Directors Should Embrace “Inclusive Capitalism”

imagesCAJUEMF1James D. Robinson II, the former chairman and CEO of American Express urged directors to embrace the important role they play in restoring public trust in capitalism.

With more than half the U.S. population believing that our current economic system is unfair,  capitalism, the great engine of prosperity and personal growth, needs a reboot. Corporate directors have a great opportunity to help, Robinson told the NACD Directorship 100 Forum.

Acknowledging that the economic and employment landscape has been completely altered by globalization and technology, hope for a better future for all Americans must be restored.

“As directors, we have a role to play in building companies but also rebuilding the public’s trust in the best system of the world.”  He calls it inclusive capitalism.  Businesses need to help today’s workers acquire the knowledge and skill to get the jobs that are available,  adopt an “easy button” philosophy to make life less cumbersome for their suppliers.  Most important, “boards and management and shareholders must balance short-term and long-term priorities, which are essential to restoring trust.”

“The issue of good governance goes beyond the corporate world, and includes the White House, state and local officials.”  He urges directors to make their voices heard.

Practical Advice for the Perfect (Small-Cap) Corporate Board

imagesCA7R23J9Adam J. Epstein, founder of Third Creek Advisors, has lived the experience of helping small-cap companies succeed.

We all know how important small companies are to the economy: Small companies are the engine of growth, the creator of jobs.  In fact, the majority of public companies are small, not the behemoths that make the headlines. Many small companies fail because of the difficulty of finding financing.  The odds are stacked against small companies.

Epstein is a corporate director and capital markets expert with extensive finance, legal and operating experience as well as an expert in corporate governance, which he has applied to understanding and therefore helping smaller companies.  His book, “The Perfect Corporate Board:  A Handbook for Mastering the Unique Challenges of Small-Cap Companies.”

The book begins with Finance because he has seen the way small cap company directors can be their own worst enemy by not facing up to the hard realities that small companies confront in order to stay in business. He prescribes a three-step process to start every financing along with the common mistakes to avoid.  Small-cap companies have to be smart about hiring the right help with the right expertise.  Directors can be enormously helpful in this process by asking the right questions.

Oh, and by the way, these directors are not getting rich in the process.  As Epstein notes, the compensation for an entire small-cap board is often less than fees that an individual director at a Fortune 500 board might be paid..  In the end, he says, being a small-cap director “is an exercise in entrepreneurial governance—being nimble, doing more with less and shepherding an asset against long odds for risk-embracing shareholders.”

If you are a director of a small-cap company, you need this book. For those who are not, this is a guided tour of just how tough it is to create success.  And just how hard so many small companies and their managers and directors are working to beat the odds.


Beating the Proxy Rush–A Day Examining Executive Compensation

As Say on Pay enters its third year, shareholders’  expectations are increasing along with the stakes for the professionals charged with helping their organizations achieve successful outcomes.

While others were enjoying the holidays, participants at the SEC Institute Executive Compensation Disclosure Forum in San Francisco and those attending by webinar spent a day drilling down to the details of executive compensation, led by Mark Borges, Principal of Compensia and chair of the Institute’s Forum. The former SEC special counsel in the Office of Rulemaking has encyclopedic knowledge of the issues and the challenges of executive compensation in a post-Dodd Frank world.

Subtitled, “How Say on Pay Has Changed Everything,” Borges conducted the all-day seminar with the skill of a concertmaster in bringing in the perspective of faculty members including David Lynn, Partner at Morrison & Foerster former Chief Counsel for the SEC’s Division of Corporation Finance, his Compensia colleague Rebecca Busch, Cooley attorney Amy Cole and shareholder engagement strategist, Karen Kane.  Eli Lilly and Company Assistant General  Counsel, Bronwen Mantlo and Susan Hutchens, Eli Lilly Director of Executive Compensation provided real world commentary on best practices. Many participants reported that they had already started proxy preparations for 2013 with the seminar a stage-setting opportunity.

