposal, but 20 percent faced three or more.

The number of proposals appearing on shareholder ballots, however, paints an incomplete picture of this form of shareholder activism. A significant number of shareholder proposals are excluded by companies with the permission of the Securities and Exchange Commission (SEC) or are withdrawn after negotiations between corporate management and proposal sponsors. A survey of Fortune 250 companies conducted for the Manhattan Institute by the Society of Corporate Secretaries and Governance Professionals shows that the number of shareholder proposals submitted to companies is 77 percent higher than those that actually show up on proxy statements.

Last year, shareholders proposals were sponsored almost exclusively by labor-union pension funds, investors with a “socially responsible” investing focus, and a small group of individuals who repeatedly file shareholder proposals with multiple companies. Only eleven percent of 2012 shareholder proposals were sponsored by individuals other than the three most active “corporate gadflies” and their family members and family trusts. Just one percent of all proposals were sponsored by institutional investors without a religious or social-investing purpose or an affiliation with organized labor. A plurality of proposals appearing on proxy ballots were sponsored by labor pension funds, but surveyed companies reported that more proposals were sponsored by social-investing groups, which suggests that such groups may be more willing to negotiate with management to withdraw proposals after submitting them.

Fully 41 of all such proposals in 2012 involved social or political issues unrelated to corporate governance or executive compensation. This is unsurprising, given the prominent role played by special-interest investors in sponsoring shareholder proposals. Indeed, the most frequently introduced class of proposals involved corporate political spending, which understandably matters to some investors but whose relationship with share return is attenuated at best.

That said, proposals involving social or political concerns, despite their frequent introduction, rarely win substantial shareholder support. Each of the 26 shareholder proposals to win the backing of a majority of shareholders at Fortune 250 companies in 2012 involved traditional corporate governance concerns, including proposals to de-stagger board elections and vote on all directors annually (nine such proposals passed) and proposals to require that directors receive the support of majority of voting shareholders to be elected (eight such proposals passed). Proposals involving corporate political spending on average received the support of just 18 percent of shareholders, down from 23 percent in 2011.

The most frequently supported proposals last year—proposals to elect directors annually—will also factor prominently in 2013. Harvard Law School’s Shareholder Rights Project, directed by professor Lucian Bebchuk, is working with eight institutional investors—seven of which are affiliated with organized labor, as well as the social-justice-oriented Nathan Cummings Foundation—on submitting shareholder proposals on this topic. Three of the nine Fortune 250 companies to hold annual meetings by mid-February faced a board-declassification shareholder proposal—at Air Products and Chemicals, Costco, and Jacobs Engineering—and each of those proposals won majority shareholder support.

Other types of proposals to watch for in 2013 include proposals to separate the positions of chairman and chief executive officer and proposals for proxy access. Proposals to separate the chairman and CEO roles were the second-most-frequently introduced class of shareholder proposal in 2012 (winning majority shareholder support at two companies, at McKesson Corporation and Sempra Energy). The increase in such proposals in 2012 followed an announced campaign on the topic by organized labor, and the American Federation of State, County and Municipal Employees has already announced that it is filing such proposals this year, including with JP Morgan Chase.

Although Fortune 250 companies faced only three shareholder proposals seeking “proxy access” for shareholders wishing to nominate directors to the board in 2012, the issue appears to be gaining prominence in 2013. Walt Disney faced such a shareholder proposal at its March 6 meeting, and the management of Hewlett-Packard, meeting March 20, put forth its own proxy-access proposal.

Directors and institutional investors need to be cognizant of their fiduciary duties and resist the pressure applied by special-interest investors when such investors advocate for concerns that may not increase expected shareholder returns for all investors. And Congress and regulators—including the SEC, which is considering a rulemaking petition on corporate political spending—need to rethink the degree to which the shareholder-proposal process facilitates market efficiency and capital formation.


James R. Copland is the director of the Center for Legal Policy at the Manhattan Institute, which publishes ProxyMonitor.org, a searchable online database of shareholder proposals submitted to the largest 250 publicly traded U.S. companies. His full Winter Report previewing the 2013 proxy season is now available.


Posted : February 26, 2013 4:32:36

by Stephen Miles, founder and CEO, The Miles Group

No board member sets out to be mediocre. And yet as institutional shareholders and activists are “grading” board performance on a steeper curve than ever before, their view is that many boards are coming up short.

ISS, government regulators, the press, and others are exercising much greater scrutiny over whether boards are executing their fiduciary responsibilities and really acting in the best interests of shareholders. While activist shareholders traditionally were able to hold sway and demand board seats in smaller companies outside the Fortune 500, today we are seeing this happen with venerable names such as Procter & Gamble, Yahoo!, BMC Software, and JC Penney.

In this climate of stakeholders’ taking a much tougher stance on what they deem to be “underperforming directors,” it’s worth it to examine the causes of mediocre performance on boards today. Why are many boards missing the mark?

Looking at the structure and process of many boards today, the following emerge as the greatest areas of concern:

• Knowledge gaps. One of the major causes of board underperformance is uneven knowledge on a subject; because some directors are way ahead of others, discussion around the table becomes limited. While it is not expected that everyone will be at the same level of knowledge about all board topics, a certain baseline is important for meaningful discussion. We have found a number of companies addressing information asymmetries by adding mandatory board education sessions on specific subjects—whether it’s M&A issues or a new geography the company may be entering or new regulatory developments. This greater leveling of content knowledge allows more robust discussion on the core issues. But the key is that these sessions become mandatory because when one or two directors miss a session, it sets everything back to zero.

• Lack of self-assessment. Boards of directors are continually pushing their CEOs to assemble the best team around them and also ensure that the top executives are being rigorously assessed and developed. Yet the paradox of corporate governance is that when it comes to the board assessing its own performance, it is often done using a check-the-box exercise with some form of gentle peer review. These reviews are frequently conducted by law firms focused on compliance rather than specialists in assessments. To better ensure director effectiveness, the best boards today are implementing truly rigorous assessments with substantive data on their performance rather than the kind of rubber-stamping sign-off that is so common—but is viewed with increasing impatience by board observers.

• Self-delusion. Because the role of a director is multifaceted and not easily quantified or measured, a psychological effect can come into play which is called illusory superiority. While it's impossible for most people to be above average for a specific quality, people deluded by this effect think that they are better than most people in many arenas including work performance. This problem is exacerbated by the lack of honest feedback—fellow directors may comment behind the back of an underperformer but won’t confront him to his face. What is even more interesting about this psychological effect is that the most incompetent people are also the most likely to overestimate their skills. The fix for this problem is employing hard performance metrics for directors. Getting specific about what makes an effective director and then training, educating, and assessing against these criteria gives directors feedback on their performance that is useful and actionable.

• Committee inexperience and recruitment shortcomings. One of the most important conditions you need for performance is “content for the role;” for boards, two of their most important duties are strategy and succession planning. Yet when you examine the real experience that directors have when it comes to succession planning, very few actually have deep experience. What is even more concerning is that you rarely see succession expertise as a criteria for being selected to a board. Additionally, the committee members in charge of succession planning are usually there by default—those directors who did not have the qualifications to be on the specialist committees (such as Audit). Finally, during succession events boards often choose to “go it alone” rather than utilizing outside advisors, something they do for every other activity the board engages in (Audit, Risk, Compensation, Legal, etc.). The combination of not having the proper expertise and the extreme stress that succession events can cause can lead to board underperformance and outright ineffectiveness at a time when shareholders need them at their best.

• Leadership issues. Out-of-touch board leadership can be one of the most problematic issues for a board, even when there are outstanding individual directors around the table. Whether a board has chosen to split the Chairman and CEO role or to utilize a Lead Director, it is very important that board leadership be taken seriously. These are typically directors who have been developed purposefully through various committee leadership roles, combined with deep and broad governance experiences. The very best Chairs and Lead Directors are able to focus the board, draw out people’s points of view, re-direct when things are off track, and deal with issues as the come up in order to maintain a productive and constructive board environment. They are active in their roles engaging individually and collectively with directors and management. They have the pulse of the board and management and are able to guide the board through stressful situations using these events to bring the board together and galvanize it versus it become a divisive and unproductive situation.

Finally, and it should go without saying, people who “need” a directorship for financial reasons should not be on the board because they are compromised before they even begin. You should always recruit directors that have no financial motivation for being on the board. A company needs directors who choose a board because they are passionate about the company and have real skills and experiences that align with the needs of the company and the CEO.

Stephen Miles is founder and CEO of The Miles Group, which advises chief executives and boards globally.


Posted : February 7, 2013 4:22:12

by Judy C. McLevey, VP, Corporate Actions & Market Watch, NYSE Euronext
excerpted from McLevey's
NYSE Euronext blog

NYSE Euronext, NIRI (National Investor Relations Institute) and the Society (Society of Corporate Secretaries & Governance Professionals) submitted a joint petition to the SEC  which focuses on the SEC’s beneficial ownership reporting rules under Section 13(f) of the Securities Exchange Act of 1934. The petition requests the SEC to reduce the time frame under which investors are required to report their holdings from 45 business days after the end of the quarter to two business days after the end of the quarter. Currently, the Exchange Act requires quarterly reporting, so a further reduction than quarterly reporting would require an act of Congress.

In addition to requesting a shortened 13(f) reporting period, the petition also encourages the SEC to raise the 13(f) beneficial ownership reporting rules with the appropriate Congressional oversight committees to establish monthly rather than quarterly reporting and advocates strong support for the SEC to review all Section 13 beneficial ownership reporting rules. 

Continue reading Improving Transparency Over Stock Ownership

Posted : January 10, 2013 4:47:13

by Ted Dysart, Vice Chairman, Heidrick & Struggles

After Illinois Tool Work’s CEO David Speer lost his battle with cancer earlier this month not only did the Chicago community lose a vital member, but ITW also found itself at a critical leadership juncture.  At a time when many companies waste crucial money and resources scrambling for a replacement – and in the process become press fodder – ITW had a plan.

Over his 30+ year career with ITW, Speer left a lasting impression.  After joining in 1978, he advanced through sales and marketing positions before becoming CEO in 2005 and, the following year added the title of Chairman.  Speer championed and led a strong acquisition program that, before the 2008 downturn, led to $1 billion in increased revenue each year.

When Speer stepped down in October to focus on the treatment of his medical condition, the company had already implemented its succession plan, shifting Vice Chairman Scott Santi to President, COO and Acting CEO.  Efficient planning, like that of ITW, often goes unnoticed.  However, attention is frequently paid to the theatrics of finding a new leader. 

Why all the drama? Data has shown that companies can be ill prepared to find a CEO replacement.  A 2010 survey of 140 CEOs and directors of North American companies revealed that 39 percent of respondents believed they had no viable internal candidates to succeed their current CEO.

But, many companies are prepared for transition or loss.

McDonald’s is just one recent example. When Jim Skinner retired after his eight-year run as CEO in June 2012, President and COO Don Thompson took over.  Thompson’s 22-year history with the company reflects McDonald’s talent retention and focus on grooming its bench strength.

Along with ITW and McDonald’s, an array of formidable Midwestern companies has cultivated CEO successors through a thoughtful process.  Organizations like Walgreens, Caterpillar, Deere, Grainger, United Continental, CDW and Northern Trust have recently found their CEOs from within – illustrating the deep talent pool they have developed for leadership.

Furthermore, many of these companies have maintained a forward view for leadership.  Instead of cloning the incumbent CEO, these organizations have sought a new direction in leadership to stay ahead of industry trends and avoid perpetuating problems.

Cardinal Health, the $102 billion Ohio-based pharmaceutical and medical supply company, promoted its Vice Chairman and division CEO George Barrett in 2009.  After taking the helm, he revitalized the company’s primary drug distribution business, leading to a more competitive position in the market.

A similar internal transition occurred earlier this year with Exelon, the $18 billion electric utility.  When John Rowe stepped down as CEO, Christopher Crane was promoted from President and COO.

Transition at the top can certainly devolve into tabloid scandal, but there are many examples of getting it right.  And unfortunately, we seem to focus on those that get it wrong.  Along with internal vetting, best practices for succession also means considering an external pool of candidates.  A thorough market scan ensures that external and internal candidates are equally evaluated so that a company truly finds the best candidate.  Even in the face of tragedy, a well-executed, thoughtful strategy can guide a company through a potential storm and away from the drama.

What makes these Midwestern players so successful?  I’d say it is a board that forces the tough questions, looks to the future and puts the organization above any one individual.  And, if I’m a shareholder, I’ll put my money with these time tested enterprises any day.

Ted Dysart is Vice Chairman of executive search firm Heidrick & Struggles.

Posted : January 3, 2013 10:49:08

by Jennifer B. Rubin, Mintz Levin Cohn Ferris Glovsky and Popeo, P.C.

Chester Ludlowe, a resident of Vermont, has an MBA from Rochville University, which also awarded him a Certificate of Distinction in Finance.  Impressive credentials, but even more so because Chester Ludlowe is a pug.   His owners purchased his online degree from a post office in Dubai for a $499 fee.

Chester (or, more accurately, his human owners) successfully mined the diploma mill industry for bogus educational credentials.  And Chester, or more likely his human counterpart, might someday be presented to you as a candidate for a senior leadership position.

No board member relishes learning that the company CEO or other senior officer has been unmasked as a fraudster – whether the misrepresentation relates to the number and type of degrees from a legitimate institution of higher learning as in the case of Yahoo! or made-up educational credentials like the former CEOs of Radio Shack, Bausch and Lomb and Lotus Corporation.  It is shocking, but true, that even CEOs misrepresent their credentials, whether the motive is to move up the corporate ladder, or secure a CEO position to build on or bury dishonest or deficient credentials. Bogus credentials cause embarrassment, distraction and even humiliation to the duped entities.   So the question must be asked, what should board members do, particularly those who sit on search committees charged with securing new leadership for the organization, to make sure this doesn’t happen to them?

