CEOs and Activists

AckmanThe CEO job has never been easy.  It’s hard finding growth in a hyper-competitive environment. Satisfying shareholders becomes a bigger challenge when activists are watching. 

 What’s a CEO to do?

 Recognize that no company is safe from a rising activist tide.  Activists have the money and the analysis to go after lagging companies. Poor financial returns are the prime reason activists get involved. 

 CEOs should enlist the board in developing a dispassionate evaluation of the company and the board’s vulnerabilities.

 Understand the issues. What is the current performance and what is the potential?  Look at the board, it’s structure, how it’s elected, how it compensates management incentives.  Do they reflect that the board is doing right by shareholders?

 How involved is the board in strategy?  Has the board sought additional analysis to more fully vet the underlying assumptions about the strategy?

 What are your shareholders telling you? 

 Activists have raised the bar. Smart CEOs are looking for board member who can help him and his management team succeed.

Leadership Lessons from Dorothy Gale

8-BOSS-articleInlineIn her message to the young women and supporters of the Metro Achievement Center for Girls, President and CEO of ComEd, Anne Pramaggiore offered her perspective on leadership with lessons from Dorothy Gale of the iconic film “The Wizard of Oz.”  Pramaggiore was honored with the MAC Leadership Award.

Pramaggiore contrasted the two Dorothys of the film:  Back in Kansas, Dorothy Gale was a fearful and tentative girl but once the bump on her head that landed her in Oz, Dorothy Gale regrouped and found her leadership skills.  She sought mentors and a support system and showed an appetite for risk by traveling to the Emerald City to find the Wizard.  Dorothy Gale also demonstrated resilience in her willingness to fail, pick herself up and try again–all important leadership lessons.

And what a fitting story for Midtown Education Foundation, dedicated to improving the future of Chicago education by offering high-quality enrichment opportunities for both girls and boys through after-school and summer programs of one-on-one tutoring, mentoring and parental involvement .  In its 49 year history, MEF’s Senior Class of 2014 became the 15th consecutive class to achieve 100 percent high school graduation and college enrollment.  Many of the MEF seniors were in attendance, selling raffle tickets and assisting with the program.

“We’re very proud of you and look forward to your greater achievements,” Pramaggiore told the graduating seniors.


Keith_GottfriedShareholder Activism on the Rise

A sure sign that shareholder activism has become more prevalent is when large cap and well-run companies like Apple and Microsoft attract the interest of activist investors, noted Keith Gottfried, a partner with the law firm of Alston & Bird LLP who leads the shareholder activism defense practice.

His advice to boards of directors:  be prepared.

“The activist playbook has become more sophisticated,” he told participants of a webinar.  “Today’s activists are knowledgeable, well-prepared and well advised.”

He suggested that boards of directors have a game plan to anticipate activist activity.  And, if the activists come knocking, he suggests a team approach to engaging with activists.

“First, know the activists’ issues,” he said.  “Some activists are focused on breaking up companies to unlock shareholder value.”

It takes coordination to respond effectively.

“Put together a team of internal and external resources,” he said.   Insiders would include the CEO, CFO and investor relations.  “You’ll want to include the proxy solicitor to understand the issues of the various shareholders as well as special counsel since the internal legal resources do not regularly deal with activists.”  It’s also important to include others such as communication experts who work with boards of directors to help them learn how to be effective in engaging with activists, he said.  “Think of any proxy battle as a campaign,” advised Gottfried.  “You not only need message points and speeches but an ability to get the messages out to the right audiences at the right time.”

He sees activism only increasing.  “The success of activist investors is attracting more investment.  Activist investors have convinced fellow shareholders that they can help to unlock shareholder value.”


Leadership Lessons from Bob Gates

blog_duty_robert_gatesFormer Defense Secretary Robert Gates spoke about his book, “Duty”, to a sold-out crowd at the Fairmont Hotel in Chicago this week.

Much of what he said he has said on television and other forums about how toxic Washington is today and the difficulty of working and accomplishing anything in the “partisan abyss”.

 Contrasting the sacrifice of our dedicated men and women in uniform with the selfishness of our elected officials, he was asked what advice did he have for the public-minded crowd assembled by the Chicago Council on Global Affairs?

