An Opportunity for Directors to Communicate More Effectively

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TK Kerstetter’s very interesting program  This Week in the Boardroom  took an interesting look  back on the events of 2009 that will impact boards and directors in the years ahead. Both Kerstetter and his guest, Scott Cutler noted that corporate governance has been politicized and  wrongly blamed for the financial crisis but both see opportunity for directors to focus on effective corporate governance and the key role that directors play. 

To Cutler’s concern that “the strongest voices in corporate governance are not being heard,” we offer the suggestion that directors could use their strong voices to communicate with greater clarity, rather than settling for languages that satisfies lawyers.

Both Kerstetter and Cutler lauded SEC Chairman Mary Schapiro who has moved quickly to bolster the SEC’s regulatory and enforcement powers. At the same time, she strives to communicate intent in all the “why” of the SEC’s action. 

Take the recent press release about increased disclosure:  The SEC announced new “rules to enhance the information provided to shareholders so they are better able to evaluate the leadership of public companies.” The rules “will improve corporate disclosure regarding risk, compensation and corporate governance matters when voting decisions are made,”  said Schapiro.

It’s true that shareholders are a diverse group and it is not the job of the board to satisfy everyone, but listening to varied points of view always improves decisionmaking.

An Opportunity for Directors to Communicate More Effectively

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TK Kerstetter’s very interesting program  This Week in the Boardroom  took an interesting look  back on the events of 2009 that will impact boards and directors in the years ahead. Both Kerstetter and his guest, Scott Cutler noted that corporate governance has been politicized and  wrongly blamed for the financial crisis but both see opportunity for directors to focus on effective corporate governance and the key role that directors play. 

To Cutler’s concern that “the strongest voices in corporate governance are not being heard,” we offer the suggestion that directors could use their strong voices to communicate with greater clarity, rather than settling for languages that satisfies lawyers.

Both Kerstetter and Cutler lauded SEC Chairman Mary Schapiro who has moved quickly to bolster the SEC’s regulatory and enforcement powers. At the same time, she strives to communicate intent in all the “why” of the SEC’s action. 

Take the recent press release about increased disclosure:  The SEC announced new “rules to enhance the information provided to shareholders so they are better able to evaluate the leadership of public companies.” The rules “will improve corporate disclosure regarding risk, compensation and corporate governance matters when voting decisions are made,”  said Schapiro.

It’s true that shareholders are a diverse group and it is not the job of the board to satisfy everyone, but listening to varied points of view always improves decisionmaking.

New Rules Require Better Board Communication

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“By adopting these rules, we will improve the disclosure around risk, compensation, and corporate governance, thereby increasing accountability and directly benefiting investors,” Chairman Mary Schapiro said in her opening statement at yesterday’s Securities and Exchange meeting.

The rules will be in effect by the 2010 proxy season and could be published as early as next week.

Do boards understand that they are being challenged to communicate more openly with their shareholders?  Better communication gets to the heart of many of the governance issues that the SEC and the pending legislation hope to address.

So what’s a board to do?

Boards should think in concrete terms about what they have communicated with their shareholders in the past and how they can improve the clarity of communication.They should avoid legalese and adopt plain English in their discussion about risk, compensation and governance.

Greater disclosure is about clarity.  Boards are in a communication battle they can win if they recognize the element of respect in their communication with the company’s owners.

It Takes Time to Be an Effective Director

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Bill McCracken joined CA, Inc. in 2005 as chairman of its Special Litigation Committee when the company  was operating under a deferred prosecution agreement after it was rocked by scandals that included the conviction of several executives including its CEO and Chairman for fraud.

A case study in corporate rehabilitation, McCracken focused on the culture of CA, which he saw as a board responsibility. McCracken describes the continuation of the company’s journey to excellence as “we’re in the fifth chapter of a 10 chapter book.”

 

In his panel discussion for the NACD Conference on Governance, McCracken also revealed that he believes the job of the lead director or chairman as requiring significant time—one and a half to two days a week or six or seven days a month.

 

Directors acknowledge a new environment where every director is spending more time on respective board assignments, especially the chairs of the audit or governance committees of the board.

 

McCracken took the unusual step of hiring an executive coach to help board members learn to work together and establish a company culture focused on transparency, teamwork and collaboration.  “It takes time and effort to build trust.  