 Boards frequently hire search and recruiting firms to source—and vet—candidates for top leadership positions.  And in fact, there is something to be said for hiring an expert to undertake the always detail-oriented and sometimes excruciatingly dull trip down memory lane to verify the credentials of candidates with long job histories and varied educational credentials.  Applying corporate (or worse, board resources) to those details doesn’t make sense because that is not what the company was designed to do, and certainly most organizations lack even the most basic training to do it right. Leaving these tasks to the experts, whether those experts are recruiters or investigators trained to conduct detailed background investigations, is sensible and valuable.  But board committee members should not be shy about providing a healthy dose of guidance to recruiters or investigators about what is, and isn’t, material to the search. And it is important that any retention contract spell out who is obligated to do what—from the actual verification procedures, to the gathering of the legal paperwork necessary before a background check can even begin. Any credible recruiter or investigator should be able to supply all the necessary services and forms.

While hiring a recruiter or investigator to perform basic investigative tasks seems wise purely from an expertise perspective, the board cannot relieve itself of the basic due diligence obligations regarding key leadership candidates.  The duty of business judgment, as broad as that is, must encompass some sort of minimum vetting obligation, such as meeting key candidates in person or even personally speaking to their references. But one would hardly expect the members of a search committee themselves to undertake an independent investigation of each candidate, or even the prime candidate.  Again, what is important is that the search committee, whether alone or with the vetter’s assistance, identify the important criteria for the job—perhaps it is a number of years of experience in a certain industry—or managing certain business units or a demonstrable record of revenue growth at a prior employer.  By the same token, some criteria are presumed—the existence of certain felony convictions, for example, might knock candidates out of the box for a public company board seat, as would learning that a candidate does not possess a valid degree.  Concocting educational credentials appears to be a particularly robust area for fraudsters, who thrive on lax verification procedures. 

And what happens if the candidate successfully hoodwinks the company? An employment agreement procured through fraud or misrepresentation is void if the lie or incorrect information is important to the hiring decision. So in the rare event that the individual lacks the integrity to voluntarily step down, the company’s position in litigation is the better one. And adding representations to employment agreements and company handbooks that misstatements about an employee’s background or credentials may result in termination is not a bad idea.

In sum, there is nothing wrong with search committees delegating the tedious but important vetting tasks to those who are expert at it, even for a CEO search.   But not all tasks can be delegated—Chester Ludlowe would have been unmasked at his initial interview.


Jennifer Rubin is a member of the Employment, Labor and Benefits section of Mintz Levin Cohn Ferris Glovsky and Popeo, P.C.





Posted : December 13, 2012 8:37:35

by Andrew C. Liazos, partner, McDermott Will & Emery LLP

Many compensation committees are being asked this month to accelerate payment of 2012 bonuses earned before year-end.  These requests are primarily being driven due to concerns about potential higher income tax rates and new FICA taxes beginning in 2013.  Typically, these bonuses are paid shortly after the end of the performance period in order to provide adequate time to evaluate corporate performance (such as reviewing audited financial results).  In addition, bonuses payments made by the following March 15 (for calendar year companies) will often result in the company being able to deduct bonuses for the prior year’s tax return.

It’s possible in many cases to accelerate payment of 2012 bonuses before year end without triggering adverse tax penalties on employees.  An important concern whenever accelerating the payment of compensation is whether doing so will trigger an additional 20% tax under Section 409A of the Internal Revenue Code that applies to “nonqualified deferred compensation.”  Fortunately, annual bonuses are typically structured to be exempt from Section 409A as so-called “short-term deferrals.”  Generally there’s no penalty when an employer decides to accelerate the payment of a short-term deferral or other type of compensation that’s exempt from Section 409A for bona fide purposes.

Great care, however, is required before a public company accelerates bonus payments before year end.  Most annual bonus plans have been structured so as to avoid the $1 million deduction limitation on payment of compensation to named executive officers under Section 162(m) of the Internal Revenue Code.  The so-called “performance-based exemption” to this deduction limitation generally requires that the compensation committee “certify” in writing that the performance goals it set earlier in the year have been satisfied before any payment is made to the executives.

IRS regulations do not address under what circumstances the required certification can be made prior to the end of the performance period for the annual bonus.  Indeed, there’s little guidance with respect to what types of actions will be treated as a bona fide certification for tax purposes.  IRS regulations only provide that the written certification requirement can be met through the use of committee minutes.  Often the Section 162(m) certification is only a line or two in the minutes for the meeting during which the committee approves payment.

Whether it will be possible for a compensation committee of a publicly held company to certify payment, in whole or  in part, consistent with Section 162(m) will depend upon a careful review of the facts and circumstances.  In particular, the precise nature of the performance goal is critical.  For example, it may be possible to get comfortable that a performance goal based on increase in revenue from the prior year has been met, in part, based on results to date with an appropriate reserve in accordance with GAAP for returns.  However, if there’s the potential for a loss or events to occur later this month that will affect previously measured performance, the decision to certify can be much more difficult.  If certification is made for a partial payment, the compensation committee would then meet in the first quarter of the following year to determine whether additional bonus amounts are to be paid.

It’s important for compensation committees of public companies to understand that the certification is not just a tax deduction issue.  Plaintiff strike suit lawyers have filed several shareholder derivative complaints over the past year alleging violations of the Section 162(m) requirements and related securities disclosure requirements.  These complaints assert that the payment of nondeductible compensation resulted in corporate waste and/or unjust enrichment and that the decision to make a payment is a  breach of fiduciary duty.  Requested relief has included recovery of previously paid compensation, orders holding directors and executive officers liable for damages, and injunctions prohibiting future compensation awards under previously approved plans. These lawyers have not been shy about alleging potential Section 162(m) violations, even when the IRS has not seen fit to do so!  (See this article if you would like more details regarding these lawsuits.)

It is prudent to evaluate how committee members can protect a public company and themselves against these risks before accelerating a bonus payment prior to year end.  Overall, it’s very helpful to have a record demonstrating that the performance goal had been met, there was an appropriate certification process prior to payment and that management did not control the approval and the acceleration of bonus payments.  Actions to consider as part of demonstrating a bona fide certification include the following:
* requiring a written report from management regarding performance, financial and otherwise, related to the performance goals that has been reviewed by the audit committee,
* receiving the report sufficiently in advance of the certification so that compensation committee members can properly evaluate the proposal,
* holding a meeting (via teleconference) so that management can make a formal presentation and answer questions from committee members about tax and other issues, and
* requiring repayment if it turns out that any amount in excess of what was permitted under the performance goals was unintentionally paid before year end.

Providing certification by unanimous written consent, while legally permissible, can be problematic.  It may raise questions about the date of the certification and corporate governance practices.

Of course, public companies should be prepared to explain the rationale for any accelerated vesting as part of the CD&A disclosure and any say on pay vote for the 2013 proxy. These and other  proposals to accelerate payments or vesting for executives before year end to trigger tax in 2012 should be carefully considered and executed consistent with corporate governance, fiduciary and tax considerations.

Andrew C. Liazos, a partner in the law firm of McDermott Will & Emery LLP, co-chairs  the Firm's Executive Compensation Group. He regularly represents public companies, large closely held businesses and compensation committees on all aspects of executive compensation.


Posted : November 13, 2012 10:23:22

by Robert Rose, Partner, Sheppard, Mullin, Richter & Hampton LLP

It has never been so enticing and so rewarding to become a whistleblower.  Casinos attract customers by hyping slot machine winners.  State governments do the same with lottery jackpots.  In September, the IRS touted the largest award ever—$ 104 million—to a former UBS banker who exposed the largest tax evasion scheme in history.  The award comes as he finished his prison sentence for involvement in that scheme. 

Earlier this year, the Department of Justice settled with five of the largest mortgage servicing companies and sent a $46 million share to a group of whistleblowers.  The 2010 Dodd-Frank Act authorizes awards of up to 30% of collections for high-quality original information.  The SEC made its first whistleblower award ($50,000) last August for information against an unidentified public company.  With $150,000 collected thus far, the identity-protected whistleblower may be receiving more checks in the future. 

Lawyers representing whistleblowers contend that most of their clients had tried repeatedly to report their concerns internally and were punished for their efforts.  A study in 2010 by a non-profit, public interest organization found that nearly 90% of employees who filed qui tam (False Claim Act) suits initially reported their concerns internally, either to supervisors or compliance departments.  Nearly 5% of whistleblowing plaintiffs actually worked in compliance departments. 

What can directors do when there’s a serious problem in the company that management may be mishandling or ignoring?  Directors typically meet a few times a year and must rely on a CEO, CFO or auditor (internal or external) for their information.  Employees do not normally report misconduct to the board unless the corporate culture permits, or actually encourages, direct communications.  Employees at large companies rarely know who chairs the audit committee.  They may have no idea how to get in touch.  Most of all, they may fear disclosure of their identities and the likelihood of retaliation, rather than appreciation.  The legal department (if there is one) reports to management and the problem may be in the top ranks. 

One step is to improve internal controls with a publicized commitment to responsiveness.  Having a hotline is a good start, training employees how to use it is better, but directing the calls to a director, rather than to a manager is the best.  Customers and suppliers should be included.  For example, if suppliers are being extorted by the purchasing agent to pay a kickback, the supplier should be permitted to call a number that goes to a board member. 

Retaliation claims begin with disclosure to management of the employee’s identity.  The best defense is to promote anonymity.  An angry, outraged employee who is being ignored and fears punishment for speaking up is a disaster in the making.  Directors should consider adopting a policy that would allow an employee to disclose via a lawyer, whose bill would be paid by the company if the information is genuine. 

Credit is given by investigators and regulators to companies that have thoughtful policies and robust systems, but that credit evaporates when the effort is merely on paper.  Continuous training is a must.  Whistleblowing happens when the established channels for internal reporting have failed. 

Whistleblowers often point to how loyal they were to the company, but that their superiors and co-workers were not.  The focus should be on the message rather than the messenger.  Even a disgruntled employee can speak the truth.  Family-owned businesses are particularly exposed to the risk that unpleasant news will be suppressed by fearful employees, fearful managers and family-friendly directors. 

Truly independent directors earn their stripes by promoting systems that can address situations internally, before a suit is filed or a subpoena arrives. 

Robert Rose is a partner at Sheppard, Mullin, Richter & Hampton LLP in its San Diego office.  He is a former federal prosecutor who represents individuals and entities facing governmental investigations as well as complex civil litigation.  He conducts internal investigations, gives preventative advice and tries criminal and civil cases in the state and federal courts. He may be reached at rrose@sheppardmullin.com.


Posted : October 22, 2012 2:51:59

by Allison O'Rourke, Managing Director, NYSE Euronext

In her second posting in a series on market jargon, Allison O'Rourke explains the term Designated Market Maker. While board members may not visit a trading floor regularly, it is nevertheless important to know how your company's stock is faring and what various stock jargon means in plain English.

Market Makers play an important role in the equities market place.  Their primary responsibility is to provide a continuous two-sided quote to ensure liquidity in stocks.  Most fully electronic exchanges (like Nasdaq) rely on competing market makers to provide a fast and efficient market for investors.  A stock may have 20 or more individual market makers all supplying various amounts of liquidity. 

In addition to these electronic market makers, the market models at the NYSE and NYSE MKT, also include a Designated Market Maker (DMM).  These DMMs are one of the key differentiators for NYSE and NYSE MKT issuers and trading customers by adding a high touch element to the market’s otherwise high tech operations.  This approach is important for discovering and improving prices, dampening volatility, adding liquidity and enhancing overall value.  Unlike an electronic market maker, DMMs have an obligation to maintain a fair and orderly market in the stocks they cover.

In addition to maintaining a fair and orderly market, DMM obligations include:
• Quoting at the national best bid and national best offer a specified percentage of the time
• Facilitating price discovery throughout the day and perhaps most importantly at the open and the close
• Providing capital to ensure liquidity during temporary imbalances in the market

Five things you probably didn’t know about DMMs:
• DMMs were formerly called Specialists
• When a company lists on the NYSE or NYSE MKT, they interview each of the DMM firms and choose the one they most want to work with
• The trading the DMMs do is proprietary, meaning they cannot use customer orders to fulfill obligations
• On average, DMMs make up over 7% of the trading on the NYSE
• DMMs act as a valuable information resource for the listed companies they trade with insight into trading and market moves

To learn more about the role of the DMM, take a look at my blog on Exchanges, Rocking the Auction Market, or the NYSE Euronext website.

Allison O'Rourke is a Managing Director in NYSE Euronext's Global Corporate Client Group. She can be reached at aorourke@nyx.com or on Twitter at @NYSEAli. Watch for upcoming blog entries on other market jargon.



Posted : October 11, 2012 2:36:02

Five Reasons the Answer Might Be “Yes"

by Nathan Bennett & Stephen A. Miles

Given its importance to a company’s health, it’s no surprise that CEO succession continues to be a favorite topic in the business press.  That iconic companies like Apple, Hewlett-Packard, and GM have recently named new CEOs only adds to the interest.  And as troubled firms such as Best Buy and Yahoo! announce new chiefs, Monday-morning quarterbacking around their selections has become a favorite pastime. 

There is no shortage of advice around what a healthy CEO succession process looks like.  We don’t have an issue with the advice that’s been proffered—it’s all about taking care to ensure a good outcome.  Yet in spite of all the attention the topic has received, we contend there is a key missing piece.  The missing piece is that the first and arguably most critical step in a succession process is ensuring that the right people are sitting around the table to execute the process. Not only should the board about to make the decision on the next CEO be experienced in such matters, but the interrelationships among the board members should also be healthy.  These criteria are often overlooked.

It’s generally assumed that the board is ready for the responsibility of picking the next CEO.  It may not be.  And when it isn’t, we are concerned that giving the wrong people the right instructions does not foreshadow a good result.

Below we share our take on the board characteristics that should cause concern during a CEO succession. 
1. Is There Interpersonal Conflict?

Boards are often filled with larger than life individuals, each with long track records of success–and strong opinions they are more than willing to express.  While a certain level of conflict helps avoid ‘groupthink’ through the discussion of multiple perspectives, conflict can be harmful when it gets personal. A lack of trust, private agendas, and the like can cause tremendous damage in the decision-making process around the naming of a new CEO.  Frankly, situations like that recently witnessed as Hewlett-Packard struggled through a number of succession challenges led many to question the board’s capabilities to provide proper governance.