His talk is available on YouTube in its entirety but his answer begins at 38:20 

 “Our politics have always been rough and tumble. As a historian and someone who has read a lot of history, I don’t think our Founding Fathers anticipated that people would make politics their life’s work.  I think they thought that farmers, lawyers, doctors would have their own life and as a matter of public service go to Washington to serve in Congress and then go home.

 “For members of Congress today being a member of Congress is all they are.  They’ve wrapped their psyche around being a member of Congress.  And being defeated is intolerable.”

 When they leave Congress, most of them stay in Washington.  “It’s as though they’ve forgotten where they came from. People come and stay for 30, 40, 50, 60 years.  That becomes their life.

 “The most empowering thing for me in Washington as Secretary of Defense was that everyone knew I wanted to go home.  I was begging to be fired. The more I wanted to go home; the more they wanted me to stay.”

 He said that if these people ever  “realized how empowering it could be to vote their conscience on issues and do what’s in the best interest of the country–first, it might be the best politics–but also, they might find it liberating.

 “I used to say, if I could be elected to one term in Congress and play a vital role in putting the country on a strong fiscal track and I got defeated at the next election, I would be proud to tell my grandchildren what I did during my one term in Congress.

 In summary, he said: “I think we have too many careerists in Congress and not enough people who go to give brief periods of public service.”

 He was reminded of a favorite quote of Teddy Roosevelt:  “I represent the public, not public opinion.”

 His answer was met with vigorous applause.









Directors Consider Peer Performance

Years ago, a highly regarded director and board chairman confided, “We have to be better about getting the poor and mediocre directors off the board.”  The issue was the collegiality of the boardroom and the reluctance to confront a non-performing director.

Today, according to the latest PwC 2013 Annual Corporate Directors Survey conducted during the summer of 2013, directors have signaled increased concern about their peers in the boardroom. With 934 public company directors responding, 35 percent now say someone on their board should be replaced compared to 31 percent in 2012.

And why do fellow directors worry about their peers’ performance?  Aging, lack of required expertise and lack of preparation for meetings are the three main reasons directors are not performing, according to the PwC survey.

Today, corporate governance continues to evolve at a rapid pace with directors taking on expanded roles and responsibilities. Expectations for board members have increased in response to regulation and greater shareholders demands.

It’s not the money (4 percent)  or prestige (3 percent) that motivates directors to serve but rather intellectual stimulation (54 percent) and staying occupied and engaged (22 percent) that attracts directors to board service, according to the survey.

One of the unintended consequences of power moving from the CEO to the board is that directors themselves decide when they should step down.  It’s still rare that shareholders succeed in removing directors.  Retirement, reaching the age of 72 or 75, is the main reason for a director to leave a board.

One governance expert noted that some boards are reluctant to invite 40-year-olds to become directors because “they could be on the board for 30 years.” Why? If it turns out that the director is not effective, board leadership is uncomfortable addressing the issue, which also implicates the inadequacy of the  board’s own self-evaluation.

Is entitlement part of board service?  Do some retired-CEOs-turned-directors regard “intellectual stimulation” and “staying engaged” as their right to suitably interesting post-CEO careers regardless of the value they bring to the enterprise? The old saws of being a director as a “lifetime achievement award” or “a victory lap” may still be true.

Shareholders are noticing.

When JPMorgan was recently recognized for enlarging the powers of its lead director as a positive development for the firm’s corporate governance, one of the company’s large investors expressed concern for the age and long tenure of the individual in the post. Dieter Waizenegger, CtW Investment’s executive director, said he wants lead director Lee Raymond removed from that role because he has been a director for 26 years.  “We need someone who can lead a new and refreshed board that departs from the problems of the past,” he told the Wall Street Journal.

Boards need to develop and execute a robust evaluation of its members and the effectiveness of the board as a workgroup. Directors need to get the right help to carry out the task. They need-someone who knows business and governance and is independent, not selling ancillary services to the company as a result of his or her advice. And, they also need to follow-through on their evaluations.  If the director is too old, does not have the expertise required or is unprepared for meetings, the board should tell the director to step down.

Isn’t it better for directors to take the steps to ensure effectiveness themselves, rather than waiting for shareholders or regulators to assert greater authority in the boardroom?

Leadership, Peer Pressure and Sponsorship

The French-American Chamber of Commerce of Chicago’s Women for Women  Committee hosted a panel discussion, “Women on Corporate Boards: Exploring Different Approaches for Bringing More Women to the Boardroom”, an event co-sponsored by the Chicagoland Chamber of Commerce and Baker & McKenzie, where the meeting was held.

