The year in governance: and what a year it was--full of crises and challenges. Our biggest ever month-by-month recap of the highlights and low points, the who's new and what's new, the successes and setbacks that shaped board oversight in 2009.
Setting a tone for the coming year, President Barack Obama in his inaugural address says that the nation faces "gathering clouds and raging storms," and calls for a "new era of responsibility"--a theme that, as the editorial page of the Wall Street Journal (WSJ) opines, "is a useful message for Americans of all walks of life to hear--from Wall Street CEOs to unmarried fathers to AARP lobbyists in Washington."
Those "gathering clouds": The Labor Department announces the unemployment rate has climbed to 7.2% and that the total number of jobs lost in 2008 was 2.5 million, the most since 1945. In the first week of the new year, Alcoa announces it will eliminate 15,000 jobs, among other cost-cutting measures, to cope with the Great Recession, as it is now becoming known. Other layoff announcements begin to gush forth, such as Cigna Corp. saying it will cut 4% of its workforce and Walgreen saying it will whack 9% of its corporate and field management positions. In one day (Jan. 26), major multinational companies announce what totals up to 75,000 layoffs.
Gathering clouds at Citigroup: Where to start? With CEO Vikram Pandit under fire, and the bank expected to announce billions in losses for its final quarter of 2008--during which it received a taxpayer capital infusion of $45 billion--the board in early January issues a statement of support for its chief executive. It is announced that lead director Richard Parsons, former CEO of Time Warner, will replace Sir Win Bischoff as Citigroup chairman, a long-rumored move. Robert Rubin, his reputation battered by the economic crisis and balance sheet troubles engulfing the bank (its fourth quarter losses do indeed tote up to a whopping $8 billion), announces his retirement from the board and as a senior counselor to the company. With the U.S. government now the banking firm's biggest shareholder (with an 8% stake), various skinnying-down schemes, floated both from internal management and external speculation, are daily grist for the financial press.
Mary L. Schapiro is appointed by President Obama and unanimously confirmed by the Senate as chairman of the Securities and Exchange Commission. She is the first woman to serve as the agency's permanent chairman. Among her stated priorities are "working to deepen the SEC's commitment to transparency, accountability, and disclosure while always keeping the needs and concerns of investors front and center."
Brouhaha at BofA: Kenneth Lewis, chairman and CEO of Bank of America (which got $25 billion in taxpayer aid in 2008) sets a statesmanlike tone early in the year by recommending to the board that he and his top officers get no bonus for 2008. Then all hooey breaks loose: Huge new losses on the Merrill Lynch acquisition are revealed; the bank tells the government it needs billions more in aid to close the acquisition; shareholders scream about not being told of the massive new fourth-quarter losses before approving the Merrill deal in December; Lewis's handling of the deal and his interactions with Treasury Secretary Hank Paulson and Fed Chairman Ben Bernanke are roundly second-guessed; and then ... Merrill CEO John Thain gets booted out of a top job at the combined company, after a reported 15-minute meeting with Lewis, just three weeks after completing the Merrill deal with BofA. (How about that $1.2 million Thain spent decorating his office while toxic assets were blowing up around him?) Can anyone say, "What a mess?" Yes, the business news website breakingviews.com says it this way: "Who needs the U.S. government to create a new 'bad bank' when it's got Bank of America? ... It has become clear that Lewis failed to properly protect the interests of shareholders [and presided over] one of the greatest destructions of shareholder value in the history of finance. Over the past year, the 84% decline in BofA's share price has cost shareholders some $250 billion."
CEO turnover: A rash of chief executives join the ranks of the general unemployed as the year gets underway, including the CEOs of Tyson Foods, Borders Group, Seagate Technology, and several other companies. Observers (correctly, as it will turn out) put GM's Rick Wagoner, Sun Microsystems's Jonathan Schwartz, and BofA's Kenneth Lewis on the "watch list." The ousters are viewed as "harbingers of significantly more turmoil in executive suites this year" (WSJ).
Booz and Company comes out with a study that says 40% of senior managers doubt that their leadership has a credible plan to address the economic crisis, and, even more striking, one-third of all CEO respondents do not have confidence in their own crisis plans.
At the first Congressional hearing on the Bernard Madoff scandal, a massive Ponzi scheme that was revealed in December 2008, the House Financial Services Committee members attribute serious systemic problems at the SEC for the Commission's failure to detect the $50 billion fraud. Meanwhile, hedge fund investor Andrew Sole calls for the ouster of the entire board of Yeshiva University (on which Madoff had served) following the devastation the scheme wracked to the school's endowment fund.
Backing the say on pay bandwagon as it starts rolling for the year, incoming SEC Chairman Mary L. Schapiro expresses support for giving shareholders a non-binding vote on executive pay plans. "Executive compensation has been a concern of mine for some time now," she says during Senate confirmation testimony. "I believe that it's an appropriate measure to give shareholders an advisory vote on these matters." Also on the bandwagon is New York City Comptroller William Thompson: Calling for reform in executive pay, his office submits resolutions at a number of companies, including Home Depot (for the third time), Rite Aid, Ryland Group, and Charming Shoppes. "Stock options too often facilitate a disconnect between reward and long-term performance at many companies," he tells Reuters.
SEC spanked by Chuck Schumer: In further Madoff fallout, the New York Post (NYP) reports that the senator from New York railing that "SEC investigators and surveillance people should be yanked from their cozy and insular world of Washington, D.C., and packed off to New York to keep them on their toes. It makes no sense to have cops who are patrolling their beat from hundreds of miles away."
Risk consulting company Kroll Inc. expects the financial turbulence and threat of global recession to result in an increase in white-collar crime. "We saw a marked increase in the number of corporate fraud cases in the market downturns of 1987, 1991, and 2001," the firm warns.
Not so fast: The American Federation of State, County and Municipal Employees Pension Plan, worried about bonuses being paid out based on short-term results that may prove unsustainable, begins submitting stockholder proposals that include a provision for bonuses to be held in escrow for three years rather than paid out immediately, with one-third of the total being paid annually if performance objectives are reached; AFSCME also submits proposals that require executives to retain a large portion of their awarded stock for at least two years after they stop working for the company.
New leadership at CalPERS: Anne Stausboll takes over as CEO of the California Public Employees' Retirement System, the nation's largest public pension fund. She is the first female CEO to lead the pension fund in its 77-year history. In addition, she serves as the co-chair of the board of Ceres, the nation's largest coalition of investors, environmental groups, and nonprofit organizations working with companies to address sustainability challenges, such as global climate change. Joseph A. Dear is named chief investment officer. He also chairs the Council of Institutional Investors. And Anne Simpson, who has been serving as the first executive director of the International Corporate Governance Network, based in London, is named senior portfolio manager for corporate governance.
Bring on the vote: Joining the bandwagon on the corporate side, Intel generates headlines by agreeing to a say on pay advisory vote at its annual meeting in May. "We are pleased that a leader in corporate governance like Intel has stepped forward and endorsed" such a vote, says Timothy Smith, senior vice president of Walden Asset Management. "Obtaining an advisory vote establishes a solid foundation for constructive dialogue with shareholders."
Richard F. Chambers becomes president of the Institute of Internal Auditors, bringing to his new post 33 years of internal audit, accounting, and financial management leadership. The IIA is the guidance-setting body of the audit profession and its chief advocate.
A federal appeals court upholds the conviction of former Enron CEO Jeffrey Skilling. The ruling on the appeal "is a victory for all those harmed by Jeff Skilling and his co-conspirators," states an assistant attorney general with the U.S. Justice Department.
The infamous "hormonal imbalance": Apple's board continues to be dogged by credibility issues related to revelations of CEO Steve Jobs' health situation. This month's announcement of what is causing his dramatic weight loss ramps up the criticism: Within two weeks of blaming it on a "hormonal imbalance," the company then says he will be taking a leave of absence until June because his condition is more "complex" than originally thought. Gary Lutin, who runs the Shareholder Forum corporate governance research and advocacy initiative, says to Barron's, "Either Jobs didn't know his condition, or he did know but didn't tell his company's board. Common sense also suggests only two possibilities for the board members: Either they didn't ask the questions they should have, or they did ask but didn't report what they learned to public investors."
We started out a tumultuous month with President Obama and we finish up the month with the new President: On Jan. 29 he signs his first bill into law--legislation making it easier for employees to sue for wage discrimination, which he calls a step toward "fundamental fairness" for U.S. workers. Question: Does this apply to underpaid boards?
Black eye for Indian governance: A major fraud scandal erupts at India's Satyam Computer Services Ltd. when the company's founder and chairman admits to cooking the books for several years; Indian authorities fire the board and move to install a new 10-member board.
Wave of litigation: Cornerstone Research and the Stanford University Law School Securities Class Action Clearinghouse report that for 2008 the level of class action litigation was at its highest level since 2004--"dominated by a wave of litigation against firms in the financial services sector." The maximum dollar losses attributable to 2008 claims jumped to $856 billion, a 27% increase over comparable 2007 data.
John Rogers takes over as president and CEO of CFA Institute, the global organization of investment professionals. He had been president and CEO of Invesco Institutional.
Battle over bonuses: What being tone deaf is all about? Wall Street bankers are blasted by the administration and Congress for continuing to award themselves multimillion-dollar bonuses after accepting $700 billion in taxpayer bailout funding. "CEOs who run their companies into the ditch should beg for forgiveness, not rewards," says Sen. Chuck Grassley, the top Republican on the Senate Finance Committee. "If you don't pay your best people, you will destroy your franchise," says John Thain (before his axing) in a CNBC interview, to which Maureen Dowd retorts in her New York Times (NYT) column: "Hello? They destroyed the franchise. Let's call their bluff."
Let's start the month with the President again: Mr. Obama proposes strict new limits on executive pay (see box). As described by the WSJ, the regulations represent "the most aggressive assault on executive pay by federal officials." Provisions include salary caps of $500,000 for executives of companies that accept "extraordinary assistance" from the government, restrictions on severance packages for dismissed executives, and greater disclosures for spending on perks. The NYT's take: "President Obama is trying to hold the financial industry accountable to taxpayers while aiming to change an entrenched corporate culture that endorses outsize bonuses and perks that often bear little relationship to corporate performance." Some critics worry that the new measures are a dangerous intrusion into a board's authority; others, like Harvard Law School's exec comp guru Lucian Bebchuk, argue that the caps on pay "are too modest" and should be "significantly tightened."
New York Attorney General Andrew Cuomo also becomes an attack dog on the executive pay issue: As he probes compensation practices at financial firms, he reports that Merrill Lynch "secretly and prematurely" moved up the date for giving bonuses and rewarded 700 of its executives with bonuses of $1 million or more apiece.
Bye bye, Las Vegas: Sign of a new austerity? Or pure embarrassment? Wells Fargo & Co. cancels an employee conference in Sin City after lawmakers learn of the event. The bank says it reversed course "in light of the current environment."
Under pressure to bring more enforcement actions in the wake of the Madoff scandal, the SEC names former federal prosecutor Robert Khuzami as its enforcement division director. "The staff and I will relentlessly pursue and bring to justice those whose misconduct infects our markets, corrodes investor confidence and has caused so much financial suffering," he says.
Bankers on the grill: Called to Washington, eight of the nation's top financial institution CEOs, including Lloyd Blankfein, Jamie Dimon, and John Mack, give Congress a chance to vent on how bollixed up the business of banking has gotten. Leave it up to the New York Post to describe the daylong session: "Like school children in trouble for an elaborate practical joke, eight of the most powerful men in finance hung their heads in shame before an irate House committee, and promised to behave better when it comes to spending taxpayer money."
In a rare public rebuke of his own financial services industry, Fidelity Investments Chairman Edward C. Johnson III calls 2008 a "period laced with toxic investment waste and the casual use of other people's money by a number of institutions," reports the WSJ about Mr. Johnson's letter to shareholders.
Are boards up to the job? The Washington Post (WP) reports that SEC Chairman Mary Schapiro plans to look into whether the boards of banks and other financial firms conducted effective oversight leading up to the economic crisis--"part of efforts to intensify scrutiny of the top levels of management and give new powers to shareholders to shape boards." The WP also discloses, based on background discussions with SEC officials, that the SEC chairman "is also considering asking boards to disclose more about directors' backgrounds and skills, specifically how much they know about managing risk." (Action to advance these director disclosures will be taken in July.)
Meanwhile, at BofA: Amidst swirling talk about the bank being a candidate for nationalization, and with its stock price skidding below $5 a share (a low not seen since 1984), Chairman and CEO Ken Lewis undergoes "the longest board meeting in anyone's memory," as he tells employees in a memo, adding "The board unanimously endorsed our business model, strategic direction and the team." He purchases an additional 200,000 shares of company stock that the WSJ states is "his latest effort to convince employees, investors and the board that he and his management team can lead [the company] out of its current crisis."
Questionable strategy for preventing media leaks: New Yahoo CEO Carol Bartz institutes a bounty system--a $1,000 cash reward--for employees who turn in fellow employees who leak information to the press.
No bonus for him: General Electric Chairman and CEO Jeffrey Immelt declines any bonus for 2008 and agrees to forgo other performance awards in the face of declining economic conditions and the company's deteriorating stock price. The stock closes below $11 in mid-February. GE also slashes its dividend to 10 cents a share per quarter from 31 cents, the first such cut since the Great Depression. (See page 48 for an excerpt from Mr. Immelt's speech on leadership at the U.S. Military Academy at West Point.)
Happy birthday, Mr. CEO: Apple shareholders, only mildly restive about the company's disclosures of Steve Jobs' health, vote down a say on pay proposal (which had passed in 2008 with a majority vote--although questions later arise that Apple may have gamed the results of this year's turndown vote). With Jobs not at the annual meeting, other directors get to speak, something Jobs has not permitted at past shareholder meetings. "It's a new era," says one union pension fund representative. And with the meeting held a day after Mr. Jobs' birthday, the crowd sings "Happy Birthday" to the CEO.
The Rockefeller family continues for a second year to press ExxonMobil Corp. on renewable energy initiatives. The descendants of Standard Oil founder John D. Rockefeller mounted a surprise campaign in 2008 for changes in ExxonMobil's environmental policies and corporate governance.
Hedgies hold back: FactSet Sharkwatch reports that at mid-month hedge fund activism is down sharply--just 12 funds are rattling boards' cages, a drop-off of nearly 75% from the same period in 2008. "There's a lot of desire, but maybe not the capability," says Christopher Young, head of M&A research and proxy contests in the governance unit at RiskMetrics, as hedge funds cope with poor performance and investor withdrawals (NYP).
