Directors:How Did You Do at Your Annual Meeting?

Annual meetingAs the 2013 Annual General Meeting season comes to a close, shareholders continue to make their presence known. Shareholders are taking action: eliminating classified boards, voting against directors who are perceived to be ineffective stewards, such as the museum executive who chaired the risk committee of JP Morgan Chase during the “London whale” scandal, and casting “no” votes on executive pay programs.

Even boards that won say-on-pay approval need a strategy and plan to manage shareholder engagement.

A review of your annual meeting is a smart place to start.

So, directors, what did you learn at the annual meeting? What will you do over the course of the next year to ensure that you understand your shareholders’ concerns, both large and small?

Did any board members speak at the meeting? Was a director designated in advance to speak for the board? Did the chair of the compensation committee respond to shareholder’s questions on the executive pay program? Was he or she trained and prepared to offer the “why” of the story?

What were the surprises? Did you hear new issues or concerns from shareholders? Did management respond to board questions? How would you rate your performance in appropriate communication to those in attendance? These are items that should have board attention.

Does it make sense to adopt a strategy to make next year’s annual meeting a chance for shareholders to “kick the tires” and get to know who is representing them in the boardroom? How could you go beyond the proxy to help them see that your experience and expertise are adding to the company’s value? What steps can you take now to ensure that you are fostering a better understanding of the value you bring in your role as a director?

Strategic boards understand that shareholders are now part of the governance dialogue and need to feel that they’ve been heard. Boards with effective shareholder engagement programs are able to listen to shareholders. Directors who understand shareholder concerns are able to both provide responsible oversight and effectively convey that the board is responsibly fulfilling its role to create long-term value for shareholders.

Begin now. The clock is ticking for the 2014 proxy season.

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2013 Annual Meeting Season: Warren Buffett Led the Way

warren buffettThe Annual General Meeting season is almost over.  And unless Edward Snowden surfaces at one of the remaining corporate board meetings, this year’s most notable AGM was once again the Berkshire Hathaway meeting in Omaha.

Berkshire Hathaway’s CEO Warrent Buffett has long demonstrated leadership in engaging with his investors by turning the Annual General Meeting into a company love fest. The meeting of more than 35,000 shareholders – already known as “Woodstock for Investors” – added a new twist this year:  Buffett invited Doug Kass of hedge fund Seabreeze Partners Management to attend.  Unlike the other investors, Kass is a short-seller who makes his living betting against Berkshire Hathaway by shorting the stock.

The meeting in the Quest Center is the central focus of the Berkshire shareholder’s year, where Buffett and Vice Chairman Charlie Munger take questions from shareholders and reporters both in person and online for six hours – albeit with a break for lunch.  The weekend kicks off with a free cocktail party.  The lines may be long to get a drink or hors d’oeuvres, but it’s free.  Shareholders are also free to wander the convention hall where Berkshire-Hathaway company booths line the floor.  The jewelry and furniture businesses offer deep retail discounts to shareholders.

By inviting Kass to join the Annual Meeting, Buffett proved that he was willing to be challenged.  In fact, Buffett has quoted Darwin that it is “man’s natural inclination is to cling to his beliefs, particularly if they are reinforced by recent experience.”  Buffett has also pointed out that when Darwin came across a finding that contradicted his conclusion, he made it a practice to write it down within 30 minutes.

Buffett’s deliberate, lifelong effort to find people to tell him why he might be wrong is one of the reasons for his success.  Another is respecting the people who have invested in the company and honoring that investment with a willingness to listen to them and answer their questions.

(I am now posting selected blogs on Please check out the experts who are contributing to this new resource for boards and directors.)


Ground Continues to Shift for Directors


ron johnsonGround Continues to Shift for Directors ,”Penney backfires on Ackman,” crowed the Wall Street Journal. The April 10, 2013 headline suggested that the brash activist investor got his comeuppance both in reputation damage and financial losses when Ron Johnson, his hand-picked savior for the retail company was sacked and the board re-installed former CEO Myron “Mike” Ullman as CEO, the man Ackman helped to oust.