Laurel Bellows moderated the panel that included Sharon Thomas Parrott, President of DeVry Foundation and SVP of External Relations, DeVry Inc., Deb DeHaas, Vice Chairman and Chief Inclusion Officer, Deloitte LLP, Francoise Colpron, President, Valeo North America and Chris Curtis, President and CEO Schneider Electric North America.

The panel explored the international efforts underway for improving women’s representation in company leadership and corporate boards.

“Diversity is a business imperative,” said Parrott, who utilizes DeVry’s civic engagement funds to support the organization’s business leaders to get involved at a board level in non-profits in the community. She suggested a report card that scored companies on their inclusion of diverse leaders and board members. Colpron’s experience as a business leader in Europe and Latin America has convinced her of the importance of boards reflecting the community in which the company operates but sees quotas a short-term fix.

While DeHaas acknowledged the pace of change in the boardroom as documented by The Chicago Network’s annual survey of women on corporate boards in Chicago as “glacial,” she noted that it will take leadership and peer pressure to bring about the increased participation of women on boards. “I would add sponsorship,” said Curtis, which he differentiated from mentorship, noting that it takes a CEO or other leader’s investment in the success of the sponsored woman as a board member or corporate leader.

Women who are interested in attaining a corporate board seat should be actively engaged, the panel agreed. With the role for recruiting new directors moving from the CEO to the Nomination Committee and less than half of those committees using recruiters, networking has become more important. “It’s nothing short of a campaign,” said Curtis.

“There’s nothing casual about aspiring to a board director appointment. It’s part of your career planning,” said DeHaas. “Be realistic about your qualifications and what you can contribute. Be a student of good governance and let people know you have an interest.”


Directors: How Did You Do at Your Annual Meeting?

Annual meetingAs the 2013 Annual General Meeting season comes to a close, shareholders continue to make their presence known. Shareholders are taking action: eliminating classified boards, voting against directors who are perceived to be ineffective stewards, such as the museum executive who chaired the risk committee of JP Morgan Chase during the “London whale” scandal, and casting “no” votes on executive pay programs.

Even boards that won say-on-pay approval need a strategy and plan to manage shareholder engagement.

A review of your annual meeting is a smart place to start.

So, directors, what did you learn at the annual meeting? What will you do over the course of the next year to ensure that you understand your shareholders’ concerns, both large and small?

Did any board members speak at the meeting? Was a director designated in advance to speak for the board? Did the chair of the compensation committee respond to shareholder’s questions on the executive pay program? Was he or she trained and prepared to offer the “why” of the story?

What were the surprises? Did you hear new issues or concerns from shareholders? Did management respond to board questions? How would you rate your performance in appropriate communication to those in attendance? These are items that should have board attention.

Does it make sense to adopt a strategy to make next year’s annual meeting a chance for shareholders to “kick the tires” and get to know who is representing them in the boardroom? How could you go beyond the proxy to help them see that your experience and expertise are adding to the company’s value? What steps can you take now to ensure that you are fostering a better understanding of the value you bring in your role as a director?

Strategic boards understand that shareholders are now part of the governance dialogue and need to feel that they’ve been heard. Boards with effective shareholder engagement programs are able to listen to shareholders. Directors who understand shareholder concerns are able to both provide responsible oversight and effectively convey that the board is responsibly fulfilling its role to create long-term value for shareholders.

Begin now. The clock is ticking for the 2014 proxy season.

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2013 Annual Meeting Season: Warren Buffett Led the Way

warren buffettThe Annual General Meeting season is almost over.  And unless Edward Snowden surfaces at one of the remaining corporate board meetings, this year’s most notable AGM was once again the Berkshire Hathaway meeting in Omaha.

Berkshire Hathaway’s CEO Warrent Buffett has long demonstrated leadership in engaging with his investors by turning the Annual General Meeting into a company love fest. The meeting of more than 35,000 shareholders – already known as “Woodstock for Investors” – added a new twist this year:  Buffett invited Doug Kass of hedge fund Seabreeze Partners Management to attend.  Unlike the other investors, Kass is a short-seller who makes his living betting against Berkshire Hathaway by shorting the stock.

