Boards Can Encourage Greater Innovation

innovationBoards need to help their companies grow. As Fred Steingraber and I note in our article, What Boards Need to Do to Remain Relevant, directors need to re-examine and even revise board committees and committee work to bring the level of attention that is required to better understand the companies they serve. While oversight of executive compensation has caused the greatest shareholder concern followed by too little attention to talent and succession management, boards have not paying enough attention to productivity, quality, growth and risk management—mechanisms by which companies renew their businesses, pursue sustainable growth and mitigate risk.

Directors, please turn to the New York Times Magazine of December 16 and read about Jump, a hybrid strategy firm focused on growth. Either charter a new committee to review organic growth targets and trends or add that to another committee’s responsibilities. Innovation is what will enhance a company’s and yes, even the country’s success. Directors who understand the broader developments in products and services, markets and channels, geography and relevant resource requirements can challenge and expand management’s thinking.  This committee should oversee the due diligence related to acquisitions as well as post-merger audits. They would also be responsible for understanding and overseeing the targeted and actual growth in revenues from new products in the last three to five years.

Improving Civic Discourse

While the editors of the Columbia Journalism Review mikeswebare addressing the press in helping to rebuild the American conversation, their advice has value for all of us.

“Ideas, particularly political ideas, are meant to be shared, to redefine themselves over the blue flame of discussion…increasingly Americans live in separate information silos. In uncertain times the tribes gather close. People don’t talk to outsiders.”

The editors urge the press to help “rebuild the forum that makes democracy work by being its best self” by taking steps to “Ignore the bias bullies”, “Stand up for facts” and “Return to deep reporting backed by institutional processes” which means “lots of feedback from near and far, fact-checking, copy-checking and double-checking, all part of the practical effort to publish something as accurate as possible.

“A massive retreat into ideological niches is hardly restricted to cable TV, and it doesn’t help the nation address its challenges.”

Amen.

Comp Committee Chairs: Get Help

say on payAmong the many requirements for Compensation Committees under Dodd-Frank is the heightened independence standard they must satisfy for any comp consultants.  The Comp Committee has the authority to appoint, compensate and oversee compensation and other consultants.  For most board members, “other consultants” or advisors would translate “attorneys.” Yet, what a chance for Comp Committees to get some real communication help.

If ever there was a time for compensation committees to clearly and credibly communicate, given the scrutiny they are under for creating and approving executive compensation, it would seem to be this proxy season.  The first step in “Say on Pay” would be for the committee to clearly articulate their decisions in arriving at the executive compensation decisions. It gives them an important chance to “tell their story.” 

“Directors must ensure that the CD&A—which is the primary tool for shareholders to understand executive pay—is straightforward, complete and written in plain English,” said Warren Batts, veteran CEO, chairman, director and NACD “Director of the Year” in a blog on executive compensation. “In addition, directors need to respond to shareholder questions and concerns as quickly as possible.  I have stood up as chairman of the Compensation Committee more than once to explain what we were doing and why—and never had a negative comment afterwards.”

 Compensation Committees that take the time to carefully explain the philosophy and background of its decisions is a sign of respect for shareholders.  Getting advice on how clearly you’ve accomplished that assignment could be the most cost-effective risk mitigation tool of the season.

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.

After 452, It’s Time for Creative Outreach to Shareholders

With the election of board directors too important to be considered routine, NYSE Rule 452 was amended to eliminate broker voting thereby removing typically management-friendly broker votes from director elections this year. 

But if shareholder voting on the election of directors is viewed as a critical component of good governance, how do you get registered shareholders to vote?

The SEC has launched an investor-focused Web site to help consumers invest wisely and avoid fraud. The site, www.Investor.gov provides tools and information, a way to ask questions, research brokers and even the mission of the SEC in ensuring fairness in the markets.   There’s a tab for proxy issues where the SEC explains “Your right to vote”, “Voting Your Shares”, “What You Should Do” and “How to Vote.”

Some companies see the opportunity to engage with shareholders.  Peggy Foran of Prudential Financial and has taken a creative approach, offering retail shareholders who vote their proxies an environmentally correct tote with the Prudential logo.  Or, the proxy-voting shareholder can also opt for a donation to a charity.

Not only will such a move encourage shareholders to vote but it signals the company’s true desire to engage with shareholders.

Navigating this proxy season will not be easy but companies that find creative ways to engage with their shareholders will improve their position and set the stage for the future.