The Parsons project: Richard Parsons officially takes over as Citigroup chairman, with one of the first orders of business being to overhaul the board. He must find six new independent board members who will be acceptable to government overseers. The bank needs a third injection of taxpayer funds, which brings government ownership up to 36%. Even the editorial page of the WSJ is revolted: "No company on Earth has failed more often then Citigroup without being put out of its misery."
The month winds down with notification by the SEC that the 400 companies that received a taxpayer rescue will have to let shareholders vote on executive pay this year--the mandate applies to any company that files a proxy statement after Feb. 26. A scramble to comply ensues.
Setting a discouraging tone for the month: The stock market goes off the cliff, with the DJIA plunging to what will be its low for the year--on Mar. 9 closing at 6547, its lowest point since April 1997. One investor's lament about this month's market action: "It's like an unending nightmare."
BofA in the crosshairs: Finger Interests, a large shareholder, launches a campaign to vote against the reelection of CEO Kenneth Lewis and two other directors, O. Temple Sloan (lead director and chair of the compensation committee) and Jackie Ward (chair of the asset quality committee), to the bank's board of directors (see page 29). Other shareholder groups, infuriated by the handling of the Merrill Lynch deal, launch their own legal and proxy assaults on the bank. A judge rules that the bank must give up the names of the individuals who got bonuses on the eve of the merger with Merrill. In an op-ed for the WSJ, Ken Lewis writes that "Amid the turmoil, it has become clear that banks need to make changes in the way they run their businesses, from risk management to expense control to compensation practices."
The government takes the wheel at General Motors: The Obama administration forces out GM Chairman and CEO Rick Wagoner; COO Frederick "Fritz" Henderson takes over as interim CEO and Kent Kresa, former CEO of Northrop Grumman Corp. and a GM director since 2003, becomes interim chairman. Federal officials also indicate an overhaul of the automaker's board is forthcoming.
Directors cut their pay: An Equilar survey done for the WSJ shows 43 companies trimming the fees paid to their board members so far this year--up from just four at this same time in 2008. A big whack came at General Motors: Tied in with a federal bailout, GM directors are receiving a $1 retainer and foregoing other board service stipends.
Barbara Hackman Franklin assumes the chairmanship of the National Association of Corporate Directors. The former Secretary of Commerce under President George H.W. Bush succeeds Robert Hallagan. She was NACD's Director of the Year in 2000 and co-chaired the NACD Blue Ribbon Commission on Executive Compensation in 2003.
Bizarro world at AIG: Amid mounting public and politician fury at the collapse of AIG and the billions being pumped into keeping companies like AIG afloat, the insurance company says it is contracted to pay $165 million in bonuses--monies that will go to employees of the unit whose trading helped crater the firm. Says an angry President Obama: "It's hard to understand how derivative traders at AIG warranted any bonuses, much less $165 million in extra pay." A usually unflappable Ben Bernanke says during a grilling from lawmakers: "If there's a single episode in this entire 18 months that has made me more angry, I can't think of one [other than] AIG." One House member says AIG stands for "arrogance, incompetence, and greed." AIG Chairman Ed Liddy admits in Congressional testimony that the AIG name has been so "disgraced" that it would probably need to be phased out. And one can always count on shareholder activist Nell Minow to pull no punches: Calling AIG "a serial offender in corporate governance" and that the AIG board's compensation committee should be the ones in the klieg lights over these bonuses, she writes in a CNN.com commentary: "Why haven't we learned that it is the boards who are responsible for the massive failures of strategy and risk management at these companies? Regulators, journalists, securities analysts and investors routinely ignore the most obvious indicators of investment risk that are presented by bad boards of directors."
More on the board overhaul front: Citigroup announces four new directors for its board: Jerry Grundhofer, retired chairman and CEO of U.S. Bancorp; Michael O'Neill, retired chairman and CEO of the Bank of Hawaii; William Thompson, retired CEO of PIMCO, the fixed income investment management firm; and Anthony Santomero, former president of the Federal Reserve Bank of Philadelphia. "This is a solid slate of candidates with extensive banking and financial services experience, a deep understanding of international credit and equity markets, and first-hand knowledge of the governing regulatory system," says Citigroup Chairman Richard Parsons. "These outstanding individuals will be great stewards for Citi as it navigates the ongoing challenges in the present environment and works to restore profitability."
Women Corporate Directors (WCD), an organization of influential C-level women executives who serve on major corporate boards, expands--announcing it is opening new chapters in Brazil, China, and Hong Kong, supported by a strategic partnership with Heidrick & Struggles International. "As a company, we are working to increase the number of women on corporate boards in markets throughout the world, and we see WCD as a powerful ally in this endeavor," says Kevin Kelly, CEO of Heidrick & Struggles. (At a meeting with the managing director of the World Bank at the 2008 World Economic Forum in Davos, Kelly pledged that for each slate of candidates the firm presents for board searches, at least one woman would be included on the shortlist.)
Muriel Siebert, the first woman to own a seat on the New York Stock Exchange, is inducted into the U.S. Business Hall of Fame (founded by Junior Achievement in 1975).
Something we haven't seen much of this year: Hedge fund investor William Ackman, heavily invested in Target Corp., launches a proxy battle against the retailer, seeking to replace five directors.
In Lyondell v. Ryan, the Delaware Supreme Court reaffirms that disinterested and independent directors have wide latitude in exercising their business judgment when negotiating the sale of a company. Lyondell Chemical Co. shareholders were upset when the board seemed to agree too hastily to a merger with a Dutch chemical company for an undervalued sum. "Simply put, Lyondell allows directors to be directors," concludes M&A specialist Gary Horowitz, a partner with Simpson Thacher & Bartlett.
Watson Wyatt reports that the number of companies that have added clawback policies to their executive pay programs has jumped sharply during the first three months of 2009.
The Millstein Center for Corporate Governance and Performance at the Yale School of Management proposes the first code of conduct for proxy advisors--as a means of increasing transparency and policing conflicts of interest within the industry. The Center also calls on institutional investors to be more transparent about the way they act as owners of public corporations by disclosing how they vote, what ownership policies they follow, and what resources they put into engagement efforts. Another report issued by the Center's Chairman's Forum, a group of independent board chairmen headed by retired GM Vice Chairman Harry Pearce, calls for companies to bolster board oversight by splitting the chairman and chief executive positions; the group specifically proposes that boards adopt a policy of naming a separate chairman after an incumbent chairman-CEO leaves office, or explain to shareholders why they did not do so.
A main conclusion from the release this month of the PricewaterhouseCoopers State of the Internal Audit Profession Study for 2009: Internal audit "must reassert its value amid the recession and increasing enterprise risks." Internal audit leaders "must raise the bar and find creative and cost-effective solutions to transform the internal audit function and bring increased value to the organization and its stakeholders."
The state of women in leadership and board positions? Could be better. The InterOrganization Network (ION), an alliance of 12 women's business organizations located across the U.S. that issues annual authoritative reports on women's progress in the C-suite and boardrooms, issues what it calls a "not encouraging" set of stats in its latest tracking survey: "Only a few ION members report increases in the numbers and percentages of women in corporate leadership positions over the past year, and those increases are at best modest. Most ION members report either setbacks or no change at all." The percentages of board seats held by women in the Fortune 500 companies in the 12 ION regions range from 11% to 18%.
Here comes the legislation: The House approves a bill that would bar companies that receive a capital infusion from the federal government from paying any bonuses or other compensation that is "unreasonable or excessive" as defined by the Treasury until they repay the bailout monies. Rep. Barney Frank, chairman of the House Financial Services Committee, is the main author of the bill.
Ventfest: Enduring a six-hour annual meeting, Citigroup Chairman Richard Parsons mollifies hundreds of vexed shareholders enough so that the board slate is elected and the management and directors live to fight another day. CEO Vikram Pandit vows to repay "every penny" of the taxpayer rescue funding.
No split: In contrast to what will happen later in the month at Bank of America, shareholders of Morgan Stanley and Wells Fargo reject proposals to separate the chairman and CEO positions.
The Delaware legislature approves changes in the state corporation law that will permit shareholder access to proxy materials and reimbursement of proxy solicitation expenses. The amendments are to become effective in August.
"A new day": "Executives Took, but the Directors Gave" headlines a tough NYT article that attempts to redirect public anger about CEO pay from the executives themselves to the board. "Little of the ire against outsize CEO paychecks has been aimed at the people who signed off on them: corporate directors." Comments a compensation committee member in the article: "We're all revisiting our practices and saying, 'It's a new day, there are new practices, we are vulnerable, and is there anything we need to change?'"
A handy checklist: The Conference Board Governance Center issues a report that provides board members with a checklist of issues they should consider addressing in their relations with shareholders--in particular, how to avoid a costly and disruptive battle with an activist investor.
In its annual analysis of CEO pay, the Associated Press reports that CEOs are taking a hit from the recession--the median pay package for CEOs of companies in the S&P 500 fell 7% in 2008.
But ... "Boards are already trying to cushion the blow," the AP notes, changing "the rules to make it easier to qualify for bonuses [and] doling out more stock options--adjustments that could mean fatter paychecks in the future." In its annual study of CEO pay, Hay Group tracks a similar decline--an overall cash compensation decrease of 8.5% in its universe of 200 companies with more than $5 billion in revenue. (See page 34 for more insights from the Hay Group survey.)
In a ruling reverberating among law firms, a federal judge in Los Angeles rules that corporate lawyers need to issue more explicit warnings to employees during company investigations that the lawyer represents the company or its board of directors and not the individual employee. The ruling comes out of an investigation into stock option grants at Broadcom Corp. "Some attorneys," the WSJ reports, "say employees may balk at speaking to company lawyers, adding to the difficulty of internal investigations."
Global Governance: The CFA Institute Centre for Financial Market Integrity issues a "Shareowner Rights Manual" designed to help investment professionals and investors better understand their rights as shareowners in the major developed and developing markets around the world.
No breakup: Even though the Great Recession has pounded GE's share price, shareholders vote down (by an almost 95% margin) a proposal to break up the company. Support for a say on pay proposal increases from 38% in 2008 to 43%.
James S. Turley, chairman and CEO of Ernst & Young, becomes chair of Catalyst, the nonprofit organization founded in 1962 that offers research, information and advice about women at work. "As the world rebuilds from the economic crisis," he says, "there is now an even more compelling reason for organizations to place renewed value on having diverse perspectives in leadership."
Yes, there will be directors needed for newly public companies after all: The IPO market gets a heartbeat again with a strong showing by language software company Rosetta Stone Inc.'s initial public offering--up nearly 40% in its first day of trading.
Carl Rosen is named executive director of the International Corporate Governance Network. He is serving as head of corporate governance and communications at the Second Swedish National Pension Fund, one of the larger pension funds in Europe with a reputation for shareholder activism. The ICGN is a leading international advocate for corporate governance, with members in over 40 countries.
Done deal: Dow Chemical Co. closes on its $16 billion acquisition of Rohm & Haas Co., a transaction launched in mid-2008 that the Rohm board and management fought tenaciously through the darkest days of the markets meltdown to force Dow to complete.
A bit of relief for bank boards: The Financial Accounting Standards Board, under pressure from Congress and the financial industry, eases up on its mark-to-market accounting so as to give banks some breathing room for taking steep losses during the financial crisis.
New BofA chairman: The month concludes with a contentious annual meeting in which Bank of America shareholders strip Ken Lewis of the chairman's title--"a stinging blow that leaves his stewardship and legacy in doubt" (NYT). Still retaining board support, he remains as CEO, with BofA board member Walter Massey, president emeritus of More-house College, stepping in as chairman.
Showtime for U.S. Shareholder Bill of Rights Act of 2009: Senators Charles Schumer and Maria Cantwell introduce this titled legislation in Congress that proposes a raft of reforms, including requiring companies to offer shareholders a nonbinding vote on executive compensation (say on pay), approval of golden parachutes, access to the proxy for nominating directors, splitting the roles of chairman and CEO, making all director elections annual, and majority voting for directors. "This legislation will give stockholders the ability to apply the emergency brakes the next time the company management appears to be heading off a cliff," Schumer says. Arguing against the bill in a WSJ op-ed, lawyers Martin Lipton and Theodore Mirvis and Harvard Business School professor Jay Lorsch counter: "Excessive stockholder power is precisely what caused the short-term fixation that led to the current financial crisis."
Board overhaul underway at AIG: American International Group Inc. announces six new independent director nominees to stand for election at the annual meeting in June: Harvey Golub, former chairman and CEO of American Express Co.; Laurette T. Kellner, retired SVP of Boeing Co. and retired president of Boeing International; Christopher S. Lynch, an independent consultant to financial intermediaries and a former partner of KPMG; Arthur C. Martinez, former chairman and CEO of Sears, Roebuck & Co.; Robert S. (Steve) Miller, executive chairman of Delphi Corp.; and Douglas M. Steenland, former CEO of Northwest Airlines Corp. "The new candidates have extensive experience with large complex organizations and in the areas of financial services, accounting and restructuring," says AIG Chairman and CEO Edward Liddy.
Governance problems in the Federal Reserve System: The chairman of the Federal Reserve Bank of New York, Stephen Friedman, resigns when conflicts of interest questions are raised about his dual role as a director and shareholder of Goldman Sachs. The 12 regional Federal Reserve banks have conflicting practices regarding directors who are board members of banks under Fed regulation, with one CEO of a bankers' association telling the WSJ that no director of a regional Fed bank should have any connections with regulated financial institutions. Criticisms are also being leveled at the boards of the Federal Home Loan Bank system about how well directors are supervising executives at these regional institutions and the credit risks they have been taking.
SOX attack: The Supreme Court agrees to hear a case brought by the Competitive Enterprise Institute (CEI) and the Free Enterprise Fund challenging the constitutionality of the Public Company Accounting Oversight Board, created by the Sarbanes-Oxley Act of 2002.
"The PCAOB has been very bad for the economy," says a CEI attorney.
High-tech companies are no longer the top target for class action claims, according to the PricewaterhouseCoopers Securities Litigation Study; the new pinata, no great surprise, is the financial services industry.
In a Watson Wyatt survey, nearly two-thirds of directors believe that executive pay programs need to change as a result of the financial crisis, but a smaller majority (54%) believes legislation and public pressures would have little or no effect on improving pay for performance.