The meeting in the Quest Center is the central focus of the Berkshire shareholder’s year, where Buffett and Vice Chairman Charlie Munger take questions from shareholders and reporters both in person and online for six hours – albeit with a break for lunch.  The weekend kicks off with a free cocktail party.  The lines may be long to get a drink or hors d’oeuvres, but it’s free.  Shareholders are also free to wander the convention hall where Berkshire-Hathaway company booths line the floor.  The jewelry and furniture businesses offer deep retail discounts to shareholders.

By inviting Kass to join the Annual Meeting, Buffett proved that he was willing to be challenged.  In fact, Buffett has quoted Darwin that it is “man’s natural inclination is to cling to his beliefs, particularly if they are reinforced by recent experience.”  Buffett has also pointed out that when Darwin came across a finding that contradicted his conclusion, he made it a practice to write it down within 30 minutes.

Buffett’s deliberate, lifelong effort to find people to tell him why he might be wrong is one of the reasons for his success.  Another is respecting the people who have invested in the company and honoring that investment with a willingness to listen to them and answer their questions.

(I am now posting selected blogs on Please check out the experts who are contributing to this new resource for boards and directors.)


Ground Continues to Shift for Directors


ron johnson“Penney backfires on Ackman,” crowed the Wall Street Journal. The April 10, 2013 headline suggested that the brash activist investor got his comeuppance both in reputation damage and financial losses when Ron Johnson, his hand-picked savior for the retail company was sacked and the board re-installed former CEO Myron “Mike” Ullman as CEO, the man Ackman helped to oust.

But there are some important nuances that directors should note.

Activist investors can no longer be dismissed as malcontents or profiteers. In fact they’ve recently garnered the label  “asset class.”

“Activist investors have won more respect as their research has improved and their campaigns succeeded,” said an investment officer for the California State Teachers Retirement System (CalSTRS.) In addition, once-passive institutional investors like CalSTRS are teaming up with activists in proxy battles.  Notable this proxy season is CalSTRS joining Relational Investors’ Ralph Whitworth to press Timken to divest its bearings and steel business to remove the “conglomerate discount that has persistently impaired Timken’s investment value for shareholders.”

Relational cites Timken’s history of poor corporate governance – notably the board’s refusal to declassify board seats following a majority-supported shareholder resolution in 2008, a “D” rating on pay-for-performance and recommended withholding votes on three of the four Director nominees by Glass Lewis characterized as insiders and family members. Both sides have filed additional documents in the runup to the May 7 annual meeting.

Ackman’s Pershing Square Capital Management LP  has incurred significant losses on its 18 percent ownership of J.C. Penney. However, the other directors are not off the hook.  Clearly, Ackman was convinced that Johnson could revitalize Penney’s fortunes, after all, at Apple he drove store sales to the highest per square foot in the industry.  Ackman convinced an independent board of directors of the logic of his strategy. Ackman was no doubt persuasive in gaining support from the J.C. Penney board of directors composed of five retired chairmen  and presidents (Radio Shack, Colgate-Palmolive, Texas Instruments, Southwest Airlines and Oxygen Media), a real estate executive, a university president and a marketing executive for Kraft Foods.  Did anyone have department store retail experience?

Johnson himself was convinced he could deliver. And yet Johnson left Penney’s with little to show for his 17-months of service because he agreed to be paid predominantly in stock and eschewed any rights to exit pay if he were fired. Additionally,  Johnson purchased warrants clearly indicating he was a pay-for-performance leader.  Compare that to Leo Apotheker who left the Hewlett-Packard Company with a $12 million package after his 11-month tenure left the company in shambles.

What investors may observe from the JC Penney saga is that activist investors may not be right 100 percent of the time.  However, they, like the shareholders, have skin in the game.  Johnson appeared to be a strategic choice for the CEO role when he was named.  What had the board done?  Did they just go along with Ackman? Unfortunately, it does not appear that the board did any succession planning during Johnson’s reign.  They gave the former CEO his old job back.

The ground is shifting, directors.  Investors and the media are scrutinizing your background and expertise.  Do you have the industry knowledge to understand and provide oversight of management’s strategy?  Do you devote sufficient time to understand the challenges that the enterprise faces?  Do you request additional information if management’s explanations are inadequate? Are you going along to get along? If you are sitting there pretending to understand, you are taking up a valuable spot.

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