John Napoli (left), Robert Master and Anthony Saitta (photos by David Nicolas/Longview)

At a recent roundtable of REIT directors hosted by Seyfarth Shaw and moderated by partner John Napoli, who heads the law firm’s national tax practice, those issues included say on pay, director compensation, balancing dividend yield versus stock performance and investor expectations of REIT boards in the new year.

The Current Environment
An investment memo issued in November by Cohen & Steers reported that U.S. REITs had a negative total return after posting a strong gain in October. The report stated: “Macro uncertainty, primarily regarding how Europe would handle its debt crisis, drove market volatility that had a bias to the downside. But REITs and other stocks surged at the end of the month—bringing year-to-date returns back to positive—when global monetary authorities provided much needed liquidity to European banks. Also fueling the late rally were better-thanexpected U.S. economic data and China’s decision to lower its reserve requirement ratio for the first time in three years.” In addition, the third-quarter earnings season for real estate companies, according to the investment advisor, “generally exceeded expectations. Guidance for 2012 was modestly lowered, which was more a reflection of global economic uncertainty than a change in real estate fundamentals. REITs continued to demonstrate good access to capital at attractive rates.”

Global uncertainty has led to “basically a fear factor in the general economy…and the compression of the business cycle is starting to make REITs think differently about their real estate assets,” said Seyfarth Shaw Partner Blake Hornick, who chairs the firm’s national securities practice. Hornick noted that the traditional REIT buys, holds and manages assets that in a static economy “may not lead to much positive growth.” Among the consequences is that shareholder value may not be as great as in the past and REITs may have to be more active managers of their portfolios amid a sea of economic, regulatory and other changes.

Having a Say on Pay
For instance, the 2011 proxy season was the first Dodd-Frank mandated but nonbinding say-on-pay votes were in place. In the main, the vast majority of these votes were favorable to the executive compensation program of the issuer. However, litigation stemming from negative say-on-pay votes has resulted in suits against some 10 companies, according to Seyfarth Shaw. Hornick opened the discussion by asking what the effect of say-on-pay votes has been for directors.

“If you look at the whole spectrum of publicly traded companies,” said Jeff Morgan, president and CEO of the National Investor Relations Institute, “only about 40 companies had negative pay votes. That’s a huge success. And I think what it has shown is that companies have been better communicators or become better communicators of their compensation packages, and investors—as you said—have an up or down vote.”

So few negative votes on say on pay was an indication that the majority of shareholders think boards are doing a good job, said Robert Masters, general counsel and chief compliance officer at Acadia Realty Trust, a value-focused REIT that went public in 1998. “That there were such a tiny number of objections to what the boards had put into place says to me that boards are doing a very good job, and the majority of shareholders understand and like what boards are doing,” Masters said, adding that “you don’t need shareholder access to the proxy to know whether the board or management is doing a good or bad job—that’s reflected in the stock market.”

One effect of say on pay is that it forces directors to communicate. While the golden rule of real estate is location, location, location, Donald E. Ellison, a Board Leadership Fellow of the NACD who has been non-executive chair of numerous boards, said directors should adopt a new motto: “communicate, communicate, communicate.”

Rather than an up or down vote, Masters suggested that communications should be more of a dialogue and proxy statements clearly written. Concurred veteran director Carlos C. Campbell: “Communications is a requirement on both sides. From the standpoint of the proxy originators, you have to be very clear and the executive summary must be precise.” This becomes particularly important for REITs that are “value plays rather than profit plays,” Campbell says. “If you are a value play and you’re going out over several years and have an outstanding record of increasing shareholder value, that has to be clearly communicated so that shareholders understand the business model.”

However, new regulations requiring greater disclosure about director qualifications and compensation consultants have added further layers of information to the proxy statement. Has the pendulum on regulation swung too far? Keith Locker, non-executive chairman of the board of Sunstone Hotel Investors, was among the participants who think so. “You can get so lost in 30 pages of disclosure relating to the compensation consultants’ report that it may be a challenge for investors to focus on the main points, the key metrics and assumptions that go into a compensation plan, and what are the ranges of compensation calculated,” Locker said.

One participant asked for clarification on the SEC’s proxy access rules, specifically the differences between Rules 14a-8 and 14a-11. The D.C. Circuit Court in September invalidated the SEC’s Rule 14a-11, which would have allowed shareholders who own 3 percent or more of a company’s voting shares for more than three years to nominate director candidates. Even so, investors may still challenge board elections on a nonbinding basis under Rule 14a-8. “What it leaves is the ability for shareholders to propose proxy access and put it on the proxy,” Morgan said. Use of that rule is expected to be limited.

Napoli asked: “What questions should the board be asking management about capital market activities and plans to enhance shareholder value?” Michael Torres of Adelante Capital responded that “Generally, once a year we bring in an independent research firm” to help the board evaluate various capital opportunities.

“If you go back a number of years,” Hornick recounted, “REITs were supposed to be a nice, stable dividend, a chance for capital appreciation—a sort of a hybrid, if you will, between bonds and a pure equity play. Well, the world has now turned upside down, and shareholders want more equity appreciation because interest rates are so low, but what you need to do to increase the stock price may require an investment that might lower your dividend yield.”

The reality, offered one participant, is that it depends on your shareholder base—retail versus institutional. Institutional investors tend to be more forgiving about a lower dividend policy. Yet, according to Locker, you need to start with a strategic plan to determine what the company’s capital needs will be. “The dividend yield to some extent,” said Masters, “reflects the quality of the portfolio. What’s the strength and quality of that dividend over the long term?”

More companies, particularly REITs, are paying closer attention to the relationship between their dividend and net income. Said another director: “For some time we didn’t pay too much attention to that, but now we’re saying, ‘I only have to pay out this much, why don’t we only pay out that much?’”

Too Much Compensation?
Napoli redirected the conversation from dividends paid to shareholders to compensation paid to directors. “What is considered adequate compensation? The reality is that it seems directors are more engaged and devoting more time to their director duties, preparing for and attending meetings and getting out to interact with customers, management and investors to better understand the business,” he said.

“It’s a different conversation than executive compensation,” noted Anthony Saitta of FTI Consulting, “because clearly directors are performing an oversight role, so the stock price on a one-year or three-year basis will be reflected in what they’re doing….I think that as directors get more involved and that as the rules continue to evolve and there are more compliance requirements, there’s more risk associated with being a director and compensation should continue to rise. But I think compensation should increase in terms of equity, giving directors more of a stake in the company so they receive the same benefit as well as pay the same price as shareholders based on how well the company performs.”

At what point does compensation then become high enough that a director is no longer independent? “I think that’s an individual question,” said Suzanne Hopgood, who has served on a number of boards in turnaround situations. “I’ve been on boards with people who said, ‘I can’t afford to lose this board position.’ And my immediate response is, ‘Well, then, you’re not independent.’” Optics are often the issue, she added: “I have been on workout boards, which typically are lower-paying, and the last thing in the world we would do is raise director compensation because regardless of how much time we put in or how much effort it would be a poke in the eye to the shareholders.”

When companies are dealing with uncertainty or financial difficulty, everyone from management to the board is working harder. “In fact,” said one participant, “our board chair generally says to us that ‘Effort is rewarded in heaven, and results are rewarded on earth.’”

Participants
Leigh J. Abrams: Director, Impac Mortgage Holdings

Pike Aloian: Director, EastGroup Properties, Brandywine Realty Trust Partner, Rothschild Realty

Carlos C. Campbell: Director, Resource America, Pico Holdings

Christopher Y. Clark: Publisher, NACD Directorship magazine and Directorship.com

William M. Diefenderfer III: Chairman, CubeSmart

Donald E. Ellison: CEO, Chairman Government Relations, LLC

Michael F. Foust: Director, Digital Realty Trust

Suzanne Hopgood: Director, The Hopgood Group

Blake Hornick: Partner, Seyfarth Shaw

Andrew S. Levine: Director, SL Green Realty Corp.

Keith M. Locker: Non-executive Chairman, Sunstone Hotel Investors

Robert Masters Sr.: Vice President, General Counsel, Chief Compliance Officer, Acadia Realty Trust

Jeff Morgan: President, CEO National Investor Relations Institute (NIRI)

John P. Napoli: Co-Managing Partner, New York Seyfarth Shaw

Frank Poli: General Counsel, EVP and Secretary Cohen & Steers

Anthony Saitta: Managing Director, FTI Consulting

Robert S. Smith: Managing Director, National Capital Merchant Banking Director, Tower Group Former COO, Friedman Billings Ramsey

Michael A. Torres: CEO, Adelante Capital Management

Judy Warner (photo by David Nicholas/Longview)

Jeff also contributes an opinion piece on the new book written by former Forbes editor Stewart Pinkerton, The Fall of the House of Forbes. He again brings considerable firsthand experience to his reading, and assessment, of Pinkerton’s story and the Forbes saga—as only he can.

Launching new programs and features is part of our charge as we work to help elevate the role of the director, while providing a blend of informative, interesting and one-of-a-kind stories to our NACD member readership. Nowhere else will you find the nuances of committee work explored in such rich and regular detail. See, for instance, the excerpt from the proceedings of our Advisory Council on Audit Committees, and take a look at who was there—I think you’ll agree that the assemblage is a testament to the strength of NACD’s convening power.