Key takeaways:

Borges:  “My thesis is that the imposition of mandatory say on pay has fundamentally changed the way companies approach disclosure.  It’s no longer a compliance exercise but a communication  operation. We have seen disclosure evolve over the last few years to a much more sophisticated presentation of a company’s pay for performance message because you know that’s what’s being evaluated by your investors and the proxy advisory firms.  It also points to the fact that shareholder engagement more important than ever.”

Lynn:  “It’s not just the amount of money that the board approves in executive compensation, but the process the board went through in arriving at their decisions.”

Busch: “About 15 percent of companies receive negative recommendations from proxy advisory firms on their say on pay vote.  But remember, only 2 percent actually fail their say-on-pay votes. Although receiving a negative recommendation puts you at a higher risk of failing, it is not a guarantee and many companies are able to convince their shareholders to support them in spite of proxy advisory firm recommendations.”

Kane:  “Compensation is a window on board competency. Say on pay legitimizes shareholder scrutiny of the board of directors and its competency in providing oversight.”

Mantlo:  “We convene a cross-functional team to manage the proxy process to bring the right communication focus to a plain English and readable proxy.

Hutchens:  “We work with our corporate communication department to ensure that our messaging around compensation is clear and consistent.”

Cole: “Dealing with proxy advisory firms has become a critical aspect of preparing for the annual meeting in the say on pay environment.  In setting up a call and engaging with the proxy firm analyst when there is a discrepancy it’s important to convey that you take their opinion seriously.”

The SEC Institute is dedicated to helping public companies in the U.S. and abroad do the best possible job of meeting the filing requirements of the U.S. Securities and Exchange Commission.  Check out their conference and workshop offerings.


How the ‘Pivot’ and ‘Naysayers’ Help You Refine Your Ideas

Alexandra Wilkis Wilson brought the extraordinary story of how she and best friend Alexis Maybank  founded Gilt Groupe and built a billion dollar business based on their passion for fashion to a breakfast meeting of the Chicago Chapter of  85 Broads.

Her New York Times best-selling book, “By Invitation Only:  How We Built Gilt and Changed the Way Millions Shop,” which she co-authored with best friend and co-founder of Gilt Groupe, Alexis Maybank is a how-to for would-be entrepreneurs.

She offered the sound advice of someone who seems to have found balance in what was a dizzying tale of bringing exclusivity and excitement of sample sales to a young, internet-savvy luxury fashion clientele, growing  Gilt to a 5 million member online shopping destination.

Janet Hanson, the founder and CEO of 85 Broads, praised the young women’s ability to “cultivate relationships, take calculated risks and execute their game-changing, visionary ideas.  The key takeaway is that one needs to have an entrepreneurial spirit and indomitable will to succeed no matter what path you’re on.”

In the morning discussion she provided insight to the advice in the book.  She believes the best leaders are confident with humility.  “You can have a great idea, but be ready to pivot depending on what the market is telling you.”

Naysayers are important, Wilson says. Listen to negative feedback, but put it into context.  “We cross-checked the negative feedback with the reasons we thought the idea would be a smashing success.  And usually the feedback helped us to refine our pitch. In getting the best decision, plan or proposition, the friction and doubt cast by contrarians are usually critical to vetting all potential angles and counterpoints before moving forward.”  Negative reactions to their idea prepared them for meetings with future brand partners and investors.

Chairmen’s Pointers for Communicating with CEO

“The CEO-chair relationship in my view only develops over time, with many opportunities for one-on-one , in-person meetings,” says Harry Pearce, the independent chairman of MDU Resources and director of Marriott.  Peter Browning also noted the importance of the executive’s style in director-CEO communication.

The critical element is that both parties need to be committed to the dialogue.

When AgendaWeek asked me for my advice, I noted the bias for open, clear and consistent communication with the CEO.  Many insights of the board are communicated to the CEO through the Chair-CEO relationship.  Strong board chairs are astute listeners who are able to bring to the CEO any questions or concerns.

“Ultimately, steady and open communication is crucial to establishing a relationship of trust and confidence between the board and CEO,” writes Browning, lead director at Nucor and Acuity Brands and director of Lowe’s Companies and Enpro Industries.  “Closer collaboration allows directors to spend their time more efficiently and be better shareholder advocates.”

Read full article here. .

