One director may say, “We owe our duties to our shareowners. Period.”

Another director may add, “Yes, but we need to pay special heed to the interests of long-term shareowners. Some shareholders are speculators and not truly owners; they are more like renters.”

And yet a third director may say “Why the focus on shareholders alone? As directors, we in fact owe our duties to the corporate entity, and as such, to all its stakeholders.”

If you have a sense of déjà vu it’s because you’ve heard all this before—including the pages of NACD Directorship. It’s a perennial debate.

Alexandra R. Lajoux

But no matter which position you take, you must agree that over the long term, the interests of shareholders and other stakeholders all converge. And furthermore, you must agree that to serve those interests requires that a company be sustainable—that is, able to stay in business over the long term, and not crash due to some unforeseen and/or managed risk—including an environmental or social risk.

So how can investors and other stakeholders gain confidence on that score? Enter the Global Reporting Initiative (GRI), the globally accepted standard for reporting nonfinancial information about a company.  In a series of recent chapter programs, NACD has been introducing the topic of GRI to our membership in a show affectionately nicknamed the “Why GRI?” show.

GRI Who?
When the Global Reporting Initiative first opened an office in the United States in October 2010, its acronym – GRI – drew mostly blank stares in U.S. boardrooms. Although a majority of the largest global companies were using this template for reporting nonfinancial data, American reporters were relatively few in number and low in profile.  Today, after a mere 18 months of promotional efforts by a US-based director, GRI is becoming a familiar name. Indeed, as of February 2012, nearly 250 U.S. organizations now report on their sustainability using the GRI template—almost double the number that reported prior to the US office launch. And even more important, there is a growing awareness that GRI is not merely about reporting: this reporting initiative seeks to improve the quality of corporate strategy and risk oversight—and therefore corporate value itself.

GRI Now!
One catalyst for the new and deeper GRI awareness has been a series of NACD chapter programs being generated at the grass roots level. Combined attendance at the first two events topped 100—a decent number for a topic that is relatively new to U.S. boardrooms.

The Kansas City Program
I’m going to Kansas City. Kansas City here I come! Appropriately for a dynamic start, the inaugural program started when Laura McKnight, co-chair of the chapter with Charles Peffer, invited GRI’s US Director Mike Wallace to address the Heartland Chapter in November 2011, along with EMC’s chief sustainability officer Kathrin Winkler.  As chair of the Greater Kansas City Community Foundation, McKnight understands the importance of corporate social impact.

During a breakfast panel on “The Board of Directors and Corporate Sustainability,” Winkler explained how her board oversees her corporation’s social and environmental presence. At EMC, management regularly reports on sustainability matters to the EMC governance committee and the full board.

At least twice a year, the chief sustainability officer provides an update to the EMC governance committee on sustainability initiatives and progress. Topics discussed on the EMC board to date include stakeholder engagement—including feedback from customers and relations with employees. Furthermore, sustainability discussions play a major role in board discussions of the company’s strategic plans and the board’s related oversight of risk. More details on EMC’s program will be forthcoming in the March-April 2012 issue of NACD Directorship.

The LA Program
From this pioneering start in the Heartland came an even more ambitious program in the City of Angels, focusing on “Corporate Strategy and Reporting in a Global Economy: the Board’s Converging Roles.”  Held at the historic California Club in January 2012, the Southern California Chapter event attracted the leaders of the LA business community, including Dann Angeloff, Chairman Emeritus of the chapter, and a Lifetime Member of NACD, in recognition for his 35 continual years of membership. Dan was the seventh person to join NACD—back in 1977, and he looks as young as ever (good governance is good for your health). But not all attendees were local. Richard Crespin, executive director of the Corporate Responsibility Officers Association attended as well—traveling all the way from Washington, DC.

Program chair Fay Feeney, CEO of Risk for Good, a governance consultancy that supports GRI as an Organization Stakeholder, moderated a panel featuring GRI’s Wallace plus three others: Mary O’Malley, Chief Sustainability Officer, Prudential; Chad Spitler, Director Corporate Governance and Responsible Investment, BlackRock; and Mary Ann Cloyd, Partner, Center for Board Governance, PwC.

The invitation to the event framed the issue precisely:

Boards are increasingly involved in helping to develop and monitor sustainable corporate strategies. At the same time, board oversight of corporate reporting has grown as well. So what is a board to do?  How will you provide oversight as a Director?