But there are some important nuances that directors should note.

Activist investors can no longer be dismissed as malcontents or profiteers. In fact they’ve recently garnered the label  “asset class.”

“Activist investors have won more respect as their research has improved and their campaigns succeeded,” said an investment officer for the California State Teachers Retirement System (CalSTRS.) In addition, once-passive institutional investors like CalSTRS are teaming up with activists in proxy battles.  Notable this proxy season is CalSTRS joining Relational Investors’ Ralph Whitworth to press Timken to divest its bearings and steel business to remove the “conglomerate discount that has persistently impaired Timken’s investment value for shareholders.”

Relational cites Timken’s history of poor corporate governance – notably the board’s refusal to declassify board seats following a majority-supported shareholder resolution in 2008, a “D” rating on pay-for-performance and recommended withholding votes on three of the four Director nominees by Glass Lewis characterized as insiders and family members. Both sides have filed additional documents in the runup to the May 7 annual meeting.

Ackman’s Pershing Square Capital Management LP  has incurred significant losses on its 18 percent ownership of J.C. Penney. However, the other directors are not off the hook.  Clearly, Ackman was convinced that Johnson could revitalize Penney’s fortunes, after all, at Apple he drove store sales to the highest per square foot in the industry.  Ackman convinced an independent board of directors of the logic of his strategy. Ackman was no doubt persuasive in gaining support from the J.C. Penney board of directors composed of five retired chairmen  and presidents (Radio Shack, Colgate-Palmolive, Texas Instruments, Southwest Airlines and Oxygen Media), a real estate executive, a university president and a marketing executive for Kraft Foods.  Did anyone have department store retail experience?

Johnson himself was convinced he could deliver. And yet Johnson left Penney’s with little to show for his 17-months of service because he agreed to be paid predominantly in stock and eschewed any rights to exit pay if he were fired. Additionally,  Johnson purchased warrants clearly indicating he was a pay-for-performance leader.  Compare that to Leo Apotheker who left the Hewlett-Packard Company with a $12 million package after his 11-month tenure left the company in shambles.

What investors may observe from the JC Penney saga is that activist investors may not be right 100 percent of the time.  However, they, like the shareholders, have skin in the game.  Johnson appeared to be a strategic choice for the CEO role when he was named.  What had the board done?  Did they just go along with Ackman? Unfortunately, it does not appear that the board did any succession planning during Johnson’s reign.  They gave the former CEO his old job back.

The ground is shifting, directors.  Investors and the media are scrutinizing your background and expertise.  Do you have the industry knowledge to understand and provide oversight of management’s strategy?  Do you devote sufficient time to understand the challenges that the enterprise faces?  Do you request additional information if management’s explanations are inadequate? Are you going along to get along? If you are sitting there pretending to understand, you are taking up a valuable spot.

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Directors Should Embrace “Inclusive Capitalism”

imagesCAJUEMF1James D. Robinson II, the former chairman and CEO of American Express urged directors to embrace the important role they play in restoring public trust in capitalism.

With more than half the U.S. population believing that our current economic system is unfair,  capitalism, the great engine of prosperity and personal growth, needs a reboot. Corporate directors have a great opportunity to help, Robinson told the NACD Directorship 100 Forum.

Acknowledging that the economic and employment landscape has been completely altered by globalization and technology, hope for a better future for all Americans must be restored.

“As directors, we have a role to play in building companies but also rebuilding the public’s trust in the best system of the world.”  He calls it inclusive capitalism.  Businesses need to help today’s workers acquire the knowledge and skill to get the jobs that are available,  adopt an “easy button” philosophy to make life less cumbersome for their suppliers.  Most important, “boards and management and shareholders must balance short-term and long-term priorities, which are essential to restoring trust.”

“The issue of good governance goes beyond the corporate world, and includes the White House, state and local officials.”  He urges directors to make their voices heard.

Practical Advice for the Perfect (Small-Cap) Corporate Board

imagesCA7R23J9Adam J. Epstein, founder of Third Creek Advisors, has lived the experience of helping small-cap companies succeed.

