Nov
10
2009

Worth Reading…Separation of CEO and Chair

The issue of whether or not to separate the roles of CEO and Chair has certainly stirred lots of conversation in board rooms across the United States, especially as shareholders and Congressmen have called for it in proxies and federal legislation.

The argument made by proponents is that having two separate leadership positions, where chair is independent, is that such a transition is evolutionary for U.S. companies and a best practice around the world. Those opposed argue that there are no proven studies that show separating the two leadership positions leads to better shareholder performance.

The Conference Board Governance Center last week released its first in a series of research digests called Board Book. The first issue’s focus is Board Leadership and CEO/Chair Separation. The publication cites a handful of papers, articles, speeches and research that analyze CEO duality. If you are a Governance Center member, you can access Board Book here (username and password needed).

In addition to the Board Book, I have compiled some more research on the subject:

  • The Value of Independent Directors: Evidence from Sudden Deaths, Bang Dang Nguyen and Kaspar Meisner Nielsen, Chinese University of Hong Kong, May 19, 2009, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1484707. Key findings: A look at the contributions of U.S. independent directors to shareholder value from 1994-2007. Overall, authors found that independent directors provide a valuable service to shareholders.
  • 2009 Proxy Season Highlights No. 5: Companies With Combined CEO and Chair of the Board Positions, Annalisa Barrett, The Corporate Library, March 23, 2009, www.thecorporatelibrary.com/news_docs/932032509splitceochair.pdf (There may be a fee to download this paper.) Key findings: In a study of more than 3,000 North American companies, TCL found 52 percent combined both positions, 21 percent were led by an independent director and 12 percent have boards led by a former CEO. Companies with dual roles have “troubling” governance characteristics.
  • 2009 Spencer Stuart Board Index, Oct. 26, 2009, http://content.spencerstuart.com/sswebsite/pdf/lib/SSBI2009.pdf . Key findings: Half of all boards have only one insider, the CEO, up from 44 percent last year. And 37 percent split the chairman and CEO roles, versus 20 percent a decade ago. Of the 184 companies that split the roles, 81 have an independent chair (versus 75 last year) and 91 have a non-independent chair (down from 105 last year).
  • 2009 Postseason Report: A New Voice in Governance: Global Policymakers Shape the Road to Reform, RiskMetrics, Oct. 16, 2009. http://www.riskmetrics.com/docs/2009-postseason-report.
  • Corporate Governance Commentary: Proxy Access Commentary No. 1, The Battle for Shareholder Access — The Current State of Play, Latham & Watkins, May 19, 2009. http://www.lw.com/upload/pubContent/_pdf/pub2633_1.pdf. Key findings: Sen. Charles Schumer of New York proposed a bill that in addition to issuing a shareholder proxy access rule and Say on Pay would call for independent board chairs. At last check, that bill had been referred to the Senate Committee on Banking, Housing and Urban Affairs.

- Gary Larkin

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Oct
29
2009

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  (www.treas.gov/press/releases/tg334.htm), 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 gary.larkin@conference-board.org.

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

- Gary Larkin

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Oct
02
2009

Directors Want Principles, Not More Regulations

As most of corporate America awaits new executive compensation regulations in the aftermath of the financial crisis, a group of about 100 independent directors has started a grassroots movement to head off the regulators.

Calling itself the Independent Directors Executive Compensation Project (IDEC), the directors recently held a meeting at the Kellogg School of Management at Northwestern University where they agreed on five key principles for determining executive compensation plans. They also agreed that “there are serious problems with executive compensation at publicly traded companies, independent directors should take a leadership role to do something about the problems and an ongoing effort should be undertaken to continuously define, research, develop and communicate principles and best practices.”

“Whether or not a mechanism is needed, everyone’s [independent directors] are very clear that they don’t want government overseeing executive compensation,” Pastora San Juan Cafferty, a longtime independent director and IDEC leader, told me last week. “We want principles, not regulations.”

Cafferty, who serves on the board of Waste Management Inc., Integrys Energy Group and Harris Financial, and Donald P. Delves, president of compensation consultant The Delves Group, have spearheaded the effort. They have been meeting with groups of 15-20 directors to discuss how to institute principles and have companies adopt and implement them. They also want to integrate executive compensation principles into the proxy statement.