When it comes to strategy, boards are faced with tradeoffs between short term and long-term gains, and differing interests of stakeholder groups. When it comes to reporting, we have the SEC, FASB, IFRS, GRI, ISO, Carbon Disclosure Project and IIRC–all of which are providing guidance and/or standards to companies about reporting.

Add the fact that there are an increasing number of shareholder proposals seeking disclosure on a wide variety of environmental and social issues, and shareholders with strong views on both sides of these issues … what is a company to do?

After an introduction from Chapter President Chris Mitchell, Feeney set the stage by pointing out that today a major percentage of any company’s value lies in intangibles rather than tangible assets. How right she is! In a very real sense, reputation is worth more than money. As Shakespeare wrote, “Who steals my purse, steals trash… but he that filches from me my good name …makes me poor indeed.” (It so happens that a villain said this in a tragedy but it is still true!) Feeney also pointed out the many names that sustainability may take on: corporate social responsibility, corporate citizenship, sustainable development, and so forth. It’s all about having a “meaningful conversation around value,” said Feeney.

Wallace explained the GRI reporting system as a highly adaptable model for reporting nonfinancial information in a variety of organizational types—in most cases on a voluntary basis.  In the U.S., company managers report sustainability on a voluntary basis as a way of informing the board, stockholders, and others about their companies’ social imprint. But Wallace noted that some governments and stock exchanges outside the U.S. are making GRI reporting mandatory for companies and their suppliers, and these mandates are touching U.S. companies as foreign and domestic buyers ask U.S. companies to disclose sustainability information.  In fact, Microsoft and Apple are both asking their key suppliers to produce sustainability reports according to GRI. Being a GRI reporter prepares companies for these unfolding compliance demands.

In his remarks about investment styles, BlackRock’s Spitler hammered home a key point. Investors may have differing expectations, including social expectations, but Blackrock favors GRI reports for financial, rather than moral, reasons. BlackRock wants to make sure the company is a good financial bet for the long term and GRI reports make it easier to compare companies’ non-financial performance.  Spitler explained that while there may be some very good information about a company in these SEC reports, much may be missing. And when companies put out their own reports on their activities in the world, it is not always easy for shareholders and others to compare one company to another as they may use different terms and categories. For many years, to compare sustainability across firms was like comparing apples to oranges to aardvarks, one might say. GRI makes the comparisons easier or shareholders—a point emphasized by Spitler.

Bringing in a high-level corporate perspective, O’Malley described the history of the reporting program at Prudential, making a very useful point for beginners. The purpose of sustainability reporting, she said, is not to brag about how sustainable we are. Its aim is set sustainability goals, disclose the goals, and reveal how far along the company is in achieving them. In short, sustainability is not a destination; it is a journey.

Rounding out the discussion from a boardroom perspective, Cloyd of PWC underscored the need for director attention to information about various stakeholder issues, as a matter of risk oversight as well as strategic opportunity.

Summarizing comments and T-ing up the peer discussions, Feeney sees this panel as the beginning of a long-term dialogue about matters of strategy and sustainability.  Watch this website for an upcoming blog by Feeney on her ongoing peer-to peer discussion program.

Moving On
And there’s more. The next NACD event to feature GRI will be the March 12-13 Master Class in Scottsdale, Arizona, where Wallace is slated to copresent with Suzanne Fallender, Director of the Global Corporate Responsibility Office at Intel, a GRI reporter.

And later this year, the Why GRI traveling show will visit new cities. On the horizon: possible events at the New York Stock Exchange and NASDAQ in conjunction with the New York Chapter.

As this road tour makes clear, corporations are more than their revenues minus expenses; more than their cash flow; more than their reportable assets. Corporations are actors on the world stage, interacting with not only investors but also customers, vendors, employees, communities, regulators, and others, and all of these constituencies want to know information about the company that goes beyond financial statements and the 10-K and proxy reports that supplement them.  GRI makes this possible. So stay tuned—and stay sustainable!

Alexandra R. Lajoux is NACD’s chief knowledge officer.

Michael W. Peregrine

These days, it is “standard operating procedure” for the board to evaluate looming controversies and crises through the use of the special investigative committee. And such procedure owes much to the structure, process (and courage) applied by the Powers Committee. Working under enormous economic, social and political pressures, the committee moved quickly but thoroughly through enormously complicated facts to deliver a comprehensive analysis less than two months following Enron’s filing for bankruptcy. The format of the Report, the independence and qualifications of the committee members, the style in which it pursued the inquiry, and the presentation of its conclusions served to “set the bar” for future efforts of this type.

