Role of the Compensation Committee

Posted on May 18, 2012 by Steve Odland

The Business Roundtable long has been a leader in Corporate Governance thought leadership.  They have written Principles of Corporate Governance going back to 2002.  This is the seventh in a series of articles that summarizes their principles.

Every publicly owned corporation should have a committee composed solely of independent directors that addresses compensation issues. The compensation committee should have at least three members and should be composed solely of independent directors. All committee members should have and maintain sufficient knowledge of executive compensation and related issues to perform their duties effectively.

The compensation committee’s responsibilities include overseeing the corporation’s overall compensation structure, policies and programs, establishing or recommending to the board performance goals and objectives for the CEO and other members of senior management (or, in some companies, in conjunction with the corporate governance committee), and establishing or recommending to the independent directors compensation for the CEO and senior management.

The compensation committee should see that the corporation’s compensation policies reflect the core principle of pay for performance and should establish meaningful goals for performance-based compensation paid to senior management. The committee should see that the corporation’s compensation policies and performance goals are closely linked to its strategic plan and that they create incentives to produce long-term value for shareholders without encouraging excessive risk-taking.

The compensation committee should have the authority to retain compensation consultants, counsel and other advisers to provide the committee with independent advice. The compensation committee should understand all aspects of an executive’s compensation package, and should review and understand the maximum payout due under multiple scenarios (such as retirement, termination with or without cause, and severance in connection with business combinations or the sale of a business).

The compensation committee should require senior management to build and maintain significant continuing equity investment in the corporation. To align senior management interests with the interests of shareholders, the committee should establish requirements that senior management acquire and hold a meaningful amount of the corporation’s stock for at least the duration of their tenure with the corporation.

In addition to reviewing and setting compensation for senior management, the compensation committee should look more broadly at the overall compensation structure of the enterprise to determine that it establishes appropriate incentives for management and employees at all levels and that these incentives do not encourage inappropriate risk-taking. The committee should consider carefully and understand the incentives created by different forms of compensation. Incentives should further the corporation’s long-term strategic plans by looking beyond short-term market value changes to the overall goal of creating and enhancing enduring shareholder value, and they should be consistent with the corporation’s culture.

The committee should see that the corporation has in place appropriate practices to mitigate risks created by compensation programs. Executive compensation should directly link the interests of senior management, both individually and as a team, to the long-term interests of shareholders. It should include significant performance-based criteria related to long-term shareholder value and should reflect upside potential and downside risk.

The compensation committee should carefully examine the benefits and perquisites provided to senior management and determine whether they appropriately balance the interests of long-term shareholders and the ability of the corporation to recruit and retain top talent. The corporation should generally bear the cost of these items only if they are directly related to management’s job performance; the corporation should not bear the cost of personal expenses.

The compensation committee should oversee the corporation’s disclosures with respect to executive compensation. Disclosure about executive compensation should be transparent and written in plain English so that it is understandable to shareholders. In particular, the committee should use the compensation discussion & analysis (CD&A) disclosure to provide shareholders with meaningful and understandable information about the corporation’s executive compensation philosophy, policies and practices, the factors that the committee and the board consider in making compensation decisions, and the relationship between executive compensation and corporate performance.

– Steve Odland

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Role of the Corporate Governance Committee

Posted on May 5, 2012 by Steve Odland

The Business Roundtable long has been a leader in Corporate Governance thought leadership.  They have written Principles of Corporate Governance going back to 2002.  This is the sixth in a series of articles that summarizes their principles.

Every publicly owned corporation should have a committee composed solely of independent directors that addresses director nominations and corporate governance matters. The corporate governance committee (often combined with or referred to as a nominating committee) should have at least three members and should be composed solely of independent directors. The corporate governance committee recommends director nominees to the full board and the corporation’s shareholders, oversees the composition, structure, operation and evaluation of the board and its committees, and plays a leadership role in shaping the corporate governance of the corporation.

Depending on how the board has allocated responsibilities among its committees, the corporate governance committee also may oversee the compensation of the board if the compensation committee does not do so, or the two committees may share oversight responsibility for this area. The committee should remain informed about legal and regulatory developments in the area of corporate governance. As part of its responsibility to oversee the composition of the board, the corporate governance committee should engage in succession planning for the board. This process should include looking at the skills and experience currently represented on the board, identifying qualifications and attributes that the board may find valuable in the near-term and the future based on the corporation’s strategic direction, and planning ahead for the departure of directors and the designation of new board members.

The corporate governance committee should regularly conduct an assessment of the mix of skills represented on the board to evaluate whether the board, as a whole, contains the right balance of professional and personal backgrounds, and includes individuals that bring industry and other relevant knowledge, financial expertise, diversity and other desired characteristics to the board.

In performing the core function of identifying and recommending director candidates to the board, the corporate governance committee should establish criteria for board membership and recommend these criteria to the board for approval. There are certain criteria that every director should have, such as sound judgment, integrity and an objective mind.

The committee should periodically review the board’s membership criteria and recommend changes to the board as appropriate. Based on the board’s membership criteria and the qualifications and attributes identified through the assessment of the board’s composition, the committee should identify director candidates, review their qualifications and any potential conflicts with the corporation’s interests, and recommend new director candidates to the board.

In identifying director candidates, the corporate governance committee should take a proactive approach by soliciting ideas for potential candidates from a variety of sources. The committee should have the authority to retain search firms as appropriate to assist it in identifying candidates and should provide search firms with the criteria articulated by the committee. The committee also should develop a process for considering shareholder recommendations for board nominees. Although it is appropriate for the CEO to meet with board candidates, the final responsibility for selecting director nominees should rest with the corporate governance committee and the board.

In connection with the renomination of current directors, the corporate governance committee should review their skills and experience, assess their contributions to the board, and consider their continued value to the corporation in light of current and future needs. Some boards may undertake these steps, in part, through individual director evaluations, which may occur through a more formalized process or in connection with renominating directors.

The corporate governance committee should monitor and safeguard the independence of the board. An important function of a corporate governance committee, related to its core function of recommending nominees to the board, is to see that a substantial majority of the directors on the board meet appropriate standards of independence that are consistent with securities market listing standards and to see that these directors are independent both in fact and in appearance. It is also important that directors have the ability to question management, exercise constructive skepticism and express their views even when those views may differ from those of management or other directors.

The corporate governance committee should consider all relevant facts and circumstances in assessing independence and make recommendations to the board regarding determinations of director independence. If the board has developed a set of standards for assessing independence, the committee should evaluate directors’ relationships in light of these standards. In addition, the committee should receive prompt notification from directors of any change in a director’s circumstances that may affect the director’s independence (such as a family member’s job change).

The corporate governance committee should conduct a periodic evaluation of the board’s leadership structure to assess whether the current leadership structure remains appropriate. In addition, the committee should oversee the process of planning for succession to the position of chairman of the board, which should involve consideration of whether to combine or separate the positions of CEO and chairman of the board when the current chairman’s tenure ends and consideration of whether a new CEO might necessitate a change to the board leadership structure.

The corporate governance committee also recommends directors for appointment to committees of the board. The committee should periodically review the board’s committee structure and annually recommend candidates for membership on the board’s committees. The committee should see that the key board committees, including the audit, compensation and corporate governance committees, are composed of directors who meet applicable independence and qualification standards. In addition, the committee should consider whether periodic rotation of committee memberships and chairs would provide fresh perspectives and enhance directors’ understanding of various aspects of the corporation’s business.

The corporate governance committee should oversee the effective functioning of the board. The committee should review the board’s policies relating to meeting agendas and schedules and the corporation’s processes for providing information to the board, with input from the lead director or independent chairman.

The corporate governance committee should assess the reporting channels through which the board receives information and see that the board obtains appropriately detailed information in a timely fashion. This includes receiving information from a variety of sources, from inside and outside of the corporation, including both positive and negative materials such as analyst reports, industry publications and press articles. It also includes seeing that relevant information that the corporation receives from key stakeholders, such as long-term shareholders, is appropriately shared with the board.

The corporate governance committee should develop and recommend to the board a set of corporate governance principles, review them annually and recommend changes to the board as appropriate. The corporation’s corporate governance principles should be available on the corporation’s website and should address, at a minimum, board leadership, qualifications for directors, director independence, director responsibilities, the structure and functioning of board committees, board access to management and advisers, director compensation, director orientation and continuing education, board evaluations and management succession.

