The Conference Board Governance Center Blog


Executive Compensation Reform is Really a Matter of Trust

All the talk about reining in executive compensation at our country’s public companies isn’t so much about corporate governance reform as it is about the lack in public trust in the markets and the companies themselves.

Having watched the recent Securities Industry and Financial Markets Association (SIFMA) speech by The Conference Board CEO Jonathan Spector on executive compensation (Watch speech here.) and read the testimony of Special Pay Master Kenneth Feinberg  (, I get it. There needs to be a restoration of public trust in the financial system now or we may never get out of this economic morass. It’s not like it was at the start of this decade when there were accounting frauds at Enron and WorldCom.

This time a Sarbanes-Oxley-like act won’t do the trick. This time the solution lies in adhering to principles, not rules and new laws. It is about having the C-level suite, the board room and shareholders understand each other’s roles and truly communicate with each other in order to meet one common goal: value creation through the lens of strong risk management.

This movement towards principles-based governance, if you will, over more regulations is starting to catch on in some organizations. From The Conference Board Task Force on Executive Compensation Report, SIFMA’s own Guidelines on Executive Compensation to the Independent Directors Executive Compensation Project (IDEC) principles, public companies now have some models to use to develop their own compensation principles.

“While the government has an important role to play in modernizing our regulatory frameworks, trust in our corporate institutions can only be fully restored if private sector institutions themselves take meaningful action,” Spector said Tuesday when addressing the SIFMA annual meeting. “You are probably asking yourselves how you can define ‘meaningful action.’ I’d like to offer a very simple answer: When deciding how to address the issue of executive compensation, take the steps that will do the most to restore trust and confidence.”

Pastora San Juan Cafferty, longtime director and leader of IDEC, writes on her organization’s blog that “we believe that directors still have an opportunity to recapture the high ground of responsible, independent oversight of CEO compensation. And the best way to do this is by working together on a program that directly addresses the public’s distrust of how compensation is administered.

“By remaining silent, boards continue to lose control to shareholders, regulators, government appointees and Congress.”

That last statement really sums up the dilemma facing public boards. If they wait for Congress, the SEC or some other regulator or, in the case of shareholder actions, courts to act, they stand the chance of losing control of their companies. And what’s next, director elections, proxy access, board leadership?

If the actions taken last week at the seven TARP companies (AIG, Bank of America, Citigroup, Chrysler, Chrysler Financial, General Motors and GMAC)  by Feinberg are any indication, I don’t think companies want the government in the practice of determining executive compensation. Just look at how he determined that he was going to cut cash base salaries and bonuses by 90 percent and overall total compensation by 50 percent at six of those companies.

Feinberg’s Reasons for Cutting TARP Company Compensation

He said: “I can summarize the flaws in the six individual company submissions as follows:

1. The companies requested excessive guaranteed cash – salaries and bonuses – for company executives;

2. The companies requested that stock issued to these executives be either immediately redeemable or redeemable without a sufficient waiting period;
3. Many of the companies did not sufficiently tie compensation to performance-based benchmarks and metrics;
4. Many of the companies did not sufficiently limit or restrict financial “perks,” such as private airplane transportation, country club dues, golf outings, etc., and in some cases provided excessive levels of severance and executive retirement benefits;
5. The companies did not make sufficient effort to fold guaranteed compensation contracts – entered into prior to the enactment of the current compensation regulations – into 2009 performance-based compensation.”

Do other public companies want this to be their executive compensation plan? I highly doubt it.

Executive Compensation Task Force Endorsement FAQ Available

That is one of the reasons The Conference Board decided to create the Executive Compensation Task Force. Next week, The Conference Board Governance Center will release its Frequently Asked Questions on endorsement for the Task Force principles. To receive a copy, you can read this blog or contact Editor Gary Larkin at

The IDEC Project has also put up its Web site. The address is SIFMA’s Guidelines on compensation are available here.


Update: Feinberg Executive Compensation Report Details

In all the excitement yesterday regarding Treasury Pay Master Kenneth Feinberg’s announcement about the compensation packages at seven of the largest TARP assistance recipients, I wasn’t able to locate his actual determinations. The U.S. Department of the Treasury officially released Feinberg’s report late yesterday following a press conference.

