The Conference Board Governance Center Blog


Worth Reading … Good Corporate Governance

A recent online discussion on good corporate governance I had with members of Dan Swanson’s Yahoo corporate governance discussion group I belong to got me thinking. It’s a good time to start looking at what thought leadership there is on corporate governance principles.

There is quite a lot of good white papers, articles and online discussion e-mail threads. While I won’t share the e-mail threads for obvious reasons, I would suggest joining some of the groups out there. Now is the time for people in the corporate governance space to talk to each other and share ideas.

I must admit that as I started reading material for this post, I noticed most of what is out there on corporate governance principles is from overseas (namely the United Kingdom, other European countries and Australia). As for what I am going to share with you this week, here it is:

•    Some Thoughts for Boards of Directors in 2010, Martin Lipton, partner; Steven A. Rosenblum, partner; and Karessa L. Cain, associate, Wachtell, Lipton, Rosen & Katz. Nov. 30, 2009. Key findings: This annual outlook is a 32-page report that stresses there is no one-size-fits-all approach to crafting a successful board. It also offers recommendations for key areas of concentration including CEO Succession Planning, Long-Term Strategy and Monitoring Performance and Compliance. “Some are perennial themes that remain relevant and deserve to be re-emphasized from year to year, whereas others have recently come into particular focus,” the authors say. Read the rest of this entry »


SEC Wants More Concise Disclosure That is Material

The SEC has three messages for public boards and management next proxy season when it comes to disclosing policies and practices regarding executive compensation, risk and corporate governance: the Compensation Discussion and Analysis (CD&A) should be used to tell their story, all disclosures should take risks into account and should have a threshold for materiality.

In so many words, SEC Chair Mary Schapiro and a majority of commissioners want disclosures, especially the CD&A, to be less voluminous, easier to read and full of content the investors can truly use. The commission is trying to instill in public companies the idea that disclosures should be treated like a “memo” to investors and not just another compliance document.

That is what I believe directors and management should take away from the SEC’s 4-1 approval Wednesday of new rules for disclosures in proxy and information statements. The proxy disclosure enhancements, which go into effect Feb. 28, 2010, would require disclosures in the proxy and financial statements on:

•    The relationship of a company’s compensation policies and practices to risk management.
•    The background and qualifications of directors and nominees.
•    Legal actions involving a company’s executive officers, directors and nominees.
•    The consideration of diversity in the process by which candidates for director are considered for nomination.
•    Board leadership structure and the board’s role in risk oversight.
•    Stock and option awards to company executives and directors.
•    Potential conflicts of interests of compensation consultants as well as the fees paid to consultants and their affiliates.

Read the rest of this entry »


Executive Compensation Reform Taking Some Baby Steps

The Obama Administration is using good old-fashioned peer pressure and more targeted disclosure to change the way executive compensation policies are carried out by public companies in the U.S. (How else can you explain that only days after the House narrowly approved an historic financial reform package (NYT, Dec. 12)  that the SEC is meeting to approve new compensation disclosure rules?)

As part of his peer pressure campaign, the President met with 12 of the CEOs from the largest U.S. financial institutions Monday morning to drive home the message that after these banks received help from the taxpayers, it’s time for them to give back. (Thanks to the tip from Pete Davis of Pete Davis Capital Investment Ideas)

“Now, I should note that around the table all the financial industry executives said they supported financial regulatory reform,” the President said in an official statement following the meeting. “The problem is there’s a big gap between what I’m hearing here in the White House and the activities of lobbyists on behalf of these institutions or associations of which they’re a member up on Capitol Hill.  I urged them to close that gap, and they assured me that they would make every effort to do so.”

Does Corporate Governance Matter?

That begs the question, “Should U.S. boards even care about corporate governance reform, especially any change to executive compensation policies, in the near future?” The short answer, as I see it, is a resounding YES! Based on discussion at The Conference Board Governance Center Fall Investor Summit, which focused on The Conference Board Task Force on Executive Compensation report, some of the issues investors are concerned about for 2010 are compensation committee composition, executive long term incentive plans and how executive bonuses will be paid. Read the rest of this entry »


Q&A With Martin Lipton and Richard Ferlauto: Short-termism

Shareholder short-termism has become the focus of Congress, regulators and corporate governance experts as everyone dissects the reasons for the financial crisis of 2007-2008. So I figured what better time to bring together two of the most outspoken people representing both sides of the subject: Marty Lipton and Rich Ferlauto.

Rich Ferlauto of AFSCME

Rich Ferlauto of AFSCME

Marty Lipton of Wachtell, Lipton, Rosen & Katz

Marty Lipton of Wachtell, Lipton, Rosen & Katz

Lipton, a founding partner of Wachtell, Lipton, Rosen & Katz, earlier this year served on the drafting committee of The Aspen Institute’s report on shareholder short-termism that was released on Sept. 9. He specializes in advising major corporations on mergers and acquisitions and matters affecting corporate policy and strategy. The report, Overcoming Short-termism: A Call for a More Responsible Approach to Investment and Business Management, is part of a long-term project of the Institute’s Business and Society Program and its Corporate Values Strategy Group.