We all know how important small companies are to the economy: Small companies are the engine of growth, the creator of jobs.  In fact, the majority of public companies are small, not the behemoths that make the headlines. Many small companies fail because of the difficulty of finding financing.  The odds are stacked against small companies.

Epstein is a corporate director and capital markets expert with extensive finance, legal and operating experience as well as an expert in corporate governance, which he has applied to understanding and therefore helping smaller companies.  His book, “The Perfect Corporate Board:  A Handbook for Mastering the Unique Challenges of Small-Cap Companies.”

The book begins with Finance because he has seen the way small cap company directors can be their own worst enemy by not facing up to the hard realities that small companies confront in order to stay in business. He prescribes a three-step process to start every financing along with the common mistakes to avoid.  Small-cap companies have to be smart about hiring the right help with the right expertise.  Directors can be enormously helpful in this process by asking the right questions.

Oh, and by the way, these directors are not getting rich in the process.  As Epstein notes, the compensation for an entire small-cap board is often less than fees that an individual director at a Fortune 500 board might be paid..  In the end, he says, being a small-cap director “is an exercise in entrepreneurial governance—being nimble, doing more with less and shepherding an asset against long odds for risk-embracing shareholders.”

If you are a director of a small-cap company, you need this book. For those who are not, this is a guided tour of just how tough it is to create success.  And just how hard so many small companies and their managers and directors are working to beat the odds.


Beating the Proxy Rush–A Day Examining Executive Compensation

As Say on Pay enters its third year, shareholders’  expectations are increasing along with the stakes for the professionals charged with helping their organizations achieve successful outcomes.

While others were enjoying the holidays, participants at the SEC Institute Executive Compensation Disclosure Forum in San Francisco and those attending by webinar spent a day drilling down to the details of executive compensation, led by Mark Borges, Principal of Compensia and chair of the Institute’s Forum. The former SEC special counsel in the Office of Rulemaking has encyclopedic knowledge of the issues and the challenges of executive compensation in a post-Dodd Frank world.

Subtitled, “How Say on Pay Has Changed Everything,” Borges conducted the all-day seminar with the skill of a concertmaster in bringing in the perspective of faculty members including David Lynn, Partner at Morrison & Foerster former Chief Counsel for the SEC’s Division of Corporation Finance, his Compensia colleague Rebecca Busch, Cooley attorney Amy Cole and shareholder engagement strategist, Karen Kane.  Eli Lilly and Company Assistant General  Counsel, Bronwen Mantlo and Susan Hutchens, Eli Lilly Director of Executive Compensation provided real world commentary on best practices. Many participants reported that they had already started proxy preparations for 2013 with the seminar a stage-setting opportunity.

Key takeaways:

Borges:  “My thesis is that the imposition of mandatory say on pay has fundamentally changed the way companies approach disclosure.  It’s no longer a compliance exercise but a communication  operation. We have seen disclosure evolve over the last few years to a much more sophisticated presentation of a company’s pay for performance message because you know that’s what’s being evaluated by your investors and the proxy advisory firms.  It also points to the fact that shareholder engagement more important than ever.”

Lynn:  “It’s not just the amount of money that the board approves in executive compensation, but the process the board went through in arriving at their decisions.”

Busch: “About 15 percent of companies receive negative recommendations from proxy advisory firms on their say on pay vote.  But remember, only 2 percent actually fail their say-on-pay votes. Although receiving a negative recommendation puts you at a higher risk of failing, it is not a guarantee and many companies are able to convince their shareholders to support them in spite of proxy advisory firm recommendations.”

Kane:  “Compensation is a window on board competency. Say on pay legitimizes shareholder scrutiny of the board of directors and its competency in providing oversight.”

Mantlo:  “We convene a cross-functional team to manage the proxy process to bring the right communication focus to a plain English and readable proxy.

Hutchens:  “We work with our corporate communication department to ensure that our messaging around compensation is clear and consistent.”