And the Report pulled no punches in its analysis. To be certain, it assigned appropriate blame to the “smartest guys in the room”—the Skillings, Fastows and other recognizable executives. But it didn’t stop there, reserving some its harshest criticism for the board itself. Board members were “called out” for severe fiduciary lapses; e.g., inadequate and poorly implemented internal controls; failure to exercise sufficient diligence over corporate operations; failure to adequately respond to “red flags”; cursory review by key committees on critical matters; failure to insist on proper information flow from management; and an inability to appreciate the significance of information with which it was provided. There was no “sugar coating”, but rather a direct recognition of the full extent to which the inadequacies of board conduct contributed to the demise of the company.

The Report’s legacy also rests in its influential effect on the evolution of the corporate responsibility movement. It’s an impressive historical roll call. The Powers Report was a principal source for the subsequent July 8, 2002 Senate Permanent Subcommittee on Investigations report on Enron, which reached additional, complementary findings on the problematic conduct of the Enron board. The Senate Subcommittee Report provided substantial fodder for the governance and financial integrity provisions of the Sarbanes-Oxley Act, which was enacted on July 30, 2002. The governance failings cited by the Powers Report and, subsequently, the Subcommittee Report, formed the basis for many of the observations and recommendations incorporated in the ABA’s highly regarded “Cheek Report” on the role of lawyers in corporate governance. The lack of board compliance awareness identified in the Powers Report helped spark the 2004 Amendments to the Federal Sentencing Guidelines. These guidelines revised compliance plan effectiveness criteria to include specific board level plan oversight obligations. Finally, the Powers Report discussion on the role of Enron’s legal counsel contributed to the influential best practices on the lawyer’s role in corporate governance, proposed in 2006 by the Bar Association of New York City.

Many of today’s board members weren’t in office 10 years ago. Enron and its progeny are something of a distant memory to most. But the governance failings chronicled by the Powers Report were real. They happened 10 years ago and they could occur again, in another boardroom in another industry. The tenth anniversary of the release of the Powers Report is thus worth more an acknowledgment by today’s boards—for how the Report was prepared, what it said, what it ultimately influenced—and for a reality check on proper standards of board conduct.

Michael W. Peregrine, a partner in the law firm of McDermott Will & Emery LLP, advises corporations, officers and directors on issues related to corporate governance, fiduciary duties and internal investigations. Mr. Peregrine’s views do not necessarily reflect the views of McDermott Will & Emery or its clients.

South Carolina Gov. Nikki Haley (left) and Attorney General Alan Wilson are sworn in before testifying at a hearing on an NLRB complaint against Boeing. (photo by Associated Press)

The agency last spring filed a complaint—since dropped—on behalf of the 31,000-member International Association of Machinists and Aerospace Workers, siding with the union. Boeing contested the charges on the grounds that opening up an assembly line in South Carolina, where it already had a facility, was in fact a business decision and not antilabor.

Lafe Solomon, NLRB acting general counsel, testified that he issued the complaint to encourage the company and union to reach a settlement. Yes, we know what kind of settlement he had in mind.

Where a company does business is a decision that managements make all the time—in the best interests of their shareholders. But, apparently, not unionized company management under the Obama administration NLRB.

Jeff Cunningham is managing director and senior advisor to NACD. He is nationally known for his views on boards and corporate governance. Prior to starting Directorship magazine, he was publisher of Forbes and managing partner of the U.K. private equity firm Schroders. He has served as an independent board chair or director of 10 public companies.

Christopher Y. Clark

Though her examples ranged from mortgages and lobbying to the FDA, many of her points should ring true in our community and I share just two of them with you below.

• “One fundamental problem is that disclosure requirements merely get information onto the table, but themselves demand no further action. According to political theory, disclosure is both a citizen’s right and a tool to ensure good government and consumer protection, because it provides information that leads to informed decisions. Instead, disclosure has often become an end point in the chain of responsibility, an act of compliance with the letter of the law rather than the spirit of transparency.”
• “In the beginning, disclosure was a means to an end, and now it’s often an end in itself,” said Kevin P. Weinfurt, professor of psychiatry and behavioral science at Duke University. “People think, If we’ve disclosed we’ve fulfilled our responsibilities.”

Given the above, we all might percolate on a sentiment I shared with Holly Gregory of Weil Gotshal and Fay Feeney of the Risk for Good blog last Friday, transparency without clarity is worthless… and I believe I did hear a subsequent amen.