Since this is the first issue of the new year, there are some forward-looking perspectives as well. In her annual State of Corporate Governance address, NACD Chairman Barbara Hackman Franklin flags key issues for boards in 2012. We also hear from Nasdaq CEO Bob Greifeld about what’s happening with the ever-dynamic stock exchange, and ISS’s Patrick S. McGurn provides a spirited, comprehensive preview to this year’s proxy season.

We hope you read and take something away from each and every story, and, as always, I welcome your feedback.

Judy Warner is managing editor of Directorship.com and NACD Directorship.

images.com

Since Intel became the first company, on May 20, 2009, to add a virtual component to its shareholders’ meeting using the Broadridge service, several other companies have followed suit, despite criticism lodged by some shareholder advocates. Those electing to use electronic platforms created by Broadridge Financial Solutions, Wells Fargo Shareowner Services or Computershare now include some of the largest names in business.

Best Buy, the electronics retailer, was a natural for being an early adopter of the technology. In addition to its in-person annual shareholder meeting, typically held in Best Buy’s hometown of Richfield, Minn., the company streams its annual meeting on its website and to television screens in the employee cafeteria. For the last two years, Best Buy has conducted a VSM as well.

“Best Buy has always had a culture of transparency and uses technology to demystify the meeting for our employees and shareholders. After all, we sell technology,” says Lisa Beth Lentini, senior corporate counsel at Best Buy. “The truth of the matter is virtual makes a lot of sense.” Proponents of the virtual format reason that it provides easier and cheaper access to shareholders who may not want to incur the time and cost of traveling to the in-person meeting. In addition to making the location of a meeting agnostic, there is a real cost savings to corporations that may forego the expense of accommodating large numbers of people, and distribute investor information electronically rather than mailing printed materials.

Robert Schifellite, corporate senior vice president of Investor Communication Solutions at Broadridge, says adoption of new shareholder communications platforms often begins in the office of the corporate secretary, which will typically consult with investor relations. “Once there is buy-in from the corporate secretary and IR, the CEO and CFO need to be educated about the technology— and then, last but not least, the board. Many directors are also eager to learn more,” he says.

Even stock exchanges are exploring this new solution. Janet McGinness, senior vice president and corporate secretary at NYSE Euronext, reports that the exchange first used the virtual platform in addition to the in-person annual meeting in April 2010. When considering whether to add the virtual component, says McGinness, “We asked ourselves what it would say about us as a company to use this new technology to engage shareholders. We decided it was important to leverage all available means of communications, including nontraditional ways to reach shareholders, in the ways that they communicate with each other and the company.”

She continues: “We are a global company, and we acknowledge that it’s difficult for some people to travel to New York City to engage in what is the most significant single event for shareholders. We’ve had a pretty good result.” Once senior management signed off on the decision to offer the meeting virtually, she adds, “we took the proposal to the our nominating and governance committee and they approved it, and then it was supported and approved by the board.” Whether the NYSE continues to offer a virtual component will likely be reviewed after its pending deal with Deutsche Börse AG is completed.

Critics of virtual meetings argue that unlike the open live meeting, VSMs put an electronic wall between the corporation and shareholders. But proponents point out that attendance at traditional face-to-face annual shareholder meetings is relatively low. The exceptions are corporations such as Wal-Mart and Berkshire Hathaway, where the annual meeting has become an extravaganza, attracting tens of thousands of shareholders. For most other companies, however, providing a new, low-cost way for shareholders to attend and interact with management has the potential to increase participation and reduce costs associated with meeting facilities, security and travel.

The appeal of the VSM is growing. Broadridge reports that the number of companies using its service—either virtual-only or in a hybrid format—has grown each year since its inception in 2009. Four public companies hosted virtual meetings in 2009, 28 companies in 2010 and 39 in 2011. More than half of the virtual meetings held in 2011 were conducted only in cyberspace—an option currently allowable in 21 states.

Yet some investor advocates are concerned about the reduction of personal interaction with executives and directors during virtual meetings.

James McRitchie, an investor advocate who publishes CorpGov.net, has expressed support for hybrids. “Most of us favor the hybrid meeting,” wrote McRitchie in an email exchange on the issue. “Any ability for shareowners to ‘attend’ who would be unable to do so physically is a plus. However, we are concerned that such meetings will morph into virtual-only meetings.” McRitchie says more campaigns against the adoption of virtual-only meetings by smaller companies would have occurred last year, but other concerns forced the issue to the back burner.

One concern for McRitchie and others is the state standard. “We certainly are not satisfied with the minimal legal standards for virtual-only meetings,” McRitchie says. “For example, Delaware defines participation by shareowners as the ability to listen to the proceedings” (not the ability to send in questions or comments). That does not allow shareholders and investors the personal exchange provided in in-person forums.

Some shareholder advocates favor an electronic display of submitted questions so investors can endorse questions they want management to answer. Broadridge’s VSM platform can enable this, although it is up to the company to configure its meeting parameters, and that includes the ability to control how and when questions are asked and displayed. Seven of the virtual meetings done with Broadridge have also had shareholder forums on Broadridge’s Investor Network during the lead-up to the annual meeting. Some companies opt to display all questions along with their answers, while others choose to have corporate executives answer directly to the questioner or at the meeting itself.

Directors and most others understand that these developing technologies will likely offer benefits to companies and their shareholders, and they are not standing in the way of continued innovation. The Council for Institutional Investors’ policy states: “Companies incorporating virtual technology into their shareowner meeting should use it as a tool for broadening, not limiting, shareowner meeting participation. With this objective in mind, a virtual option, if used, should facilitate the opportunity for remote attendees to participate in the meeting to the same degree as in-person attendees.”

Says Steve Norman, former corporate secretary of American Express, “In many years of organizing shareholders’ meetings for American Express, I was frequently disappointed by the low attendance numbers of non-employee shareholders. Often only a handful of individual shareholders would attend, as many found physical attendance inconvenient. In contrast, the company’s quarterly earnings calls always had high attendance with robust information sharing and nationwide participation. These quarterly calls showed me that virtual meetings had clear advantages over physical meetings, at least where nationwide audiences are concerned.”

Who Has Held Virtual Meetings?
Virtual
Applied Minerals
Artio Global Investors
Broadridge Financial Solutions
Centerline Holding Co.
Conexant Systems
Graham Packaging Co.
Illumina
Location Based Technologies
Orion Marine Group
PICO Holdings
Symantec
TechTeam Global
Warner Music Group
Winland Electronics
W2007 Grace Acquisition I

Hybrid
American Water Works
Atlas Mining Co.
Best Buy
Dell
Herman Miller
Intel
Lectec
NVIDIA
NYSE Euronext
Pansoft
SH Group
Source: Inside Investor Relations

Fair Conduct For Virtual-Only Shareholders Meetings

• Enable sufficient time for users to login.
• Provide clear instructions for submitting questions online.
• Indicate how responses or other information will be provided.
• Provide future access to the meeting by archive.

Source: Council for Institutional Investors

Benefits of VSM
Corporate Issuers

• It is your choice: you choose the optimal shareholder meeting format for your company and shareholders—virtual, physical or hybrid.
• Increased participation: shareholders have a meaningful way to participate in the annual meeting.
• Reduced cost: there’s no need to rent a facility to conduct your meeting.
• Convenience: increased access to more shareholders, as the “location” is available on their computer.

Shareholders

• No cost to attend and participate.
• No additional software to install on their computer.
• Increased transparency: many more shareholders can attend the meeting and ask questions, further expanding their involvement in the corporate governance process in a meaningful way.
• The ability to participate and vote “live” during the meeting.

Source: Broadridge Financial Solutions

—An unidentified spokesperson for Bank of New York Mellon when asked by a Reuters reporter about once-confidential documents disclosed by whistleblower Grant Wilson.

Olivia Kirtley (left), Mary Ann Cloyd and Tom Murnane

NACD, in conjunction with PwC, recently hosted a daylong session at the Four Seasons in New York devoted to diversity—specifically to address what actions can be taken to “move the needle” on women’s leadership. Attended by more than 120 prominent public company directors and those who aspire to board leadership, panel discussions were led by corporate governance executives from PwC; the law firm Weil, Gotshal & Manges; and the recruitment firm Spencer Stuart.

Entry to the boardroom is hindered by forces both seen and unseen—there seems to be unspoken resistance to women. In her address to the group, NACD Chairman Barbara Hackman Franklin encouraged “those of us who are inside the boardroom” to strategically advocate for inclusion. Franklin, a former U.S. Secretary of Commerce who has served five U.S. presidents and was among the first women to graduate from the Harvard Business School, has served on 14 public company boards in addition to running her own eponymous consulting firm. Her current board service includes Dow Chemical and Aetna. Based on her experience, Franklin suggested identifying the group around you: Who are your allies? Which of your fellow directors are neutral, or capable of being persuaded, and who are “the Neanderthals” whose minds are made up and won’t be changed? “You need to plant the seeds of what you are trying to do,” Franklin said.

Catherine Kinney (left), Mary Ricciardello and Marsha J. Evans

Between general assembly panels, smaller-group conversations were facilitated by leading corporate directors and governance experts to share personal experiences on the board-building process. At the day’s conclusion, three fundamental concepts for creating the optimal board composition were identified:

• Analyze the needs of the board, its strengths and weaknesses, and determine what skills are needed to align the board with the strategy of the company.
• Recruit to the board’s needs by casting a wider net to find candidates who have the skills, experience, desire and time necessary to drive performance at the board level.
• Evaluate the board regularly to identify areas to improve its own performance, and develop a plan to address those areas.

