In an NACD webinar, Ken Daly, president of NACD, Kenneth Duberstein, lead director of the Boeing Company, director of  Conoco-Phillips and The Travelers  Companies and Stuart R. Levine, director of Broadridge Financial Solutions and lead director of J. D’addario & Company addressed the thorny issue of trust between the CEO and the board.

Using his example of his work as CEO of NACD, Daly demonstrated how important it is for CEOs to invite candid dialogue from the board. “Trust is built over time and developed through actions, not words. The way to develop trust is for the board and management to recognize that they are on the same team, that communication is straight-forward, two-way and “straight from the horse’s mouth.”  It’s also important to telegraph emerging issues.  Duberstein noted that management and boards are on the same team but have different roles—management is charged with execution and the board need to actively participate in strategy decisions and provide oversight for all shareholders by monitoring performance and asking the right questions.

Properly managing executive sessions and giving good feedback to the CEO was discussed. Levine, a best-selling business author, noted that the CEO of Broadridge has a practice of calling each board member prior to the meeting to get a sense of the board’s issues and concerns. “That way, we’re already engaged before the meeting.”

What the discussion among these leaders with broad experience emphasized was how important both boards and CEOs have to do to “get it right.”  The webinar provided valuable insight.

“Collegiality can be the enemy of good board governance,” said Christine A. Poon during a NACD Chicago Chapter seminar on Global Boards and International Risk Management. She is Dean and John W. Berry Chair in the Max M. Fisher College of Business at The Ohio State University and board member of Prudential Financial and Philips Electronics in the Netherlands. She was formerly Vice Chairman of Johnson & Johnson.

Boards need to get the information they need and engage in rigorous discussion when it comes to oversight of a company’s risk management and growth.  “There’s no need to be disrespectful, but it is critical that directors get the answers they need to understand the issues.” 

Fellow panelist Lisa A. Payne concurred.  “You have to train management to eliminate the mind-numbing presentations that go out in the board books and tell them that management should come to the board with a handful of overheads so that we can use our time together to get to the heart of the matter.”  She is Vice Chairman and Chief Financial Officer of Taubman Centers, Inc. and a director of Masco Corporation and Taubman and a trustee of the Munder Funds.

Executive session is a key tool for the board.  “We often begin with an executive session,” said Payne. “It enables us to focus on the key issues through the duration of the meeting.  We often meet again in executive session after the formal meeting.”

At the NACD’s Director Professionalism training in Houston this week, a group of seasoned directors were discussing the pending Securities and Exchange Commission’s rules for the whistle-blower incentives that would circumvent the company’s own internal reporting processes.

The discussion centered on the role of the board in encouraging employees to use the internal system to report any concerns.

“We do employee surveys at our company,” said Roberta S. Brown, a director at several regulated energy companies. “The HR Committee asked to see all the written comments that accompanied the surveys,” she said as a way to better understand employee issues and concerns.  “And we learned that employees were impressed to hear we read them.”

The board’s action sent a message to employees that their opinions were valued and concretely conveyed that the board was concerned about employee sentiment on all issues.  In that way, the board encouraged the use of the internal mechanism to report concerns.  It also conveyed the importance of “tone at the top” in terms of the board’s commitment to hear the employees’ perspective on issues.

Wayne Shaw encourages directors to ask “dumb questions” when it comes to reviewing the financials of any company.  The Helmut Sohmen Distinguished Professor of Corporate Governance at Southern Methodist University notes that it is sometimes the question that wasn’t asked that gives directors insight into assessing the integrity of the firm’s financials.

His presentation was part of the NACD Director Professionalism training in Houston May 4-6.

Rather than getting caught up in the minutia, directors should ask management, “Are we on track to meet our financial goals and if not, what is the company doing about it?” He encourages directors to ask the CFO if he/she is comfortable with the financial demands of the CEO.  “Is there pressure to make the numbers?”

Directors should ask internal auditors if they have any concerns with accounting or reporting issues. In following up with the external auditors, directors should ask how the company differs from others in the industry? What weaknesses did they find?  How aggressive is the company’s accouting policies relative to the competition? And, is management responsive to the issues they raise?

Shaw cited chapter and verse of well known companies whose directors didn’t ask the basic questions.

Asking some obvious questions would have saved millions of dollars of shareholders’ investment and sometimes the company itself.

Wayne Shaw encourages directors to ask “dumb questions” when it comes to reviewing the financials of any company.  The Helmut Sohmen Distinguished Professor of Corporate Governance at Southern Methodist University notes that it is sometimes the question that wasn’t asked that gives directors insight into assessing the integrity of the firm’s financials.

His presentation was part of the NACD Director Professionalism training in Houston May 4-6.

Rather than getting caught up in the minutia, directors should ask management, “Are we on track to meet our financial goals and if not, what is the company doing about it?” He encourages directors to ask the CFO if he/she is comfortable with the financial demands of the CEO.  “Is there pressure to make the numbers?”

Directors should ask internal auditors if they have any concerns with accounting or reporting issues. In following up with the external auditors, directors should ask how the company differs from others in the industry? What weaknesses did they find?  How aggressive is the company’s accouting policies relative to the competition? And, is management responsive to the issues they raise?

Shaw cited chapter and verse of well known companies whose directors didn’t ask the basic questions.

Asking some obvious questions would have saved millions of dollars of shareholders’ investment and sometimes the company itself.