Ramp up for the FCPA: The Justice Department is increasing its crackdowns under the Foreign Corrupt Practices Act, disclosing to the WSJ that "at least 120 companies are under investigation," up from 100 at the end of last year.
CalSTRS, the second-largest public pension fund in the U.S., writes to 300 companies in which it owns shares demanding that they overhaul their executive pay policies and allow shareholders a say on pay.
In a big debunking, The Corporate Library, an independent research firm, finds no significant relationship exists between the presence of current or former CEOs on compensation committees and high levels of CEO pay--"the first statistical test of the popular perception that directors who are current or former CEOs design generous CEO pay packages."
The new pay for performance? Pay for risk-prudent performance--that's the theme of a paper issued by Claudia Zeitz Poster and Richard Furniss of Towers Perrin. In the new world of risk management oversight, the consultants suggest that one question that needs to be asked is: "What can go wrong after an incentive is paid?"
In follow-up action to the Schumer proposal (as it is becoming commonly referred to), the SEC in a 3 to 2 vote along party lines puts out a proposal for comment that would allow shareholders the right to nominate board candidates. The SEC is moving "swiftly to recapture the investor agenda," writes Anne Simpson, newly taking office as head of corporate governance at CalPERS, in the Financial Times (FT). SEC Chairman Mary Schapiro says in interviews that the agency is also considering revisions in how companies disclose CEO pay, adding more details on what would be useful to shareholders.
No calm in the BofA boardroom: The bank is understood to be searching for new directors, with new chairman Walter Massey indicating that the acquisitions of Merrill Lynch and Countrywide Financial compel a need to have directors with more experience in banking and finance. Quitting the board is longtime director O. Temple Sloan, who stepped down as lead director in April. He received the fewest votes of any director for reelection at last month's annual shareholder meeting. Uh oh, look out: The board is said to still be solidly supportive of CEO Ken Lewis; such avowals of support often are a prelude to an imminent ouster.
C. Robert Kidder, former chairman of Borden Chemical Inc. and Duracell International Inc., is named chairman of Chrysler Corp., which has just declared bankruptcy. Kidder, who is lead director of Morgan Stanley, is selected for this position by the U.S. Treasury Department (which has the right to appoint four new board members) and will assume the role once the company completes its reorganization.
Companies are also sticking with their practices on giving earnings guidance: After surveying its members, the National Investor Relations Institute reports that "despite the extraordinary economic downturn," NIRI members are not abandoning earnings guidance in any significant degree. "Companies understand that communicating with investors in challenging times is as important, if not more so, than it is in good times," says NIRI President and CEO Jeff Morgan.
The backdating of stock options, a big governance story in 2008, has
a long tail, as witness the conviction this month of James Treacy, former president and COO of Monster Worldwide Inc., on criminal counts of conspiracy and securities fraud for reaping more than $24 million in improperly backdated stock option awards.
Antitrust violation? The Federal Trade Commission begins an inquiry into the close board ties of Apple and Google, who share two directors--Google CEO Eric Schmidt and former Genentech CEO Arthur Levinson. The two companies are increasingly encroaching on each other's turf in the cellphone and operating systems markets. The Clayton Antitrust Act prohibits a person's presence on the board of two rival companies when it would reduce competition between them.
Three out of four audit committee members say they have increased their "hands-on involvement" with management and are reassessing risk management and oversight as a result of the economic crisis, according to a joint survey by KPMG's Audit Committee Institute and the National Association of Corporate Directors. "Board oversight is very different from what it was a year or two ago--and it has to be," says Henry Keizer, U.S. vice chair-audit of KPMG LLP.
CEO departures are down: Despite some heads rolling at financial institutions, Booz & Company's annual study of CEO turnover finds that during this economic crisis boards are sticking with the leaders that they know. CEO tenure among North American companies is the longest it has been since 2000.
Target Corp. shareholders overwhelmingly back management's slate of directors to end a drawn out proxy battle with hedge fund activist William Ackman; it was expensive, too--Fortune magazine reports that the company spent $11 million to promote its own candidates.
It doesn't happen often: Three directors up for reelection at Pulte Homes Inc. fail to receive a majority of votes at the shareholder meeting--"marking a rare rebuke of a company's board" (WSJ). RiskMetrics data show that in 2008 only 32 directors at 17 companies in the Russell 3000 Index of the largest U.S. companies failed to receive a majority vote.
The virtual annual meeting: Intel Corp. is pioneering a virtual dimension to its annual shareholder meeting--more than just a webcast, the company applies technology that allows shareholders of record to view the meeting but also to present questions and vote online.
The month starts off with General Motors declaring bankruptcy--the second-largest industrial bankruptcy in history. The Treasury Department selects former AT&T Chairman Edward Whitacre Jr. to chair the reorganized company. After 84 years in the DJIA, GM leaves the index, replaced by Cisco Systems.
Comings and goings at BofA: More directors bail from the board, including Gen. Tommy Franks and Adm. Joseph Prueher, as new directors, including two ex-regulators and two former bankers, come on. New directors include former Federal Reserve Board Governor Susan Bies and former FDIC Chairman Donald Powell. The bankers are William Boardman, retired chairman of Visa International and a former vice chairman of Bank One Corp., and D. Paul Jones, former chairman and CEO of Compass Bancshares Inc. Also out the door is the bank's chief risk officer, Amy Woods Brinkley. And Fed Chairman Ben Bernanke tells Congress that he did not pressure Ken Lewis into acquiring Merrill Lynch, his first public comments on the transaction since a House committee began investigating the matter.
Rise of the Pay Czar: The Obama administration introduces a sweeping set of guidelines on executive pay that will mostly affect companies that have received government assistance. The plan calls for Congress to adopt legislation that will let shareholders vote on pay programs. But for the bailed-out companies, a prominent Washington lawyer, Kenneth R. Feinberg, is appointed by the Treasury Department to oversee to oversee the compensation of their five most senior executives and their 20 most highly paid employees. These companies include AIG, Citigroup, Bank of America, GM, and Chrysler. He has the title of "special master" for compensation, but quickly gets pegged as the pay czar. Under the new rules, the TARP recipients have 60 days to submit for review the pay packages of the covered executives.
Even The New Yorker piles on: In its issue dated June 1, business columnist James Surowiecki writes: "In the apportioning of blame for the financial crisis, corporate boards of directors have remained remarkably unscathed, even though they effectively approved the strategies that immolated so many companies." U.S. Treasury Secretary Geithner would agree; he tells Congress this month that bank boards should shoulder some of the blame for the financial crisis--"I think boards of directors did not do a good job."
I knew nothing: HealthSouth Corp.'s former chairman and CEO, Richard Scrushy, in court as a defendant in a lawsuit brought by HealthSouth shareholders, testifies that he wasn't aware of a six-year, $2 billion fraud involving inflated earnings at the company that nearly bankrupted it, and blamed the wrongdoing on other executives. The judge in Birmingham, Ala., hearing the suit renders his verdict: Scrushy is ordered to pay $2.8 billion to HealthSouth shareholders.
Give it back: "Can Executive Compensation Be Reclaimed by 'Clawback' Law-suits?" is the topic of a program hosted by the American Constitution Society for Law and Policy--a discussion designed to examine new legal strategies being used to promote greater corporate accountability.
Research and ratings firm Governance Metrics International (GMI) is the highest-ranked independent provider of corporate governance research in the 2009 Thomson Reuters Extel Survey.
Where are the risk committees? A GMI survey finds only 6% of the 4,162 companies that it covers have a standalone board-level risk committee; 28% disclose having a combined audit and risk committee.
The U.S. Chamber of Commerce says it will spend $100 million in an effort--called the "Campaign for Free Enterprise"--to stem the "rapidly growing influence of government over private sector activity"; this a major new move by the powerful business group to counter the Obama administration's regulatory agenda (WSJ).
A new No. 1 money manager: The combination of BlackRock and Barclays Global Investors creates the world's largest money manager, with almost $3 trillion in assets under management. "This transaction is transformational," says BlackRock Chairman and CEO Laurence Fink.
At the International Bar Association's annual M&A conference, Vice Chancellor Stephen Lamb of the Delaware Chancery Court says government-appointed board members should be held to the same standards as directors appointed by the company. "I can't imagine a different set of standards. ... Fiduciary law is what it is for boards," he tells the crowd (WSJ). Lamb, whose 12-year term on the bench is ending, will retire in July to join Paul Weiss Rifkind Wharton & Garrison in a new office being established in Wilmington, Del.
He's back: Apple CEO Steve Jobs returns to work after a nearly six-month medical leave. Sources tell the WSJ that the SEC has opened a probe into the company's nondisclosure practices related to the CEO's health, and that the board has hired outside counsel to represent them in the government's inquiry. After the statement in January of the "hormonal imbalance," it is learned that his condition was much more serious and that he underwent a liver transplant some weeks later.
What would a year in review be without citations of Carl Icahn engaging in or threatening a proxy fight or two? This month he wins board seats at Biogen Idec Inc. and Amylin Pharmaceuticals Inc.
Not all successions are rocky, or require boards to draw from the outside: Procter & Gamble Co. announces that Robert McDonald, a 29-year company veteran, will succeed A.G. Lafley as CEO. Lafley, who spent nine years as CEO, will remain chairman until the end of the year.
Unsettled market conditions suggest that corporate directors should prepare for a rise in unsolicited takeover offers, says a report issued by the Conference Board; the report notes that hostile offers accounted for 47% of the M&A transactions in the U.S. during the first few months of 2009, compared with 24% in all of 2008.
David Landsittel, CPA, is named the new chairman of the Committee of Sponsoring Organizations. COSO provides guidance on issues dealing with internal controls, enterprise risk management, fraud deterrence, and governance, and interacts with regulators on those issues as one of its major responsibilities. It is sponsored by five professional organizations: the American Accounting Association, the American Institute of Certified Public Accountants, Financial Executives International, the Institute of Management Accountants, and the Institute of Internal Auditors.
A study by the Investor Responsibility Research Center shows that private equity firms do not implement "superior" corporate governance policies for the companies they take over, restructure, and then take public; instead, once they go public again, PE-backed companies embrace "features that potentially benefit executives at the expense of shareholders," such as related-party transactions, takeover defenses, and "poor compensation governance."
More from the PE world: Accounting firm Rothstein Kass's "Private Equity in 2009" white paper finds that more than 90% of PE managers expect the credit crisis to persist in 2010.
At the end of a second proxy season that saw aggressive campaigning against its corporate governance, ExxonMobil shareholders, seemingly satisfied with the company's performance, vote down a say on pay proposal and one to split the chairman and CEO positions.
Former Duke professor Steve Wallenstein joins the Smith School of Business at the University of Maryland, where he starts up the first university-sponsored directors' institute in the Washington, D.C., area.
Bernard Madoff is sentenced to the maximum 150 years in prison for what the judge calls an "extraordinarily evil" fraud.
AIG holds a contentious shareholders' meeting on the last day of the month, where the majority of the board members who oversaw the company's collapse are officially ousted--to which CNNMoney.com reports one shareholder proclaiming "Goodbye and good riddance."
It looked bleak for the stock market in early March, but by the end of June the Dow closes up 11% for the second quarter; it remains down 4% for the year ... and down 40% from its all-time high reached on Oct. 9, 2007.
Big merger of HR consultancies: Towers Perrin and Watson Wyatt agree to merge, forming a new, publicly listed company called Towers Watson & Co. that is expected to have annual revenues of $3 billion. Watson Wyatt Chief Executive John Haley will be CEO of the combined company.
"No Rhyme or Reason"--That's the title of a report issued this month by New York Attorney General Andrew Cuomo in which he observes that "in 2008 Citigroup and Merrill Lynch lost $55 billion between them and received $55 billion in federal bailouts, yet paid $9 billion in bonuses" (The New Yorker).
Even the Pope piles on: Pope Benedict XVI issues a rare papal communique calling for reform of the financial system, writing "Today's international economic scene, marked by grave deviations and failures, requires a profoundly new way of understanding business enterprise."
Finance is in the spotlight: 83% of respondents to a global survey by the U.K.-based Association of Chartered Certified Accountants say that the finance chief's role is more important now than in 2008, with 70% agreeing that the finance function receives more boardroom backing now than a year ago.
The House inks it: H.R. 3269, the Corporate and Financial Institution Compensation Fairness Act, is passed (happening a day after the Cuomo report, cited above, is released). The bill gives shareholders a nonbinding advisory say on pay vote and proscribes imprudently risky compensation practices, among other measures, to achieve comprehensive financial system reform. Business Roundtable President John Castellani reacts: "Government mandated actions as a substitute for decisions made by shareholders takes us in the wrong direction. This policy may only exacerbate the focus on short-term gains at the expense of long-term economic growth and job creation, a factor identified as a cause of the financial crisis." Also reacting is NACD CEO Ken Daly: "It's important for Congress, the administration, corporate America and the public to know that corporate boards are already taking substantive action to strengthen executive compensation practices along with their overall corporate governance structures."
A sobering thought: Dan Borge, a managing director with consulting firm LECG, pens this observation--"Boards of directors are used to taking flack for executive compensation practices, but this time it is serious. Petulant investors armed with peashooters have now been reinforced by government officials bearing automatic weapons."
Wachtell Lipton's Martin Lipton and Theodore Mirvis pen a client advisory titled Corporate Governance In Crisis Times, in which they counsel, "There is no reason to embrace a plethora of ill-conceived federal regulation and legislation that usurps the traditional role of state law and thereby overturn the fundamental legal doctrines that have formed the bedrock of history's most successful economic system. The engine of true economic growth will always be the informed business judgment of directors and managers, and not the hunger of short-term oriented shareholders for quick profits."
Speaking of quick, GM exits bankruptcy, after only 40 days on the dark side, with all eyes on the next moves by new GM Chairman Edward Whitacre Jr. and his new board members. The automaker is now 60% owned by taxpayers.
Who's next to implode? It looks like CIT Group, as word starts percolating that the financial lender to middle-market companies could be heading to bankruptcy.
Citigroup announces its third sweep of top management in less than a year, as regulators continue to pound on the bank to strengthen its management; in this round the bank gets a new chief accounting officer. And the bank adds three more new directors with experience in turning around troubled financial institutions and with regulatory issues: former New York State Banking Department Superintendent Diana Taylor; Ripplewood Holdings LLC CEO Timothy Collins; and former Wells Fargo Vice Chairman Robert Joss.