The corporate governance committee should oversee the corporation’s efforts in the area of shareholder engagement and coordinate with management any appropriate board-level involvement in that process. The corporate governance committee should oversee the evaluation of the board and its committees. Specifics concerning the evaluation process are discussed under “Board and Committee Evaluation.”

– Steve Odland

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Role Of The Audit Committee

Posted on April 9, 2012 by Steve Odland

The Business Roundtable long has been a leader in Corporate Governance thought leadership.  They have written Principles of Corporate Governance going back to 2002.  This is the fifth in a series of articles that summarizes their principles.

Every publicly owned corporation should have an audit committee of at least three members, who should all be independent directors. Audit committees typically consist of three to five members. The listing standards of the major securities markets require that all members of the audit committee qualify as independent directors under applicable listing standards, subject to limited exceptions, and that they meet additional, heightened independence criteria.

Audit committee members should meet minimum financial literacy standards, as required by the listing standards of the major securities markets, and at least one member of the audit committee should be an audit committee financial expert, as determined by the board in accordance with regulations of the Securities and Exchange Commission. Audit committee members, as with all directors, should understand the corporation’s business and risk profile and apply their business experience and judgment with an independent and critical eye to the issues for which the committee is responsible.

With the significant responsibilities imposed on audit committees under applicable law, regulations and listing standards, consideration should be given to whether it is appropriate to limit the number of public company audit committees on which a corporation’s audit committee members may serve.

Some boards have adopted policies that audit committee members may not serve on the audit committees of more than three public corporations, in accordance with applicable securities market listing standards. Policies may permit exceptions to this limit when the corporation’s board determines that the simultaneous service would not affect an individual’s ability to serve effectively on the corporation’s audit committee. The audit committee is responsible for supervising the corporation’s relationship with its outside auditor. In performing this responsibility, the primary functions of the audit committee include:

» Selecting and retaining the auditor and approving in advance the terms of the annual audit engagement. The selection of the outside auditor should involve an annual due diligence process in which the audit committee reviews the qualifications, work product, independence and reputation of the outside auditor, and the performance of key members of the audit team.

» Overseeing the independence of the outside auditor. The audit committee should maintain an ongoing, open dialogue with the outside auditor about independence issues. The committee should consider its overall approach to using the outside auditor as a service provider and identify those services, beyond the annual audit engagement, that the outside auditor can provide to the corporation consistent with applicable law and regulations and with maintaining independence. 

The audit committee also is responsible for overseeing the corporation’s financial reporting process. The audit committee should review and discuss the corporation’s annual financial statements with management and the outside auditor, and should review the corporation’s quarterly financial statements and related earnings press releases prior to issuance. As part of its reviews, the audit committee should review and discuss with management and the outside auditor the corporation’s critical accounting policies, the quality of accounting judgments and estimates made by management, any comments received from Securities and Exchange Commission staff, and any material written communications between the outside auditor and management.

The audit committee should oversee the corporation’s system of internal controls over financial reporting and its disclosure controls and procedures, including the processes for producing the certifications required of the CEO and principal financial officer. On a periodic basis, the committee should review with both the internal and outside auditors, as well as with management, the corporation’s procedures for maintaining and evaluating the effectiveness of these systems. The committee should be promptly notified of any significant deficiencies or material weaknesses in internal controls and should be kept informed about the steps and timetable for correcting them.

Unless the full board or one or more other committees does so, the audit committee should oversee the corporation’s program that addresses compliance with ethical and legal standards and important corporate policies, including the corporation’s code of conduct and the mechanisms it has in place for employees to report compliance issues. In accordance with applicable legal requirements, the audit committee should establish procedures for receiving and handling complaints and concerns related to accounting, internal accounting controls and auditing issues, and the committee should evaluate these procedures periodically and revise them as appropriate.

The audit committee should be briefed regularly by senior management on the status of outstanding compliance issues, including concerns submitted through the committee’s procedures for handling accounting and related concerns, and it should receive prompt notification of any significant compliance issues. The audit committee should report at least annually to the full board on its oversight of the compliance program.

Unless the full board or another committee does so, the audit committee should oversee the corporation’s risk assessment and risk management. Many corporations address risk through the audit committee, in part because securities market listing standards applicable to many corporations require audit committees to discuss policies with respect to risk assessment and risk management. However, the audit committee should not be the sole body responsible for risk oversight, and the board may decide that it is appropriate to allocate responsibility for some types of risk to other committees (for example, compensation risk to the compensation committee) or to the board as a whole.

No one risk oversight structure is right for every board, and different structures may be appropriate depending on a corporation’s industry and other factors. Committees with risk-related responsibilities should report regularly to the full board on the risks that they oversee and brief the audit committee as appropriate in cases where securities marked listing standards require the audit committee to retain some oversight responsibility for risk.

The audit committee should oversee the corporation’s internal audit function, including reviewing the scope of the internal audit plan, reports submitted by the internal audit staff and management’s response, and the appointment and replacement of the senior internal auditing executive. The senior internal auditing executive should have a direct communication line to the audit committee, so that the executive has the authority to report any issues or concerns directly to the committee.

Final decisions relating to the hiring and termination of the senior internal audit executive should be made following consultation with the audit committee. The audit committee should implement a policy covering the hiring of personnel who previously worked for the corporation’s outside auditor. At a minimum, this policy should incorporate the “cooling off” period and other auditor independence hiring requirements mandated by applicable law and regulations.

Audit committee meetings should be held at least quarterly, with additional meetings held frequently enough to allow the committee to monitor the corporation’s financial reporting appropriately. Meetings should be scheduled with enough time to permit and encourage active discussions with management and the internal and outside auditors. The audit committee should meet privately with each of the internal and outside auditors and management on a regular basis, and in any event at least quarterly, and communicate with them between meetings as necessary.

The audit committee also should hold private sessions on a regular basis with senior management responsible for the corporation’s legal function to facilitate the communication of concerns regarding legal compliance matters and significant legal contingencies. In addition, the audit committee should consider whether to hold private sessions from time to time with other parties, including senior management responsible for risk assessment and risk management, and those responsible for compliance.

– Steve Odland

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The Alternative to Shareholder Class Actions

Posted on April 3, 2012 by Steve Odland

http://online.wsj.com/article/SB10001424052702303816504577312373860495762.html?mod=ITP_opinion_0

Getty Images

In this article by Hal Scott and Leslie Silverman of the Committee on Capital Markets Regulation (of which I was a member from 2006-2010), they argue that “despite arbitration’s endorsement by Congress and the Supreme Court, the SEC has rebuffed efforts to substitute arbitration for securities class actions.”  In the past months, the SEC has blocked attempts by the Carlyle Group and proposals by stockholders of Pfizer and Gannett, to mandate arbitration rather than litigation in disputes between investors and management.  The SEC gave no explanation for its actions.  Scott and Silverman argue that securities class actions undercut the competitiveness of the U.S. capital markets and are contributing to companies issuing IPO’s to go elsewhere versus the U.S.  The Committee has focused for years on how to make the U.S. capital markets more globally competitive by reducing regulation.  Here is one more example of how regulation is harming the markets.

– Steve Odland

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Board Organization

Posted on March 24, 2012 by Steve Odland

The Business Roundtable long has been a leader in Corporate Governance thought leadership.  They have written Principles of Corporate Governance going back to 2002.  This is the fourth in a series of articles that summarizes their principles.

Virtually all boards of directors of large, publicly owned corporations operate using committees to assist them. A committee structure permits the board to address key areas in more depth than may be possible in a full board meeting. Decisions about committee membership and chairs should be made by the full board based on recommendations from the corporate governance committee. Consideration should be given to whether periodic rotation of committee memberships and chairs would provide fresh perspectives and enhance directors’ understanding of different aspects of the corporation’s business, consistent with applicable listing standards.

In connection with joining a committee, directors should participate in orientation to familiarize themselves in greater depth with the subject matter areas that the committee is responsible for overseeing. In addition, all committee members should be encouraged to participate in continuing education relating to the committee’s areas of responsibility. For example, committees may benefit from periodic educational sessions, led by management or outside experts, which address recent developments and best practices relevant to the committees’ duties. In this regard, committee members should be cognizant of how recent developments impact the corporation’s own practices.

Committees should apprise the full board of their activities on a regular basis. Processes should be developed and monitored for keeping the board informed through oral or written reports. For example, some corporations provide minutes of committee meetings to all members of the board. Business Roundtable believes that the functions generally performed by the audit, compensation and corporate governance committees are central to effective corporate governance.