THE RISK: When the conflict becomes personal, strategy and vision take a back seat. The incoming CEO—no matter how talented—is starting out at an extreme disadvantage when coming into a scorched-earth battlefield left by a warring board.  

2. Are There Irreconcilable Differences Regarding the Vision for the Company’s Future?

The nature of business today—economic uncertainty, increasing globalization that brings with it both threat and opportunity, technological advances, and equivocal signals from governments around fiscal and regulatory policies—brings with it a very noisy decision-making environment.  It is easy to see how different strong, experienced individuals could develop commitment to different strategies as the best path forward.  And no other single act more clearly affirms a strategic direction than the selection of a new CEO. When board members do not share a common vision for the future, they likely will be looking for very different capabilities in the next CEO and likely will not be able to agree. At Yahoo!, for example, it’s fair to say that the best strategic direction for that company has remained a mystery for the board.

THE RISK: If the board can’t agree on a strategic direction, an incoming CEO could be like a star quarterback who’s suddenly asked to pitch a no-hitter. A board’s ambivalence can set up an otherwise talented CEO for failure if he or she is brought in to play the wrong game.

3. Does the CEO Have Too Much Say?

In some cases, a CEO is too influential on the board.  This influence may have been earned through years of success, as when the CEO has become an icon of industry (e.g., Jack Welch).  In other instances, the dual role of Chair/CEO provides that individual a great deal of power in all board matters, including succession planning.  It wouldn’t be fair to say that heavy CEO involvement inevitably leads to a poor choice as a successor, but it is reasonable to hypothesize that allowing the CEO to dominate the process is an abdication by other board members of a key responsibility.

THE RISK: Allowing the CEO undue influence in the succession process risks keeping the focus on the past versus the future. What CEO doesn’t want to cement his or her legacy? “Handpicked” successors can work if there is a long preparation with full vesting from the board (such as Apple’s Tim Cook), but ceding too much control over the process to the CEO can leave a board weaker, dealing with the baggage of the old CEO, and removed from a critical area of accountability.

4. Is There Insufficient Diversity?

Years of research on group decision-making reveals that diverse groups – though often slower to reach a consensus–make superior decisions. Diversity is thought to widen the group’s search for alternatives, to offer a more creative process for vetting alternatives, and allow for a more open and candid discussion when identifying a path forward.  It’s reasonable, then, to hold that diversity on the board offers a benefit as the contenders in a succession process are identified and considered. Insufficient diversity around the table can limit the field of candidates: for example, when the board lacks industry diversity it’s quite possible that their networks are redundant—not likely to be broad enough in search. 

THE RISK: A narrower field of candidates known to the board is a risk when homogenous boards are casting their nets outside the company, but the risk also applies with internal candidates. Lack of diversity as far as functional background, for instance, may put blinders on the board when evaluating chief executive potential of those within the company. Gender, ethnic, and age diversity issues can also apply in the same way.

5. Is there a Lack of Succession Experience?

Like any other work group, boards are assembled with a job in mind.  Succession is a key responsibility of a board and as such, the knowledge, skills, and abilities to do it well need to be unequivocally and deeply reflected in the team.  Just as it would be unconscionable to appoint someone without proper experience to head the audit committee or the compensation committee, it is essentially malpractice to presume the succession challenge requires any less acumen to do well.

THE RISK: Lack of experience in succession planning—and the challenges that arise with even the smoothest processes (such as dealing with unexpected personal issues)—can derail a board. When there isn’t enough attention paid to appointing people who can effectively accomplish this task, all the well-intended advice in the world won’t be enough to allow anyone to be sanguine about the outcome of a succession hunt. 

As you see a company begin the process of making plans to replace a CEO—whether the event be a carefully timed and orchestrated one or a quick move in response to a crisis—a key indicator of how well the successor will perform comes from understanding how ready and capable the board is of working together, with savvy, to arrive upon a credible, capable candidate.  If the board suffers from one or more of the liabilities identified here, it may be that the first order of business is to address those challenges of the board itself.

Nathan Bennett is a professor of management in the J. Mack Robinson College of Business at Georgia State University.  Stephan A. Miles is the founder of The Miles Group.


Posted : October 3, 2012 10:19:27

by David G. Hartman and George F. Brown, Jr., Blue Canyon Partners, Inc.

Fortune just released the list of the 500 largest firms in the world, documenting 73 Chinese companies among the world’s largest, up from only 11 companies just ten years ago.   It was only twenty years ago that Deng Xiaoping’s tour of southern China announced the replacement of a planned, centrally dictated economy by a market economy.  China’s role as the home of 73 of the world’s largest companies underscores the incredible strides that have allowed the Chinese economy to transition from a backwards and closed country to a global economic powerhouse.

This rapid transformation of China has hardly escaped the attention of most executives, who have been there personally and have boots on the ground.  Still, among the demands of a challenging environment in established markets, China may be a lower priority.  Board members, with an eye on broader trends and a responsibility for positioning the company for the longer-term, can play a vital role as a catalyst for pushing the mandate of China forward. 

Our messages to our clients have been twofold:

• To still be a global leader in your industry in 20 years, you must be a leader in China.  For most firms, that is mandatory, not optional.  Few today can claim that position.
• If you haven’t yet faced a Chinese competitor with an almost-as-good offering at a very different price point from yours, you must be prepared.  Such competitors have become world leaders in some industries. The emergence of that competitor in your industry is a near-certainty, and the timing will be far sooner than what you might expect.

While few have argued that those messages require action to become a major participant in China, most place China on the list of growth initiatives to be revisited in calmer times.  Given conditions in the US and Europe, attention is naturally elsewhere.  But it is in such difficult times that the Board can be most effective in providing support for risk-taking that builds a base for future success. 

Especially in companies that are large and decentralized, the Board can be a catalyst for concerted actions.  Those Board members who have experience in focusing efforts on a company-wide objective can be especially useful in guiding a management team unaccustomed to top-down actions or without the scale of resources sufficient to make China initiatives “business as usual.” 

Those Board members with experience in China can help the management team understand the challenges there.  At the risk of oversimplification, we can see that there are two types of companies on the Global 500 list.  There are “mostly socialist” companies, largely the government enterprises occupying spots near the top of the Global 500 list, and “mostly market” companies, the smaller, fast moving companies who win in tough competitive settings. 

It is these firms in the bottom half of the Global 500 list (and even more frequently in the roster of the next 500) that should be the focus of attention, as competitive threats and as acquisition targets.  In China and elsewhere, they have won their market positions in tough competition with Chinese and foreign competitors.

When asked by Fortune to comment on the remarkable rise of Chinese companies, we noted the presence of new companies like Lenovo and Geely that grew up by first selling “good enough” products to the large mid-tier market in China and later expanded to become global players (by acquisition of the Thinkpad division and Volvo, respectively). 

These are companies that haven’t simply ridden the wave of China’s growth, but have thrived in the new environment of the market economy and in the process have created what we believe is a distinctive Chinese business model, defined by the way they compete and win.  We have described them as Second Mouse companies, from the saying “The early bird gets the worm, but the second mouse gets the cheese.”   As we have studied these companies, we have become convinced of the viability of their skills in the mid-tier markets across the globe.  They have mastered fast-follower competencies, learning world-class manufacturing and sourcing practices, being quick to market, borrowing the best features from global products, and focusing innovation on cost reduction rather than adding features to which the mid-market is largely indifferent.  Executives in industry after industry can cite the challenges that they’ve faced as Chinese competitors like Huawei, Sany, Haier, Mindray, and others have entered their industry.

Board members can be an important part of bringing their skills inside through a new approach to acquisition and integration, sooner rather than later.  That option is far more attractive than waiting until such companies achieve the scale to compete in global markets as those cited above have done.

David G. Hartman is Blue Canyon Partners’ China Practice Director.  He has previously served on the faculty of Harvard University and as executive director of the National Bureau of Economic Research.  He has been an active participant in China’s markets for over twenty years, speaks Mandarin, and resides in Beijing.  His clients include a roster of Fortune 500 firms and Chinese companies. George F. Brown, Jr., is the CEO and cofounder of Blue Canyon Partners, Inc., a strategy consulting firm working with leading business suppliers on growth strategy. Along with Atlee Valentine Pope, he is also the author of CoDestiny: Overcome Your Growth Challenges by Helping Your Customers Overcome Theirs, published by Greenleaf Book Group Press of Austin, TX.  See www.bluecanyonpartners.com for more details.



Posted : September 28, 2012 1:32:32

by Michael Whitehouse, George Washington Law, Title VII Program

Many implementation questions are looming regarding the Dodd Frank Act’s Title VII derivatives regulations:  which companies are subject to CFTC, SEC or Fed oversight?  Does our company need to submit information about transactions that are not centrally cleared?  When do the rules apply to our company?  How will counterparty risk change? How will our company manage liquidity risk and the need for collateral?

Getting a handle on the operational implications of central clearing derivatives contracts, the new trade process, and forecasting margin and liquidity needed is an uppermost concern to many company executives from General Counsel and CFO to COO and Chief Compliance Officers.  A program devoted to these important topics will take place in Washington DC on October 10th at George Washington Law School.  Commodities Future Trading Commission Chairman Gary Gensler and the CFTC's Director of Enforcement, along with Futures Industry Association leader Walter Lukken, will address the participants and share their views.

The derivatives regulations promulgated as an outcome of the Wall Street Reform Act of 2010 are designed to address counterparty risk and systemic risk in the global financial markets made apparent in the AIG and Lehman Brothers failures.  The regulations and Basel III risk based capital rules strongly incent, if not outright require, most derivatives holdings to be fully collateralized, executed on an electronic exchange and centrally cleared.  The introduction of collateral requirements, electronic execution, pricing transparency, anonymous markets, and central clearing, is a market game changer and the focus of this in-depth program.

Workshop panels will be led by senior regulators, legal experts, market participants, and leading academics, who will provide a practical analysis and understanding of the new regulations, including who is included and who is exempt. They will describe how banks and other market participants are transitioning to the new laws, and will help the audience to develop a thoughtful road map for addressing derivatives-related risk management programs, swap reporting requirements, liquidity assessments and collateral management. 
For a complete speaker list and other program details, including how to register, visit http://www.law.gwu.edu/gwl/Dodd-Frank-Title-VII. Blog readers who wish to attend this program may use this code when registering for a 50% discount: CBM650
This program is the inaugural program in C-LEAF's Senior Executive College workshop series. This new series of programs will provide senior business and finance professionals with cutting-edge presentations by leading policymakers, practitioners and academics on important current issues.
Michael Whitehouse is the Program Co-Chair, GW Law Title VII Program and the President & Founder, Vital Venture Networks, a marketing communications firm that represents GW Law School.  He may be reached at

Posted : September 21, 2012 3:55:31

by Laura J. Finn, Web Editor, Corporate Board Member

Unlike other gender diversity events, the conference I attended yesterday hosted a mix of males in the audience and on the panels. The Johns Hopkins’ School of Advanced International Studies Global Conference on Women in the Boardroom encouraged conversation among both women and men to trade ideas on how to increase the number of women on public company boards.

The star of the event was Australia, or its representatives, Elizabeth Broderick, Australia’s Federal Sex Discrimination Commissioner, Stephen Fitzgerald, former Chairman, Goldman Sachs-Australia and New Zealand, and Jillian Segal, Director, Australian Stock Exchange. Each spoke on a different gender-related topic. Broderick believes that men have a place in the gender-diversity-in-the-boardroom conversation. She said, “Men taking the message of gender equality to men is what’s going to change the situation.” She followed up her position by also arguing that women need to mentor other women, and work together. Fitzgerald discussed Australia’s model to add more females to boards, and why it works in Australia. In Australia, there is not a quota to force companies to add females to boards. Instead, Australia’s stock exchange, ASX, has set corporate guidelines for its listed companies to follow. The listed companies must establish a diversity policy and formally disclose that policy, including the companies’ objectives for adding more females to the senior ranks and the board room. Then, the companies must take reporting a step farther, and annually disclose if the company met its objectives, or why it did not. Segal, a director at ASX, said this method works in Australia, but realizes it might not work in every country. “Context and culture is extremely important,” she acknowledged, saying that is the reason a quota would not work in Australia.

Are quotas necessary?
Some panelists argued for quotas, and others argued against it. When Baroness Mary Goudie stated she did not want quotas in her homeland, the UK, because she wouldn’t want to perpetuate a feeling that women who weren’t qualified were serving as board members, Broderick countered by voicing, “I don’t think that quotas and merit are mutually exclusive.” The debate over quotas raged on during the event, and one U.S.-based panelist, Beth Brooke, pointed out that there is so much corporate governance exhaustion in the U.S. right now that quotas would likely face much adversity here. Brooke, Global Vice Chair, Public Policy, Ernst & Young, sat on a panel with Broderick and Goudie, and as the only American in the group, was asked many tough questions about why America lags behind the world in gender diversity in the boardroom. Brooke said she believes that CEOs understand the business case for diversity in their heads, but that doesn’t necessarily translate to their hearts.

Business cases for gender diversity were another hot topic of the day and TK Kerstetter, President, Corporate Board Member, had supporters and detractors when he questioned whether the gender diversity’s bottom line business case has truly been made yet.  He suggested that research studies have been questioned and if CEOs that he knows had seen and believed studies, then more would be actively working with their board to recruit new, diverse candidates.  Kerstetter said a solid business case is to have a board reflect the market it serves. It seems the way to do that is for current board members to recommend other qualified, diverse candidates, and for the governance/nominating committee to seek out diverse candidates, as well. In all likelihood, if the bottom line of a company is not being impacted by its board composition, then a CEO is probably not spending much time thinking about this issue.