Ferlauto, who has served as the director of Corporate Governance and Public Pension Programs for the American Federation of State, County and Municipal Employees (AFSCME), will become deputy director of policy of Office of Investor Education and Advocacy for the SEC in January. He will have contact with thousands of individual investors each year, hearing their needs, answering their questions and helping to solve their problems. He is a well-known shareholder activist and media commentator on corporate governance issues. Also, he is founder and chairman of a nonprofit nonpartisan organizations that represents the interests of retail shareholders.

In separate discussions with me recently, Lipton and Ferlauto opined on the ramifications of short-termism: Read the rest of this entry »


Worth Reading … Executive Compensation

With all the buzz on executive compensation coming out of The Conference Board Governance Center Fall Corporate/Investor Summit in New York City on Friday, I thought it would be a good idea to share some of the latest reading material on the subject.

In addition to the focus on The Conference Board Task Force on Executive Compensation report, some of the speakers and attendees cited other publications that might give you all some insight on compensation guidelines before the next proxy season starts. For instance, at the Investor Summit Anne Sheehan, director of corporate governance for the California State Teachers’ Retirement System (CalSTRS) made mention of her organization’s executive compensation model policy guidelines and Arthur Kohn, partner at Cleary Gottlieb Steen & Hamilton LLP cited one of Lucian Bebchuk’s recent Harvard Law School working paper, The Wages of Failure: Executive Compensation at Bear Stearns and Lehman, 2000-2008. (See below.)

Executive compensation is an issue that will stay on the shareholder radar for some time to come as the Special Pay Master Kenneth Feinberg continues to oversee the pay of top executives at TARP companies and Congress considers several corporate governance measures over the next few months. With that said, here are some publications on the subject that are worth reading:

  • The Wages of Failure: Executive Compensation at Bear Stearns and Lehman 2000-2008, Lucian Bebchuk, Director of the Program on Corporate Governance, Harvard Law School; Alma Cohen, Harvard Law School professor; Holger Spamann, Executive Director of the Program on Corporate Governance, Harvard Law School. Nov. 22, 2009. Key findings: This working paper finds that  according to the standard narrative, the meltdown of Bear Stearns and Lehman Brothers largely wiped out the wealth of their top executives.
    Many in the media, academia and the financial sector have used  this account to dismiss the view that pay structures caused excessive risk-taking and that reforming such structures is important. That standard narrative, however, turns out to be incorrect.
    The authors discuss the implications of their analysis for understanding the possible role that pay arrangements have played in the run-up to the financial crisis and how they should be reformed going forward.

  • Executive Compensation and Earnings Management under Moral Hazard, Bo Sun, Economist, Board of Governors, Federal Reserve System. August 2009. Key findings: The author creates a model that shows there is a positive association between earnings management and incentive compensation. She suggests that the model she developed may be useful for studying the issues of how incentives and pay vary across firms. It is natural to think that managerial manipulation of financial data incurs a larger personal cost in the firms with more effective internal corporate governance, she wrote.
  • Executive Compensation: Facts, Gian Luca Clementi, Professor, New York University; Thomas F. Cooley, Richard R. West Dean and Professor, New York University, and National Bureau of Economic Research (NBER). October 2009. Key findings: This paper, which looks at the important features of U.S. executive compensation from 1993 to 2006 with an update for 2008, finds that the compensation distribution is highly skewed; each year, a sizeable fraction of chief executives lose money; the use of equity grants has increased; the income accruing to CEOs from the sale of stock has increased; measured as dollar changes in compensation, incentives have strengthened over time, measured as percentage changes in wealth, they have not changed in any appreciable way.
  • Schering-Plough Announces Results of Survey on Compensation, Susan Ellen Wolf, former corporate secretary, vice president of corporate governance and general counsel, Schering-Plough. Oct. 30, 2009. Key findings: This press release from Schering-Plough, which is now part of pharmaceutical giant Merck & Co., gives the results of a year-long survey of Schering-Plough shareholders. The eight-question survey was the first time the board reached out directly to shareholders on the issue of executive compensation. With the services of Richard Koppes, former general counsel of California Public Employees’ Retirement System (CalPERS), the compensation and nominating and corporate governance committees were able to gauge the sentiments of about holders of about 0.50 percent of outstanding shares. For the most part, those shareholders responded favorably to the board on such issues as retention, performance-based pay and proxy statement transparency.
  • Goldman Sachs Outlines Compensation Methods to Shareholders, Bloomberg News, Dec. 3, 2009. Key findings: A news article that details how Goldman Sachs Chair and CEO Lloyd Blankfein has been meeting with shareholders since October to explain the investment bank’s executive compensation policies in light of the company paying out large bonuses a year after the financial crisis in which the company took federal bailout money. The article cites a 14-page memo from Blankfein in which he details the firm’s compensation practices, such as a prohibition on multi-year guaranteed pay contracts and a higher percentage of stock paid to the employees who earn the most.
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