The listing standards of the major securities markets require corporations to have an audit committee that performs specific functions, and many corporations also are required to have committees that oversee executive compensation, director nominations and corporate governance matters. Business Roundtable does not believe that a particular committee structure is essential for all corporations. What is important is that the independent members of the board address key issues effectively. These issues include compliance, executive compensation, financial reporting, governance, risk oversight, director nominations and succession planning. Thus, the references below to the functions performed by particular committees are not intended to preclude corporations from allocating these functions differently, consistent with applicable listing standards.

Additional committees, such as finance, public responsibility or risk management, also may be used. Some corporations find it useful to establish committees to examine special problems or opportunities in greater depth than would otherwise be feasible. The responsibilities of each committee and the qualifications required for committee membership should be clearly defined and set out in a written charter that is approved by the board and publicly available. Each committee should review its charter annually and recommend changes to the board as appropriate.

– Steve Odland

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Harvard Law School Supports Declassified Board Challenges

Posted on March 19, 2012 by Steve Odland

The following statement was released today by the Harvard Law School Shareholder Rights Project:

“Below are links to joint press releases issued today by the Harvard Law School Shareholder Rights Project(SRP) and each of five institutional investors – the Illinois State Board of Investment, the Los Angeles County Employees Retirement Association, the Nathan Cummings Foundation, the North Carolina State Treasurer, and the Ohio Public Employees Retirement System.

During this proxy season, the SRP has been representing and advising these institutional investors in connection with the submission of shareholder proposals to a significant number of S&P 500 companies that have staggered boards. The proposals urge a move to annual elections, which are widely viewed as corporate governance best practice. As the press releases below indicate:

  • Proposals to declassify boards have been submitted to more than eighty S&P 500 companies, and
  • Forty-two S&P 500 companies receiving proposals – about one-third of the S&P 500 companies that had a staggered board at the beginning of this proxy season – have already entered into agreements committing them to bring management proposals to declassify their boards.

The companies that have entered into agreements to bring management proposals to declassify their boards should be commended for their responsiveness to shareholder concerns and for their willingness to move to annual elections. A list of twenty-one companies that have entered into such agreements, including only companies that have already made public filings that disclose the planned management proposal, is available here.

Joint press release by the Illinois State Board of Investments and the SRP

Joint press release by the Los Angeles County Employees Retirement Association and the SRP

Joint press release by the Nathan Cummings Foundation and the SRP

Joint press release by the North Carolina Department of State Treasurer and the SRP

Joint press release by the Ohio Public Employees Retirement System and the SRP

The Harvard Law School Shareholder Rights Project is a clinical program through which Harvard Law School faculty, staff and students assist public pension funds and charitable organizations to improve corporate governance at publicly traded companies in which they are shareowners. More information regarding the SRP can be found at http://srp.law.harvard.edu.”

 

– Steve Odland

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Board Leadership

Posted on March 16, 2012 by Steve Odland

The Business Roundtable long has been a leader in Corporate Governance thought leadership.  They have written Principles of Corporate Governance going back to 2002.  This is the fourth in a series of articles that summarizes their principles.

Boards of American corporations have taken a variety of approaches to board leadership, with some boards combining the positions of CEO and chairman and others appointing a separate chairman or designating a “lead” director. No one leadership structure is right for every corporation at all times, and boards of different corporations may reach different conclusions about the leadership structures that are most appropriate for their corporations at any particular point in time.

The board should decide whether to combine or separate the positions of CEO and chairman of the board based on its assessment of what is in the best interests of the corporation and its shareholders based on the corporation’s particular circumstances, and the board should evaluate its leadership structure periodically. In addition, in connection with the CEO succession planning process, the board should consider the appropriate board leadership structure.

Whatever leadership structure a board chooses, independent board leadership is critical to effective corporate governance. To provide independent leadership for the board, the board should consider appointing a lead director (or presiding director with comparable responsibilities) if it combines the positions of CEO and chairman or has a chairman who is not independent. The lead director should be appointed by the independent members of the board and should serve for a period of at least one year. At some corporations the lead director is appointed annually, while at others the lead director serves for a longer term or an indefinite period of time.

Lead directors perform a range of functions, depending on the needs of the board. One of the primary functions of the lead director is chairing executive sessions of a board’s independent or non-management directors. The lead director should have the authority to call executive sessions, and should coordinate and oversee appropriate follow-up on matters discussed in executive sessions to maximize the effectiveness of these sessions.

Other key functions of the lead director may include chairing board meetings in the absence of the chairman of the board, reviewing and/or approving agendas and schedules for board meetings and information sent to the board, and being available for engagement with long-term shareholders as appropriate. The lead director also may play a key role in overseeing performance evaluations of the CEO and the board, and leading the board in crisis situations. Depending on the responsibilities associated with the position of the lead director or independent chairman, the position may involve substantial responsibility and require a significant time commitment on the part of a director.

– Steve Odland

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Board Composition

Posted on March 5, 2012 by Steve Odland

The Business Roundtable long has been a leader in Corporate Governance thought leadership.  They have written Principles of Corporate Governance going back to 2002.  This is the third in a series of articles that summarizes their principles.

Boards of directors of large publicly owned corporations vary in size from industry to industry and from corporation to corporation. In determining board size, directors should consider the nature, size and complexity of the corporation as well as its stage of development. The experiences of many Business Roundtable members suggest that smaller boards often are more cohesive and work more effectively than larger boards. Directors should be elected by a majority vote.

In addition, boards should adopt a resignation policy that requires a director who does not receive a majority vote to tender his or her resignation to the board for its consideration. Although the ultimate decision whether to accept or reject the resignation will rest with the board, the board should think critically about the reasons why the director did not receive a majority vote and whether or not the director should continue to serve. Among other things, the board should consider whether the vote resulted from concerns about a policy issue affecting the board as a whole or concerns specific to the individual director. If the board decides not to accept a resignation, the corporation should disclose the reasons for this decision promptly.

In addition, when a director is elected but receives significant “withhold” or “against” votes, the board should consider the reasons for the vote. Having a variety of backgrounds and experience, consistent with the corporation’s needs, is important to the overall composition of the board. Because the corporation’s need for particular backgrounds and experience may change over time, the board should monitor the mix of skills and experience that directors bring to the board and assess whether the board, as a group, has the necessary tools to work together in a productive and collegial fashion and perform its oversight function effectively. The board should consider implementing a structured framework for this ongoing process, such as using a skills matrix detailing specific qualifications and identifying the skills that current directors, and director candidates, bring to the board.

Directors with relevant business and leadership experience are beneficial to the board as a whole and to the corporation. These directors can provide a useful perspective on business strategy and significant risks and an understanding of the challenges facing the business. Corporations should assist directors who do not have significant background in a corporation’s business or industry through orientation programs and otherwise. All directors should remain informed about issues and developments relevant to the corporation’s business and industry by reviewing pertinent information provided by management and the corporation, subscribing to industry journals, reviewing analyst and press reports, and participating in educational programs. As part of the ongoing assessment of board composition, the board should plan ahead for the nomination of new directors by engaging in succession planning. The board should conduct a forward-looking assessment to identify qualifications and attributes that the board may find valuable in the future based on the corporation’s strategic plans, anticipated director retirements and evolving best practices in the corporation’s industry. The board also should plan ahead for director departures, considering whether it is appropriate to establish or maintain procedures for the retirement or replacement of board members, such as a mandatory retirement age or term limits.

The board should assess whether other practices, such as the assessment of director candidates in connection with the renomination process, annual board evaluations and individual director evaluations, may make a retirement age or term limit unnecessary. Many boards also establish a requirement that directors who change their primary employment tender a board resignation, providing an opportunity for the board to consider the desirability of their continued service in light of their changed circumstances. Board independence is critical to effective corporate governance. Providing objective independent judgment is at the core of the board’s oversight function, and the board’s composition should reflect this principle. Accordingly, a substantial majority of the board’s directors should be independent, both in fact and appearance, as determined by the board.

Board independence depends not only on directors’ individual relationships and outlook but also on their ability to question management, exercise constructive skepticism and express their views even when those views may differ from those of management or other directors. The board should make an affirmative determination as to the independence of each director annually and should have a process in place for making these determinations.

» Definition of “independence.” An independent director should not have any relationships with the corporation or its management—whether business, employment, charitable or personal—that may impair, or appear to impair, the director’s ability to exercise independent judgment. The listing standards of the major securities markets define “independence” and enumerate specific relationships involving directors and their family members (such as employment with the corporation or its outside auditor) that preclude a director from being considered independent.