After listening to voices from around the globe discuss what has worked in various countries and why, I’m not sure that more federal legislation is what U.S. corporations need right now, but I am certain that corporations wouldn’t want more federal laws to comply with. Perhaps a gentleman’s agreement with search firms to institute an informal version of the National Football League’s Rooney Rule would work—when looking for a new board member, search firms would agree to present at least one minority candidate. Attending corporate governance events on a regular basis is proof to me that minority candidates are qualified and eager to participate. If the governance/nominating committees would agree to interview at least one minority per board search, that might move the needle here in the U.S.


Related reading - interview with Susan Ness, event founder


Posted : September 17, 2012 11:22:56

by Allison O'Rourke, Managing Director, NYSE Euronext

In her first posting in a series on market jargon, Allison O'Rourke explains two important terms that executives and directors should understand. While board members may not visit a trading floor regularly, it is nevertheless important to know how your company's stock is faring and what various stock jargon means in plain English.

When I first started in the business, I found the terms “buy side” and “sell side” very confusing.  There didn’t seem to be any rhyme or reason to calling one half of the Street the Buy Side and the other half the Sell Side especially since both “sides” bought and sold stock with regularity.  I did my best to remember which was which and chalked it up to one of those quirks, of which there are many, on Wall Street. 

Of course, the names are not actually random and there are very good reasons for calling them what we do.  Investopedia’s definitions are a great place to start:  The Buy Side is comprised of investing institutions such as mutual funds, pension funds and insurance firms that tend to buy large portions of securities for money-management purposes.  Meanwhile, the Sell Side is involved with the creation, promotion, analysis and sale of securities.

Put another way, the buy side is the half of the Street we consider the professional investors (asset managers and hedge funds) who make their money investing on behalf of clients.  The sell side includes the investment bankers and brokers who make their money creating and servicing stock products.  They bring IPOs to market, offer stock research, act as market makers and trade on behalf of the buy side. 

So the naming isn’t random after all.  While both might be buyers or sellers of any given stock, one side’s primary function is to bring the stocks to market to be sold and the other side’s primary function is to buy those stocks.  And, neither half works quite right without the other. 

Allison O'Rourke is a Managing Director in NYSE Euronext's Global Corporate Client Group. She can be reached at aorourke@nyx.com or on Twitter at @NYSEAli. Watch for upcoming blog entries on other market jargon.


Posted : September 4, 2012 3:28:30

by Scott C. Ford and Alec J. Zadek, Mintz Levin

Sometimes, a special committee is not so special.  On August, 27, 2012, the Delaware Supreme Court upheld a chancery court decision ordering the controlling shareholder of Southern Copper Corporation, formerly Southern Peru Copper, to pay more than $2 billion in damages for breaching its fiduciary duty to Southern Copper’s minority shareholders.  The breach stemmed out of the company’s acquisition of an entity owned by the company’s controlling shareholder.  The hammer came down despite the existence of the traditional board-insulating measures: approval by a special committee of independent directors and a super majority of minority shareholders. 

In In re Southern Peru Copper Corporation Shareholder Derivative Litigation, Chancellor Strine peeled away the veneer of these fronts, looked very carefully at the process and substance of the negotiations surrounding the transaction, and found that the acquisition was not entirely fair.  On appeal, the Delaware Supreme Court affirmed Chancellor Strine’s decision including his award of more than $2 billion in damages to the plaintiffs.

The holding serves as a cautionary tale to all controlling shareholders and provides instruction to corporations considering, and special committees tasked with evaluating, a controlling shareholder’s proposal.

Underlying Transaction and Decision
In 2004, Southern Copper’s controlling shareholder, Grupo Mexico, offered the company the opportunity to buy Grupo Mexico’s 99.15% ownership interest in Minera, a Mexican mining company, in exchange for approximately $3 billion worth of Southern Copper stock.  Southern Copper created a special committee of disinterested directors to evaluate the proposal.  The special committee went through the motions to give the appearance of objectivity, such as hiring legal and financial advisors (who provided a fairness opinion), as well as a specialized mining consultant.   But rather than reject Grupo Mexico’s inadequate proposal or negotiate more favorable terms for Southern Copper, the Special Committee manipulated the valuation methodology until it purported to justify the proposed valuation.  According to the court, the company overpaid Grupo Mexico by more than $1.3 billion for Minera.  The court also held that a shareholder vote approving the transaction was tainted because the shareholders were not fully informed.

On appeal, the Delaware Supreme Court affirmed the chancery court’s decision and extended its holding to future cases.  The Court held, “if the record does not permit a pretrial determination that defendants are entitled to a burden shift, the burden of persuasion will remain with the defendants throughout the trial to demonstrate the entire fairness of the interested transaction.”

Lessons Learned – Substance Over Form
In the aftermath of Southern Peru Copper, members of Boards of Directors and special committees should be more cautious when evaluating transactions with a controlling shareholder.  If a special committee is created, then the Board should empower the committee with real bargaining power and allow it to consider alternatives to the controlling shareholder’s proposal.  Once tasked with their mandate, the special committee should act as a true and independent third-party negotiator to extract the best deal possible for the corporation and its shareholders.  In doing so, special committees should not re-tool the valuation methodology to become outcome-determinative, and it should revisit valuation if there is a change in material circumstances.

Lastly, in order for a shareholder vote to shift the burden of fairness, it must be “meaningful.”  That is, the minority shareholders must be fully informed of the details of the transaction.

The missteps in Southern Peru Copper highlight some of the pitfalls for Boards, special committees, and controlling shareholders.

Scott Ford is a member in the Litigation Section of Mintz Levin, where he represents clients in fiduciary matters, including shareholder disputes. Alec Zadek is an Associate in the Litigation Section of Mintz Levin in the firm’s Boston office, where he practices in all areas of complex litigation, including fiduciary matters and corporate governance. If you require assistance in this area or would like to discuss the decisions in Southern Peru Copper further, please contact either author.


Posted : August 27, 2012 2:16:24

by Judy C. McLevey, VP, Corporate Actions and Market Watch, NYSE Euronext

excerpted from McLevey's NYSE Euronext blog


On Wednesday, August 22nd, the SEC released a new rule regarding the use of conflict minerals—tin, tantalum, tungsten or gold—mined from the Democratic Republic of the Congo. Francis Byrd, Senior Vice President, Corporate Governance & Risk Practice Leader, Laurel Hill Advisory Group, spoke with me about the new rule and how important it is for companies and boards.

McLevey: What are the new rules?  What countries are covered?  What kinds of minerals are included and is there a transition period?
Byrd: Here is where we are on Conflict Minerals, and it is not all bad news. The new rule will require that companies publicly report on their “reasonable country of origin inquiry” to determine whether tin, tantalum, tungsten and/or gold from the DRC or adjoining nations/regions in Africa (Angola, Burundi, Central African Republic, Republic of Congo, Rwanda, South Sudan, Tanzania, Uganda, Zambia) were used in the manufacture of products they make or sell.

These reports would be issued as a specialized disclosure report by May 31 of each year, reporting on activity in the preceding calendar year. The good news is that these specialized disclosure reports would not be due at the same time as a company’s annual report is due so as not to interfere with a company’s preparation of its annual report.

The rule will heavily impact the electronics industry and others (automotive, jewelry, mining, and industrial machinery) but will spare retailers from reporting on store-branded items manufactured by outside contractors. The other good news from the rule is that the effective date for disclosure has been pushed back to May, 2014. The additional phase in period of two or four years (depending on size) to identify and confirm where all of their “indeterminate” minerals come from will allow companies who do not have what I call Conflict Mineral Compliance Teams (CMCTs) and processes in place to develop them.

McLevey: What should companies/boards be doing now? Are these new disclosure requirements a challenge for companies/boards? Are all companies/industries impacted?
Byrd: Those companies/boards that have not been on the cutting edge of these developments need to formulate plans on how they are going to strengthen their supply chains, establish CMCTs and determine how and who should audit the progress and effectiveness of their efforts. Also, not all companies are affected in the same manner. Following minerals from mine to smelter to supplier to manufacturer will be a difficult task as different industries take possession of products made with, or composed of conflict minerals at various stages of product development.

McLevey: Do the new rules require an executive sign-off? What do you think the implications may be?
Byrd:  They do not call for a CEO or CFO certification, in part due to a decision by the SEC to allow reporting on this issue to take place in a separate form. The logistics of corporate reporting would make combining the specialized reporting on conflict mineral and fiscal year-end quite difficult for companies. However, institutional investors viewing this as a glaring weakness in the reporting and auditing are quite concerned with accountability.

McLevey:  Do you expect to see companies transitioning away from these materials?  Are they already doing so?
Byrd:  The transition effort has already started. Several companies are already making an effort to source away from the war-torn central African region. Intel, Motorola Solutions, HP, and Apple have initiated programs designed to limit the use of conflict minerals in their products and been cited by advocates for their work according to Taking the Conflict out of Consumer Gadets, a report by the Center for American Progress.

At the same time, as I mentioned earlier, the rule was softened in some key areas so that the business community can walk away from this with some victories. That said, boards and companies should be wary of the potential for shareholder proposals in 2013 and 2014, from governance and human rights advocates seeking to plug what they are likely to perceive as laxity in the rules. Some 82 investor organizations have been following this issue closely and many have histories of filing shareholder resolutions. For example, retailers such as Best Buy, Target and WalMart could come under harsh shareholder scrutiny given the exemption from the rule granted by the SEC to retailers.

McLevey:   I’m seeing estimates in the $10-$15 billion for companies to comply with this new rule, versus the $71 million SEC estimate.  There has been some speculation about the Chamber of Commerce suing to stop this new rule from being put in place.  What are your thoughts?
Byrd: Since the SEC’s defeat last year on proxy access, the Commission has been vulnerable to legal challenges on the basis of the quality of the cost-benefit analysis put forward by SEC staff in the rule-making process. In fact, Thomas P. Quaadman, vice president of the Center for Capital Markets Competitiveness, U.S. Chamber of Commerce, hints at those very grounds for a potential challenge in a blog post on The Hill. Quaadman also attacks the expected cost of compliance as understated by SEC staff based on their lack of expertise in building or managing supply chains. The final release places the potential initial cost of executing a reporting regime in the range of $2 - $4 billion and subsequent annual cost in the range of $200 to $400 million annually.  While that is a far cry from critics’ contention of an annual cost of $16 billion, it is far more than the original SEC estimate of $73 million.

The bottom-line is that we will have to live through a couple of reporting cycles to learn what the real cost of compliance will be.


Judy assumed responsibility for the NYSE’s Corporate Actions & Market Watch team in September 2008.  She has been actively involved in governance and proxy matters at the NYSE for many years, including most recently organizing and managing the NYSE’s Commission on Corporate Governance, Proxy Fees Advisory Committee, etc.  




Posted : August 20, 2012 3:20:50

by Brian Barnier, Value Bridge Advisors

Stop, Look, and Listen

being alarmed by the clanging bells of so-called “emerging” risks. There is very little new in the world—including to observant people in your organization, industry and beyond. “Emerging risk” noise hurts when it distracts from the full range of risks to the business. As board members, we need to help management keep their eye on the ball—turning risk into performance.
Recent noise on cyber risk is really just about one of many cyber risks, data breaches of personally identifiable information (PII). Even this isn’t new. The first data breach law is a decade old. Further, actual risk didn’t arise with the law; it arose decades earlier with technology and bad guys.

Nearly 30 years ago Newsweek spotlighted cyber risk in an issue focused around the movie WarGames. That Newsweek issue also questioned whether Ronald Reagan could revive the economy, examined GM’s latest profit plan and wondered if the Titantic’s resting place would ever be found. Today, the Reagan recovery is fondly remembered, Robert Ballard is trying to save the Titanic’s remains and GM is, well, working on its latest profit plan.

Cyber risks go back farther mirroring each turn of the technology crank. While PII data breach laws mandate compliance, don’t get distracted from risks such as breach of trade secrets or broader IT-related risks to the business:
• Strategic (prioritizing business-IT investments)
• Program/project (new capabilities on-time, on-budget and on-requirements)
• Daily operations (operationally stable, available, protected and recoverable)

These categories are echoed in the Risk IT guidance from ISACA (a 95,000 member IT professional organization).

Where’s the most IT risk? The more complex and changing the organization, the more risk tends to be in investments, followed by program/project and lastly operations. Typically, IT security is 5-8% of total IT-related risk.
Noise about “emerging risks” goes beyond cyber.  One CFO publication trumpeted financial volatility, failing governments, asset price blow-up and economic hard landing in China as “emerging.” New? To whom?
• Asset bubbles probably trace back to the early 1700s British South Sea Bubble (high company valuations in a new market) or prior “manias” (such as Tulip prices in 1637).
• In AD 410 many thought Rome was safe—despite centuries of decline—right before Alaric attacked and sacked.
• Persians were perfecting political risk analysis millennia ago.

With little new, beyond nanotechnology or HIV jumping species, most all “emerging” risks are just head-in-sand risks.

Look and Listen, focus. Reviewing 1Q12 earnings, 68 S&P 500 members reported significant negative earnings surprises. About half of surprises sprung from strategic risks, about a third from operational risks, and just over 11% from strategic or operational risk-driven one-time situations. 

Thus, the real question is why people are surprised when history repeats itself. Worse, why is the “emerging excuse” accepted when history and warnings were ignored?

As board members, we need to know “who knows what now,” not later after a financial hit or a smoking gun memo is found in litigation.

We can probe whether management has penetrating insight into the business environment and capabilities, is rigorously asking “what if?,” proactively watching for warnings, prioritizing appropriately and responding by repositioning in the environment, strengthening capabilities and being ready to act to avoid danger or seize opportunity.

We need to ask ourselves these questions as we make decisions on strategy, asset allocation, succession and more.

To actively see into dark corners, the need is for realistic scenario analysis—the heart of managing risk to performance. Then we test by the quality of our library of plan B’s. Sports fanatics will dream up mountains of scenarios based on detailed data; can’t we do the same in our organizations?
Your opportunity is to help stop distractions and then focus on risk to performance. It’s what helps organizations and economies to grow in challenging times.

Brian Barnier has served on non-profit and private company boards, is an OCEG Fellow, and author of The Operational Risk Handbook (Harriman House, London, 2011).