Despite the increased call for diversity—and the glimmers of advancement evidenced by the recent ascensions of women such as Burns, Whitman and Rometty—the majority of boards have not significantly altered their number of female or minority (based on race and nationality) directors.

According to the 2011 NACD Public Company Governance Survey, nearly 68 percent of boards have one or more female directors, a statistic that has remained fairly consistent over the past several years. However, there is an increase in the number of minority directors on boards: 47.6 percent had at least one minority director in 2011, up from 43.7 percent in 2010. Smaller companies lag behind their larger counterparts: more than 55 percent of nano-cap and micro-cap companies have no female directors on their boards, and 73.7 percent have no minority directors.

Spencer Stuart’s 2011 governance study of S&P 500 companies—the Spencer Stuart Board Index—revealed that S&P 500 boards elected just 294 new directors in the 2011 proxy year, the smallest intake in 10 years, and a 25 percent drop over the past five years.

“Reasons for this downtrend may include the downsizing of boards, the raising of director retirement ages and less voluntary director resignations during the economic downturn,” said Julie Hembrock Daum, co-leader for the North American Board & CEO Practice of Spencer Stuart. “The lack of board turnover creates a very real challenge for board renewal and getting new skills on the board.”

Board size is settling at an average of 10.7 directors, down from 11.1 in 2001. Meanwhile, the average age of all independent directors continues to inch up: from 60.2 years 10 years ago to 62.4 today. Across the entire board, the average age is also higher: 37 percent of S&P 500 boards have an average age of 64 or older, more than double the share a decade ago. Nearly three-quarters of all S&P 500 boards—up from 58 percent in 2001— set a mandatory retirement age for directors, yet many retain the discretion to make exceptions to the rule.

Of that group, 83 percent set the age limit at 72 or older, versus just 36 percent in 2001. Because of age limits and the sheer number of directors approaching retirement, opportunities for women to advance should increase.

However, resistance abounds. According to PwC’s annual corporate director survey, while most boards have made it a goal to increase diversity, “many find it challenging.” When asked to describe “your board’s experience with trying to add directors of racial or gender diversity, 65 percent said it was difficult to increase racial diversity, and more than half (55 percent) said it is difficult to add gender diversity.

Diversity of a board is not simply guided by race or gender. There must be diversity on an intellectual level and ages. A board that truly serves as a strategic asset to investors is one that brings together a team whose skill sets are aligned with the goals of the company.

So what’s a woman to do? In a panel moderated by PwC’s Mary Ann Cloyd that included veteran directors Marsha J. “Marty” Evans, Rita Foley and Olivia Kirtley as well as NACD Managing Director and CFO Peter Gleason, participants noted that in addition to networking and making themselves known to board recruiters and other board members, it’s important to recognize how board evaluations and renewals are done. In the current environment, compliance, risk oversight and executive compensation tend to be center stage. Even so, as with most governance practices, no one approach can possibly apply to all boards, and reading proxy statements to learn how different companies explain their diversity policies may also shed light when seeking board opportunities.

A second panel moderated by PwC’s Catherine Bromilow honed in more specifically on the challenges facing women. Susan Hart, a member of Spencer Stuart’s North American Board & CEO Practice, suggested women cultivate their networks especially among fellow directors and that they make themselves and their credentials known to the private-equity firms that invest in sectors where you have experience. Tom Murnane, who serves as a director of Pacific Sunware and The Pantry, also recommended getting up to speed on the issues of corporate governance to improve both board readiness and worthiness.

In introductory meetings, use time wisely. Be succcinct. One of the most important responsibilities of any director is to ask questions. Once on a board, Catherine Kinney advises women to become students of the company, its industry and the management team. Murnane concurred: “Just get out into the halls or into the stores. Make sure you know what the components of the revenue are. You owe this to your shareholders.”

Steering Committee for Diversity

Catherine Bromilow: Partner, PwC Center for Board Governance

Mary Ann Cloyd: Partner, PwC Center for Board Governance

Julie Hembrock Daum: North American Board & CEO Practice Leader, Spencer Stuart

Denise Fletcher: Director, Unisys

Virginia Gambale: Director, JetBlue, Piper Jaffray

Holly Gregory: Partner, Weil, Gotshal & Manges

Leslie Heisz: Director, Ingram Micro, HCC Holdings

Steve Kalan: Associate Publisher, NACD Directorship and Directorship.com

Catherine Kinney: Director, MetLife, MSCI, NetSuite

Reatha Clark King: Director, NACD

Olivia Kirtley: Director, US Bancorp, Papa John’s Intl.

Ellen Odoner: Partner, Weil, Gotshal & Manges

Kalpana Raina: Director, Real Networks, John Wiley & Sons, Information Services Group

Mary Ricciardello: Director, Devon Energy, Noble Corp.

Henry Stoever: Chief Marketing Officer, NACD

Judy Warner

This issue’s cover story on Caterpillar Chairman and CEO Doug Oberhelman represents a milestone for this process. Speaking at a recent NACD Chicago chapter event was the chief of one of the best-known and most recognizable companies, whose machines have helped to build much of the world’s infrastructure and rebuild after catastrophic events both natural and man-made over the last 100-plus years. Just a year ago, Oberhelman, a 36-year veteran of the company he now leads, was named chairman in addition to his chief executive duties. He details how succession and executive leadership development occurred and how he approached transforming the strategy of the company, the board’s role in both intensive processes, and how that strategy is communicated to Cat’s some 150,000 employees in offices and on construction sites around the world. The new strategy required a culture change, and painful decisions—including reducing the ranks of officers by 20 percent and middle management by 17 percent— were necessary. As Oberhelman tells it, “Those two single moves got everybody sitting up in their chair, and then we started talking about a key piece of our new strategy, which was accountability and personal ownership for results.”

How it was done? Why it was done? These are some of the issues Oberhelman speaks to. It is the kind of personal and instructional storytelling about the boardroom that only NACD Directorship can bring to readers. Please let me know what you think.

A year ago, when fraud investigator Harry Markopolos spoke at the Directorship 100 Forum, he told our audience that he was working on “billion-dollar-and-up” cases that involve the C-suite. These cases, he said, are “big. They’re unbelievable, but that’s what I do for a living.” Markopolos, best known for his relentless efforts to blow the whistle on Bernard Madoff’s Ponzi scheme, is true to his word. He is now part of a group whose work is reported to have led to separate civil lawsuits by the Justice Department and the New York and Massachusetts state attorneys general alleging that two leading financial services firms systematically over-charged investors on billions of dollars of currency trades. The whistleblower group can seek a share of as much as 25 percent of any recovery the states obtain in many of the cases.

Our cover story, “The Whistleblowing Business,” explores the serious implications to corporate boards and officers of the new whistleblowing regime. It features interviews with the Securities and Exchange Commission’s first chief operating officer, Jeff Heslop, and Wachtell Lipton partner David M. Murphy, who has defended corporations in whistleblowing cases. The centerpiece of our coverage is an excerpt from a recently issued report by the RAND Institute for Civil Justice and its Center for Corporate Ethics and Governance. In addition to offering bounties, the report concludes, the most contentious aspect of the new rules is that they do not require a corporate insider to first make use of his or her company’s internal reporting channels as a prerequisite for access to the SEC and any potential award under Dodd-Frank.

The underlying theme of each of these important stories is trust. The SEC’s new bounty program for whistleblowers shows that trust is key to effective employee programs. In his comments on information technology, NACD President and CEO Ken Daly focuses on the “i” in IT, which must be trustworthy above all. I think everyone in the boardroom would agree, Schmidt was right.

Judy Warner

Each year the D100 evolves with helpful insights from an editorial advisory committee (whose identities are anonymous) and this year in particular from the guidance of NACD’s esteemed Center for Board Leadership and the NACD board of directors.

As you will see when you peruse the D100, it is really two lists. The first half of our coverage, which begins on page 26, recognizes the 100 most influential governance institutions and entities outside the boardroom followed by 100 of the most influential public company officers and directors inside the boardroom plus “People to Watch.”

No endeavor of this scope is ever a solitary effort. I want to acknowledge and give thanks to our entire team beginning first and foremost with Ken Daly, NACD president and chairman, and Jeff Cunningham, the visionary whose deep public company board service lends real-life perspective to the notion of influence—who has it and why. Our list making benefitted mightily from the recommendations and sensibilities of both NACD Managing Director and CFO Peter Gleason and Chief Knowledge Officer Alexandra R. LaJoux, who in addition to their years of experience, bring energy and intellect to what is a laborious process.

In addition, great thanks to our talented and tireless art director Patricia Smith; Editors Brendan Sheehan, Elizabeth Mullen, Kate Iannelli and Suzanne Meyer, who helped report, shape and fact check many of the profiles and biographies; our summer interns, Jordan Sapiro and Adam Lee; and to Hurricane Irene, who cooperated by weakening to a tropical storm allowing us to keep the lights on during our final weekend of proofreading.

To each of you who contributed, I thank you and to everyone on the 2011 D100, I congratulate you.

Judy Warner is managing editor of NACD Directorship and Directorship.com.

Reatha Clark King

Progress for women has stagnated in the U.S. and in Europe, where some countries have mandated gender diversity, and where others— and the European Union itself—are considering similar measures. Some sector-specific groups are adopting voluntary measures hoping their actions will thwart regulations that require diversity compliance. While legislated quotas are considered highly unlikely here in the U.S., there’s little question that more needs to be done to promote greater boardroom diversity. In its annual analysis of the Standard & Poor’s 500, the Spencer Stuart Board Index rose from 15.9 percent in 2010 to just 16.2 percent in 2011. Similarly, among the Fortune 500, a mere 15.7 percent of all directors are women, according to the most recent Catalyst Census.