» Assessing independence. The board should consider all relevant facts and circumstances when assessing directors’ independence, taking into account the requirements of the federal securities laws, securities market listing standards, and the views of institutional investors and other relevant groups. When evaluating whether a director is independent, the board should consider whether the director has any relationships, either directly or indirectly, with the corporation, senior management or other board members that could affect the director’s actual or perceived independence. Corporations must disclose in their proxy statements relationships that the board considered in assessing independence in accordance with the requirements of the federal securities laws. Many boards have adopted standards to assist them in assessing independence. These standards should be included in a corporation’s corporate governance principles.

» Relationships with not-for-profit organizations. The board’s director independence assessment should include a review of relationships that directors, and their spouses, have with not-for-profit organizations that receive support from the corporation. In conducting this assessment, the board should take into account the size of the corporation’s contributions and the nature of the relevant director’s relationships to the recipient organizations. Independence issues are most likely to arise when a director, or the director’s spouse, is an employee of the not-for-profit organization and when a substantial portion of the organization’s funding comes from the corporation. It also may be appropriate to consider contributions from a corporation’s foundation to organizations with which a director or a director’s spouse is affiliated.

– Steve Odland

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WomenCorporateDirectors Takes Action during Women’s History Month to Move Women into Board Seats Globally

Posted on February 29, 2012 by Steve Odland

http://www.prnewswire.com/news-releases/womencorporatedirectors-takes-action-during-womens-history-month-to-move-women-into-board-seats-globally-140867243.html

The Americas – Directors from throughout the Americas will convene in Palm Beach, FL on March 9 at WCD’s first-everAmericas Institute, with this year’s program focusing on Latin America and its growing priority for corporate boards. KPMG is lead sponsor of the event. Lars Thunell, CEO of the World Bank’s IFC, will deliver the keynote address at the event’s luncheon, and the slate of speakers and panelists includes: Sherry Barrat, Vice Chairman of Northern Trustand director of NextEra Energy, Inc.; Toti Graham, director of Interbank, Quimica Suiza, Grupo Salud del Peru, ENFOCA SAFI, Corferias del Pacifico, and Red i3; Janet Clarke, director of Cox Communications, eFunds Corporation, ExpressJet Airlines Inc., and Asbury Automotive Group Inc.; P. Michael McKinley, U.S. Ambassador to Bogota, Colombia, and former U.S. Ambassador to Peru; Lillian Garcia, EVP & AVP Argentina, Colombia, Venezuela & Ecuador, and Uruguay for Tupperware Brands Corporation; Madeleine L. Champion, director of Fresh Del Monte Produce, Inc., and Citizens Republic Bancorp Inc.; Julie Roberts, director of Calgon Carbon Corporation; Maria Sastre, director ofPublix Super Markets, Inc., and Darden Restaurants; and Steve Odland, director of General Mills.

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Role of the CEO and Management

Posted on February 28, 2012 by Steve Odland

The Business Roundtable long has been a leader in Corporate Governance thought leadership.  They have written Principles of Corporate Governance going back to 2002.  This is the second in a series of articles that summarizes their principles.

» It is the responsibility of the CEO and management, under the CEO’s direction, to operate the corporation in an effective and ethical manner. As part of its operational responsibility, management is charged with:

§ Operating the corporation. The CEO and management run the corporation’s day-to-day business operations. With a thorough understanding of how the corporation operates and earns its income, they carry out the corporation’s strategic objectives within the annual operating plans and budgets, which the board reviews. In making decisions about the corporation’s business operations, the CEO considers the long-term interests of the corporation and its shareholders and necessarily relies on the input and advice of others, including the board, senior management and outside advisers. The CEO keeps the board apprised of significant developments regarding the corporation’s business operations.

§ Strategic planning. The CEO and senior management generally take the lead in strategic planning. They identify and develop strategic plans designed to create long-term value for the corporation, present those plans to the board, implement the plans once board review is completed, and recommend and carry out changes to the plans as necessary. As part of the strategic planning process, the CEO and senior management identify, evaluate and manage risks associated with the plans.

§ Identifying, evaluating and managing risks. Management identifies, evaluates and manages the risks that the corporation undertakes in implementing its strategic plans and in the course of carrying out its business. It also manages the corporation’s overall risk profile, and senior management keeps the board informed on an ongoing basis about the corporation’s significant risks and its risk management processes.

 

§ Annual operating plans and budgets. With the corporation’s overall strategic plans in mind, senior management develops annual operating plans and budgets for the corporation and presents the plans and budgets to the board. Once the board has reviewed the annual operating plans and budgets, the management team implements them and monitors them, making changes as appropriate in light of changing conditions, assumptions or expectations. The management team also keeps the board apprised of significant developments and changes relating to the annual operating plans and budgets.

§ Selecting qualified management and establishing an effective organizational structure. Senior management is responsible for selecting qualified management and implementing an organizational structure that is efficient and appropriate for the corporation’s particular circumstances.

§ Accurate and transparent financial reporting and disclosures. Management is responsible for the integrity of the corporation’s financial reporting system, and the accurate and timely preparation of the corporation’s financial statements and related disclosures in accordance with Generally Accepted Accounting Principles and in compliance with applicable laws and regulations. It is management’s responsibility—under the direction of the CEO and the corporation’s principal financial officer—to establish, maintain and periodically evaluate the corporation’s internal controls over financial reporting and the corporation’s disclosure controls and procedures. In accordance with applicable law and regulations, the CEO and the corporation’s principal financial officer also are responsible for certifying the accuracy and completeness of the corporation’s financial statements and the effectiveness of the corporation’s internal and disclosure controls.

» The CEO and management are responsible for operating the corporation in an ethical manner. They should never put individual, personal interests before those of the corporation or its shareholders. Business Roundtable believes that when carrying out this function, corporations should have:

§ A CEO of integrity. The CEO should be a person of integrity who takes responsibility for the corporation adhering to the highest ethical standards.

§ A strong, ethical “tone at the top.” The CEO and senior management should set a “tone at the top” that establishes a culture of legal compliance and integrity communicated to personnel at all levels of the corporation.

§ An effective compliance program. Management should take responsibility for implementing and managing an effective compliance program and should report regularly to the board on compliance matters. As part of its compliance program, a corporation should have a code of conduct with effective reporting and enforcement mechanisms. Employees should have a means of seeking guidance and alerting management and the board about potential or actual misconduct without fear of retribution, and violations of the code should be addressed promptly and effectively.

– Steve Odland

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Ethics: The Foundation for Corporate Governance

Posted on December 9, 2011 by Steve Odland

Much has been written in the last few years about corporate governance. Despite all the new rules and regulations developed, the key to good corporate governance remains a strong commitment to ethics.

It is that commitment that makes all the difference – not simply an ethics statement or codification. The best-written set of ethics principles will fail if all corporate individuals do not practice the principles. That’s why we must communicate our principles constantly through deeds and behavior to every employee and stakeholder in the corporation. At the same time, directors and management of corporations should evaluate the ethics programs of their companies on an ongoing basis. They should be willing to ask themselves tough questions, such as: is our program today enough to head off the problems of tomorrow?

Corporations are involved in every type of human activity today. The purpose of corporations is to provide goods and services while creating shareholder value over time. Our businesses have advanced the well-being of society with breakthroughs in science, medicine, technology, and the creation of virtually all wealth. Public corporations offer a way for everyone to access ownership of a piece of our economy, and the wealth-creating opportunities afforded to them by the public markets. The “public” in public companies refers to the ability of people to invest in America through stock markets. But public companies are part of the private sector, and should not be confused with the public sector or government-controlled entities.

Corporations form the underpinnings of most things we know about America, including our economic power and all things driven by those resources. Four of the five largest corporations in the world are American. The largest is Wal-Mart with nearly $450 billion dollars in sales and over 2 million employees. There are about 15,000 U.S. public corporations. Investments in these companies form the basis of most pension funds, mutual funds, and retirement plans. Virtually all of the $14.6 trillion U.S. GDP is driven by the private sector—American corporations are our economy.

The corporate community has been through a difficult ethical period. But this same period was accompanied by scandals plaguing other institutions as well, including issues among political leaders, lawyers, journalists and even clergy. What does it say about our society as a whole when none of our hallowed institutions are free from issues?

Financial breakdowns and outright fraud have shaken the trust and confidence of Americans who rely on business for their jobs, for their savings, and for their retirement security. Public concern followed sensationalized stories of misdeeds, and federal and state officials followed in turn with new laws and regulations on corporations.