The Power of an Individual Director

John Gillespie and David Zweig offer “solutions” to their indictment of corporate boards in their bookMoney for Nothing:  How the Failure of Corporate Boards is Ruining American Business and Costing Us Trillions.  In addition to their recommendations to split the chairman/CEO role, to allow shareholders to call an extraordinary general meeting, add some clout to say-on-pay, they cite individual talented and committed directors who have helped to improve governance.

Jack Krol is cited for his role in helping Ed Breen to restore Tyco after the Kozlowski debacle, Ralph Whitworth is lauded for the ways he restored governance to Waste Management and Michele Hooper for her leadership in changing board culture and spreading those changes to multiple boards.

“Drawing on her early experience on Target’s now legendary board beginning in the 1990s, Michele Hooper, a financial expert with a University of Chicago MBA, has brought those lessons to Warner Music Group, PPG Industries, AstraZeneca, UnitedHealth Group, Seagram and DaVita.  Hooper learned from Target the value of having “a boardroom that allows for open and collegial discussion around the table without people getting upset or having a CEO who is going to put the kibosh on conversations.”

Michele has modeled excellence and has been generous about sharing what she’s learned.  As the president of the Chicago chapter of the National Association of Corporate Directors, she volunteers her time to lead one of the strongest chapters of NACD, distinguished by its highly highly effective seminar programs. A board member of the national NACD, she facilitates training sessions for directors. In her day job, she is president and CEO of the Directors’ Council, which finds candidates for boards.

By highlighting the impact of directors like Michele, the critics Gillespie and Zweig demonstrate that boards of directors are still our best hope for providing oversight to our management system.

CEOs Want Effective Governance, Too

Perhaps the most surprising element of John Gillespie and David Zweig’s book, Money for Nothing, How the Failure of Corporate Boards Is Ruining American Business and Costing Us Trillions is the jailhouse interview with Dennis Kozlowski, who considers himself a victim of the times and a weak board. The authors conclude that the Tyco board had faded into irrelevance compared to “the power, prestige, and satisfaction provided by the acquisitions” that Kozlowski engineered.

It’s clear that strong effective boards are in everyone’s interest.  Directors who offer a strategic sounding board for management, and bring to bear their wisdom and experience as the company encounters challenges, are to be highly prized.

It will take more than just committed directors to improve corporate governance.  CEOs, whether they hold the title of chairman or not, need to make the investments in effective boards. In addition to their personal commitment to make the relationship work, they need to provide the resources and support to help directors be effective.

Shareholders Have Governance Responsibilities

In the aftermath of the financial crisis, there have been many proposals, as well as new rules and regulations to prevent its recurrence. Was it a failure of rules and regulations? What about our current rules, particularly those that apply to the way corporations are run?

Well-known and respected governance attorney Holly Gregory led a group of experienced lawyers reflecting diverse shareholder, corporate and academic perspectives in examining the roles and responsibilities of shareholders and boards under corporate law.

Their report, formally “Report of the Task Force of the ABA Section of Business Law Corporate Governance Committee on the Delineation of Governance Roles & Responsibilities” aka “Governance Task Force” reflects a year of work, sets a constructive tone for boards, shareholders and policy makers to work together in strengthening corporate governance. The report reminds us that shareholders are not the only beneficiaries of the modern corporate system, which has created wealth on a scale previously unseen.  The Governance Task Force report points out that corporations contribute to the public good by employing people, innovating, improving products and services, paying taxes, supporting various community and charitable programs that benefit society at large.

Anyone interested in corporate governance should read the report, not only for the detail of the legal constructs that have created our current system, but for granular detail in the footnotes complete with links that enable the reader to follow their research and come to their own conclusion.

If you are looking for a scapegoat, there isn’t one. Nor does a brush tar one group.   Instead, the report describes how shareholders, management and boards have specific responsibilities to bring accountability to the effective management and oversight.

The recommendations are logical. “Shareholders should act on an informed basis with respect to their governance-related rights…apply company-specific judgment when considering the use of voting rights…consider the long-term strategy of the corporation as communicated by the board in determining whether to initiate or support shareholder proposals.”

Boards should “embrace their role as the body elected by shareholders to manage and direct the corporation by affirmatively engaging with shareholders to seek their views, consider shareholder returns and facilitate transparency.” In addition they should “acknowledge at times the company’s long-term goals and objectives may not conform to the desires of some of the shareholders.” In addition, they should “disclose with greater clarity how incentive packages are designed to encourage long-term outlook…”

Policymakers should “in the context of reform initiatives” understand the rationale for the current roles and “carefully consider how to best encourage the responsible exercise of power by key participants in the governance of corporations so as to promote the long-term value creation….”

The report should be required reading for all shareholders.