Here are the highlights of Feinberg’s rulings. For the whole press release, click here:

The Special Master for TARP Executive Compensation Issues First Rulings

Today, the Special Master for TARP Executive Compensation Kenneth R. Feinberg released determinations on the compensation packages for the top executives at firms that received exceptional TARP assistance. Under the Emergency Economic Stabilization Act (EESA) as amended in 2009, the Special Master has a mandate to review all forms of compensation for five most senior executive officers and the next 20 most highly compensated employees at the seven firms that received exceptional TARP assistance (AIG, Citigroup, Bank of America, Chrysler, GM, GMAC and Chrysler Financial).

The determinations announced today for the top 25 most highly paid at the seven firms receiving exceptional assistance:

1. Reform Pay Practices for Top Executives to Align Compensation With Long-Term Value Creation and Financial Stability

  • Reject cash bonuses based on short-term performance, as required by statute, in favor of company stock that must be held for the long term
  • Restructure existing cash “guarantees” into stock that must be held for the long term

2.       Significantly Reduces Compensation Across the Board

  • Average cash compensation down by more than 90 percent
  • Approved cash salary limited to $500,000 for more than 90 percent of relevant employees
  • Average total compensation down by more than 50 percent
  • Exceptions where necessary to retain talent and protect taxpayer interests

3.       Require Salaries to Be Paid in Company Stock Held Stock Over the Long Term

  • Stock is immediately vested, requiring executives to invest their own funds alongside taxpayers
  • Stock may only be sold in one-third installments beginning in 2011–or, if earlier, when TARP is repaid–aligning executives’ interests with those of taxpayers

4.       Require Incentive Compensation to be Paid in the Form of Long Term Restricted Stock – and to be Contingent on Performance and on TARP Repayment

  • Require executives to meet goals set in consultation with the Special Master, and certification of achievement of goals by an independent compensation committee
  • Any incentives granted paid only in stock that requires three years of service and can be cashed in only when TARP is repaid

5.       Require Immediate Reform of Practices Not Aligned with Shareholder and Taxpayer Interests

  • Limits “other” compensation and perquisites
  • No further accruals under supplemental executive retirement plans or severance plans

With Executive Compensation Pay Cuts, What’s Next? Say on Pay

Now that the shock of Special Pay Master Kenneth Feinberg’s decision (Reuters, Oct. 22) to cut the pay of 175 executives at companies receiving the most government aid is starting to wear off, the real fun will begin. It’s looking more like Feinberg’s announcement Thursday (Treasury Secretary Timothy Geithner’s comments) is just the first salvo in a fight between shareholders and public company boards.

Actually, another salvo was just thrown by the Federal Reserve today when it issued its long awaited proposal to oversee bank incentive compensation policies. (read the press release)

And the battle cry will be, “Say on Pay!” At least that is what the researchers at The Corporate Library (TCL) and the compensation consultants over at Pearl Meyer & Partners believe. In the same week that Feinberg’s decision was leaked to the press, TCL released a “10-Point Test” for shareholders to use when they are allowed to vote on a non-binding resolution on their company’s executive compensation packages.

Say on Pay Survey

During the recently completed National Association of Corporate Directors (NACD) annual Corporate Governance Conference, Pearl Meyer released the results of an online survey (read the press release) on company preparedness for Say on Pay. The survey of 231 participants found that more than two-thirds said their company hasn’t taken any steps to prepare for such a vote and only 35 percent plan to do so in the next six months.

Just look at what they are saying over at Pearl Meyer.“Although many believe such a requirement will not take effect until the 2011 proxy season, decisions being made now regarding 2010 compensation practices could potentially be the subject of Say on Pay votes in 2011,” said Mike Enos, the company’s managing director.

A 10-Point Test

In his “10-Point Test,” Paul Hodgson, senior research associate at TCL, wrote, “More importantly, investors, straining at the leash to have a say on pay, feel that a chance for reform is within their grasp. And not just activist investors. All investment firms are likely soon to have a say on pay, whether they like it or not…”

Some might think it a bit premature to start planning for life with Say on Pay since the Corporate and Financial Institution Compensation Fairness Act of 2009, which would require an annual shareholder advisory vote on executive compensation, is not even law yet. As of Oct. 22, that bill had been approved by the U.S. House and still faces a Senate vote. But maybe the Obama Administration is starting to move into high gear on the financial regulatory reform. Case in point: Feinberg’s executive pay cut decision.