These events not only got the attention of the public and government officials. Responsible business leaders were embarrassed by these scandals. We could not – and must not – let the misdeeds of a relatively few people jeopardize the public trust in our economic system. That trust is the basis of our free market system. There are millions of Americans who rely on this system for jobs, their retirement security, and their wealth. Without this underlying trust, the markets would not exist and our economy would collapse.

It was clear that the corporate community needed improvements and that we needed to demonstrate a commitment to reform and a commitment to restoring investor confidence. And it was important that the private sector rather than the government led these reforms.

Many private sector organizations have committed to improvements in corporate governance. The Business Roundtable, for example, took an early lead and developed its Principles of Corporate Governance. The Roundtable followed up those recommendations by spelling out Principles of Executive Compensation. They established the Business Roundtable Institute for Corporate Ethics in conjunction with the Darden School of Business at the University of Virginia. Other groups formed to work on these issues including the Milstein Center for Corporate Governance at Yale University, the Aspen Institute Corporate Values Strategy Group. And long-established groups like the Ethics Resource Center stepped up their interaction with these ethics issues.

Over the past decade, New York Stock Exchange and NASDAQ listing standards for public corporations have changed, significantly strengthening financial and governance requirements. The landmark Public Company Accounting Reform and Investor Protection Act – better known as the Sarbanes-Oxley Act – as well as Dodd-Frank have been enacted. The new regulatory requirements don’t come cheap. The average large corporation is spending millions of dollars to reach and maintain compliance, with all the laws and regulations passed in just the last few years. Collectively, these changes represent the most far-reaching corporate reform legislation in sixty years. And the rules and regulations continue to be written.

But we must be careful. We need to know when enough is enough – and that too much tampering with the system could drive unintended consequences. Ironically, many of the issues of the past decade resulted from violations of pre-existing rules and laws. So did we really need the latest avalanche of new regulations and rules or would we have been better off with stronger enforcement of the old ones? We cannot strive so hard to legislate away every last problem that we ignore the very real possibility of collateral damage to our economy, job creation, and shareholder value creation.

We also have to be careful not to criminalize honest mistakes. As long as we employ human beings, there will be mistakes. Mistakes are inherent in risk-taking and risk-taking is vital to competing in world markets. We would harm ourselves greatly if the threat of regulatory, civil, and criminal sanctions became so pervasive that corporations reduced or stopped taking risks. Risks are inherent in overall corporate growth and the U.S. economy is dependent upon that growth. Yet for corporations to grow, innovation is required in new products, scientific breakthroughs, new markets, and foreign economies where the “lay of the land” is far from stable. Well-intentioned growing companies have to do business in areas that require significant risk, and honest mistakes occur. Without risk-taking, most progress could simply come to a halt. Other countries could overtake the U.S. in economic growth and job creation as capital investment flowed to other parts of the world.

After all of these changes in corporate governance, the question becomes: Have we finished the job? The answer is: How will we ever know? Just when we think we’ve put yesterday’s scandals to rest, something new comes up. But we won’t solve these and similar problems simply by adding more laws and regulations or by introducing more voluntary corporate governance changes.

Law professor Larry D. Thompson, a fellow at the Brookings Institution, has noted that every fresh business scandal brings calls for new regulations to prevent such a scandal from ever happening again. “Regulations expand with each ensuing scandal,” he stated, “to encompass every possible abuse – except the next one.”

We should continue to refine needed regulations, of course, imposing more corporate governance changes will not ensure ethical behavior. Ultimately good corporate governance is driven by the ethics of the individuals in the company. Real, lasting change can come only from improving every corporate culture with a genuine commitment to ethical behavior. That involves moving beyond corporate “rules-based” behavior to “values-based” behavior. Or to put it another way, for people in corporations to do the right thing even when the rules don’t precisely cover it or when they don’t think that anyone’s watching. In a word, they need to act ethically.

The way corporations treat their people is another way to measure its commitment to ethical behavior. Such a commitment is attainable with a values-based approach that includes five practices:

• First, people should know what you stand for – both as the Board and as a corporation. That involves a clear statement of ethical principles.
• Second, employees and officers should be able to push back – they should report concerns and propose improvements without fear of retribution. The environment must be made safe for people to do the right thing.
• Third, there should be access to management by all constituents.
• Fourth, the organization should be transparent and open.
• Fifth, everyone must understand how we in the corporation should treat each other.
• Sixth, everyone should know what happens when we don’t uphold our values. People who violate values should be held accountable. Reports of misconduct should be investigated, and when substantiated, discipline should occur. Without accountability, values are toothless.

Knowing what’s right is a constant learning process. That often involves venturing into uncharted territory as new choices present themselves. We are forced to manage our lives and businesses with imperfect foresight in a world that judges other people based on perfect hindsight. That’s where a values-based approach comes in – to help guide us in new situations.

Ethics problems are more pervasive in today’s corporation than they have been in the past. Perhaps it is due to the secularization of society. Perhaps it is due to the liberalization of pop culture. Perhaps it is due to the pervasiveness of the Internet and social media, which is still the “wild, wild west” of communications where few rules or constraints apply. Perhaps corporations simply mirror society itself. Whatever the reason, there is a glaring need for new approaches.

Boards and management teams need to be sensitive and watchful for generational differences in ethics. According to a study by The Ethics Resource Center, “all younger workers but especially Millenials are a significant area of vulnerability in terms of observed misconduct.” Corporations cannot assume that everyone has the same sense of right and wrong. So what 30 years ago may have been taken for granted in terms of expected behavior, cannot be assumed today.

While written codes of ethics are necessary and a good first step, more is needed. “Tone at the Top” is an absolute requisite. But leaders must ensure that positive tone reaches all levels of an organization. Best practices today include situational workshops among all associates, role-playing, scenario training, case studies, and constant discussion and modeling of behavior. Most companies have anonymous 800-number hotlines for reports of malfeasance. Equally important are 800-number advice or ombudsman lines to assist all associates and managers in dealing with issues. Experience shows that most complaints currently are taken to an employee’s direct supervisor. So thorough training is required for these lower and middle level supervisors on how to deal with employee concerns and reports.

In addition to Chief Compliance Officers, many corporations now are adding Chief Ethics Officer positions. Although currently at some companies the same person performs both roles, the roles are not the same. Compliance Officers usually audit and seek to find breakdowns in compliance. Stated simply, they are charged with finding violations and violators. Ethics Officers are more proactive in risk assessment, training, counseling, and hopefully heading off future issues before they happen. If you were an associate, with whom would you be most comfortable, a cop or a counselor?

Some companies now are building ethics requirements into personal objectives for their people. These performance metrics or competencies can include good communication of ethics by leaders at all levels; personal modeling of ethical behaviors; keeping commitments; maintaining accountability among all employees across the business; visible support for the ethics and compliance programs; and performance consistent with codes of ethics. Performance can be measured periodically with 360-degree surveys, gaining input from peers, subordinates, and senior leaders.

Values-based ethics programs should be introduced in all companies to ensure future issues are identified before they occur. Any company undergoing “change” is especially vulnerable. Mergers and acquisitions add new cultures–and risk. Expansion into other countries adds Foreign Corrupt Practices Act (FCPA) risk and cultural complexity. And even change in organizational structure or IT programs can create process gaps that leave corporations vulnerable. “Change management” programs need to add values-based ethics training in addition to process change training. For new operations, this includes bringing new associates up to speed, setting expectations for behavior, and ensuring cultural consistency at the highest level of ethics.

These suggestions are very consistent with a values-based approach. Compliance is about rules, ethics are about values. Rules simply cannot be written to address every possible breakdown in behavior, especially when companies are represented by tens of thousands of people, and millions of customer and stakeholder interactions, all in real time. So a values-based approach dismisses the assumption that all employees have the same ethics and all but the odd, rogue individual will “make the right call.” Instead, instilling values requires more time, more care, more debate about all the gray areas, and ultimately leads to better decision-making and a more ethical climate.

Corporations cannot exist without the people who work there, who buy products from them, and who sit in boardrooms overseeing the overall company’s performance. People are imperfect. But people are also capable of learning and changing. That’s what a healthy, ethical corporate culture—a values-based culture–can encourage and ensure. Strong corporate governance and high ethical standards are not simply matters of personal and public morality. But they are also essential for long-term corporate success and world economic leadership by this nation. Unethical behavior and outright fraud are corrosive and ultimately betray the free market system. They discourage hard work, degrade our productivity and competitiveness, cheapen our daily lives, weaken the bonds of trust, and lead to a society in which none of us wants to live.

