Directors Face a Changed World

New normalAs Ira Millstein told directors on a recent NACD/Weil webinar on the Dodd-Frank Act, they must align with the owners of the company, the shareholders. He advised directors “not to make believe” or “live in a dream world” because governance power has already shifted to shareholders and it’s not going to be the way it was ever again.

The context for this change is the “new normal”, a term coined by economists that characterizes an environment of high unemployment, slow growth, consumer distress, overly careful investors and long-term owners who will seek growth where they can find it. This is a challenging environment in which to serve as a director.

Millstein sees the changes wrought by the Dodd-Frank Act as tectonic, making Sarbanes-Oxley look like child’s play. 

But directors shouldn’t wait until the final rules of the Act are written.  Rather, they should engage with their shareholders now.  He cited the fulsome letter that the Prudential board wrote in the proxy, introducing their thoughts on compensation. While Millstein believes directors should know what their shareholders think, he doesn’t believe that they have to agree with them.  “Explain why the board has a different view.  That seems to me perfectly rational.”

He noted that there was a huge amount to do in communication with shareholders and boards should get ready to engage. Now.

Dodd-Frank Reflects ‘New Normal’–”Boards Are the Problem”

shareholder activism“We’re seeing a sea-change in the environment of shareholder empowerment,” said Holly Gregory, Weil Gotshal partner and governance expert. “The Dodd-Frank bill accelerates a fundamental change, a new normal in the balance of governance power. “ She went on to note that the eighth anniversary of Sarbanes Oxley, enacted during the aftermath of WorldCom and Enron debacles,  boards were seen as the solution to the failures in corporate accountability. “In sharp contrast the new legislation reflects the view that boards are the problem and shareholders must be empowered to hold boards accountable.”

Gregory made these remarks on a National Association of Corporate Directors and Weil Gotshal webinar attended by hundreds of directors on Friday as boards try to gain a better understanding of the requirements that the new legislation that President Barack Obama signed into law on July 21, 2010.

“I want to emphasize that the theme within the legislation is that boards are the problem,” said Gregory.

Boards are well advised to recognize that the implementation of the legislation will fundamentally change their interactions with shareholders.  For directors who have eschewed any contact with shareholders, they must engage with shareholders in meaningful ways to elicit their support.  The sooner and more intelligently that they begin this dialogue, the better for them.

CEOs, Directors and Lake Wobegon

While the news is full of reports about shareholder concerns over the quality of corporate boards, it turns out that CEOs have questions too.

It’s the Lake Wobegon syndrome where 95 percent of directors think they’re doing a good job. CEOs see it differently.  According to work by Heidrick & Struggles, CEOs “almost universally confide” that they have one or two directors who provide wide counsel, offer advice on key issues and contribute both formally and informally to the enterprise.  That means that 80 percent of the directors are seen as not being very effective by the CEO.

The fictional town of Lake Wobegon, where “all the women are strong, all the men are good looking, and all the children are above average,” has been used to describe a real and pervasive human tendency to overestimate one’s achievements and capabilities.

CEOs need to see their boards as providing a competitive advantage to them and their enterprise. If board members are less effective, the board needs to replace them.  Without outside help, CEOs and other directors find it hard to ask less effective directors to leave.

CEOs need to ask, are they giving their boards the right tools to be effective.  Is management teeing up information for decision, providing the context and the why for the company considering it. Or, do boards get a firehose of information or worse yet, only the information that management want them to see? Are boards spending their time on the right issues?  Do boards have access to tools and advisors to make them more effective?

Boards are working harder than ever.  CEOs need to see to it that the board has the resources it needs to create strong work groups.

While the news is full of reports about shareholder concerns over the value their elected representative, the board of directors, bring to the enterprise, it turns out that CEOs have questions too.

It’s the Lake Wobegon syndrome where 95 percent of directors think they’re doing a good job. CEOs see it differently.  According to Heidrick & Struggles, CEOs “almost universally confide” that they have one or two directors who provide wide counsel, offer advice on key issues and contribute both formally and informally

Directors, Your Image Problem Isn’t Going Away

The curent issue of Newsweek features an interview with John Gillespie, one of the authors of Money for Nothing:  How the Failure of Corporate Boards Is Ruining American Business. The title alone is fairly daunting for directors who have served and are serving on boards.  Even if the public at large doesn’t read the book, the broad reach of Newsweek will brand boards as “inept.”

Charles Elson, the corporate governance expert at the University of Delaware, traces the origins of  shareholder activism to the anger shareholders were feeling that they were being ignored.

The truth is that there are strong energized boards and business leadership dedicated to delivering durable long-term value through sustained economic performance, sound risk management and high integrity and through meaningful consultation with shareholders.  But the new book paints a dark picture because so little was known about corporate governance until the financial collapse.

Good directors should be concerned about ”Money for Nothing.”  If they thought the legislative changes were merely grandstanding efforts by politicians, they are wrong. Actions by the SEC and Congress reflect the general concern that governance isn’t being carried out effectively.

Good boards are stepping up to the new environment to demonstrate that they can make corporate governance more effective to serve the company, its shareholders and stakeholders.  It will take reevaluation and rededication.

In this era of transparency, everyone will be watching.  The public won’t settle for less than effective oversight.

Feinberg’s Approach Offers Clues to Directors

How many professionals take on a highly visible thankless task for no pay not once but twice in the most challenging decade?

Kenneth Feinberg managed to create a program that persuaded 98 percent of the 3,000 victims’ families of 9/11 to stay out of court and instead apply to his fund while dispensing the $7 billion that seemed to satisfy almost everyone. Then, last year, he took on the job of administering pay for the executives of the failed businesses bailed out by taxpayers.  Not only did he create a credible template but injected common sense in the way that executives are paid. 

Directors could take a lesson.

Who but Warren Buffett could describe the current practice of a fictional greedy CEO engineering the approval of his rich pay package  by engaging the compensation firm of “Ratchet , Ratchet and Bingo” to prove to the board that he is worth it?  Buffett,  the Chairman and CEO of Berkshire Hathaway  , takes $100,000 in pay and say he would pay the company to do the job.  “It’s a great job!”  However, while he’s been running Berkshire Hathaway, the ratio of top pay to average pay at public companies has multiplied roughtly 11 times, from 24:1 to 275:1.

As Steven Brill conveys in his excellent profile of Feinberg in the New York Times Magazine, Feinberg shows himself to be a straight shooter, independent and fair.

That’s what most shareholders are asking directors to be–independent and fair.

Smart Boards Recognize the World Has Changed

Five years ago, RiskMetrics Group, the provider of proxy advisory services, seldom heard from the directors of the boards whose governance they evaluated.

“ These days, it’s not unusual for a board member—typically the lead director or a key committee chair—to initiate the contact with RiskMetric’s research team.  It’s common for a director to lead the discussion, ” said Patrick McGurn, Special Counsel , RiskMetrics Group. Continue reading

Advocates for the Public as Well as California Teachers

When Anne Sheehan, Director of Corporate Governance for the California State Teachers Retirement System (CalSTRS) speaks, companies in which the nation’s 2nd largest public pension fund invests listen.

“This is a new era,” Sheehan told the audience at the National Association of Corporate Directors. “The financial crisis of the past year has resulted in the erosion of the trust of the American public in business.  We represent our members and beneficiaries but we also believe we are a proxy for the American public who invest in public companies.” Continue reading