What insider trading? A federal judge throws out the SEC's insider trading charges against Dallas Mavericks owner Mark Cuban, with a ruling that says that even if a person who receives market-moving information agrees to keep it a secret, it isn't necessarily a violation of securities laws to trade on the information (WSJ).
Brutalized shareholders: AIG undergoes a 1-for-20 reverse stock split; weighing on the sad-sack security are worries over who will succeed CEO Edward Liddy.
The Sears Tower, the tallest building in the tallest building in the Western Hemisphere, is renamed Willis Tower, as global insurance broker Willis Group Holdings makes the iconic Chicago skyscraper its new Midwest region headquarters. (See Willis Chairman and CEO Joseph Plumeri's top 10 risk list advisory on page 47).
Five new directors are named to the Chrysler board: Douglas Steenland, former chief executive of Northwest Airlines; George F.J. Gosbee, chairman and president of Tristone Capital Inc.; Scott Stuart, a founding partner of Sageview Capital LLC; Ronald L. Thompson, chairman of the board of trustees for Teachers Insurance and Annuity Association; and Stephen Wolf, chairman of R.R. Donnelley & Sons Co. For the company's new nine-member board, meeting for the first time this month, three directors are being appointed by Fiat, one by the UAW trust, one by the Canadian government, and four by the U.S. government. The company has emerged from bankruptcy and is now being run by Fiat CEO Sergio Marchionne.
Business Week magazine, a pioneer in doing "Best and Worst Boards" rankings, goes on the block; hard times in the publishing industry and losses at the magazine lead the FT to put forth the startling conclusion that it may be had for a token $1.
Sign of the times: JP Morgan Chase brings its directors to Washington for a first-ever board meeting in the nation's capital; in attendance, also a first, is the White House chief of staff, Rahm Emanuel (NYT).
Said to be the first case of its kind brought by the SEC, the agency seeks to claw back $4 million in bonuses paid to a former CEO of a company that had overstated its financial results, even though the executive--Maynard Jenkins of CSK Auto Corp.--was not implicated in the fraudulent conduct. One head of the exec comp practice for a law firm terms the action "a wake-up call" for companies to make sure they're very careful in how they report results.
Something to bring a smile to directors' faces: Federal regulators make permanent a rule aimed at reducing abusive short-selling of stocks, which was originally put in as an emergency measure at the height of 2008's market turmoil.
Shareholders got greedy: Auto parts maker Lear Corp. files for Chapter 11; in 2007 shareholders rejected an offer by Carl Icahn to buy the company for $37.25 a share, thinking the investor's offer was too skimpy and that management was in cahoots with Icahn. "The lesson for shareholders," notes the breakingviews.com news website, "is to think hard before knocking back a deal that looks objectively generous, even if it has wrinkles that they don't like. That applies in all market conditions, but it is especially hard in a boom not to let greed get in the way."
Talk about a long tail: 25 years after the Union Carbide chemical disaster in Bhopal that killed 10,000 people, an India court pursuing additional claims issues an arrest warrant for Warren Anderson, then the CEO of the company.
The line starts here: The execrable Time Warner-AOL merger is finally on its way to splitsville, with an announcement that AOL will be spun off later in the year; despite the historic value-destruction legacy of this combo, 70 candidates are said to be on the list for the new AOL board, according to the WSJ's All Things Digital website.
"The world's most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money"--that's from writer Matt Taibbi's profile of Goldman Sachs in a Rolling Stone article, "Inside the Great American Bubble Machine." While some describe the lengthy analysis as a hit job, the term gains traction in the angry ranks of Wall Street critics.
Four CEOs in one year? That's the sorry C-suite situation at Freddie Mac. Charles E. Haldeman Jr., former CEO of mutual fund manager Putnam Investments, is the latest at the helm of the government backed mortgage insurer.
With Chrysler out of bankruptcy, Robert Nardelli returns to Cerberus Capital Management, the former owner of Chrysler that installed him as CEO of the automaker in August 2007.
A big agenda: The SEC starts discussing new rules that would require fuller disclosure of board diversity and directors' backgrounds, skills, and experiences in dealing with issues from executive pay to accounting rules. The commission also is considering barring brokers from voting clients' shares in director elections. Other new rules being proposed relate to usage of compensation consultants, risks inherent in compensation plans, and disclosures of board leadership structure and the rationale for such structure. (Approval of these proposals will come in December.)
GM rounds out its newly reorganized board with TPG Capital LP founder David Bonderman and Carlyle Group Managing Director Daniel Akerson (as government appointees); retired Burlington Northern Santa Fe CEO Robert Krebs and former Alcatel-Lucent CEO Patricia Russo; and Carol Stephenson, dean of the Richard Ivey School of Business in Western Ontario who has been a member of the General Motors of Canada advisory board.
The crown passes at AIG: "I had no idea what I was in for," writes Edward Liddy in a farewell letter as he steps down as CEO of AIG. Liddy will be succeeded as CEO of the troubled insurer by Robert Benmosche, former chairman and CEO of MetLife. The insurer changes its bylaws so that its chairman must be an independent director; Harvey Golub, who was elected to the board in May 2009, is selected by the board to be its nonexecutive chairman. "Harvey Golub is one of the most experienced and respected executives in the financial services industry today, known for his leadership, integrity, and business acumen," Liddy says.
Room for improvement? An Ernst & Young survey shows that companies spend about 4% of revenue on risk management activities; "considering the events of the past 12 months," notes the firm, the follow-on finding might not be surprising--96% of survey respondents believe that their risk management programs could be improved.
Carl Icahn finds himself on the other side of the line of fire: A hedge fund alleges in a lawsuit that as director and majority owner of XO Holdings Inc. Icahn hurt shareholders by snubbing three approaches to acquire the struggling telecommunications company that could have boosted the stock (WSJ).
Not so fast: In BofA news this month, the bank agrees to a $33 million settlement with the SEC on a civil lawsuit alleging that it mislead shareholders about billions of dollars in bonuses promised to Merrill Lynch employees when it bought the firm in the midst of the financial crisis; but then Federal Judge Jed Rakoff gives that settlement a raspberry, calling the agreement reached "puzzling," "vague," and "so at war with common sense," and asks for more documentation to support the settlement. Former Citigroup CFO Sallie Krawchek joins BofA to run the global wealth and investment division.
The new GM board meets for the first time. On the agenda: regaining market share in the U.S., potential sale of the Opel unit in Europe, fending off political meddling from the government, and charting a return to profitability. New Chairman Ed Whitacre Jr. vows to maintain the No. 1 spot in U.S. sales.
Shake-up at the SEC: Stung by criticism of lax enforcement, new enforcement chief Robert Khuzami outlines his plans to overhaul the enforcement division and to give the agency's attorneys more authority to pursue investigations.
First the squid call, then ... "Goldman Sachs still has that Gordon Gekko look to it among the general public" is one of the conclusions of a survey conducted for the FT to track the damage done to the bank's reputation among both the general public and financially sophisticated investors. The New York Post reports that CEO Lloyd Blankfein "has warned his employees to avoid making big-ticket, high-profile purchases as the gold-plated Wall Street firm hunkers down amid a firestorm of public and political anger over outsize bonus payments"--to which a reader ripostes on the paper's website, "This is like that scene in 'Goodfellas' after the Lufthansa heist when [the Robert DeNiro character] Jimmy is going around telling everyone not to spend money and making people return their fur coats and Cadillacs."
A year in the works, a task force formed by the corporate governance committee of the ABA Section of Business Law issues its Report on the Delineation of Governance Roles and Responsibilities (see sidebar below).
Whoa! "Study Finds Women Directors Damage Profits" is how the FT headlines an article reporting on a study of women on boards. Based on a survey by two U.K. academics of 87,000 directorships at 2,000 U.S. companies between 1996 and 2003, the study concludes that having more women in the boardroom can detract from performance--in terms of being less profitable and having a lower market value.
As the pushback against proxy access begins to gain strength among business groups, Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware, pointedly tells the FT that "Ultimately the real solution is proxy reimbursement as opposed to access. The real expense in not getting on the ballot--the real expense is the campaign itself."
Gloomy picture for bank boards: The Federal Deposit Insurance Corp. updates its list of problem banks, which now tops 400--about 5% of the nation's banks.
More on Google: The company, which has not been paying board members with cash as part of their director remuneration, institutes a $75,000 annual retainer in a modification of board pay that will "put in place a traditional compensation structure similar to that used by many of our peers," a Google press rep tells Reuters.
Federal regulators seek more than $22 million from the former head of Kmart Corp., who was found liable for misleading investors about the company's finances before a bankruptcy filing in 2002. The SEC asks a judge to punish Charles Conaway for "intentionally lying" to Wall Street and concealing information from Kmart directors. (AP)
"Pay Czar Has Loads of Dough" headlines the New York Post on the release of Kenneth Feinberg's government ethics filing that reports his law firm compensation of $5.8 million in the past year and assets worth between $11 million and $37 million.
An item for the agenda of a board's corporate social responsibility committee? Income inequality in the U.S. is at an all-time high, surpassing even levels seen during the Great Depression, reports a research paper from the University of California, Berkley.
In assessing the mood in Washington for financial market reform, CalPERS' Chief Investment Officer Joe Dear tells the FT, "We have the best opportunity ever to advance corporate governance--both in how companies are governed and how investor interests are protected by the regulatory agencies."
Oracle reports in a regulatory filing that it will cut Chief Executive Larry Ellison's salary to $1 in fiscal 2010 from $1 million the past year; the bulk of his compensation comprises an annual cash bonus and stock options.
Hyatt Hotels files for a $1.15 billion initial public offering, which would make it the biggest IPO of the year. The company was founded in 1957.
Needs work: In the 2009 Fraud Survey Report out this month from KPMG, a third of the surveyed executives expect fraud to rise at their organizations, and two-thirds say their internal controls "may need work."
"Bankruptcy is the new M&A"? That's the latest quip in the business blogosphere. Reader's Digest Association enters into a prepackaged bankruptcy that will ease its $2 billion bank load: a condition of the financing is the replacement of all the members of the company's board except for CEO Mary Berner.
"You can have my Apple board seat when you pry it from my cold, dead hands" quips the All Things Digital website about Google CEO Eric Schmidt's intent to stay on the board of the computer maker as both companies face regulatory scrutiny over their board ties (see May); nonetheless, Schmidt steps down from the Apple board as concerns over business overlaps mount. Business Week reports that Schmidt took no cash retainers or stock for his board service--just "lots of Apple gear."
Turnaround specialist Stephen Cooper, who parachuted into Enron to run it during its bankruptcy, is hired to help salvage the debt-laden Metro-Goldwyn-Mayer Inc. film studio. His most recent restructuring job was with Krispy Kreme Doughnuts.
Michael Oxley, a former member of Congress best known as co-sponsor of the Sarbanes-Oxley Act of 2002, is elected chairman of the board of the Ethics Resource Ethics Resource Center, the nation's oldest nonprofit, nonpartisan research organization devoted to business ethics. He is of counsel in the Washington, D.C., office of Baker Hostetler and is a senior adviser to the board of Nasdaq OMX Group Inc.
In his quarterly earnings call with analysts this month, Cisco Systems Inc. Chairman and CEO John Chambers says, "We have gone through the toughest economic period we've seen in our lifetimes."
"It's much better to be acquiring and growing than selling and shrinking," Huntsman Corp. CEO Peter Huntsman tells the WSJ on the chemical company's agreement to acquire pigment-producer Tronox Inc. for $415 million.
Breathing much easier in the boardroom: This month is better than September 2008--which was a September not to remember, what with Lehman Brothers declaring bankruptcy and AIG imploding. "The recession is very likely over," declares Fed Chairman Ben Bernanke. The Dilenschneider Group Trend/Forecasting Report finds that "87% of executives are very, or somewhat, confident about prospects for growth through 2010 and more than 92% of large-company executives expect serious revenue growth to occur before the end of 2012." But unemployment rises to 9.8%, a 26-year high; a Time magazine report on "Jobless in America" broaches the almost unthinkable question, "Is double-digit unemployment here to stay?"
The Fed gets into the game of curbing executive pay: In a desire to rein in risk taking at financial institutions, the Federal Reserve floats its own proposal on how it will impose limits on banks in their structuring of executive pay--not only for CEOs but also loan officers and other employees. Such a move to regulate pay at banks would be even a further incursion into board decision making.
Bank of America CEO Kenneth Lewis announces that he will resign by year end. The bank, he says in a statement, "is well positioned to meet the continuing challenges of the economy and markets." The resignation culminates a tough month, during which a federal judge formally rejects a settlement the company had reached with the SEC over its disclosure of controversial bonuses paid to Merrill Lynch employees--a settlement, says U.S. District Judge Jed Rakoff, that "does not comport with the most elementary notions of justice and morality, in that it proposes that the shareholders who were the victims of the Bank's alleged misconduct now pay the penalty for that misconduct." Also this month, New York Attorney General Andrew Cuomo subpoenas several BofA board members to testify about the Merrill Lynch acquisition, saying that "A big unanswered question as we look back on the financial crisis is, where were the boards?"
Richard Trumka becomes president of the AFL-CIO; in one of his first actions, he leads a rally on Wall Street to protest again the ""apostles of greed" and to advocate for increased financial regulation "to make sure the financial sector is the servant to the real economy, and not its master" (NYT). President Obama also travels to Wall Street this month to press for his financial reform proposals, which are getting push back from banks and conservative legislators.
The Pope weighed in earlier in the year on the financial crisis (see July), and now the Archbishop of Canterbury mulls whether bankers should repent for the meltdown; in an interview with the BBC, Archbishop Rowan Williams, spiritual leader of the global Anglican community, proffers that "There hasn't been what I would, as a Christian, call repentance. We haven't heard people saying, 'Well actually, no, we got it wrong and the whole fundamental principle on which we worked was unreal, was empty'" (NYT).
On other compensation fronts, at a banking conference in Europe Goldman Sachs Chairman and CEO Lloyd Blankfein says that anger over bank compensation and bonuses is "understandable and appropriate" and that multiyear guaranteed employment contracts "should be banned entirely" (WSJ); shareholders at Royal Dutch Shell, angry over pay, force out the head of the board's remuneration committee (FT); and a study shows that shareholders of companies receiving TARP funds are approving the pay packages that have been put to them for a vote--at all 237 of the 282 bailed-out public companies that reported results of their say-on-pay votes, the executive pay packages got okayed, calling into question, some say, the value of say-on-pay resolutions (WSJ).