The business case for adding women to boards has been made. Data that correlate the number of women in leadership positions to corporate financial performance grows. A 2008 study by McKinsey and Co. found that companies with a higher-than average proportion of women on their management committees delivered the best performance. McKinsey data revealed that companies with more women on their boards outperformed rivals, with a 42 percent higher return on sales, 53 percent higher return on equity and a 66 percent higher return on invested capital. A 2007 Catalyst study reported that corporations with at least three female directors had “notably stronger financial performance.”

Daum worked briefly for Catalyst, a nonprofit devoted to helping advance women in leadership, before joining Spencer Stuart as an executive recruiter 18 years ago. Since then, she has placed 881 board directors, with 34 percent being women and minorities. She views the current stagnation in part as a matter of seat count. “Lack of turnover is a very big problem. The number of board seats open not just to women but all candidates is limited. You have to get renewal however you can,” she says. More diverse boards result from rigorous board evaluations, Daum asserts. “If we allow boards to think about who is in the room, we’ll get much better boards….If you’re on a nominating and governance committee, you should be pushing for serious board evaluations.”

Any change in business strategy should necessitate a conversation on whether the board has the requisite expertise to carry out its oversight mission. “After the annual or biannual strategy meeting, if this is the company’s strategy, what does this mean for the board?” advised Patricia Barron, who has served on public boards since the 1980s. “If you speak about board turnover in a business context, who can object?”

Age and term limits, still used by many boards, have become, in some directors’ views, a cop out for full-board evaluation. Although most boards evaluate individual directors, the continuation of age limits (used by more than half of boards) and term limits (used by almost 10 percent, according to NACD data), can make boards complacent about using their evaluation tools to the fullest. Holly Gregory, a partner at Weil Gotshal who advises boards on governance matters, says the downside for age and term limits is that they set the expectation for long tenure even though boards are elected annually in most instances. Instead, boards should ask themselves each year: “Do we have the right board to achieve the company’s current strategic objectives?”

Another barrier to women’s advancement in the boardroom— aside from the low number of board seats and complacency about turnover—is the legendary glass ceiling within companies. Bettina Whyte, a turnaround crisis-management expert whose first exposure to boards was as an interim CEO, points out that systemic issues cause more women to opt out rather than seek higher positions with greater operating responsibilities and a bigger salary. The male-dominated culture that permeates Corporate America at the highest level may thwart the ambition of some women, so it behooves companies—and boards as their monitors—to assess how leadership pipelines are being filled.

Looking beyond the CEO population could also refresh the very definition of what constitutes an “ideal” board director. If women aren’t making it to the top of the C-suite, then perhaps expertise other than experience as a CEO should be considered. Kalpana Raina recommends that looking in nontraditional places for directors will expand the candidate pool: “On one of my boards, we looked beyond sitting CEOs. Of the two candidates now being considered to join the board, one is a very young, serial entrepreneur and the other is president of a major university.”

Ellen J. Odoner, head of Weil’s public company advisory group and founding chair of her law firm’s women’s initiative, noted that, for the current generation at least, areas such as law may provide rich sources of women candidates who have the requisite business experience and judgment for board service. Virginia Gambale, a director at JetBlue, predicts that a paradigm shift resulting from the convergence of new technologies will force a different profile for director candidates. “We are at an inflection point,” she says, “because of the convergence of three technologies: social media, mobile devices and cloud computing. They will create fundamental changes for every business that will require greater diversity of competence on board.”

Companies need to be held accountable, but the question of how assertive women’s groups should be in “outing” boards lacking diversity stirred both agreement and debate. Some believe that a stick is more effective than a carrot. Patricia Flynn was among a group of Massachusetts-based business leaders who launched a grassroots campaign aimed at increasing the share of women on corporate boards to 20 percent or greater by 2020. In its efforts to educate consumers and others about the status of women on corporate boards, the group’s website (www.2020wob.com) highlights companies with at least 20 percent women directors (“W”) and those that have zero women on their boards (“Z” companies). Flynn reports that being singled out in a negative light has prompted at least one company to expand the size of its board in order to add a female director.

As King noted, “It takes one to get to two.”

Participants

Patricia (Tosh) Barron: Director, USAA, Quaker Chemical Corp., Ultralife Corp., Teleflex Corp.

Catherine Bromilow: Partner, PricewaterhouseCoopers

Janet Clarke: Director, Asbury Automotive, Unisys

Julie Hembrock Daum: Co-Leader, North American Board and CEO Practice, Spencer Stuart

Denise K. Fletcher: Director, Unisys

Patricia Flynn: Director, Columbia RiverSource Funds

Virginia Gambale: Director, JetBlue

Holly Gregory: Partner, Weil Gotshal

Leslie Heisz: Director, Ingram Micro, HCC Insurance Holdings

Cynthia Jamison: Director, Tractor Supply Company, B&G Foods

Steve Kalan: Associate Publisher, NACD Directorship

Reatha Clark King: Director, NACD

Catherine Kinney: Director, Metlife, Netsuite, MSCI

Olivia Kirtley: Director, US Bancorp, Papa Johns

Lynn Krominga: Director, Avis Budget, Sunrise Senior Living

Ellen Odoner: Partner, Weil Gotshal

Kalpana Raina: Director, Real Networks, Information Services Group, John Wiley & Sons

Henry Stoever: Chief Marketing Officer, NACD

Bettina Whyte: Director, Rock-Tenn, AGL Resources, Amerisure Insurance

Rosalie Wolf: Director, North European Oil Royalty Trust

Phoebe Wood: Director, Invesco, Coca-Cola, Leggett & Platt

Leading the list of contenders identified by Delaware insiders to succeed Chandler is Vice Chancellor Leo E. Strine Jr., the court’s most senior judge. Prior to being appointed to the court in 1998, Strine served as counsel to former Delaware Gov. Thomas R. Carper, now one of Delaware’s two senators, and prior to that as a litigator for Skadden Arps.

Other possible candidates identified in media reports this week include Sam Glasscock III, chancery court master; Delaware Superior Court Judge Mary M. Johnston; and Kevin F. Brady, partner at Connolly Bove Lodge & Hutz in Wilmington, Del.

The process of choosing Chandler’s successor got underway on Tuesday when the Delaware Judicial Nominating Commission (JNC), chaired by Andre G. Bouchard, managing partner at Bouchard Margules & Friedlander, issued a public notice soliciting candidates. The court is required by the state constitution to be bipartisan and all candidates must be Delaware residents. Candidates must submit a completed questionnaire no later than noon, May 13. They would be interviewed by the JNC which refers all finalists to Gov. Markell who then recommends one candidate to the state Senate for approval.

Writing on his blog, Delaware Corporate and Commercial Litigation Blog, Francis X. Pileggi notes that “the history of judicial selection supports the conventional wisdom that any vacancy (or vacancies) on the Delaware Court of Chancery will be filled promptly by some person who will be selected by the JNC, appointed by the Governor, confirmed by the Delaware Senate and installed on the court by the end of the regular legislative session on June 30.”

The 60-year-old Chandler notified the Delaware governor he plans to retire to seek opportunities in the private sector.  His last day on the court will be June 17.

Chancellor William B. Chandler III

“I want to pursue new and exciting opportunities and challenges that are available to me,” said Chandler. “I also believe now is the time for me to seek greater financial rewards in the interest of my family.”

In the cover story in the December/January issue of NACD Directorship, Chandler spoke of his legacy as chancellor. “To me, the most important case I have worked on is the one I’m working on right now. Whether it’s Disney or the dissolution of a failed start-up company—all of my cases are equally important. Some of the smaller disputes involving micro-cap companies frequently generate some of the most important principles and ideas in our jurisprudence. I will have to leave it to others to assess which cases define my legacy.”

Chandler’s resignation—described as a surprise by the Delaware News-Journal, which broke the story—creates a vacancy that will be filled.

According to the Delaware News-Journal, Chandler is being aggressively wooed by several top-tier international law firms. Among the contenders to succeed Chandler is Vice Chancellor Leo W.  Strine Jr., according to Charles Elson. The director of the University of Delaware’s Weinberg Center for Corporate Governance told Bloomberg that Strine, appointed in 1998, is now the court’s most senior judge. Any successor must be nominated by Markell, a Democrat, and approved by state legislators. Strine served as counsel to former Delaware Gov. Thomas R. Carper, who is now one of Delaware’s two senators.

Left to right: Donna Shalala, Jim Liddy, and Mary Pat McCarthy

The growing complexity of business—compounded by new government regulations and accounting standard convergence, an increasingly difficult compliance environment and the ongoing white hot scrutiny of shareholders and media alike—moves risk and crisis management to the forefront of audit committee agendas.

Set aside other top concerns for a moment and consider the sheer volume of legal and regulatory compliance requirements. Dennis Beresford, whose significant board experience spans a decade—including Fannie Mae, Kimberly-Clark and Legg Mason—said this daunting set of issues is driving some audit committees to re-evaluate and in some instances beef up their company’s internal compliance processes and resources. Depending on the nature of the company’s business, compliance related to financial reporting, taxes, and industry-specific regulations from, for example, the Federal Communications Commission or Food and Drug Administration —not to mention whistleblower programs and the Foreign Corrupt Practices Act (FCPA)—have added new levels of complexity and risk.

