How Boards Are Dealing With Today’s New Realities
Moderator: Jeffrey M. Cunningham, chairman, CEO, NACD Directorship.
Panelists: Mary Pat McCarthy, executive director, KPMG’s Audit Committee Institute, U.S. vice chair, KPMG LLP; Cynthia Jamison, national managing partner of restructuring, Tatum, director, B&G Foods, Tractor Supply Co.; Eileen Lach, corporate secretary, associate general counsel, Wyeth; Peter Lupo, managing partner, Pearl Meyer & Partners.
The economic crisis has shined a spotlight on corporate governance practices, and, in particular, the failure in some cases of the board’s risk management responsibility. Will there be a boardroom revolution? KPMG’s Mary Pat McCarthy said a recent survey of audit committee members showed 85 percent are changing the way they are doing governance and oversight. “Oversight has changed for good in the corporation,” she said.
Cynthia Jamison said a progression that started at the turn of the century with Sarbanes-Oxley is intensifying: “We are moving along the steep part of the evolution curve.”
Eileen Lach, citing tentative regulatory changes, said, “The revolution is not over just what gets done in the boardroom. It is over who is in the boardroom.”
Whether shareholders will continue to increase their push for more say in how boards operate is not clear-cut, but some experts are becoming concerned that the pendulum could swing too far in their favor, leading to disruption. If that happens, said Peter Lupo of Pearl Meyer & Partners, “the whole dynamic changes between management and the CEO. And you will get a poorer outcome than what we have now.” Jamison is concerned that new regulation and testing could interfere with the day-to-day responsibilities of CEOs and CFOs: “When will CEOs and CFOs get to do their jobs?”
Risk, compensation, and liability are dominating board members’ attention. “Not all risk is the same,” says Lupo, citing differences between financial and manufacturing risk. Jamison agreed: “Risk is hard to define and calibrate.” As for risk committees, Jamison supports their use.
Boards Under Fire: What Shareholders Really Want
Moderator: Barbara H. Franklin, president and CEO, Barbara Franklin Enterprises, director, Aetna and The Dow Chemical Company, chairman, National Association of Corporate Directors. Panelists: Patrick McGurn, special counsel, RiskMetrics Group; Amy Borrus, deputy director, Council of Institutional Investors; Hye-Won Choi, head of corporate governance, TIAA-CREF
As overhauls to capital market regulation are put forth, it is abundantly clear that shareholders are going to get at least some of what they want, most notably proxy access, advisory votes on executive compensation, and the elimination of uninstructed broker votes in director elections.
When asked what shareholders really want, Hye-Won Choi of TIAA-CREF said the shareholder advisory vote on compensation was at the top of her list. “Compensation provides a very good window into the boardroom because it involves very sensitive issues such as evaluating the CEO and balancing competing interests and demands, and it tells us whether the board is exercising its business judgment, its skills, and its independence to stand up for shareholders.”
Patrick McGurn of RiskMetrics spoke not of what is wanted, but of what “they’re going to get.” Proxy access is a given, he said, predicting that there would be widespread support for say on pay beyond the financial firms participating in the Troubled Asset Relief Program. McGurn chastised those officers and directors who view compensation discussion and analysis (CD&A) purely as a compliance issue when remuneration is “the most contentious issue out there.” The CII’s Amy Borrus suggested that the CD&A be used as both an “early warning system” and as an “opportunity to speak with your shareholders and draw the link between performance and pay and address it head on.”
While down on legislating corporate governance, Choi noted that advisory votes on pay is a case where investors want boards to develop their own workable solutions: “We wanted companies to take this, run with it, and come up with workable solutions that are meaningful to shareholders.”
The Next Era in Liability: The Plaintiffs’ Bar Game Plan
Moderator: Michael Smith, president, Executive Liability, a division of AIU Holdings.
Panelists: Stanley Bernstein, partner, Bernstein Liebhard; David Kistenbroker, managing partner, Katten Muchin Rosenman.
Two lawyers, often on opposite sides of an issue, debated the litigation climate in light of the financial crisis. One thing they discovered they agreed on is the acceleration of litigation stemming from or directly related to the economic crisis.
David Kistenbroker said that the rate of lawsuits filed against Corporate America would continue to rise, and warned that a recent change at the Securities and Exchange Commission—now only one commissioner needs to sign off on a request for a subpoena rather than all five—creates “a whole new ballgame.” Kistenbroker expects to see an impending barrage in litigation related to executive compensation: “Attorney generals, the SEC, and the Department of Justice are going to be very aggressive,” he said, noting that “in the civil realm, Bernstein and his colleagues on the plaintiffs’ bar have not been taking any time off.
Bernstein, a leading plaintiffs’ lawyer who most recently chaired the plaintiff’s committee on IPO Securities Litigation that resulted in a settlement of $586 million, said his firm is now doing “a lot of work with the various states.” He defended his work by reading portions of the Schumer bill, which cites widespread failure of corporate governance and boards’ lack of accountability to shareholders for the economic crisis. “There is a sea change,” Bernstein said. “At one time, Schumer was the biggest friend of public companies and no friend of the plaintiffs’ bar, and that should serve to caution directors more than ever before.”
As for the plaintiffs’ bar, Bernstein was matter of fact: “We want money. So, it’s going to be an active litigation arena and money is going to be the primary focus rather than corporate governance reforms—that’s our mandate and we’re incentivized to get the money.”