McCracken also observed: You can’t do both jobs—serving as chairman and CEO.  He has taken over as interim CEO as they search for a new CEO.

 “The Chairman runs and manages the board and the CEO runs the company.” 

 Perhaps attending quarterly board meetings and an occasional telephonic meeting were the typical director time commitment a generation ago, but not today.  Certainly, for the board to understand the risks in a corporate strategy means a much greater time commitment.

 It’s a bigger job today. Without an increased time commitment and an ability to work well together, “all that experience of the directors does not get engaged.”

Clearly, management needs to take full advantage of directors and the experience they bring for the long-term growth and benefit to the company and its shareholders

Do the Right Thing: A Key Director Responsibility

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Whether you are serving on a public or private company board, there is an important principle to guide you:  doing the right thing, not just for the constituency that brought you to the board but for all the shareholders, according to Michel Feldman, partner in the Chicago office of Seyfarth Shaw, who has served on a number of private company and public boards.

“Especially when you are asked to be on a private board, be sure that you understand what you are getting into,” said Feldman at an NACD Chicago panel.  In private companies, it’s especially important to beware of a dominant CEO.

“And always, do the right thing for all shareholders.”

Why CEOs Should Blog

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CEOs need to see themselves as their own media company.  It’s not just about being interviewed by The Wall Street Journal or CNN, but framing the discussion you want to have and reaching out to your clients and customers in your own voice.

Write a blog.  It gives you a chance to connect to your audiences in a very authentic way.  It’s about having a dialogue rather than a press clip.

Do it now.  The field is yours:  not many CEOs are blogging.

Blog to establish leadership.  Blog to get customer feedback.

Start the conversation.

First Lady of Corporate Governance aka ‘The CEO Killer ‘

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Nell Minow, editor and co-founder of the Corporate Library and most recently the subject of a New Yorker profile took to the podium for the opening of the International Corporate Governance Mid-Year Conference in Washington and in her inimitable style called them as she saw them.

Wall Street executives are no different than the welfare queens–they’re taking our money, opined Minow. “They are capitalists on the way up and socialists on the way down.”

Clawbacks are meant to be punitive, she agrees:  “It’s not your money–you didn’t earn it.”

In her view, too big to fail means the company is a utility and those who manage utilities need to be paid accordingly.  Her view is that “too big to fail is really too big to succeed.”

“Remember when we gave Chrysler $1.8 billion?  We thought that was a lot of money. AndLee Iaococca wouldn’t take more than $1 in salary until Chrysler was outperforming the competition. Let’s remember what we learned from that.”

Minow believes that outsized pay packages are a risk indicator especially in the way they describe their programs.   “Companies tell us that they have established principles and accompanying metrics.  We like it when we hear that there are nine principles for compensation.  We hear a number and the word, metrics.  But then the next sentence is that the company will pay out IF any ONE of those metrics are met.”   Clearly, this is not what she had in mind.

Boards are really asked to be disagreeable, says Minow. “It’s the duty of the board to imagine the worst and deal with it, like a mystery novel writer.”

In her brief remarks, Minow showed that she cares passionately about these ideas.  “It’s up to us to fix corporate governance. It’s not the government but the boards and the shareholders.  It’s our responsibility for capitalism to work.”

First Lady of Corporate Governance aka 'The CEO Killer '

Posted on by

Nell Minow, editor and co-founder of the Corporate Library and most recently the subject of a New Yorker profile took to the podium for the opening of the International Corporate Governance Mid-Year Conference in Washington and in her inimitable style called them as she saw them.

Wall Street executives are no different than the welfare queens–they’re taking our money, opined Minow. “They are capitalists on the way up and socialists on the way down.”

Clawbacks are meant to be punitive, she agrees:  “It’s not your money–you didn’t earn it.”

In her view, too big to fail means the company is a utility and those who manage utilities need to be paid accordingly.  Her view is that “too big to fail is really too big to succeed.”

“Remember when we gave Chrysler $1.8 billion?  We thought that was a lot of money. AndLee Iaococca wouldn’t take more than $1 in salary until Chrysler was outperforming the competition. Let’s remember what we learned from that.”