The Conference Board Task Force on Executive Compensation issues a report that offers guiding principles for restoring credibility and trust in executive pay processes and oversight (see page 41).
A survey of 140 corporate directors by the USC Marshall School of Business reports that most board members believe CEO pay packages need trimming, especially in some elements such as severance pay and use of corporate aircraft; 47% of directors believe the total amount of CEO compensation should decrease.
Director pay modulates: The annual review by Towers Perrin of director compensation at Fortune 500 companies shows that pay packages rose by a median of just 3% (2008 over 2007)--a modest increase compared to the median annual pay increases near 10% seen in recent years. "By 2008, corporate directors were keenly aware of the economic challenges that lay ahead and adjusted their compensation packages accordingly," says John England, leader of the firm's executive compensation practice.
A dustup over climate change: Nike announces that it will resign from the board of the U.S. Chamber of Commerce (but will stay a member), joining other companies that are pulling back from the business lobby organization over its fierce resistance to environmental regulation. Meanwhile, Cisco Systems, Boeing, and Pepco Holdings are among a handful of U.S. companies leading efforts to tackle climate change, according to the Carbon Disclosure Project (CDP) S&P 500 Report. The CDP represents some 475 global institutional investors in collecting climate change data from 2,500 major organizations around the globe.
Two boards that are going to be kept very busy for the rest of the year: Kraft Foods Inc. launches an unfriendly offer initially valued at $17 billion for British confectioner Cadbury PLC.
'Public directors': The Center for American Progress, a nonpartisan research and educational institute, noting that 92% of the management and directors of the top 17 recipients of TARP funds are still in office, issues a call for the establishment of "public directors" for TARP-funded companies--board members who would represent the interests of taxpayers and "provide federal agencies that are the new owners and regulators with a visible structure of accountability." Public directors should be appointed "on a roughly proportional level to the amount of funding received by the rescued firm ... if a company receives government funding equivalent to 25% of its market capitalization, public directors should make up roughly 25% of that company's board."
The NYSE forms an independent advisory commission to examine U.S. corporate governance--"to take a comprehensive look at strengthening U.S. best practices for corporate governance and the proxy process." Larry Sonsini, chairman of the Wilson Sonsini Goodrich & Rosati law firm, is chairing the advisory commission.
He's back ... in the public eye: Apple CEO Steve Jobs demonstrates new products in his first public appearance since undergoing a liver transplant earlier in the year--"I'm vertical, I'm back at Apple, loving every day of it" (WSJ).
Not getting my vote: Despite fewer organized "Vote No" campaigns against directors in 2009, proxy advisory firm Proxy Governance Inc. reports that at least 84 directors at 48 companies failed to attain majority support from shareholders through August 2009. Withholding votes from directors based on corporate governance concerns is a growing trend among some large institutional investors, the firm notes--"Of all the director nominees who had more than 20% of shares withheld or voted against them in board elections, nearly 60% served on compensation committees," says Scott Fenn, Proxy Governance's senior managing director for policy.
"A bold call"--that's what 28 leaders in business, investment, government, academia, and labor call their appeal to "end the focus on value-destroying short-termism in our financial markets and create public policies that reward long-term value creation for investors and the public good." The "Overcoming Short-Termism" public policy statement is released under the auspices of the Aspen Institute Business & Society Program's Corporate Values Strategy Group; among the signers are John Bogle, Warren Buffett, Lester Crown, Barbara Hackman Franklin, Louis Gerstner, Martin Lipton, Ira Millstein, Peter Peterson, Felix Rohatyn, and John Whitehead.
Here's a director who's in the digital age: Bill George, former chairman and CEO of Medtronic Inc., launches a website, www.billgeorge.org. George, who serves on the boards of Goldman Sachs Group and ExxonMobil Corp. and is a professor of management practice at Harvard Business School, also releases a masterfully well-timed new book, his fourth, Lessons for Leading in Crisis. And he is on Twitter, Facebook, and LinkedIn, too.
Mutual fund governance: In an overview of fund governance practices, the Independent Directors Council and the Investment Company Institute report that independent directors make up three-quarters of boards in almost 90% of fund complexes (current SEC rules generally require that independent directors hold more than 50% of board seats), and nearly two-thirds of fund complexes have an independent board chair.
Energy to spare: Citigroup Chairman Richard Parsons joins Providence Equity Partners Inc., a PE firm specializing in media, communications and information technology, as a senior advisor; he will advise on new investment opportunities and "on certain of its existing investments," the firm says in a statement, but chairing Citigroup "will remain his primary business activity."
Guessing game: Much speculation swirls around who will replace Ken Lewis as BofA CEO when he steps down. Institutional investors press for an outsider; the board also begins to narrow potential successors from within and to consider the possibility of an interim CEO. All candidates will be scrubbed by government overseers. The WSJ editorial page froths that Lewis is "The Fall Guy"--"Someone had to be sacrificed as expiation for the financial panic and bailout, and the politicians are determined to convince voters that the bankers did it all. So heave-ho, Mr. Lewis had to go."
Naissance Capital, a Swiss investment firm, says it will start the Women's Leadership Fund to invest in companies whose boards include women and to take minority stakes in companies without women on their boards so as to encourage changes; the fund plans to raise awareness about the shortage of women on corporate boards while still generating returns for its investors, drawing on the positive correlation some studies have found between the number of female directors and company performance (NYT).
On the pay front: As the governance world braces for announcements from the investment banks of plans for big year-end bonuses, pay czar Kenneth Feinberg unveils the Treasury Department's ruling on what to pay to whom: Among the sweeping--some term them "slashing"--new measures ordered, cash salaries paid to the 175 highest-earning executives at seven companies getting big doses of bailout money will be capped at $500,000, stock compensation must be held for two to four years, and guaranteed bonuses and retention bonuses are eliminated. In a one-two punch, the Federal Reserve also officially unveils what it's calling its "Guidance on Sound Incentive Compensation Policies"--the Fed's own rules for regulating pay at financial institutions. One reaction, from NYT columnist Joe Nocera: "As well-meaning as Mr. Feinberg is, and as diligently as he worked through his assigned task, he shouldn't be the pay czar. No one person should be. That's a job more properly reserved for shareholders. You know, the ones who own the company."
Corporate counsel say they are steeling themselves for a big year of litigation ahead--42% of U.S. respondents anticipate an increase in legal disputes their companies will face in the next 12 months, according to the 2009 Fulbright & Jaworski LLP litigation survey; that's up from 34% in last year's survey.
In addition to selecting a Lifetime Achievement Award winner (see photo on page 45), the National Association of Corporate Directors selects Marilyn Carlson Nelson as its Public Company Director of the Year (she is a director of Exxon Mobil Corp.); Keith Alm (a director of Follett Corp.) as Private Company Director of the Year; and J. Shan Mullin, partner with Perkins Coie LLP, as Nonprofit Director of the Year.
In the annual Spencer Stuart Board Index tracking of new directors among the S&P 500, the survey shows that of the 333 new independent directors for 2009, just over one-quarter are active CEOs, COOs, or chairman, down from 53% in 1999.
Sudden passing: Bruce Wasserstein, a banker whom many directors got to know, particularly during the takeover era of the 1980s, dies suddenly at the age of 61; he "reshaped the mergers and acquisitions business into a high art," the NYT noted in its obituary of him.
What succession planning? The BofA board seems to have a lot of company in being caught short in doing succession planning--a National Association of Corporate Directors survey (of 632 board members at public companies) reports that 44% of directors say their boards have no succession plan in place for when the CEO leaves. "What kind of a message does that send out?" asks leadership consultant Marshall Goldsmith in an AP interview. "How about chaos, disorganization, and lack of preparedness?"
On a brighter succession note, how's this for a kudo? "One retiring executive who has definitely earned his pension is Chevron CEO David O'Reilly," opines the Wall Street Journal. "In his decade at the helm, Chevron absorbed Texaco and Unocal, cementing its position as America's No. 2 oil major. ... [Advisory firm] PFC Energy calculates Chevron's total shareholder return at 123% over the past 10 years, close to Exxon's 127%, Moreover, Chevron expanded oil and gas output by 68%, against Exxon's 50%." Chevron Vice Chairman John Watson is taking over at year end.
The Nasdaq Stock Market begins soliciting comments from its listed companies on "potential adoption of corporate governance best practices." The exchange's Listing and Hearing Review Council, an independent advisory committee, says it is seeking comment on such practices as executive sessions of independent directors, continuing education and training for directors, the director election process, and shareholder interaction with directors.
Proxy access on ice for the moment: The SEC, saying it needs more time to study the issue, announces it will now wait until 2010 on taking any action on a proposal to give shareholders a bigger role in nominating directors. "It is not a slam dunk like everyone thought it was," a representative from the U.S. Chamber of Commerce, which is opposing the proposal, tells the WSJ.
Heidrick & Struggles International Inc. taps Bonnie W. Gwin to lead the firm's North American Board Practice. During her more than 11 years with the firm, she has held a number of leadership positions, including president of the Americas Division and global managing partner of the Technology Practice.
The Supreme Court agrees to hear a case that involves the fees that money management firms can charge; the outcome may heighten the fiduciary role of mutual fund boards in negotiating fee arrangements with the fund management companies.
Carl Icahn goes away: In a letter to Yahoo CEO Carol Bartz on giving up the board seat he won in a settlement of a threatened proxy fight in 2008, the investor writes, "My resignation in a way is a compliment to you in that I do not believe that Yahoo any longer needs an activist shareholder."
Nelson Peltz comes aboard: The activist investor joins the board of Legg Mason Inc. after accumulating a 4.3% stake in the asset management company. He is also on the board of H.J. Heinz Co., where as a dissident investor he fought hard for a board seat in 2006.
Nonprofit boards: The Foundation Center, acknowledging an "increasing emphasis on governance reform," releases The 21st Century Nonprofit: Managing in the Age of Governance; the guide explores "key concepts--accountability, transparency, and responsibility--at the heart of effective governance ... [and] paints a portrait of the leadership of nonprofit organizations at a time when the driving force behind change is the need for sound governance."
The shared directorships between Google and Apple come undone again when Genentech Chairman (and Apple director) Arthur Levinson resigns from the Google board amidst an FTC probe that Google board amidst an FTC probe that caused Google CEO Eric Schmidt to resign from Apple's board (see August).
October sees the Dow reach the symbolic 10000 level, the first time at that confidence-building milestone since October 2008.
Hard start to the month: On the first day of November CIT Group Inc. files for bankruptcy protection.
A new boost for say on pay: Senate Banking Committee Chairman Chris Dodd unveils his financial reform plan that would give public company shareholders an advisory vote on executive pay starting in 2011. Meanwhile, Cisco Systems shareholders narrowly approve a say on pay proposal, with 34% or shares outstanding voting in favor while 32% are opposed (and the rest abstaining).
Gutting of Sarbanes-Oxley? The House Financial Services Committee voted to permanently exempt public companies worth under $75 million from disclosing their internal financial controls, and asked for a study on whether companies worth less than $250 million should be allowed to stop complying with the law. "Sputtering with rage" is how the NYT described some veterans of past reform efforts such as former SEC Chairman Arthur Levitt, who told the paper, "Any-one who votes for this will bear the investors' mark of Cain."
"Bad mistake"--that's what Bank of America Director Chad Gifford called the acquisition of Merrill Lynch, and he also said that the bank was "pressured" by the government into completing the deal. These disclosures come out during a House hearing into the $20 billion capital infusion made to the bank (FT).
The Federal Reserve tightens up on its own governance, closing a loophole that allowed a director at Goldman Sachs to be a director of the New York Fed as the agency was bailing out Wall Street during the financial crisis: Certain Fed System directors representing the public are prohibited from being shareholders in banks (NYT).
Richard Ferlauto joins the SEC's Office of Investor Education and Advocacy (OIEA) as deputy director of policy; he was with the American Federation of State, County and Municipal Employees as the union's director of corporate governance and public pension programs. OIEA serves the commission as the "investor's office" and provides educational resources to help individual investors make informed financial decisions.
The largest private equity deal of 2009: Buyout firm TPG Capital (formerly Texas Pacific Group) and the CCP Investment Board (Canada Pension Plan) agree to acquire IMS Health, the world's leading provider of market intelligence to the pharmaceutical and healthcare industries, in a transaction valued at $5.2 billion.
Nearly 10 years after "he played a central role in a costly corporate accounting scandal" (AP), a federal grand jury finds Charles McCall, the former chairman of McKesson Corp., guilty of securities fraud and evading corporate accounting controls.
They don't always agree, but on this they do: A survey conducted by the National Venture Capital Association and Dow Jones VentureSource shows that both VCs and the CEOs of venture-backed companies are aligned on what the most important characteristic is of an effective board--"open communication."
Fallout from more federal aid needed: Former Citigroup executive Michael Carpenter becomes CEO of GMAC Financial Services upon the restive board's sudden ouster of Alvaro de Molina; Carpenter joined the board of the taxpayer-supported auto lender in May as part of the government's toughened scrutiny of GMAC, where the Treasury filled two of the seven board seats (WSJ).
RiskMetrics Group acquires KLD Research & Analytics Inc., a leading provider of environmental, social, and governance research and indexes to institutional investors.
After an investigation lasting nearly two years, New York Attorney General Andrew Cuomo initiates a lawsuit accusing Intel of using "bribery and coercion to maintain a stranglehold on the market"; the chip company is already under an FTC investigation and has been censured by the FTC's counterparts in Europe, Japan, and Korea (FT).
Away you go: Time Warner completes the spinoff of AOL Inc. to shareholders, a coda to perhaps the sorriest spectacle of a shareholder value-destroying deal ever forged. New board members leading AOL forward include former FCC Chairman Michael K. Powell, former CBS Corp. CFO Fredric Reynolds, and Gilt Groupe Inc. CEO Susan Lyne.
GM Chairman Edward Whitacre seizes the wheel as interim CEO of the automaker upon the forced resignation of Fritz Henderson. Speculation swirls as to the next succession step, with some commentators insisting that the board should recruit an outsider as CEO, while others are in Bill George's (see September) camp, who blogged (presciently, as it will unfold) that "GM doesn't need a new CEO--it has Whitacre."
Directors at mid-sized companies made out a little better than their larger-company peers (see September), according to the BDO 300 Mid-Market Board Compensation Study: despite the poor economy, board comp in this universe increased by 6% in the past year.