How Leaders Like Fred Steingraber Are Creating “Leadocracy”

Geoff Smart, the best-selling author of “Who,” believes that our highly dysfunctional government is “not a problem without a solution.”

After being asked to assist John Hickenlooper, the newly elected governor of Colorado in recruiting talented leaders for his cabinet, Smart concluded that there were too few great leaders in government as well as “forces keeping our greatest leaders out of government.”

While it would be natural for Smart, the founder of the leadership firm ghSMART, to conclude that getting more great leaders in government was the solution, he was pleased to find that such a movement was already underway.  It took Smart to name it, “Leadocracy,” which he says means “government by society’s greatest leaders” and he found a shining example in Fred Steingraber.

The three As of Leadership are Analyzing, Allocating and Aligning, three things that Steingraber did when he took over as President of the Village of Kenilworth.

Like many communities, Kenilworth was in trouble—three consecutive years of deficits. “Great leaders start by analyzing the needs and priorities of their constituent group,” according to Smart. Before becoming president, Steingraber led a strategy study of the town. Not only did he convince the village to do a needs analysis and quality survey but to gather benchmark data from other communities as well, helping them to evaluate their own costs, services provided, productivity and the like.

Smart calls Steingraber “possibly the most overqualified government leader I have ever met. He had served as CEO and Chairman of A.T. Kearney, the international management consulting firm.  Under Fred’s leadership, the company achieved massive success.  He grew the firm from $30 million when he took over to $1.5 billion when he left.”

Steingraber has had just as dramatic impact on Kenilworth, trading deficits for surpluses, engaging in strategic partnerships with other communities and improving communication between village management and the residents.

Steingraber’s private sector success created jobs, notes Smart. “The number of employees under Fred’s leadership grew from two hundred to 6,500. Amazing! Bravo! Imagine all the tax revenue that his firm and the taxpaying employees generated for their countries, states and municipalities.  In addition, he has served on twelve corporate boards, four advisory boards, and over twenty not-for-profit boards.”

Steingraber also has been an advocate for boards taking the initiative in restoring confidence to our capitalistic system. Fred and I co-authored the Corporate Finance Review article, “What Boards Need to Do to Preserve Their Relevance and Provide Value in the World of the New Normal.”



Boards Should Tell Us Which Derivatives Are Being Used to Manage Risk. . .Or,Tell Us Why Not

Richard L. Sandor, recognized as the “father of the financial futures markets” for his work creating futures contracts on currencies, Treasury bonds and mortgage securities, has a simple proposition for boards of directors.  When a futures market exists for products your company makes, or supplies your company buys, or the currency or interest rate risk your company faces – does your management team use those futures markets to quantify or control risk?

If not, a board is simply speculating – betting that the price of fuel, or metal, or money, is going to move in a certain direction. A decision not to use available risk-management tools to hedge commercial or financial risks is a decision to speculate, says Sandor. Speaking to a hometown crowd gathered June 20 at the Chicago Council on Global Affairs to mark the publication of his book, “Good Derivatives:  A Story of Financial and Environmental Innovation,” cited the role of fuel hedging by Southwest Airline as a major factor in outdoing those airlines that left themselves – and their shareholders – exposed to the volatility of world oil markets despite the existence of highly-liquid, well-regulated futures markets where they could have transferred the risk of rising fuel costs to other parties and thereby prevented or reduced financial losses.

One result of the financial crisis is that the word ‘derivatives’ is now applied indiscriminately, blanketing contracts traded on regulated futures exchanges with the same opprobrium heaped on the too-clever financial instruments that Wall Street engineered to trade among themselves and their biggest clients. The former are risk mitigation tools linked to underlying commercial activity in metal mining, agriculture, financial services and a host of other business activities. The future price of any of these useful contracts is determined in a transparent process that balances supply and demand factors. What we saw in the financial meltdown were financial products that were opaque and which offered no counter-party guarantees because they were traded “over the counter”, between sophisticated firms that supposedly knew what they were doing, instead of being traded on regulated exchanges that utilized an independent central clearinghouse to monitor the financial status of market participants and ensure timely payment by both sellers and buyers of futures contracts.