Broc Romanek’s blog has one of the best descriptions of Feinberg’s actions. Click here to read.

Principles, principles, principles

I find it interesting that while investors and some companies are gearing up for Say on Pay and the possibility that executive compensation packages will be cut, some are actually trying to get ahead of the reform wave by being proactive. Credit Suisse (Wealth Bulletin, Oct. 21) did just that on Oct. 21 when the Swiss bank adopted the G-20 compensation model that was announced back on Sept. 25. Basically, the bank will focus on higher base pay and more deferred variable compensation tied to the long-term performance of the bank. The bank has also included clawback provisions for bonuses in the new model.

With Credit Suisse’s action, I thought it was a good opportunity to write a list of top executive compensation principles. So below is a table comparing the G-20 principles to that of The Conference Board Task Force on Executive Compensation.

And right here are the principles released by the Securities Industry and Financial Markets Association (SIFMA):

  • Firms should establish compensation policies consistent with effective risk management
  • Compensation should be linked to sustainable performance
  • Risk management professionals should be appropriately independent
  • Firms should communicate their compensation practices to shareholders.

Executive Compensation Principles

G-20 Summit Financial Stability Board Principles for Sound Compensation Practices
(Released Sept. 25, 2009)

1.) Financial institutions should have an independent board remuneration (compensation) committee that oversees compensation policies.

2.) Compensation should be aligned with long-term value creation by avoiding multi-year guaranteed bonuses and requiring a significant part of variable compensation be deferred, tied to performance and subject to clawback. They should also take into account current and potential risks.

3.) Financial institutions ensure that compensation of senior executives and others who have a material impact on risk exposure align with performance and risk.

4.) Financial institutions disclose compensation policies and structures to guarantee transparency.

5.) Variable compensation be limited as a percentage of total net revenues when it is inconsistent with the maintenance of a sound capital base.

The Conference Board Task Force on Executive Compensation
(Released Sept. 21, 2009)

1.)  Compensation plans should establish a clear link between pay, strategy and performance.

2.)  Provide compensation that is fair, affordable and clearly aligned with actual performance.

3.)  Eliminate controversial compensation practices that conflict with the notions of fairness and pay for performance – such as excessive golden parachutes, overly generous severance arrangements, gross-ups of parachute payments or perquisites, and golden coffins – unless specific justification exists.

4.)  Demonstrate credible board oversight of executive compensation.

5.)  Foster transparency with respect to compensation practices and appropriate dialogue between boards and shareholders.


Directors Get It: Shareholders Want Independent Board Chair

Like it or not, the wave of corporate governance reform is coming to the U.S. boardrooms quicker than some might like either in the form of successful shareholder proposals, SEC disclosure regulations or federal legislation. And the one getting the most traction lately is mandating an independent board chair.

Nearly one year after the financial crisis flashpoint (the Lehman Brothers failure), shareholders are seeking their pound of flesh by targeting the top executives of public companies. Other than raising their ire over the executive compensation packages (including bonuses), some are looking to change the company governance guidelines regarding company leadership.

RiskMetrics Group’s 2009 Postseason Report: A New Voice in Governance: Global Policymakers Shape the Road to Reform, which was released Oct. 16, found that investors have become more aggressive in seeking governance changes. During the 2009 proxy season, there were 31 proposals calling for an independent board chair vs. 28 in 2008. Also, the amount of support increased 7 percentage points to 36.3 percent from 29.3 percent. Looking back to 2007, that figure was only 25 percent.

On Oct. 9, Norges Investment Bank (registration required) of Norway successfully persuaded Sara Lee Corp.’s board to split the role of chair and CEO once its current chief executive Brenda Barnes’ tenure ends. The company amended its governance rules immediately ahead of its Oct. 29 annual meeting. You can read the amended Sara Lee governance guidelines here. Norges Bank also submitted similar independent chair proxy proposals to the boards of Harris Corp., Clorox Co., Cardinal Health and Parker Hannifin.

And the resolutions kept coming. On Oct. 14, the Nathan Cummings Foundation and the Benedictine Sisters of Mt. Angel, Oregon, announced they filed a shareholder resolution with Goldman Sachs board “urging the board to review pay disparity at the company and analyze the appropriateness of its spiraling pay packages.” In a statement, both investors said other investors would file resolutions for “say on pay” or separation of chair and CEO positions. This all took place as the investment bank announced its annual bonuses would reach a record level in 2009.