The SEC's holiday gift to governance: The agency on Dec. 16 adopts final rules that broaden the scope of required executive compensation and corporate governance disclosures. The enhanced disclosures focus on six specific issues: 1) director and director nominee qualifications, background, and diversity; 2) board leadership structure; 3) board risk oversight; 4) use of, and potential conflicts of interest with, compensation consultants; 5) material risk in pay policies and practices; and 6) tabular disclosure of the value of equity and option awards. The rules are to become effective Feb. 28, 2010. The challenge for companies now, advises Francis Byrd of governance advisor The Altman Group, "will be in determining how best to communicate this information to investors."
The House of Representatives passes a sweeping financial regulation bill that, as characterized in the WSJ, "would bring the biggest change to financial rules since the 1930s, changing business practices for everyone from mortgage brokers in California to traders on Wall Street." One element of the bill gives shareholders an advisory vote on executive pay.
Apple CEO Steve Jobs was paid his customary $1 annual salary in 2009, but as the AP reports, "Apple's strength through a rough economic climate returned the value of his personal holdings in the company to pre-meltdown levels"; the newswire service notes that he holds 5.5 million shares of Apple stock. Apple shares gain 148% in 2009.
The chairman-CEO split: Whole Foods Market Inc. co-founder and CEO John Mackey garners headlines when he gives up the chairman's title "to conform with current standards for good corporate governance" (WSJ); Dr. John Elstrott, lead director since 2001, will become chairman. As of early 2009, according to The Corporate Library, about 37% of S&P 500 companies had separate chairmen and CEOs, up from about 22% in 2002. Splitting the two positions was an agreed-upon term in settling litigation this month in a stock option backdating case at Comverse Technology.
Corporate governance in the U.K. undergoes a deep review with the publication of a draft proposal for banks, corporations, and shareholders to consider enhanced stewardship--drawing upon the recommendations of the Walker Report, which concluded the need for more disclosure by bank boards of executive pay and their need to be more involved in monitoring banks' risk taking and compensation setting.
The buzz heats up in the corporate and investment communities as to how to handle the coming end of broker voting--the practice of brokerage firms casting votes without guidance from shareholders for elections of corporate directors. "Mundane elections of company board members are about to get a lot more interesting" in 2010, writes the NYP.
"Assessing RiskMetrics" is one of the year-ahead Key Issues for Compensation Committee Members identified by the Wachtell Lipton law firm in a client advisory, with the firm noting, "Compensation committees will need to determine the appropriate level of consideration to be given to RiskMetrics Group's position on pay practices."
Don't be piggish: Harvard Law School's exec comp guru Lucian Bebchuk looks at more than 2,000 companies to see what share of total compensation earned by the top 5 executives goes to the CEO, and finds that the bigger the CEO's slice of the pie is the lower the company's future profitability and market valuation.
In what the WSJ describes as "a first" for Goldman Sachs, the firm begins meeting with its major investors to head off a backlash over its record compensation pool; the firm ultimately decides its top 30 executives will receive no cash bonuses for 2009 despite record expected profits.
Maybe next year for more IPO board opportunities: Renaissance Capital reports only 63 IPOs in the U.S. in 2009, up a tad from 43 in the collapse year of 2008--but well below the 200 a year from 2004 through 2007.
Is SOX legit? The Supreme Court on Dec. 7 hears Free Enterprise Fund v. Public Company Accounting Oversight Board, a lawsuit challenging the constitutionality of much of the Sarbanes-Oxley Act of 2002. A decision won't be issued until 2010.
The Bank of America board sticks with an insider to replace Ken Lewis as president and CEO--choosing Brian Moynihan, who has been leading several of the company's lines of businesses, including consumer and small business banking and global corporate and investment banking, and who has also served as general counsel for the company. He takes office on Jan. 1, 2010. A good-natured remark Lewis makes about his successor to the WSJ is that a "unique characteristic" of Moynihan is that "he wanted the job."
Lost decade? Wall Street wraps up the year with positive gains: 19% for the DJIA, 23% for the S&P 500, and 44% for the Nasdaq composite. But ... all three indexes are below 1999 levels. That means many long-tenured directors are sitting on boards of companies whose stock price essentially has gone nowhere or is lower than when they joined the board a decade ago.
No, 'decade from Hell': Concludes a year-end essay in Time magazine by Fortune Editor Andy Serwer, titled "The '00s: Goodbye (at Last) to the Decade from Hell": "Bookended by 9/11 at the start and a financial wipeout at the end, the first 10 years of this century will very likely go down as the most dispiriting and disillusioning decade Americans have lived through in the post-World War II era."
While many executives expect difficult times to continue into 2010 and have taken short-term defensive actions, a Boston Consulting Group study finds that they are not taking, or even yet planning to make, "more wrenching, longer-term moves"--such as divesting businesses or selective exits from product lines, customer segments, or sales channels.
James Kristie has been editor of DIRECTORS & BOARDS since 1981 and the journal's associate publisher since 1991.
RELATED ARTICLE: PRESIDENT OBAMA TAKES ON EXECUTIVE PAY
The following is an excerpt of an address on executive pay delivered by the President on feb. 4, 2009.
The economic crisis we face is unlike any we've seen in our lifetime. It's a crisis of falling confidence and rising debt. Of widely distributed risk and narrowly concentrated reward.
To restore our financial system, we've got to restore trust. And in order to restore trust, we've got to make certain that tax-payer funds are not subsidizing excessive compensation packages on Wall Street.
We all need to take responsibility. And this includes executives at major financial firms who turned to the American people, hat in hand, when they were in trouble, even as they paid themselves their customary lavish bonuses. That's the height of irresponsibility. That's shameful. And that's exactly the kind of disregard for the costs and consequences of their actions that brought about this crisis: a culture of narrow self-interest and short-term gain at the expense of everything else.
This is America. We don't disparage wealth. We don't begrudge anybody for achieving success. And we believe that success should be rewarded. But what gets people upset--and rightfully so--are executives being rewarded for failure. Especially when those rewards are subsidized by U.S. taxpayers. For top executives to award themselves these kinds of compensation packages in the midst of this economic crisis is not only in bad taste--it's a bad strategy--and I will not tolerate it as President. We're going to be demanding some restraint in exchange for federal aid.
As part of the reforms we are announcing today, top executives at firms receiving extraordinary help from U.S. taxpayers will have their compensation capped at $500,000--a fraction of the salaries that have been reported recently. And if these executives receive any additional compensation, it will come in the form of stock that can't be paid up until taxpayers are paid back for their assistance.
Companies receiving federal aid are going to have to disclose publicly all the perks and luxuries bestowed upon senior executives and provide an explanation to the taxpayers and to shareholders as to why these expenses are justified. And we're putting a stop to these kinds of massive severance packages we've all read about with disgust.
We're asking these firms to take responsibility, to recognize the nature of this crisis and their role in it. We believe that what we've laid out should be viewed as fair and embraced as basic common sense.
Finally, these guidelines we're putting in place are only the beginning of a long-term effort. We're going to examine the ways in which the means and manner of executive compensation have contributed to a reckless culture and quarter-by-quarter mentality that in turn have wrought havoc in our financial system. We're going to be taking a look at broader reforms so that executives are compensated for sound risk management and rewarded for growth measured over years, not just days or weeks.
RELATED ARTICLE: MEMO TO IRA: A MODEST PROPOSAL FOR PRESIDENTIAL ACTION
Ed Note: Lisa Tepper Bates was a student in Ira Millstein's Corporate Governance Course at Yale School of Management when she wrote a paper on "Improving Corporate Governance" as a class assignment. The paper garnered on enthusiastic response from the professor (and, we assume, a good grade), who passed a copy along to DIRECTORS & BOARDS. The following is an excerpt from the paper.
March 16, 2009
To: Ira Millstein
From: Lisa Tepper Bates
Re: Presidential Commission on Leadership in Corporate Governance
While regulatory and perhaps legislative changes are needed to improve the quality of corporate governance in the U.S., one factor critical to improving corporate governance cannot be regulated, mandated, or legislated into existence: improved exercise of leadership by the actual leaders.
There are rigid limits to what can be accomplished with regulations and legislative measures. For every new limitation the President and Congress might seek to impose, creative and sharp business leaders can find dozens of ways to meet the letter of the law and subvert its intent. The question, then, is how to inspire (re-inspire) the voluntary exercise of real leadership at the highest levels of corporate America?
The President should capitalize on the current environment and the focus of the American people on his leadership to establish a "Presidential Commission on Leadership in Corporate Governance."
The body would be led by a well-respected, major American investor (Warren Buffett, for example). The commission itself would be constituted of 12 other leading investors (including representatives of large institutional investors), board directors of major institutions across the industry spectrum, and CEOs.
The President himself would launch this commission, addressing directly an assembled group of 300 top corporate executives and governance leaders. His personal appeal to these leaders would be that they agree to participate in an unprecedented exercise of leadership from within the private sector to change the course of corporate governance in America. This kick-off event would be held in New Haven, sponsored by the Millstein Center for Corporate Governance.
The work of the commission and its subcommittees would be to develop a set of best practices for more aggressive and effective corporate governance. The best practices the commission identifies would form a voluntary code of conduct. The Millstein Center would serve as the executive secretariat of the commission. The commission would issue recommendations primarily on:
* Building solid risk management strategy and practice as part of corporate culture from top to bottom of every firm.
* Improving compensation plans to incentivize management at all levels that promote development of long-term value for individual firms and for the country as a whole, and discourage the taking of excessive and unproductive risk.
Additional issues could be identified and considered by the commission, as well.
The 13 members of the commission would meet quarterly with Secretary of the Treasury Timothy Geithner, and would meet annually with the President. Participants in the broader work of the commission (up to and including the original 300 kick-off conference participants) would be included in a an annual conference, attended by the Secretary of the Treasury and the President, in New Haven to review the work of the commission.
Following adoption of the commission's Code of Corporate Governance Best Practices, firms above the targeted minimum size would be asked to sign on to the code, and to accept the requirement to submit progress and performance reports annually. A list of the companies that sign on, as well as those that do not sign on, would be available at the commission website. Progress reports from firms that opt to adopt the code--or letters from firms that choose not to sign on and are willing to volunteer the reasons as to why--would also be available electronically.
The core of the concept is two-fold: first, to leverage the influence of the President to call upon business leaders to bring their unmatched expertise to bear for the good of corporate governance, their industries, and their country in the long term. Second, to leverage the influence that key leaders can exert on each other, by way of encouraging each other from inside the private sector to join in an effort to break the mold of "business as usual," and enhance the values at the core of private sector governance and management.
Following her graduation from the Yale School of Management in 2009, Lisa served as a visiting fellow at the Millstein Center during 2009-2010 and is now the executive director of a nonprofit organization in Mystic, Conn.
RELATED ARTICLE: AMERICAN INNOVATION: A DISASTER IN THE MAKING
The following is an excerpt from a keynote speech, "American Innovation in Crisis," that venture capitalist Pascal Levensohn gave in March 2009 at Cybersecurity Applications and Technologies Conference for Homeland Security in Washington, D.C.
Innovation and entrepreneurship, the crucial growth engines of the U.S. economy, are at risk of stalling out due to the convergence of three major negative trends. The first two trends have been developing for decades, and the third has precipitated a potential disaster for our country's future leadership in innovation.
The first negative trend concerns decades of American spending on research and development emphasizing incremental innovation and commercialization at the expense of basic research. While both incremental innovation and basic research are necessary, by emphasizing the former, our country has increased the long-term economic risks associated with underinvestment in basic research.
Second, since the mid-1990s, the United States has reduced the intensity of overall R&D funding as a percentage of GDP at the same time that the nature of global competitiveness in business has fundamentally changed.
And third, the recent and ongoing global financial crisis has induced the systemic failure of large financial institutions, severely curtailing an already diminished pool of risk capital to fund future innovation and draining liquidity from the public equity capital markets. This combination has had particularly devastating effects on emerging growth companies.
Why is the interest rate paid by the U.S. government to issue debt practically zero today while the private sector remains starved for access to credit? Because investors around the globe are so thoroughly afraid to take any risk that they are willing to accept zero nominal return from the government in order to know that they will at least get their principal back.
The risk premium for non-investment grade corporate debt, which is calculated as the interest rate spread between treasuries and these private debt instruments, is wider today than at any time after the dot-com collapse or at the height of the Enron scandal. And this has happened before, in Japan during the mid-1990s, when risk avoidance among investors became so prevalent that the Japanese government could issue new debt with virtually no coupon--at the same time that the rest of the economy withered from a lack of access to capital.
Ironically, precisely at the time when we most need long-term risk capital to plant the seeds for the next generation of break-through innovations and to fuel sustainable job growth in America, these factors have conspired to drain the risk capital that is the lifeblood of our economy. This financial dislocation dims what could otherwise be a bright future for the next generation of American entrepreneurs.
Pascal Levensohn is the founder and managing partner of Levensohn Venture Partners, a technology venture capital firm that he founded in 1996 (www.levp.com). He serves as chairman of the National Venture Capital Association's education committee. He is also the managing director of Presidio Strategic Services, a division of wealth advisory firm Presidio Financial Partners (www.presidiofp.com), which has $4 billion under management. He currently serves on five portfolio company boards, including one Nasdaq public company. He has written several notable articles for DIRECTORS & BOARDS on enhancing board effectiveness.
RELATED ARTICLE: MORE INSURANCE COVERAGE MAY MEAN LESS PROTECTION FOR DIRECTORS
BY EVAN ROSENBERG
When insurers broaden a policy's scope of coverage, all of the insureds expect better protection. That's not always how it works out, however, and directors and officers liability insurance is a prime example of when more may beget less. Expanding the number of risks the policy covers only dilutes the financial protection it was designed to provide for independent directors.
Since the mid-1990s, market forces have pressured insurers into expanding D&O liability coverage. The result is a policy that functions more like a safety net for insiders and corporate entities. Three developments--driven by case law and brokers trying to differentiate themselves--are largely responsible for this policy evolution.
Several pivotal court decisions first began eating away at independent directors' limits in 1995. At that time, D&O liability policies did not cover corporate entities for securities claims. Insurers would allocate responsibility for a loss between corporate executives and their uninsured organization and then indemnify directors and officers accordingly. That year, however, three federal appellate court rulings severely restricted the ability of insurers to allocate D&O liability losses.