Posted : July 16, 2012 2:59:06

by James R. Copland, Center for Legal Policy at the Manhattan Institute

Most publicly held corporations have now held their annual meetings for 2012, including 173 of those in the Fortune 200. What were the trends in shareholder proposal activity and say-on-pay votes this year?

Number and Composition of Proposals
The Fortune 200 companies to have held annual meetings to date, as listed in the Manhattan Institute’s Proxy Monitor database, have averaged receiving 1.4 shareholder proposals—a number equal to last year’s. This total is slightly down from that seen from 2006 through 2010, when large companies regularly received proposals calling for shareholder advisory votes on executive compensation; such proposals have vanished given the mandatory requirement for such votes under the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.

While the number of proposals has remained roughly constant, the composition of such proposals has changed. For the first time, this year, a plurality of all proposals—20 percent—involved corporations’ political spending or lobbying. Most of these proposals sought disclosure in some form, though some also sought shareholder advisory votes on political spending or sought to prohibit all political participation by the corporation. Other common classes of proposals included those involving executive compensation (15 percent), chairman independence (12 percent), voting rules (chiefly majority voting, 10 percent). 10 percent of proposals related to the environment and 9 percent sought to expand shareholder power to act outside the annual meeting process, either by calling annual meetings or through written consent.

Vote Results
Among Fortune 200 companies, 14 proposals received majority support in 2012: seven seeking to declassify the board, four seeking majority elections for directors, two seeking to enable shareholders to act by written consent, and one calling for shareholder votes before approving any anti-takeover “poison pill.”

Three companies in the Fortune 200 saw shareholders vote down executive compensation proposals in 2012: Best Buy, Citigroup, and Community Health Systems. ISS had recommended against the Best Buy exec-comp package based on its objection to the severance awarded to outgoing CEO Brian Dunn, and ISS and Glass Lewis both recommended that shareholders vote against the pay plans at Community Health and Citi. Fortune 200 companies receiving less than 60 percent support for their proposed executive compensation packages were Bank of New York Mellon (59%), Disney (57%), Hess (57%), J.C. Penney (57%), Johnson & Johnson (57%), Johnson Controls (57%), Motorola (58%), and Safeway (51%).

None of the 30 proposals for chairman independence at Fortune 200 companies received majority support, but 11 received the support of at least 40 percent of shareholders: Amgen (42%), AT&T (44%), Dean Foods (46%), Dupont (43%), Honeywell (46%), ITT (44%), Johnson & Johnson (43%), JPMorgan Chase (40%), Northrup Grumman (43%), Pepsi (45%), and YUM (42%).  In addition, Goldman Sachs agreed to shareholder activists’ demands to appoint an independent lead director.

While companies saw a record number of proposals involving political spending or lobbying—up  40 percent from 2011, and up over 200 percent since 2008—these proposals only garnered the support of 17 percent of shareholders on average, down from 22 percent last year and a lower support level than any year dating back to 2006. Some of this decline is explained the increased introduction of aggressive proposals that seek to prohibit corporate political participation or seek a shareholder advisory vote on political spending; these proposals received low single-digit support from shareholders. But even among the more limited class of proposals seeking certain political-spending disclosure, being pushed in part by the Center for Political Accountability, shareholder support across the Fortune 200 fell from 27 percent in 2011 to 23 percent in 2012, and none saw as many as 40 percent of shareholders support the proposal. Some or all of this drop, of course, might be explained by changes in corporate practice and/or corporate communications with institutional investors.

Lessons for Directors
What should directors take away from this proxy season? To begin with, though shareholder proposals have been unlikely to pass and executive compensation plans likely to be approved, directors should not be complacent. The relatively high levels of support for chairman independence at many companies, as well as the number of companies who failed to garner 60 percent support for their pay packages, suggests that boards should remain active in communicating to large institutional investors and ISS—and should respond aggressively to adverse recommendations from the proxy advisory firms.

Although political-spending-related proposals are not gaining significant traction, the Center for Political Accountability counts twelve companies that saw an uptick in shareholder support for its proposal year-over-year. These companies—or at least those that saw shareholder support above 30 percent—should aggressively communicate to large investors both the broad objectives of their political participation and their current levels of disclosure. Boards should remain firm, however, in following the broad direction from the majority of shareholders who oppose the political-spending-related proposals: the principal backers of such proposals, social investing funds and labor union pension funds, have interests that do not correspond to the average diversified investor, who has an interest in corporate participation in the political process.

James R. Copland is the director of the Center for Legal Policy at the Manhattan Institute, where he oversees the Center’s shareholder-proposal database, ProxyMonitor.org.


Posted : July 2, 2012 9:51:26

by Ken Favaro, Senior Partner, Booz & Company

Imagine the agenda at the next board meeting you attend. There will certainly be some time set aside for an audit committee report, a compliance update, a review of the succession plan. There will be a report from the CEO, an update from the chairman, a recitation of the previous meeting’s minutes, and a financial review.

But will there be any explicit discussion of the company’s organic growth?

Probably not. And that’s a problem.

Falling interest rates, debt-fueled spending, and the opening of new markets made growth relatively easy for many companies between 1980 and 2007. All these tailwinds either are gone or have less power, and they won’t strengthen for the foreseeable future. The result: organic growth is tougher, and it will be for years to come. Meanwhile, growth by acquisition isn’t the answer—fewer and fewer acquisitions can be justified by cost synergies alone. Increasingly, to make acquisitions pay, a company has to organically grow what it acquires.

The new, tougher environment means that organic growth needs to be the business of everyone—the operating units, the corporate center, and, yes, even the board. To be sure, in a post-Sarbanes-Oxley era, most directors don’t want to add anything new to their already packed agendas. After all, directors might reasonably ask, isn’t organic growth the job of management? Do we really know enough to contribute meaningfully? For that matter, might we not inadvertently dilute the CEO’s accountability for the company’s strategies and execution by inserting ourselves into a discussion about organic growth?

My answer is that the risk is worth taking—and must be taken—because organic growth is absolutely essential to a company’s success and the environment is as tough as it’s been in 30 years. The trick, once organic growth is an item on the board’s agenda, is using it to increase the CEO’s accountability and ability to drive this growth. As a director, you can do this by asking the following questions:

• What do the company’s managers consider an organic growth opportunity? For example, is it in your low-share or high-share markets? Is it with your most loyal customers, your competitors’ most loyal customers, or customers who are loyal to no one? What about innovation, sales-force investments, pricing initiatives, marketing campaigns? A sharp definition of what is an “organic growth opportunity” helps to minimize the pursuit of rainbows that will never be caught, the tendency to confuse actions with opportunities, and the proliferation of growth initiatives that strain the company’s resources.

• What gaps in the market can the company close with the capabilities it has or could reasonably expect to develop? This is what determines the company’s headroom for growth. The specifics of a good answer will tell you whether you should prioritize your efforts to gain share, grow your markets, enter markets, or create new markets.

• In the minds of management, what is the connection between organic growth and growth by acquisition? Are these parallel paths, are they alternative paths, or is one a prerequisite to the other? In particular, when considering a specific acquisition, the board should ask, “How are we going to grow this thing beyond the growth we’re already paying for?” at the same time that it asks, “Where are the cost synergies going to come from?” If the answers management provides don’t get into detail about who the customers are; what makes them loyal versus prone to switching; and what levers the management team plans to use to bring switch-prone customers into the fold (or keep them in the fold), the board may be looking at an acquisition the company should not be making.

• How do the CEO and top team work with the operating units to identify opportunities for organic growth? Is their contribution limited to setting targets for the operating units and leaving it up to those units to deliver? Many CEOs believe that operating units should be accountable for driving organic growth and that the corporate center should get out of the way, focusing on other things such as M&A, capital spending, and the setting of financial goals. This is a mistake. The corporate center can play a vital role in creating the conditions for healthy organic growth in the operating units, in looking across the operating units to find organic growth opportunities, and in providing the data to help the organization grow in a focused and coordinated way.

A regular dialogue on these questions should be on every board’s agenda. It will help you forge an effective partnership between the board and CEO; it will help you fulfill your fiduciary duties; and it will help your company thrive in the much tougher environment for organic growth that lies ahead.


Ken Favaro is a senior partner in Booz & Company’s New York office and the global head of the firm’s enterprise strategy practice. Visit www.booz.com/organicgrowth for more information.


Posted : June 21, 2012 2:42:45


by Rupert de Ruig, Vice President and Managing Director, Dow Jones Risk & Compliance

As companies look for growth and business opportunities outside of their home territories, relationships with local business partners are becoming more important. Consultants, sales agents and other third-parties with local knowledge, language skills and business connections can fast-track an organization’s entrance into a new market, but they can also be source of risk which can change without notice.

Some of the most lucrative growth opportunities exist in some of the countries at the lower end of Transparency International’s Corruption Perceptions Index, including Nigeria, India, Iraq and Bangladesh*.  Given the heightened risk of corruption in these markets, the critical importance of knowing who you are doing business with becomes clear.

Corporate boards play a central and critical role in managing corruption risk. ‘Tone at the top’ and leading by example is cited time and again in anti-bribery and corruption regulatory guidance, which also makes it clear that board members have a responsibility to be fully informed about the effectiveness of the compliance policies and procedures in place within their organizations.

The consequences of ineffective compliance programs can have severe consequences for an organization including reputational damage, hefty financial penalties and potential sanctions. Furthermore, board members may find themselves personally liable for a regulatory breach due to inadequate compliance in the form of criminal proceedings, fines and even prison sentences.

A comprehensive and robust business partner due diligence program will identify potential risks prior to engaging with a third-party, and is commonly accepted as best practice. Circumstances can change though, and without ongoing, regular monitoring companies leave themselves exposed to emerging risks.
However, the recent Dow Jones State of Anti-Corruption Compliance Survey indicated that:

• 52% of the companies responding either never monitor their business partners, or only monitor them annually.
• 43% admitted to only updating due diligence on an event-driven basis. 
• Only 38% of companies said they have automated the due diligence process for their business relationships. Among non-financial companies, only 32% report any sort of automatic review.

These statistics reveal that a significant number of companies are leaving themselves exposed to regulatory, reputational and financial risk by losing oversight of their business relationships. Waiting for an event, such as negative media coverage of a business partner, to trigger a due diligence review puts directors and boards into damage limitation mode, dealing with the potentially negative consequences of the actions of a third-party.

Some of the reasons survey respondents gave for these gaps in their programs were:

• Cost (26%).
• Time taken to perform due diligence (24%).
• Lack of access to commercial information services (21%).

An effective due diligence and monitoring program is, however, possible with limited budget and resources as long as you:

• Understand your internal capabilities—know what you can handle effectively with internal resources, and where you may need to bring in outside support.
• Don’t spend money on due diligence and monitoring for the sake of it—assess where your real risks are and focus expenditure and efforts in those areas.
• Leverage technology to automate and streamline the process--drive efficiency whilst managing costs and reducing the burden on internal teams.

Following these simple steps will ensure business partners are a driver of business growth and not a serious threat to your company.

*Source: William Buiter, economist, Citi 


Posted : June 4, 2012 8:20:37

by Fay Feeney, CEO and Digital Whisperer, Risk for Good

The information explosion unleashed by the Internet has been magnified in the last five years by social media, and it is changing the world.  Beyond Facebook “Likes”, public opinion has created an on line perception about products, companies, and their policies.

The initial premise of “social media” is simple: Being “social” in the digital age means creating and exchanging user generated content on line. 

The complication arises when anyone, anywhere in the world, can praise or pan your brand and its performance to a worldwide audience.

Public opinion and commentary is not new for CEOs and board chairs.  What is new: the speed and the scale of amplification to connect millions of points of feedback that quickly permeate all groups from news media to customers to investors instantly.  Every action (or inaction) is now publicly scrutinized and then talked about instantly. This scale of social commentary involves not hundreds but millions.  That’s a very large magnifying glass and it can generate a lot of heat.

So who’s got your back in the digital age when you are operating in a “word of mouth at scale” world?

What Got You Here May Not Keep You Here!
Today CEOs must work in a world where connectivity is leading to the re-imagination of EVERYTHING.  Yet getting to the top is as hard and tough as ever.  However you and your company probably won’t get to stay as long.  In the last ten years tenure in the CEO’s office has dropped from 8.1 to 6.3 years, and is trending down.

Most CEOs got their job the same way as their predecessor: a carefully developed network that provided information on opportunities and threats, and the tools to outperform competitors.  That same tried and true network has operated for years in person behind closed doors and via the phone.  That’s old school connectivity.

That was a world where careers weren't derailed by:  NOT GR8 NEWS:  U R FIRED.

Boardroom Risks in the Digital Age
Mark Schwartz, Board Member, MasterCard Inc. was recently asked: “What worries you when you look at what’s happening in the boardroom?”

His answer speaks to CEO and board chair challenges: “How can we be on top of things when there’s so much happening on a continuous basis 24/7, and so much information available not only to us but to our competitors, to regulators, to shareholders, to all of our stakeholders?  How can we capture all of this information, make the right judgments at our board, at our senior management level?  How can we react smartly, prudently, thoughtfully to really manage all of the risk attending to us around the world? That’s the greatest challenge in the boardroom.”

In the first wave of the digital economy, the focus was on the conversations corporations were having with their customers.  And the marketing department was in charge of overseeing that information was carefully controlled and distributed.

We are now in the second wave of the digital economy where silos are being replaced with connections and less not more hierarchy.  Information about your company, its products, and its policies can no longer be carefully controlled and distributed.  As you and your board become digital citizens, you will be leading socially enabled enterprises with your stakeholders, board members, and key investors.

What Can A CEO Do To Lead In The Digital World?
Get your arms around Big Data. It is more than what you can learn about your customers. It is about proactively building moats around your existing businesses and identifying new opportunities. Incorporate your existing tools like SWOT and risk identification using social media data.

Don’t wait for your board to ask about social media.  Tell them how you are mining the opportunities from big data and monitoring risks.  Directors will want to help you drive value by drawing unique insights from digital data and leveraging it with your new enlarged networks.