And let’s not forget back in March when a UK pension fund asset manager Railpen Investments sought a similar shareholder proposal from Texas Instruments board before its annual meeting.

When you consider that New York Congressman Charles Schumer’s Shareholder Bill of Rights (which is still in committee) has a provision that calls for an independent chair and the SEC has a proposed rule that would seek company disclosure on CEO duality, you can see what I mean by traction. For the first time in years, shareholder groups are working in tandem with government to change company governance rules.

“Shareholders are actually looking for an independent chair, not just separating the Chair and CEO roles,” Catherine Bromilow, partner in PWC’s Corporate Governance Group, said during an Oct. 1 Corporate Board Member Boardroom Channel Webcast. “If we look back about 10 years ago, roughly 80 percent had the two positions combined. Now that figure is about 61 percent. It’s clear companies are considering this issue more.”

After exchanging e-mails with one director this week, I realized that what TK Kerstetter, president and CEO of Board Member, said during his Webcast resonates with the director community: “It’s not about titles, it’s about leadership.”

“I believe that a regulation requiring separation of the CEO and Chair does not fit every board,” C. Warren Neel, executive director of the University of Tennessee’s Corporate Governance Center (he’s also director with Healthways and Saks Inc.), wrote me. “There are a host of differences, one being if the company is run by its founder that will make splitting the roles very difficult. The alternative of a lead director then is what some companies choose for a reason, and find very effective. The right lead director can accomplish the same outcome as splitting the roles of CEO and Chair.”

What TK and Warren said reflects what The Conference Board Governance Center advocates in its just released Corporate Governance Handbook: Legal Standards and Board Practices (Third Edition). “Boards should adopt a structure providing outside directors with the leadership necessary to act independently and perform effectively their oversight role. This structure could include separating the positions of chairman and CEO, creating a lead independent director, or, in the case of a former employee acting as chairman, appointing a presiding director from among the independent directors.”

The Commission on Public Trust and Private Enterprise (See Corporate Governance Handbook, page 36) in 2003 stated that “where companies have a nonindependent chairman, the lead independent director or the presiding director should have ultimate approval over information flow to the board, meeting agendas and meeting schedules…”

It’s funny how the UK and a good part of Europe are at least a decade ahead of U.S. companies on this issue. Instead of regulations and best practices, they call them Codes.


Directors May Want to Look at That CEO Succession Plan

As investors continue to take aim at public companies and the federal government is ready to ratchet up regulation in the aftermath of the financial crisis, some directors are wondering about their executive team’s future. And that inevitably leads to the question, “How good is our CEO succession plan?”

In the last two weeks alone, there have been at least three high profile “emergency” cases of CEO transitions. Based on the swift action of one of the companies, it seemed that the other two companies did not have an affirmative answer to the above question. Other than internal politics or unique circumstances, it seems one reason for companies lacking good succession plans in today’s environment is that there is no definitive rule by regulators and only one exchange addresses it.

The New York Stock Exchange listing standards require members to have guidelines for the selection of the CEO, the performance review of the executive and the description of a general roadmap to follow in the event of an emergency (including a sudden departure or need for dismissal and the unexpected death, disability or impediment). NASDAQ does not have any rules regarding succession planning.

When Bruce Wasserstein, chair and CEO of venerable financial advisor and asset manager Lazard Ltd., died Wednesday unexpectedly at age 61, the Board of Directors named Vice Chair Steven J. Golub as interim CEO effective immediately. Golub, 63, has been with the firm since 1984 in various senior leadership positions, including CFO and chair of the company’s financial advisory business. As required by NYSE, Lazard has listed its succession plan in its governance guidelines.

In the other two cases (Bank of America and CIT Group), the circumstances involve resignations: Bank of America’s CEO Ken Lewis on Sept. 30 and CIT Group’s Chair and CEO Jeffrey Peek on Tuesday. Both boards weren’t totally surprised considering that Lewis had already been stripped of his chairmanship five months earlier and large number of directors had already been replaced following a divisive annual meeting and Peek is facing the prospect of seeking bankruptcy court protection. Both boards were given a much shorter timeframe to complete the succession plan than most corporate governance experts advise.