Based on his experience as an advisor to audit committees, the challenge of dealing with the volume of information audit committees receive about these and other risks facing the enterprise is a growing concern, said KPMG Vice Chair of Audit Jim Liddy. “One of the things I tend to see many boards struggling with is how to sort through all the information they receive. They are being inundated with data and oftentimes it’s difficult to understand how that data can help them accomplish their oversight objectives. What is the information they need and how can they process and analyze that information to gain important insights and ultimately offer helpful advice and make good business and governance decisions?”

Left to right: Alex J. Mandl, Donna Zarcone and Bart van Ark

Interestingly, information technology skyrocketed onto the short list of top audit committee oversight concerns this year in a KPMG Audit Committee Institute poll of some 120 audit committee members attending the Audit Committee Issues Conference in February. In addition to an increase in cyber-related crimes, what’s driving those concerns, according to one director, is that hackers seem to be getting more sophisticated and corporate security systems are not keeping pace. And the adoption of emerging technologies—such as cloud computing— and the implications of WikiLeaks and other social media risks are sparking more rigorous discussions with the CIO.

Audit committees also sit on the cusp of what Tom Duffy, KPMG’s national managing partner for audit, described as the “biggest standard-setting agenda scheduled to unfold in a very concentrated period of time—the greatest change in accounting that most of us have seen in our careers.” It is clear that significant change to U.S. accounting is on the way as a result of joint activity of the FASB and IASB.

Teresa Iannaconi, a partner in KPMG’s Department of Professional Practice and former deputy chief accountant in the SEC Division of Corporation Finance, pointed out that FASB Chair Leslie Seidman has publicly committed to issue final accounting standards by June in five key areas. While that schedule may prove to be ambitious indeed—with year-end 2011 being a more feasible timeframe—Iannaconi emphasized that these new standards (and others to follow) will bring profound change to U.S. GAAP and the way companies and investors report and interpret corporate financial statements.

What Audit Committee Members Said
On the upside, however, resolution around accounting standards can benefit those companies pushing into new markets, said board director Alex J. Mandl. “To be able to effectively do business there and control that business from an auditing point of view requires that you learn and adopt the appropriate auditing systems and operational procedures. As you extend [your companies] into new parts of the world, that burden becomes enormous.”

Left to right: Irvine O. Hockaday Jr., Holly J. Gregory and Barry A. Fromberg

Irvine O. Hockaday Jr., who serves on the boards of Crown Media Holdings, The Estée Lauder Cos., and Ford Motor Co., sees great risk—no pun intended— of directors conflating their roles concerning risk oversight, business advice and counsel and risk management. The right balance is crucial and will fluctuate with particular circumstances. The risk environment is constantly changing, and directors need to assess whether they and their board are in a position to understand the implications of these changes for the company.

According to Hockaday, “This is an opportunity to take a step back and look at the composition of the board in the context of the company’s strategy and risk profile today and for the next several years.” There is a real need for a rigorous self-evaluation process, “and in my experience,” he said, “it’s pretty perfunctory.”

The chairman of MG Advisors, Mary J. Steele Guilfoile, who serves on the boards of Interpublic and Valley National Bancorp, wants to make sure that audit committees don’t become overly focused on “process”—checking boxes, dotting i’s and crossing t’s. “With the regulatory scrutiny we’re all under, it would be very easy to get caught up in a lot of process, rather than spending the time doing what is most productive in terms of benefitting shareholders, which is to really learn about the business and its inherent risks. That’s what our job is really about,” she said.

And, as CEOs may tend to view risk through a business opportunity lens, audit committees often must force the issue. To that point, Mandl suggested that the process of risk management be integrated into the strategic planning process so that the two are interwoven and there are proper checks and balances.

There is no substitute for industry knowledge, and boards need to have directors who truly understand the business, noted Adrian Tocklin, a director who serves on the audit committee of Thrivent Financial for Lutherans.“I am a much better board member when I know the business from top to bottom because you can’t understand the risks if you don’t understand the business.” Directors with deep industry knowledge become important sources of information for other board members and can help promote the healthy skepticism that is a defining characteristic of an effective board.

Another challenge for boards—and another popular image stemming from the financial crisis—is the strong willed, “imperial” chief executive, daring to be questioned. The downfall of once high-flying Wall Street firms such as Bear Stearns and Lehman Brothers, as well as Tyco and Enron almost a decade before, had average investors and corporate governance experts alike asking: Where was the board?

Left to right: Mary J. Steele Guilfoile, Adrian Tocklin and J. Thomas Presby

J. Thomas Presby, whose varied board work currently includes ExamWorks Group, First Solar, Invesco Ltd., Tiffany & Co. and World Fuel Services, has observed CEOs who attempt to manage their boards by controlling the flow of information or by causing the board to name an executive committee consisting of a few members who happen to be close colleagues. The executive committee, rather than the full board, can then become the forum where the most sensitive issues are covered. Cases like these, where the culture is one of control rather than collegiality and transparency, are strong arguments for the separation of the chairman and CEO roles. However, it is important to remember that each particular set of circumstances requires the governance structure best suited to it.

Presby also pointed out that “you can’t fault the CEO when he or she behaves like one. Strong leaders, like the ones who make it into the C-suite, will want to manage everything important around them. This will include managing the board if the board permits it. Board members need to keep in mind exactly which body is governing which. I emphasize that this is a matter of managers’ DNA rather than sinister or sneaky motives. They simply can’t help themselves…It’s just another challenge for the independent directors.”

One participant described an approach—shared by an audit committee chair of a major company— that was used to set clear expectations regarding the board’s relationship with the CEO. Prior to its first board meeting, the audit committee chair met with the company’s new chief executive to present a one-page description of how the board planned to interact with the new CEO and management. “The paper essentially said, ‘We’re going to question. We’re going to be skeptical and we’re going to ask for alternative viewpoints. And it doesn’t mean we don’t trust you. And it doesn’t mean we don’t like you. But this is how we as a board are going to operate.’ That strikes me as a very direct and constructive way of establishing good, healthy skepticism and dynamics.”

Left to right: Steven Hill, H. Raymond Bingham and Dennis R. Beresford

Listening to the discussion unfold, H. Raymond Bingham, whose current directorships include Oracle; Flextronics International, where he is chairman of the board; and STMicroelectronics, challenged audit committees to improve their knowledge by increasing the investment made to understand the business from a strategic and operational sense. “When you get the answer to the question that you’re inspired to ask, you also need to understand the implications of that answer to the strategy, risk and vitality of the business. And that goes for every director, but audit committees in particular, should always focus on raising their game in this respect.”

Barry Fromberg, a director at Constellation Brands and Xtera Communications, agreed that strategic focus is crucial. “I see boards spending a lot more time on understanding the strategy and where the company’s big bets are. As growth returns, how well are we positioned to take advantage of the opportunities out there?”

What the Educator Said
“Every board I sit on wants to know what the bottom line is on healthcare,” said Donna Shalala, the University of Miami president who for eight years served as Secretary of Health and Human Services under President Bill Clinton and now serves on the boards of Gannett Co., Lennar Corp. and Mednax. Shalala recommends that boards ensure there is a corporation-wide analysis of a company’s healthcare usage and data.

As head of the largest employer in Greater Miami—some 13,500 workers report to the university each day—Shalala says it doesn’t matter whether you’re a Republican or Democrat, the medical system needs cost containment. Even so, she predicted that states will battle the federal government and raise questions of constitutionality that will ultimately lead to the Supreme Court.

Asked by a director for specifics on what the University has done to help control employees’ medical costs, Shalala said, “You know, everybody believes that individuals ought to have more of their own dollars in the system so that they are sensitive. We’ve tried everything from higher co-pays to higher deductibles and wellness programs including smoking cessation…but people need to be educated at the micro level.” Shalala is adamant that the new so-called “Obamacare” signals the beginning of a necessary systemwide change.

What the Economists Said
The enactment of Obamacare could cost upwards of $800 billion over the next 10 years while the United States deficit as a percent of GDP hovers near an alltime high of 10 percent. Turning from the subject of healthcare, Moderator Jeffrey M. Cunningham queried economist David Hale on the prospects for “meaningful deficit reduction and what the ramifications are if you in your heart don’t believe that the American people have the willpower?”

Left to right: Jeffrey M. Cunningham, Tom Duffy and Teresa E. Iannaconi

Since President Barack Obama’s state of the union address took place just days before the Issues Conference convened in Miami, Hale remarked that the President made only a cursory comment about corporate tax reform and provided no details, a powerful signal that “on the Administration side, I don’t see a lot of movement” on deficit reduction.

And what happens if there isn’t deficit reduction? Ultimately, warned Hale, “the solution will be some kind of national crisis…If we make no progress on deficit reduction, and trillion-dollar deficits continue indefinitely, in 2013 or 2014 the government bond yield would be 9 or 10 percent and then you’d have a real panic, a real fear.”

The Conference Board’s chief economist, Bart van Ark, sees significant challenges and opportunities in the U.S. and global economies. “There are very real risks right now in the emerging markets, including inflation, possible asset bubbles, and maintaining sustainable growth,” he said. On the upside, van Ark points to significant gains in U.S. productivity, as well as advancements in technology and innovation. “The United States clearly has an important opportunity to lead in these areas.” And he agreed with the general sentiment among Roundtable participants that a longterm, strategic view is critical for companies at this pivotal point in the global economic recovery.