While not perfect, the U.S. has the best corporate governance, financial reporting, and securities markets in the world. These systems work because of the adoption of best practices by public companies within a framework of laws and regulations. While there have been exceptions to the overall record of success, generally the system has worked very well. But this system can be greatly enhanced by further commitment beyond the rules, to values-based governance. Then we will be in the best position to face unexpected challenges, overcome them, and prosper. And as long as we can keep that idea central, we can continue to look forward to a 21st century of greater prosperity and progress.

– Steve Odland

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We the Directors

Posted on January 29, 2011 by Steve Odland

Years ago being a director of a public company was a much simpler proposition.  Directors were invited to join the board by the chairman, usually a friend or close acquaintance in the same hometown.  Boards were small, board members knew each other very well, were friends, were like-minded, and were parochial.  Boards served largely to act as advisors to their friends and colleagues who managed the business.  This system worked reasonably well for much of the 19th and 20th centuries.  So what changed?

Well, business changed.  After decades of mergers and acquisitions, business became larger–national and multi-national.  Companies became more complex with a greater variety of businesses and models that were difficult to understand.  Rules and regulations exploded.  Shareholders expanded from a small number in the community to strangers, foreigners, pension funds, and professional risk takers.  And financial and operating risk increased.  All of this required a different type of director.

Today’s boards of public companies in some ways resemble those of old, with a relatively small group of people voted upon by shareholders.  But directors now are recruited mostly by search firms, often are strangers to each other, and are more diverse in experience, gender, race, and geographic origination.  They no longer are friends and colleagues of management.  This has led to a different kind of board, with best practices drawn from guidelines written by government, shareholder groups, business groups, etc.  The system has changed rapidly over the past ten years to adapt to the changing environment as well as the various business crises that erupted.

To overstate it:  boards have evolved from a business advisory model to a risk/compliance model.  The intent is to avoid more business failures and breakdowns in compliance that created dramatic business failures and shareholder loss.  This evolution obviously was necessary.  The positives are evident as nobody likes to see a company’s constituencies harmed.  But we also need to be mindful of the cons. We directors need to ensure that the risk/compliance activities don’t distance us from management.  We can’t switch totally to a risk/compliance group and simply outsource our advisory role to external consultants.  We need to be sure we continue to provide the advice and counsel to the companies that boards have traditionally provided.  We need to have a trusting, collegial, relationship with management.

Yes, we the directors need to augment our roles to adapt to the current environment and needs of the modern corporation.  But we need also to remember our traditional roles, and be a safe place for managements to turn for advice and counsel.  It is in this balance is where our highest and best contribution lies.

– Steve Odland

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5 Ways To Get The Governance We Want

Posted on January 10, 2012 by Steve Odland

The best-written set of ethics principles will fail if all corporate individuals do not practice the principles. That’s why we must communicate our principles constantly by deeds and behavior throughout the corporation. CEOs should evaluate the ethics programs of their companies on an ongoing basis to ensure their current program is robust enough to head off the new problems of tomorrow.

Financial breakdowns and outright fraud have shaken the trust and confidence in our system. Public concern followed sensationalized stories of misdeeds, and government followed with new laws and regulations on corporations. Over the past decade many “fixes” have been implemented including the New York Stock Exchange and NASDAQ listing standards for public corporations, the Sarbanes-Oxley Act, and Dodd-Frank.

But we must be careful. We need to know when enough is enough – and that too much tampering with the system could drive unintended consequences. Ironically, many of the issues of the past decade resulted from violations of pre-existing rules and laws. So did we really need the latest avalanche of new regulations and rules or would we have been better off with enforcement of the old ones?

We also have to be careful not to criminalize honest mistakes. As long as we employ human beings, there will be mistakes. Mistakes are inherent in risk-taking and risk-taking is vital to competing in world markets. We would harm ourselves greatly if the threat of regulatory, civil, and criminal sanctions became so pervasive that corporations reduced or stopped taking risks. Risks are inherent in overall corporate growth and the U.S. economy is dependent upon that growth. Yet for corporations to grow, innovation is required in new products, scientific breakthroughs, new markets, and foreign economies where the “lay of the land” is far from stable.

The corporate community has been through a difficult ethical period. This same period was accompanied by scandals plaguing other institutions as well, including issues among political leaders, lawyers, journalists and even clergy.

But we also need to be introspective and ask ourselves what we could have done inside companies to make sure we were implementing programs to ensure our people were following our values. Ultimately good corporate governance is driven by the ethical behavior of individuals in the company.

Ethics problems seem more pervasive in today’s corporation than they have been in the past. Perhaps it is due to the secularization of society. Perhaps it is due to the liberalization of pop culture. Perhaps it is due to the pervasiveness of the Internet and social media, which is still the “wild, wild west” of communications where few rules or constraints apply. Perhaps corporations simply mirror society itself. Whatever the reason, there is a glaring need for new approaches.

CEOs need to be sensitive and watchful for generational differences in ethics. According to a study by The Ethics Resource Center, “all younger workers but especially Millenials are a significant area of vulnerability in terms of observed misconduct.” Corporations cannot assume that everyone has the same sense of right and wrong. So what 30 years ago may have been taken for granted in terms of expected behavior, cannot be assumed today.

So what can CEOs do?

  • Every company must have a written code of ethics and CEOs must talk about them constantly; “Tone at the Top” is an absolute requisite and CEOs must ensure that tone reaches all levels of an organization.
  • Best practices today include situational workshops among all associates, role-playing, scenario training, case studies, debate about gray areas, and constant discussion and modeling of behavior.
  • Companies should have an 800-number advice or ombudsman lines to assist employees and managers with ethical issues separate from the anonymous 800-number hotlines for reports of malfeasance.
  • Since most complaints currently are taken to an employee’s direct supervisor, thorough manager training is required on how to deal with them.
  • CEOs should add Chief Ethics Officer positions reporting directly to them. These need to be separate from Chief Compliance Officers. Compliance Officers are charged with finding violations and violators. Ethics Officers should be more proactive in risk assessment, training, counseling, and hopefully head off future issues before they happen. If you were an associate, with whom would you be most comfortable, a cop or an advisor?

CEOs should build ethics requirements into personal objectives for their people. These performance metrics or competencies can include:

  • Good communication of ethics;
  • Personal modeling of ethical behaviors;
  • Keeping commitments;
  • Maintaining accountability among all employees across the business;
  • Visible support for the ethics and compliance programs; and

Performance can be measured periodically with 360-degree surveys, gaining input from peers, subordinates, and senior leaders.

Any company undergoing “change” is especially vulnerable. Mergers and acquisitions add new cultures–and risk. Expansion into other countries adds Foreign Corrupt Practices Act (FCPA) risk and cultural complexity. And even change in organizational structure or IT programs can create process gaps that leave corporations vulnerable. “Change management” programs need to add values-based ethics training in addition to process change training.

Compliance is about rules, ethics are about values. Rules simply cannot be written to address every possible breakdown in behavior, especially when companies are represented by tens of thousands of people, and millions of customer and stakeholder interactions, all in real time. CEOs cannot assume that all employees have the same ethics. Instead, they need to introduce training programs and role-playing to instill ethical values, and ultimately lead to better decision-making and a more ethical culture.

While not perfect, the U.S. has the best corporate governance, financial reporting, and securities markets in the world. These systems work because of the adoption of best practices by public companies within a framework of laws and regulations. This system can be greatly enhanced by further commitment beyond the rules, to values-based governance. Then we will be in the best position to face unexpected challenges, overcome them, and prosper.

– Steve Odland

 

http://chiefexecutive.net/5-ways-to-get-the-governance-we-want

Posted in Board, Board of Directors, Corporate ethics, Corporate Governance, Ethics, Green business | Tagged , , | 2 Comments

Customize Corporate Governance

Posted on January 15, 2012 by Steve Odland

The “rules” seemingly have been written about corporate governance.  Risk Metrics, Glass-Lewis, Proxy Governance, etc. all have written their version of rules that public companies are supposed to follow.  Large institutional investors also have their own rules, each guided by their views on how public companies should be run.  But it’s impossible to have a “one-size-fits-all” approach to corporate governance.  Every company is different.  Every board and management team is wrestling with different issues.  Consequently, boards and management teams need to be mindful of popular corporate governance practices, but customize corporate governance implementation that is right for their company.