At the beginning, we asked: who has your corporate back?  Tap your risk manager (or general counsel if you don’t have a chief risk officer) and your director of strategy or business development. This component of their job description is increasing exponentially.

And do not forget the magnifying glass works both ways.  There is a treasure trove of information about competitors, partners and strategic opportunities for new business initiatives swirling in the social media pool.  There is information about the activities of your key investors and where they are seeking new investment opportunities that you need to know about.  Let big data filter the noise, so you can do more, better, faster, cheaper.  Get help to learn the tools that are available now to keep you ahead of your competition.

If your internal team hasn’t acquired these skills, they will; or they will not survive.  That’s what winners in the digital age will be doing: accessing new networks that feed them real-time information!

Fay Feeney is CEO and Digital Whisperer at Risk for Good, a global firm accelerating governance into the digital age.  She can be followed on Twitter @fayfeeney #corpgov


Posted : May 30, 2012 12:07:54

...and stay out of the headlines

by Mark Rogers, CEO of BoardProspects

There is an ongoing global corporate governance crisis within public, private and non-profit companies that can be traced back to the public company scandals of Enron and MCI WorldCom. As we all know, Enron placed the dysfunctional world of corporate governance front and center as the fallout spread well beyond the numerous criminal convictions against Enron’s top management for intentional acts meant to defraud the company and its shareholders of millions of dollars. Unfortunately, this disaster was exacerbated by the staggering lack of oversight by Enron’s board of directors, as well as financial relationships that extended past compensation.

The only positive return from this debacle was the increase in attention, action, laws, corporate governance reforms and a general call for increased transparency from Congress, the SEC, many states and the general public that arose back in 2001. During the Enron investigation, a Senate Congressional sub-committee investigated the role of Enron’s board in the scandal and concluded:

The Enron Board of Directors failed to safeguard Enron shareholders and contributed to the collapse of the seventh largest public company in the United States, by allowing Enron to engage in high risk accounting, inappropriate conflict of interest transactions, extensive undisclosed off-the-books activities, and excessive executive compensation. The Board witnessed numerous indications of questionable practices by Enron management over several years, but chose to ignore them to the detriment of Enron shareholders, employees and business associates.

And yet here we are again, headlines from scandals that have occurred at Best Buy, Chesapeake Energy and Yahoo have put the light back on corporate governance. Besides a general distaste for such illegal and deplorable actions, corporate boards have suddenly felt the pressure to fortify their teams with the same virtues they always strived for, with an increased emphasis on personal and professional integrity. Why is it that despite the numerous corporate governance reforms that have been adopted world-wide in the post-Enron era, we continue to see a proliferation of corporate governance scandals in the public, private and non-profit sectors? Simply put, these reforms are only as good as the boards that implement them.

It’s time to shake up the business world’s process for board recruitment and ask the question: How can corporations expect to really improve corporate governance if they keep electing from the same group of individuals?


Current options are limited to tapping into a network of slow, pricy, yet established board recruiters. More frequently, the process is limited to the annual “who do you know” conversation around the boardroom table, which only lends itself to the “good old boy network” and results in a shallow pool of out-of-touch director candidates. This quickly limits the potential talent, skills, experience and expertise in the boardroom and impacts the goals and integrity of the company.

There are a set of requirements that boards must commit to, as the only real way to improve corporate governance is to break the cycle and expand the base of potential board candidates:

• Corporations need to be willing to go beyond the traditional boardroom recruitment process to discover candidates who best meet the needs of the company.
• Boards must conduct an annual self-evaluation which will help crystallize the type of board members they are looking for as it relates to skill sets, experience, and strengths, and then use that as a guidepost in their search for the right candidate.
• Boardroom nominating committees must take the time, energy and resources, for the good of the company, to exhaust all possible avenues in their search for board candidates. This is the only way to find the best talent available, especially as it relates to the specific areas of expertise they need to best advance the company.
• Most critical and complementary to these commitments is that those searching and recruiting board members must utilize technology.

Up until now, social networks, like LinkedIn and Facebook, are used as part of reactionary strategies only, to check the background, resume and personality of an executive. Why not proactively circumvent the filtering of unqualified applicants and search a pool of talented and qualified board prospects online and in one place? It is beneficial to tap technology and leverage the influence of social networks as a complement to the “who do you know” conversation. Your search does not have to revolve around the connections of your executives and fellow board members.

In addition to those “who do you know” conversations, leveraging social networks, recruiting technologies, and search firms, you should also make sure that you promote that your board is in search of the right prospect. This incoming strategy will only increase the likelihood of widening your pool of candidates, as a complement to your manual outgoing search efforts. It’s also important to instill a process for candidate interest to be expressed. For instance, an individual on the management team could become the point person for interested candidates to contact and then acts as the conduit with the Board or the Chair of the Nominating Committee.


As is with many recruitment scenarios, it is becoming much more about your connections – first, second, third and tenth degrees of separation. Elevate your networks and your recruitment process into the 21st century to find the best available talent for your board.

Mark Rogers is the founder and CEO of BoardProspects, an online professional community dedicated to building better boards for private, public and non-profit organizations, launching in Summer 2012. Prior to founding BoardProspects, Rogers was partner at a law firm in Boston, advising non-profit and for-profit entities on corporate governance and boardroom matters. He was an adjunct faculty member at the New England School of Law, is published and lectures frequently on governance, compliance, board policies, corporate liability, health care policies and more. Rogers received his J.D. from Suffolk University Law School and Bachelor of Arts degree from the College of the Holy Cross. E-mail Mark at mark@boardprospects.com.

Posted : May 15, 2012 3:14:58

by Dr. Thomas J. Saporito

The high-stakes and competitive corporate world perceives external talent as an increasingly attractive solution to a company’s performance or management woes. Known as “white knight syndrome,” more and more companies and their boards are being seduced by the concept that looking outside their ranks for a new chief executive will save the day – and the bottom line.

And yet the results do not seem to live up to the promise. In September 2010, Hewlett-Packard announced the appointment of Leo Apotheker, formerly of SAP AG, as its newest chief executive. Less than one year later, Apotheker was removed by the HP board amid a falling stock price and damaging communication errors.

In January 2009, Yahoo Inc. brought on Carol Bartz, formerly of Autodesk, as its chief executive. Yet Bartz, too, was out less than a year later when she failed to engineer a turnaround for the search engine giant. Yahoo is facing yet another succession crisis, this time focused on allegations that it newest externally hired chief executive, Scott Thompson, falsified education information on his resume. Now, Thompson too will step down, and the company is reshuffling its board to avoid a looming proxy fight.

Occasionally, the outsider CEO does come into an organization and hits a home run. Even pitchers connect once in a while. External benchmarks should always be part of a successful CEO succession plan.

However, in over 65 years of experience working with organizations large and small, RHR International consultants have learned that the major cause of failure for external hires is a lack of fit. One aspect of fit, of course, is to match candidates with the business needs of the organization and seek out individuals (internal or external) who have the ability to deliver on current and future strategic goals. But believe it or not, this is only the tip of the iceberg. Lack of attention to cultural fit can cripple the effectiveness of even the most talented executive.

A board might be tempted to bring in a so-called “name” candidate, to focus only on this hero’s track record, and to tout his or her credentials. Yet such a view is short sighted if it fails to account for the key question of cultural fit (either as it currently exists or as it will need to adapt for the organization to succeed). At the end of the day, a history of past successes does not automatically translate into the ability to effectively manage the strategic, interpersonal and even philosophical aspects of running a new and different enterprise. It is insight into the cultural aspects of the organization (good or bad) that can make the critical difference.

To avoid being seduced by the false promise of the “white knight,” companies and their boards must keep several key succession considerations in mind:

1. Assess for Fit: Impressive credentials and a record of success on paper can easily overpower considerations about the seemingly intangible question of “cultural fit.” Yet board members must think carefully about how an outside candidate will interact with the culture to fulfill a company’s current and future business requirements. Leadership is personal as well as situational and hinges upon relationships as well as abilities. Even the most promising and capable candidates can be tripped up if cultural factors are not taken into account.

2. Avoid the Rush: Pressure from shareholders and other stakeholders is particularly pronounced when it comes to succession. These pressures often force boards to hasten their search process, thus making the “white knight” even more alluring. Boards should be aware of this pressure, and must understand when they are giving in to it. Taking a step back and examining alternative perspectives will benefit the board and the organization in the long run. Take the time to do extra homework on external candidates and check sources carefully.

3. Review Internal Candidates: No succession process is complete without a careful examination of internal candidates. Too often, talented candidates are pushed aside in favor of the white knight. Yet if internal leaders are identified as succession candidates, boards must put more faith in the leadership development processes of their companies and give these individuals their due. Directors may find the devil they know (warts and all) is better than the devil they don’t.

While the increasing speed of business and the competitiveness of the global economy may make it more difficult to avoid the temptation, do not let white knight syndrome keep your organization from designing and executing a deliberate, focused and open-minded CEO succession plan.

Dr. Thomas J. Saporito is chairman and chief executive officer of RHR International, a global firm committed to the development of top management leadership.

Posted : May 2, 2012 3:35:01

by Carter Burgess


There are a number of ingredients that go into making a board truly successful.  Of them, I believe a relevant board composition, a collaborative culture, and highly committed board members are three of the most important success factors.

My colleagues and I spend a great deal of time advising our clients on their board composition and recruiting directors who best meet their criteria.  What has become even more important than ever is for directors to be relevant to their boards and the corresponding companies through, for example, contributing relevant experience (e.g. industry, international, regulatory, government, academia, etc.) and/or skills and expertise (e.g. financial, manufacturing, marketing, technology, etc.).  By definition, boards govern corporations with shareholders’ best interests at heart.  Yet, to be even more value-added to its constituents, including shareholders, management, employees and fellow directors, boards should be comprised of directors whose combined collection of backgrounds, experience and skills are relevant to and therefore align well with what the company does, its strategy, opportunities and challenges.  While this sounds obvious, if you were to review a wide collection of boards, you might conclude otherwise.

The board could therefore better assess how the management and the company are performing and more effectively probe and ask the right questions.  Just as important, relevance enables a board to be a much more effective strategic discussion partner with the CEO and his or her executive team.  For instance, a company is in the process of expanding into China and is making a big investment and commitment of talent to this major initiative.  It would be very helpful to have on the board an active senior executive who has successfully built and led her company’s Far East operations and who can provide a value-added perspective on what was learned in the process and what her team is seeing real time in that region of the world. Such examples are potentially endless.  In addition to the CEO, other members of the senior management team could reach out to specific directors with equally important types of topics to discuss. 

When thinking about composition, “employed versus retired” are very important attributes.  Boards should be comprised of both types, and there’s no specific formula for how many of each a board should have.  It depends on what a board is looking for in each of its directors.  For example, a board seeking a real-time perspective in a certain industry or region of the world would likely prefer a director who is an active senior executive or CEO than a former senior executive who has been retired for a number of years. Financial expertise could be gained from a retired financial expert.  However, the board might benefit even more from having an active and multi-dimensional public-company CFO who is very involved and current on what is going on in the financial and accounting world on a real-time basis.  Given the ever-shrinking pool of active CEOs who have capacity for board service, retired CEOs are a logical alternative.  The composition of active versus retired directors can therefore be somewhat unique to each board. 

A board should possess a culture that is based on independence of thought, collaboration, honesty, mutual respect and transparency.  Oversized egos and prima donnas who demand attention and like to hear themselves speak are seldom, if ever, welcome.  Arrogance and distain for others’ opinions can be quite destabilizing to the group.  Accomplished at a very senior level, balanced, doesn’t take him or herself too seriously but does take the role of being a director seriously are key foundational attributes of the types of directors who can foster the ideal board culture.  Along those lines, additional ideal director attributes include but are not limited to:  high intellect, the highest integrity, sound judgment and good old fashioned common sense, team player, ability to challenge in a constructive way, calm under pressure, think strategically and get down into the weeds when absolutely necessary.  When bringing a new member on to a board, it is critical to assess him or her for these attributes, while taking multiple references. 


Board members have to possess a strong level of commitment and corresponding work ethic.  They are expected to prepare for and attend all board and committee meetings (both in-person and telephonic).  But often, more is required of directors.  Major corporate events (e.g. a major reorganization/restructuring, merger or acquisition, etc.) can yield many more in-person and telephonic meetings than anticipated. As part of the succession process, board members can be asked to meet with and get to know high potential senior executives, sometimes outside the normal board meeting schedule.  I have known of boards where directors are asked to mentor up-and-coming stars, meeting with them on multiple occasions throughout the year.  Directors can also be asked to visit different company site(s) annually.

The point of this is that when serving on a board, there is a certain amount of unpredictability and an unwritten requirement to go above and beyond the call of duty when the need arises.  While directors may not have the time or necessarily the capacity for the additional work, they have to pull their own weight, particularly in moments of crisis.   At the end of the day, a board is “in it together.”  If there are director(s) who choose to do less than they’re asked, then the board’s effectiveness and the collaborative and team-oriented aspect of its culture well may be compromised.

Carter Burgess is a Managing Director and Head of the Board Practice at RSR Partners, a leading corporate board and executive recruiting firm founded in 1993 by Russell S. Reynolds, Jr., based in Greenwich, CT. The firm partners with both public and private companies across a wide variety of industries including financial services, healthcare, industrials, consumer/retail and technology.

Posted : April 26, 2012 12:03:03

by James W. Gauss 

Facing talent shortages, today’s boards are vying to attract highly strategic, broad-based thinkers. Skills such as information technology, treasury knowledge, and merger-and-acquisition experience are in high demand as organizations position themselves for growth and competitive advantage.

In the past, a hospital or university may have recruited the chief financial officer of a local business to handle budget discussions. Today the issues have changed dramatically and it has become increasingly urgent to recruit board members who know how to access capital, develop venture capital relationships, and restructure or consolidate business units.