What the Examiner Said
“What I’ve seen, not just with Lehman Brothers but with other institutions, is that the problems are frequently known, or can be known if the board is prepared to ask [the CEO] for dissenting opinions. It’s a simple question: ‘I see what you have to say. Now, are there any other individuals in the organization who have a different opinion?”

Left to right: Anton R. Valukas, David Hale and Ram Charan

So began Anton “Tony” R. Valukas’ recounting of his experience as the court-appointed examiner in the Lehman bankruptcy, the largest in American history—greater than Enron, WorldCom, Washington Mutual and CIT combined. Valukas, who is chairman of the law firm Jenner & Block, assembled a team that studied the causes of Lehman’s demise detailed in a 2,200-page report issued last year.

Valukas addressed the questions that directors most want to know: what happened, how could it have happened and what are the lessons for boards? In short: Management believed that a countercyclical strategy would be profitable despite the market signals that suggested caution. The mantra was “pedal to the metal,” he said, and the board ratified management’s strategy, which, in retrospect, might have been scrutinized and challenged in greater detail. Just eight months before Lehman declared bankruptcy, it announced its most profitable year.

When Valukas spoke at the NACD Directorship 100 Forum in November (see NACD Directorship, February/March 2011) and again before this audience of audit committee members, his message was clear: “Lehman failed because of its own decisions to increase risk.” While there were regulatory failures within the SEC and the Federal Reserve and structural failures within Lehman itself, the core issue, according to Valukas, stems from management’s failure to understand and accurately measure the extent of risk at this once formidable financial institution and the board’s failure to more aggressively question management on its strategy to take on more risk.

Valukas suggests that directors and members of all board committees need to exercise healthy skepticism. More probing questions—including: Are we hearing dissenting views from people down the line?—might have helped the board steer Lehman on a different, safer course, noted Valukas, acknowledging that the board did not have the benefit of knowing then what we know now.

What the CEO Guru Said
When the globe-trotting management expert Ram Charan spoke, directors leaned forward in their chairs to capture every word. The sometimes softspoken consultant to CEOs has spent the last 30 years living from a suitcase, on the move from one C-suite appointment to the next.

On this day, he arrived at the Scottsdale meeting from Delhi, eager to share his insights on the oftendelicate, but critical, dynamic between the C-suite and the board. Ever since the passage of Sarbanes-Oxley-mandated director independence, and subsequent court decisions that have underscored directors’ fiduciary duty to represent shareholders in their boardrooms, the balance of power has shifted.

“What is an effective board?” Charan asked. The main task for boards, he said, is not governance but leadership. Charan has a seemingly innate ability to simplify and articulate. To effectively oversee strategy, he advised that the management team, led by the CEO, present the strategy to the board “in less than five written pages.” The language should be clear and concise. There should be no financial statements or external data. The strategy document should be shared with each director and a phone call between the director and the CEO should take place so that the director has the opportunity to ask questions. He suggested that boards, led by the lead director or non-executive chair, work with the CEO to set agendas for 12 months. Peer and board evaluations are musts and can be boiled down by answering three simple questions: Over the last two years, what has been the net output—versus the inputs—of the board? What two things could the board have done better? What two things does the board need to do next year?

Wrap Up: The Big Picture
“It’s a new risk and regulatory world out there,” said Mary Pat McCarthy, executive director of KPMG’s Audit Committee Institute and a vice chair of KPMG LLP. “And it will be a real challenge for audit committees and boards to keep sight of the forest while they’re dealing with all the trees.”

Indeed, echoing Beresford’s concerns about keeping a handle on all the regulations impacting companies, Weil Gotshal attorney Holly J. Gregory reminded the group of three converging trends that should put oversight of corporate compliance high on the agenda: heightened FCPA enforcement, new whistleblower bounties and recent amendments to the Federal Sentencing Guidelines. “Companies should thoroughly reassess their compliance programs and have a robust dialogue with the compliance officer,” the lawyer advised. “Where are the greatest compliance risks? And what is the company doing to set the right tone for ethics and compliance throughout the organization?”

Another macro trend that, for many companies and industries, has arrived already: developments in IT and cloud computing and the risks and opportunities that emerging technologies present. “The proliferation of technologies and data is bringing profound change,” noted Steven Hill, KPMG’s national innovation leader. Citing the increasing virtualization of organizations and mobile workforces and projections that “more data will be produced, managed and analyzed in the next two years than in all of human history,” Hill sees the paradigm shift in IT and information well under way. “Until now, most data has been retrospective. But technology is now turning that on its head as the value of data becomes more prospective,” he said. “It’s important to analyze what happened last quarter, but to see what’s ahead—that is the Holy Grail.”

Four Major Risks to the U.S. Economy – An excerpt from David Hale Global Economics Forecast, Vol. 09.01

Inflation
Higher inflation could depress real income growth and thus constrain the upturn in consumer spending. The Consumer Price Index (CPI) increased by 0.5% during December because of a 4.6% gain in energy prices. The oil price in early January of $91 per barrel is high compared to a fourth quarter average of $85.03 and a 2010 average of $79.43. Food prices also rose at a 1.5% annual rate, which was the second largest increase since June 2009. During the past year, the CPI rose by 1.4% and was led by a 2% gain in commodity prices and a 1.2% gain in service prices. The core CPI excluding food and energy rose by only 0.6%, or the lowest rate of gain in the last 50 years.

In 2011, energy prices could rise another 10% during the first half of the year. The USDA expects food prices to increase 2-3% for the year as a whole. Energy has a 9% weighting in the CPI and food has a 14% weighting. They could produce an annualized inflation rate of 2.8% during the first half of 2011. The Social Security tax cut should boost personal income growth into the 4-5% range during the first quarter, and thus help to compensate for higher inflation.

Weak Housing Sector
The housing sector remains weak because of excess inventory resulting from foreclosures. It could take 11 months to sell the current supply of housing on the market, compared to a long-term average of seven months. There are currently 3.9 million homes for sale compared to a long-term average of 2.5 million. Since 2006, 6.4 million homes have gone through foreclosure while 4.4 million mortgages are currently more than 90 days overdue or in foreclosure.

The U.S. should have a core housing demand of 1.6 million units per annum because of new household formation (1.2 million) and homes being destroyed by fire (400,000). The recession sharply curtailed the rate of household formation. As employment conditions improve, there will be a rebound that could bolster demand for new housing. The recovery will then become self-reinforcing by creating new construction jobs.

State and Local Government Spending
The Center on Budget and Policy Priorities estimates that state deficits will be $122.6 billion during the 2011 fiscal year and could be as high as $112.7 billion in fiscal 2012. The Obama stimulus program has so far provided $140 billion of assistance, but only $60 billion remains to help the states this year and this number will drop to $6 billion in fiscal 2012. The state and local government sector accounts for 19,407,000 jobs, or 14.8% of the total. It could easily lose another 200,000 jobs in 2011.

The municipal bond market has suffered from investor concern about deteriorating credit quality. Yields on 30-year triple A bonds have risen above 5% for the first time since 2009. Municipal bond funds have experienced an outflow of $20 billion over the past 10 weeks. The Vanguard Group has delayed plans to launch three new municipal bond funds.

Federal Fiscal Policy
The newly elected Republican Congressional majority is determined to reduce federal spending. They will attempt to use the pending need to increase the fiscal debt ceiling as a form of leverage for obtaining spending cuts this year and next year. The Republicans now acknowledge that their original target for $100 billion of spending cuts is unrealistic, but they will probably strive for at least $50 billion of spending cuts. They are also talking about $2.5 trillion of cuts in discretionary nondefense spending over 10 years. The markets could be apprehensive about the politics of the debt ceiling increase if the Republicans make promises to reduce discretionary spending.

Participants and Speakers:
Dennis R. Beresford – Director, Fannie Mae, Kimberly-Clark, Legg Mason

H. Raymond Bingham – Director, Dice Holdings, Flextronics International, Oracle, Spansion, STMicroelectronics

William A. Burck – Partner, Weil, Gotshal & Manges

Ram Charan – Business advisor, author and management/leadership expert

Jeffrey M. Cunningham – Managing director and senior advisor, NACD

Tom Duffy – National managing partner, Audit, KPMG LLP

Barry A. Fromberg – Director, Constellation Brands, Xtera Communications

Mary J. Steele Guilfoile – Director, Interpublic Group, Valley National Bancorp

Holly J. Gregory - Partner, Weil, Gotshal & Manges

David Hale – Chairman, David Hale Global Economics

Steven Hill – National innovation leader, KPMG LLP

Irvine O. Hockaday, Jr. – Director, Crown Media Holdings, The Estée Lauder Cos., Ford Motor Co.

Teresa E. Iannaconi – Partner, KPMG’s Department of Professional Practice and former deputy chief accountant, SEC’s Division of Corporation Finance

Jim Liddy – Vice chair, Audit, KPMG LLP

Alex J. Mandl - Director, Dell; chairman, Gemalto and Horizon Lines

Mary Pat McCarthy – Executive director, KPMG Audit Committee Institute and U.S. vice chair, KPMG LLP

J. Thomas Presby – Director, ExamWorks Group, First Solar, Invesco Ltd., Tiffany & Co., World Fuel Services

Donna E. Shalala – President, University of Miami and former U.S. Secretary of Health and Human Services

Adrian Tocklin – Director, Thrivent Financial for Lutherans

Anton R. Valukas – Chairman, Jenner & Block; Court-appointed Examiner, Lehman Brothers Holding Bankruptcy

Bart van Ark – Chief Economist, The Conference Board

Donna Zarcone – Director, Cigna Corp., Jones Apparel Group

“I have a passion for great management. I want business to behave responsibly. I want corporations to be proud of themselves, what they do and how they do it. Boards need new perspectives and more people with different perspectives. I believe that my perspective is too often absent in the boardroom. I have a deep understanding of how the core of a corporation functions. And I believe if directors don’t know what’s happening in the middle of an organization, they don’t really know what’s happening at all.” Directors, Dunn says, need to listen to the “melody of the middle” as much as employees listen to the “tone at the top.”