What about the management of companies in using hedging devices such as derivatives? Sandor suggests that the board develop an understanding of available derivatives markets and hold management accountable if they don’t find a way to utilize derivatives to manage the risks inherent in their respective businesses. At the same time, boards need to inform shareholders how the governance process intended to serve as the shareholders’ fiduciary representatives encompasses the use of available hedging and risk-transfer tools, or provides the rationale for foregoing such protection and accepting exposure to volatility in the cost of financing and other inputs.

If Americans don’t “get derivatives,” the Chinese do. Sandor’s firm, Environmental Financial Products, specializes in inventing, designing and developing new financial markets.  Sandor serves as a distinguished professor of environment finance at the Guanghua School of Management at Peking University.

Perhaps Boards Need Fewer Famous and Iconic Board Members

In its account of the verdict in the conviction of Rajat Gupta, the former head of McKinsey & Co, and a former director of Goldman Sachs and Procter & Gamble for securities fraud and conspiracy to share confidential information, the Wall Street Journal noted,  Gupta was “once one of America’s most-respected corporate directors, was motivated not by quick profits but rather a lifestyle where inside tips are the currency of friendships and elite business relationships.”
The government’s prosecution of such an iconic leader, says that such an insider mentality and breach of responsibility will not be tolerated. He was a figure of trust. His conviction emphasizes the importance of board members who are trustworthy and behave ethically.  Directorships are not honorariums to be awarded to those who have been successful in business or government. If there is a separate set of rules for the elite and famous, then average investors have no reason to invest. That’s why trust is so critical. Shareholders must trust that all investors will be treated fairly.  Ethical behavior by directors and management is critical to the operations of the free market.


Congratulations Chicago Fed, Terry Savage and MoneySmart Week

The Chicago Fed kicked off MoneySmart Week and celebrated the 10th year of what has grown from a week of financial literacy events in Chicago to a national program with partners such as Visa and the American Library Council.
Terry Savage, Sun-Times columnist, who wrote the book on financial literacy, recalled the first meetings at the Fed with the idea of connecting people who needed financial advice with the information that a host of financial service companies could provide.
As she noted, it wasn’t just the concept of a program of partner, but rather the Fed’s leadership under Fed President Michael Moskow and now Charlie Evans that supported and advanced the program.  The turnout at the Chicago Fed today in kicking off a 10th year was a testament to the importance of the topic and the Fed’s ongoing support and expansion of the program.
Alejo Torres, Chicago Fed’s Senior Outreach Manager, recognized the many partners that have contributed to the program over the years.  In reviewing the history, Fed Public Affairs VP Doug Tillett explained, “It’s the power of connecting people to resources they need.”
As Chicago City Treasurer Stephanie Neeley and United Way CEO Wendy DuBoe CEO of the United Way concurred, improving financial literacy is needed now more than ever!

Saving the Economy with Candor, Compromise and Equity for All

Taking inspiration from George Washington’s Farewell Address, Paul Schott Stevens, President and CEO of Investment Company Institute addressed the issue of our troubling economic situation and our national security.

He laid out the cost of our staggering indebtedness, fourth only to Japan, Iceland and Greece brought about by a 30 year practice in Washington of using the national debt to avoid saying no to anyone. Whoever takes office in January of 2013 will be presiding over a country whose debt is 103 percent of GDP. With interest payments on the debt soon to exceed the Defense Department’s budget, Admiral Mike Mullen, former chairman of the Joint Chiefs of Staff,  said that the debt is the biggest risk to our economy and national security.

How do we move from “kicking the can down the road” or ignoring our plight to address our debt and put the U.S. back on a sound financial footing for prosperity and growth?

Stevens gave us three principles: candor, compromise and an equitable solution in the broadest sense.

Candor is first, says Stevens because “A great nation is honest with itself about its priorities.” That is, take the debt seriously and deal with it. The most promising solutions to our fiscal problems are multi-faceted and require compromise, something we must insist that our representatives do. Finally, solutions must be equitable in the broadest sense, meaning that budget cuts alone or tax increases alone can solve the problem, but a combination of the two.