Within the healthcare and insurance industries, board members with proven clinical experience in quality measurement and performance improvement are especially prized. As the healthcare landscape and its financial incentives are transformed, board members are being asked to forge novel partnerships between care providers and insurers and navigate their institutions through complex consolidation decisions. Hospital board members must also be knowledgeable about how to maintain not-for-profit status and document community benefits for those served by the institution.

Start-ups pose unique challenges in their talent hunts. When founders are seeking to commercialize an idea, their innovation may lack the sales, marketing, business development, finance and operations skills to effectively build the product on a mass scale and take it to market. They turn to board members with strong business acumen who can guide, coach and sometimes mentor the founders through a successful launch. For example, incubator businesses within the fast-growing life sciences sector – including drug discovery and biotechnology organizations – are very interested in a board member’s ability to network with investors and help form strategic alliances with complementary companies. Some of these board members are arriving on the scene with solid experience in research and setting up businesses overseas.

The bottom line is that an effective board will understand the importance of assembling the right team to match the organization’s stage of development. A significant change that we’re seeing in national board searches is enormous interest in people with CEO and board experience in unrelated industries who can bring fresh perspectives. These boards are willing to mentor new members in the nuances of a particular industry, but they prefer candidates who already have substantial governance experience and can contribute early in their tenure.

These demands mean that boards often have to look for candidates beyond their local communities. They may even embark upon a non-traditional national search to locate individuals with the desired skills and innovative viewpoints they seek. For example, Witt/Kieffer is currently handling an assignment to fully audit and reconstitute a board for a large, complex organization, including defining new roles and recruiting members in areas of short supply: technology and clinical expertise.

Boards are also seeking a rich diversity of culture, thought, race, ethnicity and gender to bring enhanced decision-making to the table. The most successful organizations reach beyond their local markets to attract diverse talent. They choose to network with organizations and academic institutions where minority leaders can be found. Over time their commitment to diversity – often embedded as a critical element in their strategic plan – becomes known and they serve as magnets to attract a wider range of leaders.

I recommend the following steps to keep your board healthy and high-functioning:

1. Audit: Assess your organization’s current situation and forecast future needs driven by the strategic plan.
2. Gaps: Identify current and anticipated gaps in the board’s composition and skills.
3. Pipeline: Develop and cultivate a pool of prospective members who meet the needs of the organization’s vision and strategies.
4. Succession planning/talent management: Determine when board changes will occur and prepare individuals to assume new responsibilities.
5. Mentoring: Nurture your board talent by pairing newcomers with more established members to cross-pollinate experiences.

Board composition is dynamic and must keep pace with the organization’s evolution and strategic focus. When done well, the recruitment and development of top-notch board talent is an exercise that pays dividends for years to come.


James W. Gauss is Chairman of Board Services at Witt/Kieffer

Posted : April 11, 2012 10:53:41

by Steve Seelig

Companies that give their CEOs high pay opportunities are more likely to receive lower levels of shareholder support for their say-on-pay votes than those with smaller pay opportunities. Moreover, the likelihood of receiving lower levels of shareholder support triples for companies with poor performance compared to those that are top performers. These are among the findings of a review we recently conducted of pay data at 728 companies from publicly available proxy filings from 2008-2010.

Following the 2011 proxy season, we studied why some companies succeeded and others didn’t with their say-on-pay voting results. We wanted to provide compensation committees with some empirical basis for making future pay decisions that would not necessarily focus on a proxy advisor’s recommendation nor would be perceived as litmus tests for pay designs. Rather than being a strictly predictive model for how shareholders will vote on say-on-pay, the findings provide guideposts for how compensation committees should act if they are seeking acceptable levels of shareholder support.

For our analysis, we deemed a 70% or above favorable vote to be the threshold level of “acceptable” shareholder support. While most of our findings reinforce conventional wisdom, we found some surprises:

Targeting the 75th Percentile Creates Greater Risks: Companies that give their CEOs high pay opportunities are more likely to receive lower levels of shareholder support for their say-on-pay votes than those with smaller pay opportunities. We defined “high” as those companies who pay at the 75th percentile or higher. Almost one-third (32%) with high CEO pay opportunities received low say-on-pay shareholder support (below 70%), compared to only one in five companies (19%) with CEO pay opportunity at or near the median. As expected, the higher the pay opportunity over the 75th percentile, the greater the chances for having an unacceptable vote level.

Poor Performance Cannot Overcome a Well-Designed Plan: The likelihood of receiving lower levels of shareholder support triples for companies with poor performance compared to top performers. Not surprisingly, companies in the bottom third in total shareholder return (TSR) were more than three times as likely (34%) to receive less than 70% shareholder support than companies with top levels of TSR (10%). However, we were surprised that these findings were consistent regardless of the CEO pay opportunity granted. In other words, a poorly performing company that grants low CEO pay opportunities is just as likely to receive low shareholder support as a poorly performing company that grants high pay opportunities. When a company performs poorly, the say-on-pay vote really becomes a say on performance vote. It is only when a company performs near or above median that the pay to performance relationship becomes the basis for shareholder voting results.

Shareholders Have Long Memories Except When Pay is Increased: We also wanted to discover what companies could do if they were in the danger zone for receiving unacceptable voting results. What we found was that companies with high CEO pay opportunities in 2008 and 2009 received similar shareholder support levels, regardless of whether they changed pay levels for 2010. Slightly more than three-quarters (78%) of companies that lowered pay for 2010 received acceptable shareholder support levels, compared to just under three-fourths (74%) of those that kept pay at high levels. Thus, companies with historically high pay cannot necessarily expect that immediate pay reductions in a single year will improve their chances of obtaining an acceptable vote.

However, the same does not hold true for companies that increase pay levels for the proxy year. We found that companies with median pay levels for 2008 and 2009 that increased their CEO pay opportunities to high levels during 2010 saw reduced shareholder support, with just less than two-thirds of those having done so receiving acceptable shareholder support.

With just one year of say-on-pay results, our findings only provide some preliminary insights into how shareholders may respond to different pay practices. Once we have another year of results, we will have a better understanding of actions that sway voting results.

Steve Seelig is Executive Compensation Counsel at Towers Watson

Posted : April 2, 2012 2:29:13

by Gary L. Neilson

This post refers to findings detailed in the current HBR article “How Many Direct Reports?” which draws on HBS professor Julie Wulf’s large panel data analysis and Gary Neilson’s 32 years of consulting experience with Booz & Company.

Even the most sharply attuned CEOs need help to determine the right top team, and directors have an important role to play. A CEO who has too many direct reports can paralyze his organization. Having the wrong mix of expertise on the team can limit how responsive any strategy can be to external changes.


Why turn to directors? Especially when they’re new, CEOs have few places to go for advice. For CEOs-in-waiting, company executives will certainly offer guidance, but their agenda may not always be aligned with the goals of the enterprise. Other CEOs can offer advice from their own experience, but these, too, may not be relevant to new CEOs’ situation. Directors, in contrast, have independence and a good understanding of where the company is and where it’s going.

In making decisions about their top teams, CEOs have to consider different factors than they did even 20 years ago. Odds are, for example, that a new CEO will not also be named Chairman: In 2001 in North America just over half of incoming CEOs held both titles, a share that fell to just one in ten in 2010. This shift gives CEOs time to take on more direct reports. Indeed, CEOs now have on average twice as many direct reports, up from about 5 to about 10, and 4 out of 5 of the new positions are functional, rather than general management positions.

As directors counsel CEOs on building the right team, there are number of factors you should consider: whether the CEO is also chairman or not, the degree of cross-organization collaboration required, and the burden of activities beyond the CEO’s span, such as spending time with customers or regulators. In my experience, however, the most significant factor is how long the CEO has been in the position. There are 3 relevant stages in a CEO’s life cycle:

Stage 1: During the first 12-18 months of tenure, CEOs are assessing executive talent, figuring out how to lead the team, and charting the strategic direction. If the new CEO was the COO, he or she is unlikely to replace that role right away. And new CEOs want a full set of voices at the table to bring the full spectrum of perspectives to strategy development. During this stage, the target span of control is typically 12 to 15.

Stage 2: The “steady state” after the first 12 to 18 months and before preparing for succession is where the most common pitfall lies: Too often CEOs populate their team with the usual suspects—people included based on how many employees or how much revenue they control—even though the company has developed a new strategy. CEOs should turn this logic on its head and start with the capabilities and roles needed to push the strategy forward. From that basis, the best CEOs delegate control of mature areas of the business to strong leaders. They then elevate people in functional positions essential to the strategy, often bringing new CXOs to the table. During this stage, target span of control is typically 8 to 10.

Stage 3: In the last 12 to 18 months in a planned CEO succession cycle, executive development takes center stage in a search to find the next CEO. Generally the CEO, with the counsel of directors, puts one or a few people into positions with significant P&L responsibility and consolidates many elements of the business under them. During this stage, the CEO’s span of control should fall to 5 or 6.

As a director, you are integral to helping your CEO understand the differing needs of these three stages. CEOs will appreciate it if you raise these issues, particularly because new CEOs may be reluctant to reach out to the board for fear of appearing less than confident. In later stages, directors’ reaching out is equally important because some CEOs may prefer to manage issues, particularly those related to succession, alone.

Gary L. Neilson is a senior partner in the Chicago office of Booz & Company.

Posted : March 27, 2012 12:01:12

by James R. Copland

In 2012, we’ll again be tracking annual meetings among America’s largest public companies at the Manhattan Institute’s ProxyMonitor.org. Our 2012 Proxy Scorecard contains relevant proxy-ballot information on the largest 200 public companies, as ranked by Fortune magazine, including links to all shareholder proposals and executive compensation advisory votes. Our publicly available, easy-to-use database is sortable by meeting date, company name, type of proposal, proponent, and voting results. We will be adding companies’ information to the scorecard throughout the year, as soon as ballots have been distributed to shareholders, and we will update the database with voting results after meetings occur and results have been reported to the Securities and Exchange Commission’s Edgar website.

Although the corporate annual meeting season begins in earnest in mid-April, twelve Fortune 200 companies have already held their annual meetings, and 51 had mailed proxy ballots as of March 15. From this partial sample, we can already discern some trends of interest.

Of the 12 companies to hold meetings to date, three companies have seen shareholder proposals receive majority support:

• Johnson Controls, which at its January 25 annual meeting saw over 85 percent of its shareholders vote for a proposal by Gerald Armstrong calling on the company to declassify its board;

• Emerson Electric, which at its February 7 annual meeting saw over 76 percent of its shareholders vote for a proposal by the pension fund of the American Federation of State, County, and Municipal Employees (AFSCME) to declassify its board; and

• Apple, which at its February 23 annual meeting saw over 80 percent of its shareholders vote for a proposal by the California Public Employees' Retirement System to adopt a majority-voting standard for director elections.


That 2012’s successful shareholder proposals have involved procedural rules such as board declassification and majority voting is in keeping with recent trends.

Such corporate-governance related proposals, not involving executive compensation or social or public-policy issues, thusfar constitute a majority of all shareholder proposals in 2012, a higher share than that seen recently. Proposals relating to executive compensation remain far less frequent relative to their levels before 2011, when executive compensation advisory votes became mandatory for all public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act.

2012’s early returns involving such say-on-pay votes demonstrate the substantial role being played by the nation’s largest shareholder advisory firm, Institutional Shareholder Services (ISS), in such voting. While no Fortune 200 company has seen shareholders reject executive pay packages in 2012, the four companies to have received the lowest percentage support—Johnson Controls, Navistar, Qualcomm, and Walt Disney—each received “no” vote recommendations from ISS on their executive pay plans. On average, these companies received 64 percent support from shareholders in say-on-pay votes, as compared to an average 94 percent support for other companies meeting by mid-March.

Since ISS’s position almost certainly helped to influence the markedly different shareholder votes on pay packages, it would seem that an unintended side effect of Dodd-Frank-mandated say-on-pay votes is to give the proxy advisory firm a major “gatekeeper” role over executive pay. ISS’s strengthened position might be enhanced further if institutional investors heed its newly promulgated advice to challenge management to respond whenever fewer than 70 percent of shareholders approve of board-proposed compensation packages—a position that would seem to be rather self-fulfilling given ISS’s influence over the votes in the first place. Given that many of ISS’s clients are labor-union pension funds and social-investing funds that may be motivated by issues other than maximizing shareholder value—and have respectively sponsored one-third and one-fifth of all shareholder proposals to date in 2012—I’ll be watching the proxy advisory firm’s role closely.

What else will I be watching in the upcoming annual meeting season? I’ll be paying particular attention to certain classes of shareholder proposals in which union and social funds have taken a special interest:

• Proposals related to corporate spending on politics and lobbying (looming for Citigroup on April 17, Honeywell on April 23, BB&T and IBM on April 24, Johnson & Johnson on April 26, AT&T on April 27, and UPS on May 3), which have been increasing in number—though not getting majority support—in the wake of the Supreme Court’s 2010 Citizens United decision affirming First Amendment protection for corporate political speech;

• Proposals calling on the company to separate the positions of chairman and CEO (looming for Bank of New York Mellon on April 10, Honeywell on April 23, General Electric on April 25, Johnson & Johnson and Lockheed Martin on April 26, and AT&T on April 27), which have been pushed hard by union funds and certain shareholder activists; and

• Proposals calling on the company to grant proxy access to shareholders nominating directors (looming for Wells Fargo on April 24), which are reappearing on this year’s proxy ballots after the D.C. Circuit last summer rejected the mandatory proxy access rule proposed by the SEC.

Check Proxy Monitor during the annual meeting season for my ongoing analyses of these and other issues, as well as our up-to-date scorecard of scheduled meetings and voting results.

James R. Copland is the director of the Center for Legal Policy at the Manhattan Institute, which hosts a database of all Fortune 200 companies’ shareholder proposals, ProxyMonitor.org.

Posted : February 14, 2012 2:26:00

by Dr. Thomas J. Saporito, RHR International  

If you believe the media, the boardroom is a battlefield where chief executive officers (CEOs) and directors are locked in combat over the leadership of the organization. While some high-profile CEOs have poor relationships with their boards, most don’t fall into this category –and the ones who do are simply those that make for good press. In fact, according to RHR International’s CEO Survey Snapshot, 98% of U.S. CEOs report having good relationships with their boards of directors and 95% say they believe their board supports them in the majority of decisions they make. 