Dunn currently serves on the board of Easter Seals in Connecticut where she lends her 30 years of experience to the non-profit sector. Even though she has not been a CEO, she understands their challenges because she has coached and trained generations of them. Though not a CPA, she has scrutinized balance sheets and assessed financial performance. And while not a lawyer, she has counseled managers who are confronting the immediacy of compliance issues in the field. Her profile is at present unconventional for nominating committees, but she is determined to find new avenues for her experience that lead to the boardroom.

More stories in The Boardroom Guide for New Directors:
Directors Registry Now Exceeds 4,000 Listings
A Performance in Three Acts
A Dodd-Frank Cheat Sheet for New Directors

To help Dunn prepare for her desired role as a director, NACD Directorship invited her to join a gathering of new and seasoned directors to share their experiences and discuss best practices for newly appointed board members. The ground rules for the conversation that ensued were simple: we wanted the new or aspiring directors to ask their more seasoned counterparts how to get to the boardroom—and how to succeed there upon arrival. Questions around the table included: How did you land your first directorship? What questions should a new director ask of company management and fellow directors when first coming on board? What about culture? Pay? Finally, how will responsibilities match the value a candidate has to contribute?

Breaking In…With Class
How to get your first, second and third board seats? Network. Network. Network.

Directors come to board service in a variety of ways—and for a variety of reasons. The population of directors available for board seats can be pretty much divided into two camps: the C-suite executive who seeks personal development with an eye toward moving up to become chief executive or business executives looking to embark on a second career after a successful and rewarding first career.

Michele Dunn

Most directors and their professional advisors acknowledge that the first board seat is both the hardest to obtain and most important. According to Thomas J. Presby—who chairs the audit committees of five public-company boards— your first board seat helps establish your credibility and should play an important part in the expansion of your board network. Looking for a directorship should be approached with the same vigor and rigor as a job search. “It’s a job, not a hobby,” he says. Presby goes so far as to recommend writing to the chair of a nominating and governance committee stating your case for why that company board specifically aligns with your skills and experience.

Allen F. Freedman was named to his first public directorship in 1980 when a company he had invested in went public. Freedman remained on that board for more than 30 years, served on other boards and founded the Association of Audit Committee members.

A professional colleague recommended Lou Lipschitz to his first public-company board seat shortly after he retired from Toys “R” Us in 2004. Now the audit committee chair for The Children’s Place Retail Stores, New York & Co. and Majesco Entertainment Co., and the compensation committee chair for Forward Industries, Lipschitz was the CFO of the toy retailer as it grew from operating 300 stores with annual revenues of less than $2 billion into to a worldwide retailer with more than 1,600 stores and revenues of $11 billion before he retired in 2004.

With more than 23 years of sales, marketing and operations experience at Kellogg, Alan F. Harris agreed to join the board of his first public company board shortly after retiring in 2007. Heidrick & Struggles was retained to lead the search for an independent director by Lancaster Colony, a Nasdaq-listed company that manufactures and distributes specialty foods, glassware and candles; Fulton was the partner in charge and aware of Harris’ relevant marketing, sales and operation experience along with his desire to serve. Harris, who now calls both North Carolina and South Africa home, says public-company board service gives him the opportunity to stay involved in business after nearly 30 years at Kellogg: “I am still fascinated and motivated by business, and you don’t simply switch into the off position when you retire.”

Q: Where should I look for the latest official SEC information on the shut-down?

The SEC guidance issued on April 7 states that “the Commission will have only an extremely limited number of staff members available to respond to emergency situations involving the safety of human life or the protection of property, including law enforcement.” For up-to-date information from the SEC, click here.

Q: Will EDGAR accept filings?

Yes, the SEC has stated EDGAR will remain fully functional.

Q: Will SEC Staff members be available to resolve EDGAR filing issues?

Yes, but on a more limited basis than normal.

Q: Will it be possible to obtain answers from SEC Staff members to interpretive questions?

No.

Q: Will it be possible to obtain no-action relief from the Division of Corporation Finance?

No.

Q: Will SEC examiners be available to process filings?

No.

Q: Will SEC Staff members be available to confirm the absence of stop orders?

No.

Q: Will automatically effective Securities Act registration statements and automatically effective post-effective amendments go effective when filed?

Yes.

Q: Will other Securities Act registration statements and post-effective amendments be declared effective or accelerated?

No.

Q: Will it be possible to pay filing fees during the shut-down?

Yes, including on a “pay-as-you-go” basis for automatic shelf registration statements.

Q: Should all Exchange Act filings be made by their due date?

Yes, including filings such as proxy statements and Forms 10-K, 10-Q, 8-K, 3 and 4.

Q: Will the shut-down change what constitutes a “business day” for purposes of the Securities Act, Exchange Act or the SEC’s rules under those statutes?

No, except for purposes of certain rule-making by self-regulatory organizations.

This means, for example, that the references to “business day” in Rule 13e-3, Rule 13e-4, Regulation 14D, Regulation 14E (including the 20 business day requirement of Rule 14e-1) and Regulation M will not be affected by a shut-down.

Source: Cleary Gottlieb Steen & Hamilton; Cravath, Swaine & Moore; Davis Polk & Wardwell; Latham & Watkins; Mayer Brown; Shearman & Sterling; Sidley Austin; Simpson Thacher & Bartlett; Skadden, Arps, Slate, Meagher & Flom and Sullivan & Cromwell

Directors like to joke that in the “old days” before Dodd-Frank, the audit committee handled most of the board’s heavy work. Not any more. Some compensation committee members, investors and their advisors believe the most profound and lasting impact of Dodd-Frank is to shift the balance of power from management to the shareholder, as new and pending regulations empower compensation committees as never before.

“We have to keep the intent of Dodd-Frank front and center,” says Robin Ferracone, the founder and executive chair of the compensation consulting firm Farient Advisors. “The intent was to encourage shareholder communication more directly, frequently and openly with their directors and Dodd-Frank is the catalyst for that. The law is not trying to become the dominant force. The law is trying to facilitate this communication. And we should not lose sight of that.”

There’s no doubt, however, that the effect of Dodd-Frank on boardrooms—more specifically the pay-for-performance proxy disclosures effective last year and the new rules expected this year for “say on pay,” clawbacks, and compensation committee and advisor independence—“is a seminal change,” says Catherine R. Kinney, a public company director who retired from NYSE Euronext in 2009 as president and co-chief operating officer and now serves on the boards of MetLife, MSCI (the parent company of ISS Governance Services) and NetSuite. “I think it’s a huge power shift in the boardroom… The fact that an investor can look at the CD&A and vote against a director is one of the biggest changes relative to performance around the boardroom table.” She sees it as one more step in the direction of progress, that is, “management and the board working together to find the right performance for the shareholder.”

Click here to view the full Director’s Guide to Compensation

More stories in the Director’s Guide to Compensation:
New Risks and Rewards
An Investor’s Point of View
Executive Pay and the Boardroom After Dodd-Frank

Says one Fortune 100 director, who asked not to be quoted by name, “Management can no longer ask the HR person and the top three directors they like to serve on the compensation committee. Today, the compensation committee is chosen by the independent directors and working on behalf of the shareholder. It’s dramatically different and as a result, most compensation committees today are scrambling for information and education.”

Stephen W. Sanger, retired chairman of General Mills and a prominent public company director whose board service currently includes Target, Pfizer and Wells-Fargo, concurs. He says Dodd-Frank dramatically transforms the compensation committee role from “compliance to advocacy.” David Lynn, a partner at the law firm Morrison Foerster, notes that in addition to new disclosure, “what shows up in the proxy statement is more important because of the environment we’re in.”

Most compensation committee chairs are seeking direction and education on implementing both new and pending rules, and how the language of disclosure in the annual proxy statement should read. Like their audit committee brethren, compensation committee members are being encouraged to set their own budgets and retain independent compensation consultants and advisors.

“There’s a lot of trial and error—and learning— in the compensation process right now,” observed Ferracone during a meeting of the NACD Advisory Council on Compensation (See below for complete participants’ list). “As a compensation committee member, you have to be sensitive and attuned to the issues being faced from an emotional and dynamic standpoint. It takes a lot of skill to not let the mechanics of the discussion overwhelm the process and leave you with a dysfunctional result.”

New rules for all publicly traded companies— including say on pay and say-on-pay frequency in effect for the upcoming proxy season—stipulate greater disclosure, while opening the door for boards to communicate more often with shareholders. By one count, Dodd-Frank requires regulators to create 500 rules, conduct 81 studies and issue 93 periodic reports. The stated objective of the legislation is “to promote the financial stability of the United States by improving accountability and transparency in the financial system, to end ‘too big to fail,’ to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices and for other purposes.”

One of the “other” purposes is to rein in risktaking promoted by excessive compensation or by compensation that is tied too closely to short-term financial performance—especially in the financial services sector, the main focus of the law.

