Big Picture

What do you think about the overall policy and regulatory climate that CEOs and boards face these days?

It’s more intense than it’s ever been. That’s both good and bad. It’s good in the sense that the board has a keener focus on issues like strategic direction, CEO compensation and the competitiveness of the company. It’s bad in that a number of practices have been adopted, in committees or at the board level, in which too much time is spent talking about compliance with Sarbanes-Oxley or worrying about some of the techniques of corporate governance. If you’re not careful, all this can become a check-the-box mentality that’s about protecting your rear end. That may divert time from talking about the customer and where the business is going.

My own guess is that the major part of adapting to Section 404 and New York Stock Exchange requirements is behind us. The better companies are going to come out of all this stronger. The information flows between senior management and the board are more intelligent and constructive. That’s a good thing.

But boards have to be very careful that they don’t become so process-oriented that they concentrate on form versus substance. Boards should not be so focused on risk-avoidance that we scare the CEO and management out of taking legitimate business risk.

How can a board member judge whether his or her board is spending too much time on process?

Well, just sit there after the meetings are over and ask yourself, “How much of that time was really spent in a constructive fashion?” That doesn’t mean that you don’t need to spend time talking about risk definition and risk management, because risk properly goes well beyond the financial and audit risk that have traditionally been the purview of the audit committee. In my mind, each committee and the board itself have to try to identify the reputational risk, the environmental risk and the customer exposure risk, any one of which could do serious harm to the company. They need to talk about those.

Have some boards become so bureaucratic that they are hurting their companies’ competitiveness? Has it gone that far?

Well, I think it can go that far if boards aren’t careful. If you look over the past 20, 30, 40 years, American industry has done a phenomenal job of generating choice in products and services to U.S. consumers and also at the international level.

When you look ahead, American businesses need to continue to do that, because they’re going to be in an increasingly competitive environment. Look at China. Look at India. Those economies are getting their acts together. That is a very good thing indeed, because the safest world is an economically interdependent one.

In the final analysis, competitiveness must be kept at the forefront of the board’s and management’s thinking. If there are no sales, there are no jobs.

Do you think it’s fair to say that by shifting the relationship between government and companies, and by encouraging shareholders to demand more accountability from directors, we’re at risk of changing the American capitalist model?

There is a risk. It doesn’t mean that a lot of initiatives and views from some of those groups are wrong. If they are challenging boards and managements to be accountable, that’s an appropriate thing. We have to ask, however, whether accountability forces short-term thinking and worrying about quarterly earnings. It’s too easy for activist shareholders or others to focus on the short term and prevent management from pursuing long-term investment ideas.

Looking ahead to the next proxy season, is the issue of CEO compensation going to be hotter than ever?

I think it will be, and I think it should. It got out of hand over the past eight to 10 years. The markets of the 1990s perhaps helped account for part of that. When you moved into the year 2000, option awards and other decisions were made with the expectation that companies would deliver value X, but it turned out to be value 5X. Shareholders by and large did well. But a lot of the performance of older-line companies has to be attributed to years and years of investment by prior management teams.

How did CEO pay get out of control, as the critics allege? Was it the boards or the CEOs or the compensation consultants?