Based on the responses of a select group of CEOs, the survey indicates that boards are a fruitful source of feedback and support for CEOs, with 96% of participants saying they can speak honestly with certain directors about their performance and the impact of their decisions. Fifty-nine percent cite the board as their most helpful source of feedback. The lead director emerges as CEOs’ key board confidant; with 50% of chief executives naming this board member as the person they trust to discuss their own performance and key decisions. 

This data confirms what I have learned in my career about best practices in board/CEO relationships. CEOs and boards must work together in a balanced environment that includes not only board oversight, but collaboration – and the lead director is often the engineer of this healthy balance. They promote consensus among board members, become a trusted advisor to the CEO, and create alignment between directors and the CEO. To manage these forces and steer things in the right direction, an effective lead director must consistently employ good judgment, keen insight, and deep wisdom. 

When will lead directors most likely need their “A” game? That would be when it comes time to select a replacement for the chief executive officer. This is the one area where the survey showed that even good board/CEO relationships can begin to break down. Through research and experience, RHR consultants have found that succession planning is full of complex psychological nuances, such as the incumbent CEO’s readiness to step down. The degree of willingness to discuss the issue, combined with other equally challenging elements, can make the succession process very difficult for both boards and CEOs. Many chief executives reported that miscommunication with the board about selection decisions and responsibilities are the most difficult part of the succession process. Additionally, the majority of CEOs feel left out of the loop: 76% of CEOs believe they should be more involved in planning their own succession. 

To be effective, CEO succession requires a well-defined course of action that ensures a supply of highly capable candidates ready to assume the chief executive position whether through an unexpected event or a planned transition. Successful companies realize that this requires that CEO succession should be an on-going program, not an event. They manage the process well in advance with a clear set of procedures, roles and milestones that minimize the friction that can occur when the incumbent chief executive and the directors are not aligned on their respective responsibilities. 

When is the foundation of a successful board/CEO affiliation laid down? In our experience, a solid relationship between the board and the CEO begins before day one. As soon as a new CEO is selected, the outgoing chief executive should orchestrate formal and informal meetings between the successor and the directors. Boards should make an extra effort to be proactive and deliberate in supporting a new CEO; they should not wait for the CEO to come to them. In a group and individually, board members should initiate contact and be intentional in their approach. An open door policy is not enough. According to a recent joint RHR International/Corporate Board Member study on leadership transitions, incoming CEOs highly value board clarity, alignment and a mutual understanding of how their performance will be evaluated. 

It is essential to have alignment between the new CEO and the board on the organization’s future strategic imperatives. To set the stage for an effective partnership, the incoming chief executive and board members should have frequent interactions in which they share thinking about strategy (as well as their own personal experiences in the CEO role). This will prevent the new CEO from falling into many of the common pitfalls experienced during a changeover. 

While the CEO Snapshot Survey indicates that the majority of relationships between chief executives and board directors are harmonious, this rapport should not be taken for granted. As in any relationship, trust, alignment, planning and communication are the keys to ensuring that the association remains solid and productive for years to come.

Posted : January 4, 2012 2:45:50

by Jane Stevenson and Peter Thies, Korn/Ferry International 

Last October, when IBM CEO Sam Palmisano announced that he’d be handing the reigns over to senior vice-president Virginia Rometty at the beginning of 2012, it was an historic occasion. Not only is Rometty only the ninth CEO in IBM’s 100-year existence, she is also its first female chief executive. The press was lucky they had that tidbit to focus on. Otherwise, the transition was so smooth, so universally accepted, and so undramatic they’d have had trouble filling their column inches.

And that’s a very good thing when it comes to CEO succession. The buzzword with IBM’s customers, suppliers, and investors was “stability,” and in a world where bad breakups and head-scratching CEO choices can tarnish a company’s reputation and shave its stock price, stability is the gold standard.

But why was IBM able to pull off such a smooth transition when other companies’ transitions devolve into a soap opera? Because Big Blue looks at CEO succession as a process, not an event. They have a robust talent development pipeline and a plan that looks forward to developing generations of CEOs. Rometty, for example, spent 30 years at the company, including stints in most of the major divisions and years of intense mentoring. She was one of many similarly groomed execs. IBM has mastered what so many corporate boards squirm their way out of every chance they get—talking about change at the top of the C-suite. Dealing with CEO change is so traumatic, boards will often leave a chief executive in the top spot for years after his or her mojo has clearly vanished just to avoid the uncertainty that comes with searching for a new top dog.

They’re probably right to worry. Research Korn/Ferry International recently conducted on the pitfalls of CEO succession found that turnover at the top was indeed hazardous. Of the 132 Fortune 500 companies that replaced their CEOs between 2003 and 2005, we found that almost half of the new CEOs were already out the door by 2010. Many of the companies were acquired or ended up in mergers. Most of them underperformed the rest of the Fortune 500, and only 16 had what we considered consistent, strong growth. With 63 percent of companies admitting they don’t have a succession plan, even in an era with record CEO flame-out and turnover, failure to plan is not only irresponsible, it’s a burden to the whole economy.

It’s also a legal liability. The SEC Division of Corporate Finance Bulletin 14 E, which was updated in 2009, requires corporate boards to ensure that there is a competent succession plan in place. That’s why Korn/Ferry recently gathered its deep experience in succession planning consultation into a formal CEO Succession offering. Like Big Blue, we look at succession as an ongoing process, not a once-in-a-lifetime vote with a puff of white smoke at the end. It’s a generational program of identifying and developing potential candidates. Notice the plural. It’s not about finding “the one” who will sit at the current CEO’s right hand and absorb their wisdom. Developing a diverse bench of candidates is like carrying a full toolbox—you never know exactly what you’ll need in the future. The hammer that saved your company yesterday won’t work if you need a paintbrush tomorrow.

Building that CEO toolbox, or talent pipeline, is the focus of succession planning. We suggest thinking two or three CEOs into the future. That means taking the time and resources to develop the talent you already have in your company. We estimate there are five to seven potential CEOs hidden within the hierarchy of most competent companies. The job of the board is to find those individuals, assess their talents, guide their development, and have a deep bench of CEOs to choose from when the time for change finally comes around, planned or not.

But who is CEO material? Our study found that the education level of the incoming CEO doesn’t matter much, previous experience as a CEO was negligible, their industry, their age, and their gender made little impact on a candidates success. CEOs recruited from the outside did not outperform internal hires, and vice versa. What that means is there’s no perfect template, no squared-jawed, go-getter type that can turn around any company that hires them. It all comes down to due diligence on the part of the board in figuring out how an individual aligns with their goals, fits with the culture, and would lead the company.

Even more important, the succession process is a reflection of the way a company is managed. Wouldn’t it have been more surprised if even-keeled IBM had panicked after Palmisano retired and hired Donald Trump? Great companies take succession planning seriously, start the process early, and see it as an integral part of protecting shareholder value. But the biggest fringe benefit? If you convince your leadership to think about what they will need two, five, or ten years down the road, just imagine how that impacts what they think about today.

Jane Stevenson and Peter Thies head the CEO Succession practice for the executive recruitment firm Korn/Ferry International.

Posted : October 5, 2011 10:51:15

by Michael W. Peregrine

Michael W. Peregrine is a partner in the law firm of McDermott Will & Emery

Been paying any attention to the conflicts controversy involving the former SEC General Counsel? You know, the one where the guy made seven separate internal conflicts disclosures, but it wasn’t enough to satisfy the Commission’s internal watchdog? You remember that one? Well, if you haven’t been paying attention to it, you should because it serves as a “head’s up” that we may be headed into a brand new conflicts of interest environment. One in which a higher level of attentiveness, disclosure and diligence may become the order of the day for boards.

What? That’s a bit of a stretch, you say? That how a federal agency handles its internal conflicts problems has anything to do with how corporate boards handle their own affairs? Well, hold on for a second. Understand that we’re operating in a corporate accountability environment, in which officers and directors are increasingly being held responsible for harm committed both to –and by—the corporation. Folks are mad, they’re looking for someone to blame, and the boardroom is as good a place as any to go looking for villains. So, if you don’t think that corporate governance regulators aren’t following this story, and wondering how it applies to their jurisdictions, think again. They are—and maybe they should be, as well.

So, we need to pay attention to what’s really at stake in this matter. Not about who is right or who is wrong; about which arguments have merit and which don’t. Let’s leave those to the process of justice. Rather, boards should focus on the veritable “Big Picture:” what this controversy is telling us about where conflicts of interest scrutiny may be heading...and what boards should be doing about it.

Because, somehow, the old ways might not be enough anymore. It might not be enough that the director is widely admired for his service. That he’s totally transparent about his financial interests. That neither he, nor the board chair, nor the compliance officer, saw the potential for conflict. What might matter is that others (including fellow directors and executives) might see it differently, that they might complain, and that the complaint might have wings. And reputations—both individual and corporate—can get tarnished as the mess works its way through.

And just what should boards do in response? Well, kick the tires of its existing conflicts policy, hard. Start with the nomination process. Are we picking nominees who are prone to conflicts? Move to education—what duty of loyalty lessons are we giving our directors? Then turn to disclosure—how often, how detailed, and with what guidance is it made? How hard, how far, how “creatively” are we looking? Don’t forget the actual process of review—who is making the actual “conflicts call,” how “independent” are they, what criteria are they using to make decisions? And even when it seems OK to do so, have we the tools and the will to effectively “manage” a conflict without creating more problems? Just when is basic recusal the safe play?

And while you’re looking at it, check out the internal reporting requirements of your key legal and compliance executives. Do they contain seeds of what the government might regard as conflicts? Is the compliance officer reporting to the general counsel or CFO, as opposed to another senior officer? Does the general counsel report to the CFO, as opposed to the CEO or COO? Do both the general counsel and the compliance chief have the independent access to the board?

This is not to say that the “conflicts sky is falling;” that the criminalization of conflicts of interest is on the horizon; that your approach to conflicts must be turned upside down. We’re not there. But this SEC mess is a gift of sorts, a no-cost prompt to boards to take a close second look at a very important governance policy. Because there’s absolutely no “down side” to doing so, and you may be doing your board, and the corporation, a very big favor.

Posted : September 20, 2011 1:33:09

by Michael Ryan

Michael Ryan is Senior Vice President & Managing Director, Board Services for Corporate Board Member, an NYSE Euronext Company

Is following "best practices" always the best practice to follow? In many situations—both complex and routine—the answer is yes. If you are operating a nuclear power plant or managing an air traffic control system, following best practices helps minimize the possibility of catastrophic failure. Even in more routine activities, best practices ensure a level of orderliness necessary for a civil society.

The term "best practices,” however, suggests a rigid discipline or "one-size-fits-all" mentality that does not always work. Certainly, in many contexts, this thinking is very useful. But in others, not only is it unhelpful, it can be harmful over the long-term. Nowhere is this probably truer than in the area of corporate governance. Of course, no one is against any company following strong corporate governance practices. Nor is there any inherent harm in the use of the phrase "best practices" when referring to corporate governance—after all, it's just a two-word phrase.

The problem, however, is the emerging mentality symbolized and reinforced by this phrase. There are those—and the universe is growing—that believe there are a set of corporate governance “best practices” that should be followed by every company. Now, in fairness to this burgeoning group, they would never go as far as to posit that if a company follows a set of corporate governance best practices, all will be well and investors will live happily ever after.

The practices they are insisting upon, however, are far too often accompanied with a naive understanding of what it means to oversee the operation of a company in a complex global economy. This perpetuates, perhaps unwittingly, a way of thinking that excuses the creative thinking, nuanced decision-making and tough judgments that underlie a director's fiduciary duties. It runs the risk of pushing boards toward more robotic-like process, undermining the reasoned risk taking and innovative corporate culture so vital to a dynamic economy.

Let's consider two examples—one moving in a negative direction and the other in a positive direction. First, on the negative side, is the growing trend toward separation of chairman and CEO at all companies at all times. Now, being in favor of separating the chairman and CEO role is not inherently problematic. And, certainly, separating the two responsibilities might be a great practice for a given company at a given time.

But, calling it a "best practice" for all companies at all times does perpetuate a way of thinking about governance that grossly oversimplifies the complexities of governance, unnecessarily removes discretion from directors in how they manage the affairs of the board and shifts the focus from the most critical issue at hand: ensuring that every board has policies and practices in place that provided—both on a regular basis and in times of crisis—that an independent director takes on a leadership role to make certain there is a clear path for raising and addressing issues that are not best suited to be addressed by executive management. The application of these policies and practices can be very fact sensitive and necessarily require an assessment of the strengths and weaknesses of the individual directors as well as their experience and qualification for handling the responsibility.

The second illustration concerns efforts to keep directors informed about and up to date on the topics that are vital to their board service. Fortunately, there have been some positive developments on this front. Up until several years ago, ISS considered director education in its governance rating system, but the cost to monitor this became too great for ISS and dropping it had no negative impact on its revenues. The problem was not that ISS was promoting director education. Indeed, directors’ keeping current and informed is fundamental to satisfying their fiduciary duties. Rather, the problem was that ISS's governance rating was—and, unfortunately, in many other areas continues to be—a rigid, "one-size-fits-all" approach.

This, in effect, diminished the importance of education by turning it into a "check-the-box" exercise to get a favorable ISS rating rather than a thoughtful process about the specific informational and educational needs of the individual directors in the context of the opportunities and challenges facing their company.

Corporate Board Member's database of more than 5,000, mostly public, U.S. companies includes more than 33,000 individuals serving on the boards of these companies. This offers a rich mix of experiences, qualifications and educational backgrounds and demands an equally rich array of educational opportunities. ISS’s waning influence in this area presents issuers a new opportunity to develop a better—but not "one-size-fits-all"—practice: in connection with the discourse of the experience and qualifications of directors, enhance the disclosure concerning the board's policies and practices for ensuring that directors have access to appropriate educational and informational resources.