A Long Way to Go
A recent study commissioned by the Council of Institutional Investors (CII) found that while the pay-forperformance link on Wall Street has strengthened somewhat since the global financial crisis, banks still are not tying compensation to long-term gains in performance. CII comissioned the report, “Wall Street Pay: Size, Structure and Significance for Share-owners,” to gain a better understanding of pay at big Wall Street banks and how it differs from executive compensation at other large U.S. companies. “While many banks have strengthened their pay practices, there’s still a long way to go,” says Ann Yerger, CII executive director. “The report suggests they need to do more to make sure that executive compensation rewards performance over the long term.”

Howard Goldstein

The NACD biannual General Counsel Advisory Board meeting, co-chaired by Fried Frank, offered an opportunity to preview the regulatory environment and provide recommendations for what should be on the working agenda of every public company director when meeting with general counsel. The consensus was that growing cooperation among enforcement agencies—including the Department of Justice, Securities and Exchange Commission and the Federal Bureau of Investigation, along with their regulatory and enforcement counterparts overseas— is likely to perpetuate the increase in enforcement and prosecution activity under both the FCPA and Britain’s soon-to-be implemented Bribery Act.

“At the end of the day, it’s all about prevention and how we are going to position ourselves within our respective organizations,” said Joseph Polizzotto, managing director and general counsel for the Americas at Deutsche Bank. “I would rather prevent the problems in the first place. This is a good moment in time for general counsel to be assertive.”

In addition to the onset of enforcement under the Bribery Act and stepped-up FCPA activity, at least two provisions of the Dodd-Frank Act are also likely to increase investigations, according to Fried Frank Partner William F. Johnson. The SEC is now studying whether broker-dealers should be subject to a federal fiduciary duty and has recently promulgated regulations that could provide sizable payments to whistleblowers in successful prosecutions. Johnson noted that “continued political pressure for investigations in capital markets will continue to ramp up the pace of investigations as shown by the recent uptick in cases related to subprime and CDO exposures.”

William Johnson

A regulatory provision that would allow money to be paid to individuals whose whistleblowing results in a successful prosecution is a purely American phenomenon. There are no such rewards for whistleblowing in the U.K., said James Kitching, who practices in Fried Frank’s London office, adding, “The emerging consensus is that the introduction of a reward would be seen as a retrograde step for the U.K.”

Howard W. Goldstein, a litigation partner at Fried Frank since 1990, was serving as an assistant U.S. attorney in the Southern District of New York when the FCPA was passed by Congress in 1977. For years, there was little if any enforcement, but two months before the close of 2010, there were some 40 FCPA-related cases pending.

Moreover, FCPA settlements continue to set records, and Goldstein predicts that cases “will continue to grow bigger and bigger.” Companies settling FCPArelated charges in 2010 paid a record $1.8 billion in financial penalties to the DOJ and SEC, according to the FCPA website. That compares with $641 million in 2009 and $890 million in 2008, the year of Siemens’ $800-million settlement, still the largest ever.

Referring to a recent FCPA case in which the company’s general counsel played a key role in investigating and preventing a fraud scheme, Johnson said that the GC’s actions could prove useful to others who might need help convincing their boards or CEOs that compliance programs should be improved or expanded: “The fact that the general counsel got some credit for stopping this scheme is something companies should want. It’s definitely something that makes both the company and the general counsel look good.”

Joseph Polizzotto

FCPA investigators could begin to use wiretaps, Goldstein said, given the predilection of the courts to allow conversations gleaned from professional eavesdropping into evidence as witnessed in the ongoing insider-trading case now underway against Galleon Group executives and employees.

Johnson, who worked at the SEC and was chief of the Securities and Commodities Fraud Task Force in the U.S. Attorney’s Office for the Southern District of New York prior to joining Fried Frank in 2009, said that many banks have strong internal compliance programs, but that non-financial services companies also need to address this area too: “The SEC is under no obligation to alert a company if a problem arises, so companies need to be proactive about ensuring their compliance programs adhere to high standards.”

The assembled GCs were also advised to be aware of the Bevill Test, adopted by the Ninth Circuit Court in US v. Graf, which sought to clarify the standard on whether a corporate employee has a special privilege with inside counsel. “In-house counsel should clearly state to any employee that you represent the entity and not the individual,” Johnson said.

The outcome of the global Innospec case, settled for $40 million, was also significant because it raised questions about London’s Serious Fraud Office (SFO)—the independent government department that investigates and prosecutes complex cases of fraud and corruption—and its adoption of more American-style strategies such as plea bargaining, settlements and protection from prosecution. Multinational companies are also likely to place greater emphasis on achieving global settlements, though it is unclear to what extent that will be achievable in light of the decision of the U.K. Court in Innospec.

Goldstein anticipates a major shift once the Bribery Act goes into effect, with greater cross-border cooperation in the investigation and enforcement of corruption offenses. A striking example of this new cooperation, he pointed out, occurred last year when a sting operation at a conference in Las Vegas involving the FBI, DOJ and City of London Police resulted in the arrests of 22 executives on bribery charges under the FCPA.

The upper limit of sanctions for bribery offenses in the U.K. will also be much more severe than under the FCPA. In the United States, settlements are more common. Under the Bribery Act, Kitching points out, “Maximum penalties are ten years imprisonment and unlimited fines.”

Other penalties upon conviction can include disbarment from public procurement contracts and disqualification from acting as a company director. “Notably, the sentencing judge in the Innospec case observed that corruption is much more serious in terms of both culpability and harm in cartel-type offenses,” Kitching said, “where the level of fines imposed is now very substantial and measured in tens of million of pounds.”

Participants:
Matthew Biben – Chief Administrative Officer, Senior Vice President, General Counsel; Next Jump

Chris Clark – Publisher, NACD Directorship

Paul Golding – General Counsel, Citi Infrastructure Investors

Howard W. Goldstein- Litigation Partner, Fried, Frank, Harris, Shriver, and Jacobson, New York

William F. Johnson – Litigation Partner, Fried, Frank, Harris, Shriver, and Jacobson, New York

James Kitching – Litigation Partner, Fried, Frank, Harris, Shriver, and Jacobson, London

David Maryles – Director, Legal, BlackRock

Robert Masters – SVP, Chief Compliance Officer, Secretary, General Counsel; Acadia Realty Trust

Jason Ment – Chief Compliance Officer, General Counsel; StepStone

Joseph Polizzotto – Managing Director, General Counsel; Deutsche Bank

Scott Posner – Assistant General Counsel, Terex Corp.

Alexander Simpson – Vice President, Corporate Secretary, General Counsel; Reis

Will Terrill – Vice President, U.S. Flag Services, Intermarine, LLC

Judy Warner – Managing Editor, NACD Directorship and directorship.com

Judy Warner

Opportunities for you to contribute to the development of each issue of NACD Directorship, here on our website—directorship.com—and our educational events are abundant. From our cover stories to our programs, there are many ways to raise your profile as a director, enhance your daily discourse with director peers and influence the corporate governance debate. For example, The Director’s Chair is a regular column that provides seasoned advice from a sitting director. This issue, Ann Rhoades, who chairs the comp committees at JetBlue and P.F. Chang’s, offers pointers on how to adapt to the new requirements for compensation committees. Those requirements are detailed in our article, The Director’s Guide to Compensation, which includes an interview with Stephen L. Brown, the head of governance for TIAA-CREF. Learn what Brown has to say about shareholder engagement, based on his experience at a long-term institutional investor.

Our cover story—an interview by the NACD’s Jeff Cunningham with attorney Stanley Bernstein—provides a look at the cases the plaintiffs’ bar is sizing up that may affect your life as a director. Jeff’s service as a director for 10 public companies, four of them Fortune 500, as well as his deep publishing experience and keen awareness of the events shaping the director’s world make him an unrivaled moderator and interviewer and Bernstein gamely agreed to a cross examination.

This issue also contains coverage of the 11th NACD Directorship 100 Forum. Our annual tribute to the most influential people in corporate governance has grown to become the ultimate social and educational event on the governance calendar. Take note: The 2011 D100 gala dinner and forum is on November 8 and 9 at a new location, the Waldorf-Astoria New York.

Whether you want to contribute an article, suggest a story idea, participate in one of our many programs or simply weigh in on a topic, I welcome your insight on how to better deliver what you value most: boardroom intelligence.

Fast forward to another event—a meeting of NACD’s Advisory Council on Compensation in New York to brainstorm for an upcoming “Boardroom Guide to Compensation” slated for the February/March 2011 issue. One idea added an unexpected dimension to the discussion the minute it was mentioned: the notion that the rules stemming from Dodd-Frank are less about intrusion due to federally mandated requirements and more about empowering directors, particularly those who chair and serve on compensation committees. It was as though a veil had suddenly been lifted.

Predictably, the compensation committee will rely more on third-party advisors to guide their decision making and strengthen their communications. Given the importance of executive pay, it is imperative that boards make their reasoning and judgment clear to investors—especially given the pending advent of proxy access, a game changer for compensation committees.

As we close this issue of NACD Directorship and plan for the new year, two upcoming initiatives serve to empower and give voice to directors. The second installment of the Board Confidence Index (BCI) and the second annual “What Society Thinks?” (WST) survey about boards and business—both seek to heighten the profile of the director community to the world at large. The BCI measures how directors view the economy and their company’s financial prospects. WST will show how various constituencies feel about the job that directors are doing on behalf of the companies they serve. I look forward to sharing the results of both initiatives in upcoming issues and to hearing your reaction.