Minow believes that outsized pay packages are a risk indicator especially in the way they describe their programs.   “Companies tell us that they have established principles and accompanying metrics.  We like it when we hear that there are nine principles for compensation.  We hear a number and the word, metrics.  But then the next sentence is that the company will pay out IF any ONE of those metrics are met.”   Clearly, this is not what she had in mind.

Boards are really asked to be disagreeable, says Minow. “It’s the duty of the board to imagine the worst and deal with it, like a mystery novel writer.”

In her brief remarks, Minow showed that she cares passionately about these ideas.  “It’s up to us to fix corporate governance. It’s not the government but the boards and the shareholders.  It’s our responsibility for capitalism to work.”

Shareholders Have Governance Responsibilities

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In the aftermath of the financial crisis, there have been many proposals, as well as new rules and regulations to prevent its recurrence. Was it a failure of rules and regulations? What about our current rules, particularly those that apply to the way corporations are run?

Well-known and respected governance attorney Holly Gregory led a group of experienced lawyers reflecting diverse shareholder, corporate and academic perspectives in examining the roles and responsibilities of shareholders and boards under corporate law.

Their report, formally “Report of the Task Force of the ABA Section of Business Law Corporate Governance Committee on the Delineation of Governance Roles & Responsibilities” aka “Governance Task Force” reflects a year of work, sets a constructive tone for boards, shareholders and policy makers to work together in strengthening corporate governance. The report reminds us that shareholders are not the only beneficiaries of the modern corporate system, which has created wealth on a scale previously unseen.  The Governance Task Force report points out that corporations contribute to the public good by employing people, innovating, improving products and services, paying taxes, supporting various community and charitable programs that benefit society at large.

Anyone interested in corporate governance should read the report, not only for the detail of the legal constructs that have created our current system, but for granular detail in the footnotes complete with links that enable the reader to follow their research and come to their own conclusion.

If you are looking for a scapegoat, there isn’t one. Nor does a brush tar one group.   Instead, the report describes how shareholders, management and boards have specific responsibilities to bring accountability to the effective management and oversight.

The recommendations are logical. “Shareholders should act on an informed basis with respect to their governance-related rights…apply company-specific judgment when considering the use of voting rights…consider the long-term strategy of the corporation as communicated by the board in determining whether to initiate or support shareholder proposals.”

Boards should “embrace their role as the body elected by shareholders to manage and direct the corporation by affirmatively engaging with shareholders to seek their views, consider shareholder returns and facilitate transparency.” In addition they should “acknowledge at times the company’s long-term goals and objectives may not conform to the desires of some of the shareholders.” In addition, they should “disclose with greater clarity how incentive packages are designed to encourage long-term outlook…”

Policymakers should “in the context of reform initiatives” understand the rationale for the current roles and “carefully consider how to best encourage the responsible exercise of power by key participants in the governance of corporations so as to promote the long-term value creation….”

The report should be required reading for all shareholders.

Boards Should Show Leadership in Corporate Governance

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With unprecedented interest in corporate governance, the Chicago NACD Chapter panel of Holly Gregory, Fred Steingraber, Donna Zarcone and William Atwood  addressed Changes in Regulation and Implications for Directors.

Panelist  Fred Steingraber, former Chairman and CEO of AT Kearney and director of several US and several international boards, said the time for boards to react was over.  Rather, boards should take a leadership position by demonstrating that they provide value through their oversight through transparency and better shareholder communication.

“Boards are in the midst of a very serious struggle to regain respect and control over  their growing responsibilities and image,” said Steingraber.  “To accomplish this will require demonstrating the will and capacity to make changes ranging from board organization/leadership, policy, process, committees, board composition to shareholder communications. They must now demonstrate leadership at the board level with a results orientation in the conduct of their work.

“Today,  the government is taking control of boards, largely due to directors not building good relations with shareholders and all too frequently being too defensive and too reactive in their communication.”

Boards need to break their silence to retain and regain control rather than ceding authority to critics.

Not only do boards need to listen to  shareholders to understand their concerns, but they also need to go beyond the derivative information that they normally receive to drill down to the underlying issues of business performance, said Steingraber. “Boards need to put together a longer term program that addresses the issues of succession planning and risk management.  This will not happen overnight.” For that reason boards need to lead by creating a  framework for change and communicate those changes, which will take place over time.