Here are some key issues in corporate

governance that should be considered carefully for each firm

1)    Chairman and CEO.  There has been a lot of pressure from advocates to separate the Chairman and CEO titles.  The belief is that these are two separate roles and that having one person responsible for both vests too much power in that individual.  But today, most boards have a Lead or Presiding Director to interface between the CEO and board, to chair the executive sessions of the board, and to lead the board on issues where the involvement of the CEO would be inappropriate.  Further, whereas historically a chairman would have sole control over the agenda, all

board members today can contribute to establishment of the board agendas.  Governance committees lay out the master plan of topics for each meeting and each board committee insures their key topics are covered.  So the role of chairman largely has become a title only.

When an independent board member is made chairman, the person usually takes on extra duties related to coaching a new CEO, or dealing with a specific business issue.  That chairman has responsibility and authority greater than a lead director who is an equal to other board members.  The decision of split or joint role should be driven by the needs of each individual company.

2)    Executive Compensation.  Many advocates want a formula used for executive compensation to be established as a multiplier of other salaries in the company.  One goal is to limit compensation to executives but the other goal is to raise compensation of lower level employees.  Either way, neither shareholders nor proxy advisory firms are as close to the situations of each individual company.  The board has accountability to oversee the governance of the company and is closest to each situation.  Boards need to be given the latitude to set compensation as they feel is appropriate.

3)    Mandatory retirement.  Many governance rules demand that directors retire at a specific age, say 72 or 75; or after a certain term on the board.  Here again, the objective should be to make sure that boards don’t become entrenched or beholden to management.  Rather than specifying certain ages or tenure, governance committees should ensure that there is new experience and thinking brought to the board every year or two, that committee chairs rotate every few years, that committee members rotate, and that the Lead Director role rotates.  This way boards can refresh oversight and decision making within a board without losing the collective experience of the board.  But these decisions should be made with the needs of each company considered rather than formulaically.

4)    Proxy Access.  Activists want proxies to be open for anyone to “run” in the election and for director elections to be contested.  The theory is that this will make for more responsive directors and result in directors working harder to create shareholder value.  But it is the accountability of management to create value and for boards to provide guidance and oversight.  Boards need to work as cohesive units in a collegial fashion with management, focused on an agreed-upon strategic plan to create value.  Contested elections have not driven greater shareholder value creation historically.  Hostile directors will not make for better performance.  Shareholders would be better off working through the boards to help drive greater value rather than contesting elections.  But there are cases where unresponsive boards need to be awaken and the current proxy rules allow this to happen

Net, activists should focus on driving alignment of objectives rather than forcing specific “one-size-fits-all” rules on boards.

– Steve Odland

 

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Don’t Force Split CEO, Chairman Roles

Posted on January 17, 2012 by Steve Odland

Today’s Wall Street Journal article entitled “Drive to Split CEO, Chairman Roles Gains Steam” talks about a group of mostly past chairmen & CEOs called the “Chairmen’s Forum” that are proposing a policy endorsing an independent director as chairman after an incumbent CEO-chairman leaves.  Their view is that boards function more effectively with independent chairmen. 

Once again, this view endorses a “one-size-fits-all” approach to corporate governance.  Their point of view may be valid in some cases but it may also not be the best approach in other cases.  This is why boards are made up of mostly independent directors with usually the CEO as the only non-independent director.  Independent directors need to have the latitude to implement the best structure for the firm based on their judgment and knowledge about the needs of the firm.

It’s disappointing that a group of people almost all of whom had the ability to lead their company with combined chairmen and CEOs roles now have decided that it would be best to dictate to all companies to do the opposite.  It’s almost as if they are seeking to create roles for themselves as non-executive chairmen so they have something to do in retirement.  I’m sure that couldn’t be the reason but why push this for all firms?  Instead they should outline a principles-based approach that states when it makes sense to combine the roles, and when it doesn’t.  They should acknowledge that the huge shift in governance of the past decade has led to mostly independent boards and that these boards are best capable of defining the structure that is best for their companies.

Prescriptive, one-size-fits-all approaches to corporate governance are not the answer.

–Steve Odland

 

http://online.wsj.com/article/SB10001424052970203735304577165041967514410.html?mod=WSJ_business_whatsNews

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BlackRock To Vote Proxies Directly

Posted on January 20, 2012 by Steve Odland

In a letter to 600 of its largest holdings, BlackRock chairman Laurence Fink urged companies to consult with BlackRock directly to address their proxy issues before they consult with proxy advisory firms.  This is a huge development.  BlackRock holds at least 5% of the stock of more than 2400 companies worldwide through actively managed funds as well as their iShares index funds.  They hold about $3.5 trillion in (yes, with a T) in client assets.  This move to weigh in on proxy matters with their own considerations is uniquely different than most institutional holders who rely on outside proxy advisory services to determine how to vote on proxy issues.

This development may be negative for a company if BlackRock decides to create their own “rules” of corporate governance.  But, alternatively, this could be a positive development since BlackRock says they will consider each company’s issues uniquely.

BlackRock reportedly has voted with the board’s recommendation 91% of the time historically.  Time will tell if this support continues or whether BlackRock decides to take a different course.

– Steve Odland

 

http://www.bloomberg.com/news/2012-01-19/fink-leverages-blackrock-s-3-3-trillion-in-shareholder-push.html

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Back To School

Posted on December 29, 2011 by Steve Odland

http://video.foxbusiness.com/v/4294915/office-depot-ceo-on-back-to-school-sales

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Buy Green Be Green Sell Green

Posted on January 1, 2012 by Steve Odland

http://klatcher.com/ExecDigital/Exclusive_Interview__Steve_Odland

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WomenCorporateDirectors Announces Launch of First Annual “Americas Institute” for Boards

Posted on February 2, 2012 by Steve Odland

http://www.prnewswire.com/news-releases/womencorporatedirectors-announces-launch-of-first-annual-americas-institute-for-boards-138566604.html

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Short-termism Creates Long Term Problems

Posted on February 5, 2012 by Steve Odland

If you asked most people what the goal of corporations should be they would rightly say the creation of long term shareholder value.  Unfortunately, today, most behaviors of public companies are focused on short term results, often quarter to quarter, resulting in long term issues.

The accounting requirements of quarterly earnings reporting has created a cadence for the planning and execution of business.  Each quarter companies are required to predict, execute, announce, and defend the variance of the results.  Each quarter’s results are expected to be higher than the previous quarter and the same quarter in the prior year.  Of course, like gravy, business is lumpy.  No business, even so-called non-cyclical businesses, operates on a straight line.  And yet that is what the analysts typically forecast and what investors expect.  Deviation from the line on the upside creates even higher expectations for the future and ultimately a let down, while deviation from the line on the downside often creates a call for management change.  In fact, “good management” is often defined as consistency in results.  Anyone who has ever worked inside a company knows that consistency is the rarest form of result and is more serendipitous than a symptom of good management.

The focus on short-termism can have negative consequences inside a company.  Once expectations for the coming quarters are shared internally, employees feel bound and determined to deliver.  But there are only so many buttons and levers that can be pushed in the short term to legitimately drive results.  As a result, short-term decision-making creeps in.  When results are not coming in as expected, costs must be cut and in the short-term this usually means marketing expenditures needed to grow the business are reduced or eliminated.  These cuts make more money in the short term but damage long-term results, sometimes irreparably.  Worst case, some employees may take things into their own hands and act or report financial results improperly.  Of course this is a terrible result that always ends up damaging the company for years to come.

Even the practice of issuing quarterly earnings guidance, once believed to be good management practice, creates short-termism.  In addition to defining the future focus as three months rather than three years or three decades, it creates the pressured referred to above.  Heaven help the management team that misses guidance as the analysts pummel them personally, shareholders are critical, and boards lose faith that their teams can deliver.  Hence the tendency to under forecast.  But even this practice can end poorly as it may diminish the goals and results

Boards and management teams must work together to resist short-term practices and focus on the long term.  They cannot allow pressure from short-term investors to take their eye off the ultimate goal of long-term shareholder value creation.

– Steve Odland

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CalSTRS To Vote Proxies Independently

Posted on February 6, 2012 by Steve Odland

CalSTRS introduced their report on executive pay last week.  It was notable for a couple reasons.  First, the large retirement fund acknowledges that questionable pay practices are on the decline although there still is room for improvement in their opinion.  From their press release:

“The California State Teachers’ Retirement System (CalSTRS) released, “Lessons Learned: The Inaugural Year of Say-on-Pay,” its analysis of shareholders’ ability to vote on executive compensation, known as say-on-pay, during the 2011 proxy season.  The analysis provides key findings from the first year with mandatory say-on-pay. The document notes that some questionable practices are on the decline, such as companies paying taxes on executives’ use of perquisites, and excessive perquisites themselves. However, the analysis also discusses CalSTRS’ primary reasons for voting against say-on-pay proposals and identifies areas where many companies can improve. Among these findings, are:

  • Persistent disconnect between executive pay and company performance was CalSTRS’ overwhelming reason for “against” votes.
  • Continued board use of broad discretion in developing compensation policies remains problematic.
  • Appropriate peer group selection continues to be a challenge.”