Responding to the resulting market pressure to eliminate loss allocations, insurance companies introduced entity coverage for civil securities fraud claims. Entity coverage quickly became a policy mainstay, but instead of providing greater protection to directors and officers, it weakened their level of protection. With the D&O liability policy now covering the entity's legal defense costs and the entities' independent liability in securities fraud cases, a smaller portion of the policy limits is available to directors and officers. Keep in mind that defense costs are part of the aggregate limit of liability, and every dollar spent on defense costs reduces the amount available for settlements or judgments.
Insurance companies were then pressed into absorbing the defense costs of corporate executives facing criminal fraud charges. Like entity coverage, criminal defense cost coverage does not benefit independent directors, as prosecutors typically focus their cases on inside officers with day-to-day control over their organizations.
Once again, this added coverage threatens independent directors' financial protection. An inside officer who faces a prison term will usurp every resource to fight incarceration. For example, the criminal defense costs for Enron's executives devoured a significant portion of the company's $350 million of the D&O liability limits.
Plus, convicted executives routinely claim financial ruin after trial, thwarting insurers' ability to recoup defense cost payments and replenish policy limits. Again, independent directors face diminished insurance protection just when they need it for their own defense costs and indemnification for losses that could arise in the civil securities fraud lawsuits that typically accompany criminal prosecutions.
Since the late 1990s, further coverage expansions have continually chipped away at independent directors' protection for the benefit of insiders. For example, policies now often cover employment practices liability, employed lawyers liability, and fiduciary duty liability insurance.
In reviewing their D&O coverage, independent directors typically only ask how much limit the firm buys, how much it cost compared to last year, and, perhaps, who the insurers are. Directors need to do better due diligence and broaden their coverage examinations, especially new directors being asked to serve on a board. During such examinations, directors should ask whether existing coverage extensions would drain limits from their protection and whether any new coverage (such as Side A or independent directors liability coverage) would better protect them.
Fortunately for independent directors, the evolution of the D&O policy has not led to a succession of losses for which independent directors have no coverage due to an exhaustion of the policy limits. But, as securities experts point out, past performance is no guarantee of future results.
Evan Rosenberg is a senior vice president and Global Specialty Lines manager for Chubb & Son (www.chubb.com).
RELATED ARTICLE: WHAT OUR CAMPAIGN AT BANK OF AMERICA ACCOMPLISHED
BY JONATHAN S. FINGER
My father, Jerry Finger, had a relationship going back 40 years with Hugh McColl and Bank of America (BofA). As such, we were reluctant players in our 2009 shareholder campaign to change both the corporate governance and management culture at BofA. At the same time, as significant shareholders of the company, we felt very strongly that the board of directors had failed to protect the shareholders they were legally and morally bound to serve.
Specifically, we felt the board lacked objectivity and was too close to management, and therefore failed to provide any real checks or balances on the judgment and ambitions of management. The board did not provide active oversight, and permitted management to make overpriced and risky acquisitions. The management team was allowed, with board approval or acquiescence, to pursue a strategy of growth through acquisitions where size, footprint, and market share were the primary strategic considerations, and the risk-return trade-off to shareholders was a secondary or nonexistent consideration.
This management strategy culminated in the permanently dilutive agreement to acquire Merrill Lynch. The board's rubber stamp of the Merrill deal, coupled with its failure to disclose to shareholders billions in Merrill losses prior to the shareholder vote, catalyzed us to action.
By all objective measures, our shareholder campaign met and exceeded our expectations. We succeeded in getting shareholders to separate the chairman and CEO position, and the two other directors we sought to displace both resigned within 45 days after the annual meeting, presumably in response to the negative shareholder votes. One year after the Merrill deal announcement, nine of the original directors resigned, six new directors were appointed, and two directors did not stand for re-election. The overall board shrunk from 17 members to 13 members. A new chairman was appointed from the non-legacy director group. At the same time, we believe that the reconstituted board is still developing cohesion, and has yet to fully demonstrate where its loyalties truly lie.
What was our greatest accomplishment in our campaign? We demonstrated that an active and well-designed shareholder campaign can shine light on the failures of boards and management teams, and remind the board of their duty to protect shareholders. Further, we showed that shareholders can unite to hold management and the board accountable for their actions, and force changes in corporate governance and culture.
Much remains to be done. Even in cases of significant board failures, such as Bank of America, corporate directors are shielded from personal liability or financial downside by Delaware law, D&O insurance, and corporate indemnities. Also, directors remain nearly impossible to unseat by shareholder vote. Corporate governance reform should limit possible abuse, and include (i) a credible proxy access process, (ii) rules separating the chairman and CEO positions, (iii) director term limits, and (iv) some limited financial exposure for directors.
Lastly, directors must change their mentality and acknowledge their shareholder constituency by enhancing transparency, opening lines of communication, and working to fulfill their duty to protect the interests of shareholders ahead of the interests of management.
Jonathan S. Finger along with his father Jerry E. Finger are managing partners of Finger Interests, an investment management firm located in Houston. They are private investors with over 50 years of combined operating experience in commercial banking, real estate finance and development, investment banking, fiduciary and investment management, and principal investing.
RELATED ARTICLE: RISING STARS OF CORPORATE GOVERNANCE
At its June 2009 conference, the Millstein Center for Corporate Governance and Performance at the Yale School of Management announced the recipients of its second annual Rising Stars of Corporate Governance Award. This award recognizes global corporate governance professionals under the age of 40 who are making their mark as outstanding analysts, experts, activists, or managers. The work of these awardees "is even more meaningful this year given the financial crisis, corporate governance failures, and need for reform," said Ira M. Millstein, senior associate dean for corporate governance at the school. Here are the 2009 rising stars:
* Nada Abdelsater-Abusamra, partner, Raphael & Associes, a law firm in Beirut, Lebanon. She co-authored the first Lebanese Code of Corporate Governance.
* George M. Anderson, partner, Tapestry Networks, a firm that brings together networks of leaders--such as its lead director network--for peer discussions on strategic issues.
* Stephen L. Brown, director and associate general counsel, corporate governance, TIAA-CREF. He works to enhance the governance practices of companies held in the TIAA-CREF investment portfolios.
* Evelynne Change, coordinator for corporate governance, African Peer Review Mechanism (APRM), an initiative of the African Union, where she is engaged in issues relating to corporate governance reform for African countries.
* Deborah Gilshan, corporate governance counsel, Railpen Investments, the investment management arm for the trustee of the pension funds for the U.K. railway industry, where she implements Railpen's global governance and shareholder engagement policies.
* David Hess, assistant professor of business law and business ethics, Stephen M. Ross School of Business, University of Michigan. His research focuses primarily on the role of the law in ensuring corporate accountability.
* Elizabeth Ising, associate attorney, Gibson, Dunn & Crutcher LLP. Her practice focuses on corporate governance, securities regulation and disclosure, and executive compensation.
* Alexis B. Krajeski, associate director, Governance and Sustainable Investment, F&C Investments in London, where she is responsible for engaging with U.S. and emerging market companies on governance issues and oversees F&C's global proxy voting.
* Rachel C. Lee, senior corporate counsel, EMC Corp. Her practice includes the review and implementation of governance best practices, shareholder and stakeholder communications, and sustainability, and she provides legal support for key committees of EMC's board.
* Julieta Rodriguez Molina, associate attorney, Galindo, Arias & Lopez, a law firm based in the Republic of Panama. She also is the founder of the Institute of Corporate Governance of Panama and serves as president of the institute's executive committee.
The recipients were nominated by their peers and selected by a committee of leaders from the Millstein Center, the Open Compliance and Ethics Group, the International Corporate Governance Network, and Weil Gotshal & Manges based on criteria such as past accomplishments and thought leadership, future projects and endeavors, reputation among existing industry leaders, and potential to influence the industry in the future.
RELATED ARTICLE: EXECUTIVE PAY--DID BOARDS OVERREACT TO THE 2008 CRASH?
BY IRV BECKER AND JEFF BACHER
One of the most consequential and publicly visible decisions made by a board of directors is how to pay its CEO and executive team. These decisions are disclosed in the annual proxy statement that is filed with the SEC and sent to shareholders, and thus often picked up in the popular press. Bad decisions can have an impact on the image and reputation of both the company and individual members of the board.
As a result, compensation committee members have increasingly focused on good governance practices and have shifted in the direction of "pay for performance." Over the last several years, the trend in long-term incentive plan design migrated from options and restricted stock to plans based on multiyear financial and operational performance. Shareholders were happy. The governance community was happy. Congress and the regulators were happy.
And then, in 2008 the economy collapsed. Pay for performance now meant that CEO and executive compensation plans were linked to significant declines in both operating results and stock price. After years of steady growth, executive pay dropped. In 2009 boards were faced with an uncertain climate and felt uncomfortable with their business plans and incentive goals. Many expected to see another year of significant declines in compensation.
But it didn't happen. Although pay declined slightly in 2009--reported fully in the Wall Street Journal/Hay Group 2010 survey of CEO compensation--the alignment between pay and performance took a significant step backward, or perhaps sideways. In fact, the relationship between pay and performance took one of the most unusual twists seen in recent years.
To test the relationship between performance and pay, Hay Group in its 2010 CEO pay survey divided 200 large U.S.-based companies into three groups--top, middle, and bottom performers. Annual performance was measured by change in net income. Long-term performance was measured by annualized total shareholder return (TSR). In both the annual and long-term performance categories, the middle third performers had the highest compensation.
In addition, companies shifted long-term compensation plan design from performance plans to more time/service-vested awards. Restricted stock had the highest growth in the type of award used in 2009, at the expense of mostly performance-based plans.
So what happened? Looking back, it appears that compensation committees headed into 2009 most concerned about the retention of top executives. As a result, many lowered the bar on annual incentive goals and shifted the mix toward time/service-based long-term incentive plans. It also appears that in many cases they simply overreacted to the 2008 downturn and were perhaps too pessimistic about their company's ability to produce solid financial performance and deliver stock price growth.
Looking forward, it is probable that "shareholder empowerment" (increased disclosures, say on pay, etc.) will have an impact on committee decisions in 2010 and 2011. Whether committee members will take a step back from the overly cautious decisions made in 2009 is anybody's guess, but a look in the crystal ball would suggest that it is likely that the strong pay-for-performance trend prior to 2008 should continue in 2011 and beyond.
Irv Becker is national practice leader of Hay Group's U.S. Executive Compensation Practice and Jeff Bacher is senior executive compensation consultant with Hay Group (www.haygroup.com).
RELATED ARTICLE: WHO SHOULD DO WHAT IN GOVERNANCE?
After a year at work, a task force formed by the corporate governance committee of the American Bar Association's Section of Business Law issued in August 2009 its Report on the Delineation of Governance Roles and Responsibilities. This report explores the apportioning of governance roles and responsibilities between shareholders and boards of directors--"a question of Particular relevance in light of the current interest in governance reforms in Congress and among regulators," as the task force acknowledges. The 25-member task force, chaired by Holly J. Gregory of Weil Gotshal, was comprised of seasoned lawyers representing a broad array of shareholder, corporate, and academic perspectives and experience in corporate governance, corporate law, and securities regulation. Here is an excerpt.
* Act on an informed basis with respect to their governance-related rights in the corporation, and form company-specific judgments regarding such matters while taking into account their own investment goals.
* Apply company-specific judgment when considering the use of voting rights and contested elections to change board composition.
* Consider the long-term strategy of the corporation as communicated by the board in determining whether to initiate or support shareholder proposal.
* Embrace their role as the body elected by the shareholders to manage and direct the corporation by: (a) affirmatively engaging with shareholders to seek their views; (b) considering shareholder concerns as an important data point in the development and pursuit of long-term corporate strategy; and (c) facilitating transparency by ensuring that shareholders are informed of the company's efforts toward achieving its identified long-term goals and objectives.
* Acknowledge that, at times, the company's long-term goals and objectives may not conform to the desires of some shareholders, and be prepared to explain board decisions nevertheless to pursue such goals and objectives to shareholders and the market.
* Disclose with greater clarity how incentive packages are designed to encourage long-term outlook and to reward steps toward achieving long-term strategies while discouraging unduly risky behavior.
Policy makers and regulators should:
* In the context of reform initiatives, understand the rationale for the current ordering of roles and responsibilities in the corporation and assess the impact of proposed reforms on such ordering.
* Carefully consider how best to encourage the responsible exercise of power by key participants in the governance of corporations so as to promote long-term value creation.
* Ensure that there is equal transparency of long and short, and direct and synthetic, equity positions of shareholders.
The report (which was sent to the SEC commissioners and to Congressional leaders) can be downloaded at http://www.weil.com/aba-task-force-corp-gov-report.
RELATED ARTICLE: PROCEDURAL SAFEGUARDS IN A BUYOUT GET A BOOST
BY DOUG RAYMOND
Ed. Note: For this Year in Review special edition, we asked our "Legal Brief" columnist Doug Raymond to select a court ruling from 2009 that he felt is of particular consequence to a board's decision-making considerations and fiduciary obligations. The case he selected, In re John Q. Hammons Hotels Inc. Shareholder Litigation, is reviewed below. He is in good company with this selection, as this case also drew the attention of the New York Times "Dealbook" blog, which cited it for its "potential to bring about a revival" of management buyouts.
For a Delaware corporation, "entire fairness" is the test for going-private mergers with controlling stockholders. Under entire fairness, as enunciated in Kahn v. Lynch, the burden is on the board to demonstrate that the transaction is entirely fair to minority stockholders. The standard involves two prongs, fair dealing and fair price, and focuses intensely on the process used by the board during the transaction.
Since Kahn, the courts have gradually created exceptions to this standard, notably in Pure Resources, which applied the less onerous business judgment rule to acquisitions by controlling stockholders carried out by front-end tender offers followed by short-form mergers. The Hammons case continues this trend.
In Hammons, a third party bought out all of the hotel company's stockholders, but in doing so negotiated heavily with the company's controlling stockholder (founder John Q. Hammons), who obtained additional benefits that the minority did not receive. Even though the controlling stockholder was heavily involved, the court held that Lynch did not apply to situations where an unrelated third party purchases shares from minority stockholders because the third party, unlike controlling stockholders in going-private mergers, "does not stand on both sides of the transaction."