Cole: “Dealing with proxy advisory firms has become a critical aspect of preparing for the annual meeting in the say on pay environment.  In setting up a call and engaging with the proxy firm analyst when there is a discrepancy it’s important to convey that you take their opinion seriously.”

The SEC Institute is dedicated to helping public companies in the U.S. and abroad do the best possible job of meeting the filing requirements of the U.S. Securities and Exchange Commission.  Check out their conference and workshop offerings.


How the ‘Pivot’ and ‘Naysayers’ Help You Refine Your Ideas

Alexandra Wilkis Wilson brought the extraordinary story of how she and best friend Alexis Maybank  founded Gilt Groupe and built a billion dollar business based on their passion for fashion to a breakfast meeting of the Chicago Chapter of  85 Broads.

Her New York Times best-selling book, “By Invitation Only:  How We Built Gilt and Changed the Way Millions Shop,” which she co-authored with best friend and co-founder of Gilt Groupe, Alexis Maybank is a how-to for would-be entrepreneurs.

How the ‘Pivot’ and ‘Naysayers’ Help You Refine Your Ideas

She offered the sound advice of someone who seems to have found balance in what was a dizzying tale of bringing exclusivity and excitement of sample sales to a young, internet-savvy luxury fashion clientele, growing  Gilt to a 5 million member online shopping destination.

Janet Hanson, the founder and CEO of 85 Broads, praised the young women’s ability to “cultivate relationships, take calculated risks and execute their game-changing, visionary ideas.  The key takeaway is that one needs to have an entrepreneurial spirit and indomitable will to succeed no matter what path you’re on.”

In the morning discussion she provided insight to the advice in the book.  She believes the best leaders are confident with humility.  “You can have a great idea, but be ready to pivot depending on what the market is telling you.”

Naysayers are important, Wilson says. Listen to negative feedback, but put it into context.  “We cross-checked the negative feedback with the reasons we thought the idea would be a smashing success.  And usually the feedback helped us to refine our pitch. In getting the best decision, plan or proposition, the friction and doubt cast by contrarians are usually critical to vetting all potential angles and counterpoints before moving forward.”  Negative reactions to their idea prepared them for meetings with future brand partners and investors.

Chairmen’s Pointers for Communicating with CEO

“The CEO-chair relationship in my view only develops over time, with many opportunities for one-on-one , in-person meetings,” says Harry Pearce, the independent chairman of MDU Resources and director of Marriott.  Peter Browning also noted the importance of the executive’s style in director-CEO communication.

The critical element is that both parties need to be committed to the dialogue.

When AgendaWeek asked me for my advice, I noted the bias for open, clear and consistent communication with the CEO.  Many insights of the board are communicated to the CEO through the Chair-CEO relationship.  Strong board chairs are astute listeners who are able to bring to the CEO any questions or concerns.

“Ultimately, steady and open communication is crucial to establishing a relationship of trust and confidence between the board and CEO,” writes Browning, lead director at Nucor and Acuity Brands and director of Lowe’s Companies and Enpro Industries.  “Closer collaboration allows directors to spend their time more efficiently and be better shareholder advocates.”

Read full article here. .

How Leaders Like Fred Steingraber Are Creating “Leadocracy”

Geoff Smart, the best-selling author of “Who,” believes that our highly dysfunctional government is “not a problem without a solution.”

After being asked to assist John Hickenlooper, the newly elected governor of Colorado in recruiting talented leaders for his cabinet, Smart concluded that there were too few great leaders in government as well as “forces keeping our greatest leaders out of government.”

While it would be natural for Smart, the founder of the leadership firm ghSMART, to conclude that getting more great leaders in government was the solution, he was pleased to find that such a movement was already underway.  It took Smart to name it, “Leadocracy,” which he says means “government by society’s greatest leaders” and he found a shining example in Fred Steingraber.

The three As of Leadership are Analyzing, Allocating and Aligning, three things that Steingraber did when he took over as President of the Village of Kenilworth.