A second notable comment comes from the report itself:  “Given the unique nature of compensation, CalSTRS tried to evaluate pay holistically at every company.”  This is good news.  It is another example of a large investor looking at governance matters at public companies on an individual basis rather than relying on the black box models used at proxy advisory firms.  This judgment is welcome as no two situations are the same.  Good corporate governance demands that institutional investors make judgments about their investments’ corporate governance in context.  Hopefully more investors will follow this route in the future.

– Steve Odland

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FTI Consulting Corporate Governance Survey

Posted on February 13, 2012 by Steve Odland

Capital Markets -Corp Gov Survey Feb 2012 FINAL

Here is the latest survey on Corporate Governance by FTI Consulting.  There were several interesting key findings:

  • Executive compensation is still a critical topic for investors and may be even more so than it was in 2011
  • Director independence and separation of chairman and CEO role are vital; investors are also focused on director qualifications and access to the Chairman
  • The trend toward greater shareholder involvement in corporate affairs continues
  • Proxy access is back
  • Other emerging issues in corporate governance have reasonably strong support
  • Ability to call a special meeting
  • Political contributions
  • Act by written consent
  • Decision-making on proxy matters is mostly independent and fairly balanced between PMs and Legal/Compliance

Of course, none of these issues is new but they continue to be top of mind.

– Steve Odland

 

Published with permission of FTI Consulting.

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Role of the Board of Directors

Posted on February 22, 2012 by Steve Odland

The Business Roundtable long has been a leader in Corporate Governance thought leadership.  They have written Principles of Corporate Governance going back to 2002.  This is the first in a series of articles that summarizes their principles.

» The business of a corporation is managed under the oversight of the corporation’s board. The board delegates to the CEO—and through the CEO to other senior management—the authority and responsibility for managing the everyday affairs of the corporation. Directors monitor management on behalf of the corporation’s shareholders.

» Making decisions regarding the selection, compensation and evaluation of a well-qualified and ethical CEO is the single most important function of the board. The board also appoints or approves other members of the senior management team.

» Directors bring to the corporation a range of experience and knowledge, but there are certain characteristics that all directors should possess. Every director should have integrity, character and sound judgment. In addition, a director should represent the interests of all shareholders; directors should not represent the interests of particular constituencies.

» Effective directors maintain an attitude of constructive skepticism; they ask incisive, probing questions and require accurate, honest answers; they act with integrity and diligence; and they demonstrate a commitment to the corporation, its business plans and long-term shareholder value.

» The composition of the board, as a whole, should reflect a mix of skills and expertise that are appropriate for the corporation given its circumstances and that, collectively, enables the board to perform its oversight function effectively.

» Directors need to have a thorough understanding of the corporation, its business and the industry in which it operates. Directors should keep abreast of any relevant developments. Directors can gain and maintain this understanding through briefings from management, reviewing industry journals and press and analyst reports, participating in educational programs, etc.

» In performing its oversight function, the board is entitled to rely on the advice, reports and opinions of management, counsel, auditors and expert advisers. The board should use care in choosing advisers, be comfortable with the qualifications of those it relies on, and hold managers and advisers accountable. The board should ask questions and obtain answers about the processes used by managers and the corporation’s advisers to reach their decisions and recommendations, as well as about the substance of the advice and reports received by the board. When appropriate, the board and its committees should seek independent advice.

» Shareholders and other constituencies should reasonably expect that directors will exercise vigorous and diligent oversight of a corporation’s affairs. However, they should not expect the board to micromanage the corporation’s business by performing or duplicating the tasks of the CEO and senior management team. Directors should be informed about the operation of the corporation’s business, but they should not become involved with operational matters, which are the province of management.

» The board’s oversight function carries with it a number of specific responsibilities in addition to that of selecting and overseeing the CEO. These responsibilities include:

§ Planning for senior management development and succession. The board should oversee the corporation’s plans for developing senior management personnel and plan for CEO and senior management succession. When appropriate, the board should replace the CEO or other members of senior management. The board should review the corporation’s succession plans at least annually and periodically review the effectiveness of the senior management development and succession planning process.

§ Reviewing, understanding and monitoring the implementation of the corporation’s strategic plans. The board has responsibility for overseeing and understanding the corporation’s strategic plans from their inception through their development and execution by management. Once the board reviews a strategic plan, it should regularly monitor implementation of the plan to determine whether it is being implemented effectively and whether changes are needed. The board should understand the relationship between strategy and risk and review the risks inherent in the corporation’s strategic plans. The board also should be comfortable that the corporation’s incentive compensation program is appropriately aligned with the corporation’s strategic plan.

§ Reviewing and understanding the corporation’s risk assessment and overseeing the corporation’s risk management processes. The board has responsibility for overseeing the significant risks facing the corporation and the processes that management has implemented to identify and manage risk. The board, together with senior management, should agree on the appropriate risk profile for the corporation, and the board should be comfortable that the corporation’s strategic plans are consistent with that profile. The board should establish an appropriate structure for overseeing risk, involving assistance from committees as appropriate and the designation of senior management responsible for risk management. Whatever risk oversight structure the board adopts, that structure should enable the board to remain fully informed about, and understand, all of the corporation’s major risks and the steps that the corporation is taking to manage them.

§ Reviewing, understanding and overseeing annual operating plans and budgets. The board is responsible for reviewing, understanding and overseeing the corporation’s annual operating plans and for reviewing annual budgets presented by management. The board should monitor implementation of the annual plans to assess whether they are being implemented effectively and within the limits of approved budgets and whether the annual plans are appropriately responsive to changing conditions.

§ Focusing on the integrity and clarity of the corporation’s financial statements and financial reporting. The board, assisted by its audit committee, should be satisfied that the financial statements and other disclosures prepared by management accurately present the corporation’s financial condition and results of operations to shareholders and that they do so in an understandable manner. To achieve accuracy and clarity, the board, through its audit committee, should have an understanding of the corporation’s financial statements, including why the accounting principles critical to the corporation’s business were chosen, what key judgments and estimates management made, and how the choice of principles and the making of these judgments and estimates affect the reported financial results of the corporation.

§  Advising management on significant issues facing the corporation. Directors can offer management a wealth of experience and a wide range of perspectives. They provide advice and counsel to management in formal board and committee meetings, and they are available for informal consultation with the CEO and senior management

§ Reviewing and approving significant corporate actions. As required by state corporate law, the board reviews and approves specific corporate actions, such as the election of executive officers, the declaration of dividends and (as appropriate) the implementation of major transactions. The board and senior management should have a clear understanding of what level and types of decisions require specific board approval.

§ Reviewing management’s plans for business resiliency. As part of its risk oversight function, the board should oversee the designation of senior management who will be responsible for business resiliency. The board should periodically review management’s plans to address this issue. Business resiliency can include such items as business continuity, physical and cyber security, and emergency communications.

§ Nominating directors and committee members, and overseeing effective corporate governance. It is the responsibility of the board, through its corporate governance committee, to nominate directors and committee members, and to oversee the composition, independence, structure, practices and evaluation of the board and its committees. The committee should regularly evaluate the skills and experience represented on the board and oversee succession planning for the board.

§ Overseeing legal and ethical compliance. The board should set a “tone at the top” that establishes the corporation’s commitment to integrity and legal compliance. The board, acting through its committees as appropriate, should oversee the corporation’s compliance program and be comfortable that the corporation has implemented systems that enable the board to remain informed about the program and any significant compliance issues that may arise. In this regard, the board should be knowledgeable about the corporation’s compliance program and should be satisfied that the program is effective in preventing and deterring violations. The board, or an appropriate committee, should receive regular briefings about developments and significant changes relating to the program and about the corporation’s compliance trends. In addition, significant investigations of possible misconduct, investigations of misconduct involving senior management, the conclusions from any such investigations, and the investigative and remedial actions being taken should be presented to the board or appropriate committee. The board should pay particular attention to conflicts of interest, including related-person transactions.

 

– Steve Odland

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