Those who work in corporate communications and public affairs have long held that companies must operate in the larger public interest.  Now, Hillary Sale, a law professor at Washington University has coined a new term, “publicness” as she examines the Model Business Corporation Act and describes a set of responsibilities that U.S. companies need to better handle.

Communication professionals have pointed to Arthur W. Page, a PR executive for AT&T from 1927 to 1946 who developed a set of principles about how a company should operate including “a successful corporation must shape its character in concert with the nation’s. It must operate in the public interest, manage for the long run and make customer satisfaction its primary goal.”

Professor Sale has used the law to describe how officers and directors of companies should act. She attributes the creeping regulation as a result of “the failure of officers and directors to govern in a sufficiently public manner has resulted not only in scandals, but also in more public scrutiny of their decisions, powers and duties.” The government and the media, she says, is driven by the public, and now “have increasing influence over corporations, which requires a change in the way officers and directors understand and do their job.”

CEOs and corporate directors would do well to read her excellent article in the Duke University journal, “Law and Contemporary Problems.”

The bell has already been rung. The government and a larger public are involved in corporate governance and their concerns need to be addressed.

My article, suggesting that companies refine the concept of the Fifth Analyst Call to improve upon the proposal by a group of institutional investors and serving the narrow interests of this coalition to make it a fair process that corporate managers can properly use to serve all investors equally has drawn some interesting reactions.

John Wilcox, the Chairman of Sodali commented, “that directors of U.S. companies are not ready for open dialogue with their investors, even on a narrowly defined topic such as corporate governance and the annual meeting. The reason they are not ready is because U.S. companies – and boards in particular – are generally on the defensive in their communication with shareholders. Instead of communication, U.S. companies practice disclosure. Disclosure is defined by prescriptive rules and enforced by liability and regulatory penalties.”  This, he says makes “boards and shareholders mistrustful of each other and relies on adversarial modes of engagement.

Boards guided by legal counsel continue to respond by addressing the “letter of the law” grudgingly meeting new demands for transparency rather than the spirit of the law, which Mary L. Schapiro, SEC Chairman emphasized as “true engagement with shareholders.”

In this environment, Washington will continue to regulate, with many unintended consequences until CEOs and their boards see shareholders as part of the governance process and critical to not only their long-term health but the health of capitalism in the 21^st century.

Dominic Barton, McKinsey’s managing director, argues that capitalism is endangered unless business leaders take steps now to “modernize” the system.  This “precious machine”  and “the best economic system” requires both popular and political support.

Barton spent 18 months talking to 400 business and government leaders around the world to develop his Harvard Business Review article, “Capitalism for the Long Term.”

McKinsey has posted videos of Barton discussing his ideas as well as articles to encourage others to engage in the discussion.  “There’s a lot of things that business leaders can fix,” Barton says in one short video.  “We don’t need the government to tell us what to do but we need to get out there and move on it.”

Moving on it requires adjustments, shifting from a quarterly to a long-term focus, serving stakeholders while building value for shareholders, and strengthening governance.

Pointing to the increased complexity of business, Barton observes that the current governance model was developed for another time 30 years ago.  The most shift is that directors need to spend more time on board work to understand the business well enough to provide strategic advice. He points out that boards of private equity firms spend about 74 days a year; corporate boards spend 15-20 days, too little to provide the strategic help that companies need in a competitive, global and 21^st century environment.

Dominic Barton, McKinsey’s managing director, argues that capitalism is endangered unless business leaders take steps now to “modernize” the system.  This “precious machine”  and “the best economic system” requires both popular and political support.

Barton spent 18 months talking to 400 business and government leaders around the world to develop his Harvard Business Review article, “Capitalism for the Long Term.”

McKinsey has posted videos of Barton discussing his ideas as well as articles to encourage others to engage in the discussion.  “There’s a lot of things that business leaders can fix,” Barton says in one short video.  “We don’t need the government to tell us what to do but we need to get out there and move on it.”

Moving on it requires adjustments, shifting from a quarterly to a long-term focus, serving stakeholders while building value for shareholders, and strengthening governance.

Pointing to the increased complexity of business, Barton observes that the current governance model was developed for another time 30 years ago.  The most shift is that directors need to spend more time on board work to understand the business well enough to provide strategic advice. He points out that boards of private equity firms spend about 74 days a year; corporate boards spend 15-20 days, too little to provide the strategic help that companies need in a competitive, global and 21^st century environment.

In his remarks before the National Press Club, Broadridge CEO Richard J. Daly called for a nationwide effort to encourage employees to vote their proxies and thereby participate in the larger enterprise of improving corporate governance.

As we said in our tweet earlier today (Karen Kane@BoardAdvisor)  Daly is right to use his position to encourage shareholder education by asking the country’s top 1000 CEO’s to mobilize employees to participate in corporate governance by voting their proxies.

Daly calls Broadridge the major player in investor communications and proxy distribution, providing the digital pipes for these transactions but he also notes that Broadridge makes no more or less money from an increased exercise of proxies.

Companies and the boards of directors that provide oversight need to embrace the concept that engaging shareholders has never been more important in restoring trust. Shareholders need to be reminded that their proxy represents their investment, their wealth and their financial returns.

“It is clear to me that when raising capital, creating jobs and effectively competing in an ever increasingly global market, companies need input and support from shareholders to validate they are on the right track.”