Having decided not to apply the entire fairness doctrine, the Delaware Court of Chancery in Hammons instead applied the business judgment rule, which gives enormous deference to the board's decision. However, the court imposed these conditions: First, that the transaction be recommended by a disinterested, independent special committee; and second, that it also be approved by a majority of all the minority stockholders through a non-waivable vote. Because a controlling stockholder is able to scuttle any transaction and is competing with the minority for the consideration the third party is paying, the court imposed these procedural protections to guard against those risks and prevent the controlling stockholder from railroading the process.
Having established these conditions, the court concluded they had not been satisfied in Hammons because the special committee had retained the right to waive the approval by the majority of the minority stockholders and, in any event, the approval was conditioned on a majority of the minority actually voting, not all of the minority stockholders. Instead, the court applied entire fairness.
Despite the weakening of Lynch, most going-private transactions involving a controlling stockholder, including Hammons, are subjected to the high standard of entire fairness. Hammons, like Pure Resources, focused on the importance of robust procedural safeguards if the lesser standard of the business judgment rule is to apply. While the cases still are unclear about some aspects of these procedural safeguards, it is clear that the use of a non-waivable majority of the outstanding minority approval requirement will go a long way in protecting a transaction from challenge. Furthermore, using an independent special committee with the power to negotiate and approve or reject a transaction is also recommended to avoid later headaches. Boards that do not take these steps may risk subjecting the transaction to entire fairness review, and potentially expensive and distracting litigation.
However, a special committee, if truly independent, may reach conclusions to which the controlling stockholder objects. For example, in Hammons, one bidder's proposal reduced the price if the transaction was conditioned on majority of the minority approval. The key to effectively negotiating a buyout transaction is to balance the competing interests while employing those precautionary safeguards that are as protective as possible of the transaction. Even if successful at this, it will still be anyone's guess as to the standard of review the courts will apply.
Doug Raymond is a partner of the law firm Drinker Biddle & Reath LLP and heads its Corporate and Securities Group (www.drinkerbiddle.com). Audrey Burns, an associate with the firm, assisted in the preparation of this article.
RELATED ARTICLE: GUIDING PRINCIPLES FOR SETTING COMPENSATION
After six months of study and debate, the Conference Board Task Force on Executive Compensation issued a report in September 2009 that offers guiding principles for restoring credibility and trust in executive pay processes and oversight. The task force was co-chaired by former Rohm & Haas Chairman and CEO Raj Gupta and Robert Denham, partner of law firm Munger, Tolles & Olsen LLP, and included a group of directors, shareholders, experts in compensation, governance, and law, and members of academia. Here is an excerpt.
Certain pay practices have come under heightened scrutiny for providing payouts to executives without regard to performance or inappropriately differentiating between executives and other managers. These "controversial" pay practices can raise special risks for companies, shareholders, and the system of overall executive compensation because they are unrelated to successful performance and can undermine employee morale, raise "red flags" for investors, and erode credibility and trust of key constituencies such as employees, shareholders, and the public.
The task force believes that executive compensation executed correctly, in furtherance of a company's business strategy and shareholder value and consistent with the company's values, is essential to the economic health of America's business sector. It has provided guiding principles for setting executive compensation, which, if appropriately implemented, are designed to restore credibility with shareholders and other stakeholders. The following summarizes these principles:
1. Compensation programs should be designed to drive a company's business strategy and objectives and create shareholder value, consistent with an acceptable risk profile and through legal and ethical means. To that end, a significant portion of pay should be incentive compensation, with payouts demonstrably tied to performance and paid only when performance can be reasonably assessed.
2. Total compensation should be attractive to executives, affordable for the company, proportional to the executive's contribution, and fair to shareholders and employees, while providing payouts that are clearly aligned with actual performance.
3. Compensation committees have a critical role in restoring trust in the executive compensation-setting process and should demonstrate credible oversight of executive compensation. To effectively fulfill this role, compensation committees should be independent, experienced, and knowledgeable about the company's business.
4. Compensation programs should be transparent, understandable, and effectively communicated to shareholders. When questions arise, boards and shareholders should have meaningful dialogue about executive compensation.
RELATED ARTICLE: BOARD DIVERSITY HITS THE SEC'S RADAR SCREEN
While the SEC was weighing the adoption of new disclosures for companies to make about their board diversity, Commissioner Luis A. Aguilar gave a speech at Stanford Law School on Sep. 10, 2009, titled "Diversity in the Boardroom Yields Dividends." The following is an excerpt.
It's amazing to me that in 2009, there still remains a need to highlight the importance of diversity in the boardroom. In an increasingly global environment, the ability to draw on a wide range of viewpoints, backgrounds, skills, and experience is critical to a company's success.
The truth remains that there is a persistent lack of diversity in corporate boardrooms across this country--women and minorities remain woefully underrepresented. For example, in 2008, the Alliance for Board Diversity compiled statistics about the composition of the boards of directors of Fortune 100 companies and found the majority of board members, 83%, were white men, and only 17% of the board seats were held by women and minorities.
Given the apparent lack of diversity and the many studies that indicate the real economic benefits of diverse boards, it should be no surprise that many investors--from individual investors to sophisticated institutions--have asked the Commission to provide for disclosures about the diversity of corporate boards and a company's policies related to board diversity.
Recently, in its proposal discussing several proxy disclosure enhancements the Commission did ask for input on this very question.
Investors care a great deal about corporate governance. At the SEC, we are charged with creating and implementing rules that require investors to be provided with the information they need to make informed decisions on the proxy ballot as well as when they make investment decisions. The information that investors require does not remain static, and our rules must be adapted to best serve investors' needs.
Because of the importance of boards of directors, investors increasingly care about how directors are appointed, and what their background is. This is especially true as American businesses compete in both a global environment, and in a domestic marketplace that is, itself, growing more diverse. In this ever more challenging business environment, the ability to draw on a wide range of viewpoints, backgrounds, skills, and experience is critical to a company's success.
I think it is essential that investors have access to information about the composition of a board of directors, including the directors' backgrounds, and to know whether or not companies take diversity into consideration when constructing applicant pools for open director seats. Accordingly, I worked with SEC staff to seek input through a Commission release as to whether investors and other market participants require greater information regarding diversity in the boardroom.
Specifically, the release solicits comment on whether the Commission should amend our rules to provide for disclosure of whether diversity is a factor a nominating committee considers when selecting someone for a board position. We are also seeking comment on whether we should amend our rules to provide for additional or different disclosure related to diversity.
In today's environment, diversity in the boardroom is a business necessity and public companies, including mutual funds and other investment companies, would be well served by implementing practices to increase corporate board diversification. I look forward to reviewing the letters we receive on this important issue.
The views expressed by the author are his own and do not necessarily reflect the views of the Securities and Exchange Commission, the other commissioners, or members of the SEC staff. The SEC adopted new rules on diversity disclosures in December 2009, three months after Commissioner Aguilar delivered these remarks.
RELATED ARTICLE: THE 10 TOP RISKS FACING BUSINESS
He says he's "no David Letterman," but when Joe Plumeri, chairman and CEO of global insurance broker Willis Group Holdings Ltd., spoke at Town Hall Los Angeles in December 2009, he presented a Letterman-type list of the top 10 risks facing business in the coming decade. Here is an excerpt.
What have we learned from the past decade? Nor enough, in my opinion. The risks confronting business today are new, complex, and increasing--and the old answers just won't cut it. The specific order is not critical. This list will change depending on what business you're in.
10. Reputation: Companies have always worried about their reputation, but the importance of managing reputational risk has never been higher. Just look at the potential impact on reputation from social media. Anyone can start a Facebook group attacking your company and it can become a tipping point before you know it. How many of your companies are actively monitoring blogs and other social media?
9. Supply Chain Integrity: You just have to think of toys, toothpaste or drywall from China to know what I'm talking about here. When they aren't up to standard because the product safety mechanisms are lacking, the liability may rest with U.S. companies.
8. Piracy: We're not talking about Errol Flynn and Johnny Depp anymore. At Willis, helping our clients protect and insure themselves against piracy is among our fastest-growing businesses. And our experts in this area say that it could get much worse in the waters off Somalia. Piracy could spread to Yemen and choke off access to the Suez Canal. Just think of the risk to global trade and the cost of doing business.
7. Cyber Security: We all know about external threats from hackers and data losses. Yet cyber crime affects every company in ways you might not think about. A recent Ernst & Young survey of senior executives found that 75% were concerned about possible IT-related reprisals from departing employees.
6. Globalization: The interconnected nature of business and human interaction brings great benefits but it's also a major new risk underscored by the financial meltdown. Many economists were surprised by what a house of cards the worldwide financial system had become.
5. Cost and Availability of Credit: So many businesses--especially small and mid-size enterprises--rely on being able to secure credit at a reasonable cost. That certainty has vanished in this marketplace.
4. Regulation and Compliance: Compliance risk has the potential to damage your reputation, diminish your franchise value and undermine your competitiveness when it comes to hiring and keeping talent.
3. Pandemics: I hope you're prepared to protect your business against the impact of a pandemic with a robust continuity plan. The good news is that many big companies do this. The bad news is that many small and mid-tier businesses don't--and they're the lifeblood of our economy. Former FEMA chief David Paulison said recently that between 40% and 60% of small businesses don't survive a catastrophe.
2. Terrorism: People like to believe that because we've not been attacked since 9/11, it won't happen again. Unfortunately, we are still vulnerable to an attack in this country.
And my No. 1 risk of the 21st century--Climate Change.
So, whether it's severe weather or pandemics or cyber security that represents the greatest threat to your business, the point is this: the risks of the 21st century are big, and real, and must be faced. How? Transparency. Seeing things for what they are and telling it like is. As business leaders, we must look at all the risks we face. We have to address them head on. And we have to be honest and open about what we see and what we're doing about it.
RELATED ARTICLE: 'THE WORLD IS BEING RESET'
"There is economic and social unrest inside our country," said General Electric Chairman and CEO Jeffrey Immelt when he spoke at the United States Military Academy at West Point in December 2009. "Unemployment is at 10%; we have endured the worst financial crisis since 1940; trillions have been lost in financial assets and housing prices. People are angry and frustrated. The world is being reset." He was addressing the topic of "Renewing American Leadership." He had a message of hope for his audience of young future leaders: "I know that out future will be better than the past. I am convinced that American leaders will come together to solve our problems." Here is a key passage from his speech:
Leaders must like and respect people. We are at the end of a difficult generation of business leadership, and maybe leadership in general. Tough-mindedness, a good trait, was replaced by meanness and greed--both terrible traits. Rewards became perverted. The richest people made the most mistakes with the least accountability. In too many situations, leaders divided us instead of bringing us together.
As a result, the bottom 25% of the American population is poorer than they were 25 years ago. That is just wrong.
I was recently at an event with some unemployed steel workers. Their stories are truly sad. They just want to work. They want to be led.
What is my responsibility? What will your responsibility be someday? Technically, nothing. Financially, nothing. We do not have to care. But we should.
It begins by people telling the truth. We do have to compete to be great; we must improve training and education; we cannot protect everyone in a global economy. In my career, I have had to deliver difficult news that I believed was in the best interest of the enterprise.
At the same time, ethically, leaders do share a common responsibility to narrow the gap between the weak and the strong. I have taken on the challenge to increase manufacturing jobs in the United States. These are the jobs that have created the Midwestern middle class for generations. Manufacturing jobs paid for college educations, including mine. They have been cut in half over the past two decades.
Many say this is a fool's mission. I don't have all the answers. What I can bring ... what GE can bring ... are investments, training and operating approaches to help everyone win.
The residue of the past was a more individualistic "win-lose" game. The 21st century is about building bigger and diverse teams; teams that accomplish tough missions with a culture of respect.
RELATED ARTICLE: WHY MICROSOFT ADOPTED 'SAY ON PAY'
BY BRAD SMITH
At Microsoft's annual shareholder meeting in November 2009 more than 3 million stockholders had the opportunity to cast an advisory vote on compensation programs for senior Microsoft executives. This was the first time that Microsoft shareholders could weigh in on the compensation of the company's top leaders--a practice known informally as shareholder say on pay.
Our say on pay policy was shaped in an environment of economic crisis and low public confidence in the business community. We saw it as an opportunity to express our longstanding commitment to strong corporate governance principles and progressive practices, and to take our own step toward helping restore public confidence in business. We recognized at the time that policymakers in Washington, D.C., were focusing as well on strengthening corporate governance policies via federal legislation, but we also felt it was important to take the initiative ourselves.
For Microsoft, our say on pay policy grew out of extensive study and dialogue with corporate governance advocates, other companies, our largest shareholders, and shareholder proponents of say on pay, including the United Brotherhood of Carpenters, Walden Asset Management, and Calvert Investments. It was part of an ongoing comprehensive approach to executive compensation. We have also increased obligations for executives to own company stock, added stronger policies to claw back executive compensation in circumstances that involve restated financial or nonfinancial metrics (even if no improper conduct is involved), and ensured the independence of the consultant to the board's compensation committee.
While our discussions on say on pay led us to the conclusion that a three-year cycle is optimal for say on pay votes at Microsoft, we acknowledge that there are important constituencies who support an annual say on pay vote. Microsoft will of course comply with any requirements that emerge either through federal legislation or regulatory changes adopted by the Securities and Exchange Commission.
We will continue to look at additional ways to engage with our shareholders on executive compensation. Just as Microsoft believes in constant innovation in our products and services, we believe there is considerable room for innovation in shareholder dialogue.
More broadly, we will keep pursuing opportunities to demonstrate commitment to strong corporate governance principles. As economic uncertainty continues and public confidence in business leadership remains low, scrutiny from elected officials and regulators will only intensify. If boards of directors want to protect the flexibility they need to serve their shareholders, they will need to take steps to assert their leadership for stronger governance.
With more than 12,000 public companies in the U.S., each with its own growth trajectory, competitive position, and set of strategies and assets, we continue to believe boards need flexibility to adopt governance policies that suit their companies' particular circumstances.
Ultimately, it will be up to Congress, the President, and federal regulators to determine how much flexibility the business community will retain. Only time will tell. But there is still opportunity for the business community to develop a stronger voice in Washington if it takes proactive and responsible steps now to address reasonable governance needs.
Brad Smith is Microsoft's general counsel and senior vice president, Legal and Corporate Affairs. He leads the company's Department of Legal and Corporate Affairs, which has just over 1,000 employees and is responsible for the company's legal work, its intellectual property portfolio, and its government affairs and philanthropic work. He also serves as Microsoft's corporate secretary and its chief compliance officer.