Both are prime examples of how two well-known companies, in this case banks, run by CEOs with visions of staying in their positions for the long-term were caught off-guard because they seem to have no discernible succession plan. Both banks failed to name interim replacements as the sitting CEO helps in the search process.

The Conference Board Governance Center’s Executive Action Report The Role of the Board in Turbulent Times CEO Succession Planning (Aug. 2009), points out the importance of directors immersing themselves in the leadership makeup of their company. “… directors should acquire their own personal knowledge of the talent pool available at various levels within the organization and feel confident about the effectiveness of the leadership development program. Considering that the final decision on issues of succession resides with the board as a whole, each director should be able to contribute to the debate his or her informed opinion about the preparedness of internal candidates.”

As for the Bank of America, not only does the board of the country’s largest bank have to name a successor by Dec. 31 (the date Lewis will officially step down), it faces a jury trial with the SEC over an investigation into the nondisclosure of bonuses paid to Merrill Lynch employees prior to the bank’s purchase of Merrill. In addition, the bank faces a separate probe by New York State Attorney General Andrew Cuomo and a House subcommittee.

At the same time, the investor backlash continues as evidenced by this Oct. 6 post by Beth Young, a senior research associate at The Corporate Library. More and more shareholders have been putting forth proposals that address CEO succession plans and even call for management preparing an annual report on such plans. (See Whole Foods Market no-action letter request to the SEC, Oct. 5, 2009.)

The Bank of America board’s six-person search committee headed by Chair Walter Massey now faces the dilemma of elevating insiders such as Chief Risk Officer Greg Curl or Brian Moynihan or going outside the organization and face the possibility of other executives leaving, according to Massey, who faces a mandatory retirement next year, had been “cooking up” succession plans for himself and Lewis back in April, according to’s Dealscape column in May. reports that in August Lewis placed “a number” of key executives in a position “to compete to succeed me at the appropriate time.”

The bank addresses its succession plan policy in its Corporate Governance Guidelines. Its most recent proxy statement (March 2009) lists “creating a succession plan for the position of Chief Executive Officer and reviewing succession plans for other executive officers and senior management” as the board’s third top responsibility.  Additionally, the proxy states that the lead director has the responsibility of discussing succession planning with the CEO. But, unfortunately the lead director resigned in May following a shareholder campaign to remove him.

At the CIT Group, in a prepared statement Tuesday, the company said it is forming a search committee to oversee the recruitment process and ensure a smooth leadership transition at the company.

“Now is the appropriate time to focus on a transition of leadership, and I look forward to working closely with our board during that process,” Peek said.

Most corporate governance experts would beg to differ. They believe succession planning is not meant to be a one-time “emergency-only” task. It should be part of a company’s strategic plan. In The Role of the Board in Turbulent Times, The Conference Board recommends that corporate directors dedicate full attention to their succession planning duties and use the challenges posed by the economic crisis as an opportunity to improve their companies’ leadership development programs.

The report spells out five steps boards should take as a roadmap to help directors organize succession planning, integrate it with existing board responsibilities, make it transparent both within and outside the company and ultimately define it as an ongoing element of business strategy. Those steps are: assign responsibility to a standing board committee of independent directors, make succession planning continuous and integral to business strategy, integrate succession planning into top-executive compensation policy, integrate succession planning into risk management and make succession planning   transparent and describe it the company’s annual disclosure.

Beverly Behan, principal of Board Advisor LLC, believes Bank of America’s board (which had a huge turnover following the annual meeting in May) should have made succession planning a priority over the past four months. “Any succession conversation in the BofA boardroom should have involved a discussion of an interim replacement in a crisis – and an agreement on who that should be,” Behan wrote in her Oct. 6 column The Boardroom on

Instead, what she saw there is what she has seen at many public companies. “When I work with boards on CEO succession planning, I am shocked at how often I find that their emergency plan consists of little more than a list of high-potential internal candidates and a telephone tree of “who calls who” if a crisis breaks,” she wrote.

For what it’s worth, I did find a recent example of one company that completed a planned top executive transition that was not precipitated by an emergency. Blue Cross and Blue Shield of North Carolina announced it has elevated its COO J. Bradley Wilson to be president while its CEO Bob Greczyn stays on eyeing a possible retirement in 2010. The insurer stated the decision was the result of a year-long succession plan carried out by its board.

Back to Top