Ideally, they are looking to create an executive compensation standards board based on the Financial Accounting Standards Board (FASB) model and develop Generally Accepted Executive Compensation Principles similar to Generally Accepted Accounting Principles (GAAP). (See The Case for an Executive Compensation Standards Board, Directors&Boards, Spring 2009)

In addition to such a standards board, IDEC wants to take a similar approach to the German Corporate Governance Code, which was adopted in 2006. That code has three levels of guidelines that include requirements that must be followed, recommendations that should be followed and suggestions that could be followed.

“Independent directors who attended these meetings have expressed interest in fostering a voluntary peer-led process that would establish and expand these principles and encourage boards to incorporate them into their practices and proxy statements,” Delves and Cafferty said in an e-mail.

As the group works on honing its principles-based compensation strategy message, Cafferty tells me they are including the work of The Conference Board (See Executive Compensation on Everyone’s Mind, Sept. 22 Governance Center Blog post), Kellogg School of Management and the Center on Executive Compensation. The group also plans on putting up a Web site soon.

“We have also talked to four leading compensation consultants,” Cafferty said. “We thought that anything that independent directors had concerns about needed to be rooted in the compensation consultant industry.” There is a major concern that this fast-growing industry has no standards, she said.

It’s interesting to look at the executive compensation pay principles that have been floated thus far. Here is a look at IDEC’s , the Center on Executive Compensation’s (an offshoot of the HR Policy Association) and The Conference Board Executive Compensation Task Force’s guiding principles:

IDEC (See Agenda Week article, Sept. 21 – registration required)
•    Accountability – Boards must account for pay-setting decisions.
•    Alignment – Executive compensation should be precisely aligned with performance.
•    Fairness – The amount paid to a given executive should be fair to the individual and, above all, the shareholders.
•    Transparency – Boards should make decisions on pay in an open and accessible manner.
•    Objectivity – There should be an effective use of incentives to motivate innovation to create wealth for shareholders.

Center on Executive Compensation
•    Aligned – Executive compensation arrangements should be aligned with the best interests of a company’s shareholders and other stakeholders.
•    Fully compliant – Executive compensation arrangements should be structured and executed in full compliance with applicable laws and regulations.
•    Independently informed and approved – Executive compensation arrangements should be approved by the board of directors’ independent and active compensation committee.
•    Appropriately Customized – Executive compensation arrangements should be appropriately customized to and aligned with the company’s culture and values, business strategy, industry and competitive and financial conditions.
•    Transparent and Accessible – The compensation committee should ensure that the company’s executive compensation program is disclosed in a clear and understandable manner.
•    Fair and reasonable – Executive compensation arrangements should be fair to the company’s shareholders and executives.

The Conference Board Task Force on Executive Compensation
•    Establish a clear link between pay, strategy and performance;
•    Provide compensation that is fair, affordable and clearly aligned with actual performance;
•    Eliminate controversial compensation practices that conflict with the notions of fairness and pay for performance unless specific justification exists;
•    Demonstrate credible board oversight of executive compensation; and
•    Foster transparency with respect to compensation practices and appropriate dialogue between boards and shareholders.

As of Sept. 21, six companies said they would adopt The Conference Board task force’s principles (AFC Enterprises Inc., AT&T Inc., Cisco Systems Inc., Hewlett-Packard Co., NASDAQ-OMX Group Inc. and Tyco International).

Worth Reading …

Here are some interesting articles on executive compensation
•    A Price to Pay: Kellogg professors debate the merits of regulating executive compensation (Kellogg School of Management, April 2009)
•    Is Executive Compensation Shaped by Public Attitudes? (Paper, Camelia M. Kuhnen, Kellogg School of Management;  Alexandra Niessen, University of Cologne (Germany), May 2009)
•    The Best Thing You’ll Read About Executive Compensation Today (The Tally Sheet, Corporate Board Member Blog, Sept. 25, 2009)

- Gary Larkin

Posted by Gary Larkin at 12:12 PM | 2 Comments »
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