Like many communities, Kenilworth was in trouble—three consecutive years of deficits. “Great leaders start by analyzing the needs and priorities of their constituent group,” according to Smart. Before becoming president, Steingraber led a strategy study of the town. Not only did he convince the village to do a needs analysis and quality survey but to gather benchmark data from other communities as well, helping them to evaluate their own costs, services provided, productivity and the like.

Smart calls Steingraber “possibly the most overqualified government leader I have ever met. He had served as CEO and Chairman of A.T. Kearney, the international management consulting firm.  Under Fred’s leadership, the company achieved massive success.  He grew the firm from $30 million when he took over to $1.5 billion when he left.”

Steingraber has had just as dramatic impact on Kenilworth, trading deficits for surpluses, engaging in strategic partnerships with other communities and improving communication between village management and the residents.

Steingraber’s private sector success created jobs, notes Smart. “The number of employees under Fred’s leadership grew from two hundred to 6,500. Amazing! Bravo! Imagine all the tax revenue that his firm and the taxpaying employees generated for their countries, states and municipalities.  In addition, he has served on twelve corporate boards, four advisory boards, and over twenty not-for-profit boards.”

Steingraber also has been an advocate for boards taking the initiative in restoring confidence to our capitalistic system. Fred and I co-authored the Corporate Finance Review article, “What Boards Need to Do to Preserve Their Relevance and Provide Value in the World of the New Normal.”



Boards Should Tell Us Which Derivatives Are Being Used to Manage Risk. . .Or,Tell Us Why Not

Richard L. Sandor, recognized as the “father of the financial futures markets” for his work creating futures contracts on currencies, Treasury bonds and mortgage securities, has a simple proposition for boards of directors.  When a futures market exists for products your company makes, or supplies your company buys, or the currency or interest rate risk your company faces – does your management team use those futures markets to quantify or control risk?

If not, a board is simply speculating – betting that the price of fuel, or metal, or money, is going to move in a certain direction. A decision not to use available risk-management tools to hedge commercial or financial risks is a decision to speculate, says Sandor. Speaking to a hometown crowd gathered June 20 at the Chicago Council on Global Affairs to mark the publication of his book, “Good Derivatives:  A Story of Financial and Environmental Innovation,” cited the role of fuel hedging by Southwest Airline as a major factor in outdoing those airlines that left themselves – and their shareholders – exposed to the volatility of world oil markets despite the existence of highly-liquid, well-regulated futures markets where they could have transferred the risk of rising fuel costs to other parties and thereby prevented or reduced financial losses.

One result of the financial crisis is that the word ‘derivatives’ is now applied indiscriminately, blanketing contracts traded on regulated futures exchanges with the same opprobrium heaped on the too-clever financial instruments that Wall Street engineered to trade among themselves and their biggest clients. The former are risk mitigation tools linked to underlying commercial activity in metal mining, agriculture, financial services and a host of other business activities. The future price of any of these useful contracts is determined in a transparent process that balances supply and demand factors. What we saw in the financial meltdown were financial products that were opaque and which offered no counter-party guarantees because they were traded “over the counter”, between sophisticated firms that supposedly knew what they were doing, instead of being traded on regulated exchanges that utilized an independent central clearinghouse to monitor the financial status of market participants and ensure timely payment by both sellers and buyers of futures contracts. Check this out for more up-to-date information.

What about the management of companies in using hedging devices such as derivatives? Sandor suggests that the board develop an understanding of available derivatives markets and hold management accountable if they don’t find a way to utilize derivatives to manage the risks inherent in their respective businesses. At the same time, boards need to inform shareholders how the governance process intended to serve as the shareholders’ fiduciary representatives encompasses the use of available hedging and risk-transfer tools, or provides the rationale for foregoing such protection and accepting exposure to volatility in the cost of financing and other inputs.

If Americans don’t “get derivatives,” the Chinese do. Sandor’s firm, Environmental Financial Products, specializes in inventing, designing and developing new financial markets.  Sandor serves as a distinguished professor of environment finance at the Guanghua School of Management at Peking University.