Christopher Y. Clark is publisher of NACD Directorship magazine and Directorship.com.

Malcolm Forbes (seated) with his sons (L-R) Timothy, Steve, Robert and Christopher (Kip) (Michael I. Price/Getty Images)

But don’t tell that to Stewart Pinkerton, a longtime editor of Forbes magazine and, like many Forbes employees, a recipient of the family’s largesse— and now the author of The Fall of the House of Forbes, a hyper-critical examination of the sons’ stewardship of the assets inherited from their father.

Apart from money and fame, it’s not a simple task to decipher the reasons for writing a book. Pinkerton’s raison d’être may be obvious in that he tells a story of decline and decay from the perspective of a romanticized vision of the past. The truth behind the Forbes legacy is that the sons did what they had to do to survive the tumultuous aught years of this century—just as they previously did what they had to do to thrive in the go-go ’90s.

My role in this colorful saga was as the magazine’s publisher from 1990–1998, when Forbes was the leading magazine in America. I reported directly to Steve and Kip Forbes, the CEO and vice chairman, respectively (at the time), and later indirectly to Bob and Tim Forbes as well. I count those years as an infinitely better business education than a Harvard MBA mixed in with a Tony Robbins refresher course.

For directors looking for a tale of rags to riches to rags in three generations (Malcolm’s father, B.C. Forbes, founded the magazine in 1917), you’re in for a surprise: this third generation has actually gone from advertising-driven riches to a more diverse set of riches with far less risk. Others looking for the inside story behind the Forbes legend and its alleged downfall will need to keep in mind that the author’s real beef is a longing for the good old days of paradise publishing under Malcolm Forbes. What makes the Forbes story so interesting—and one that Malcolm would be proud to realize—is that he ultimately passed on something other than flamboyant, literary, cultural, political junkie, bon vivant, collector and adrenalin rush (as in fast vehicles) genes. He passed on a survivor’s instinct.

The sons are criticized roundly in the book for pawning cultural icons for wads of cold cash. But the Forbes were looking at a business that had huge risk and no downside protection. Magazine products such as BusinessWeek could be worth a $1 billion one decade and $5 million the next. I see it as pragmatism that fell not far from the root. Malcolm was once overheard saying that if all else fails, his sons could sell the Fabergé eggs. Eventually they did—to a Russian oligarch, at the height of the Russian playboy billionaire philanthropist era under Boris Yeltsin.

Similarly, they partnered with global media companies to produce low-risk, high-gloss overseas versions of Forbes. They sold off most of the other collections, including paintings, autographs, toy soldiers, palaces, islands, eventually the Highlander itself and the Boeing 727 Capitalist Tool. That cash— plus the $500 million valuation with half up front from Elevation Partners, rock star Bono’s private equity firm—made these sales the smartest moves in the magazine industry.

But the question begs asking, was selling off assets and diluting the Forbes mystique the right move or the only move? As George Kennan, the famed global strategist, once said about statecraft, “There is more respect to be won…by a resolute and courageous liquidation of unsound positions than by the most stubborn pursuit of extravagant or unpromising objectives.” There is special glory in staying afloat while others are sinking. Ask Bill Gates or Warren Buffett.

Another reason for the lopsided storytelling in Pinkerton’s account is that he never spent much time in the back office. This was part of the genius of Malcolm S. Forbes: he compartmentalized like a mad dictator, but his madness was actually pure common sense. No employee could truly understand his Byzantine way of keeping everyone on a flotilla that pointed to Malcolm and allowed each of us to shine although not eclipse his reflected glory. Malcolm knew you, and you knew he knew you, and he knew you knew it. It made him omnipresent and omniprescient, which only increased his magnetism as his fame spread and his iconic stature grew.

The sharing of duties fell to the sons as well. Steve was groomed to become the CEO and the editor-in-chief, mirroring Malcolm’s own rise to the family throne, which Pinkerton covers ably. Steve keeps his own counsel and can at times seem sphinx-like in demeanor, but his prophetic gifts and dynamic qualities emerge when he writes his column or stands before a podium talking politics or the economy.

Pinkerton calls Steve’s two runs for president the $75 million sales call. This is pure balderdash from those who weren’t there. Steve believed in his cause, which was to bring back the tenets of Teddy Roosevelt’s bully pulpit mixed with Adam Smith’s free-market capitalism using common sense in place of needless regulation, and adherence to the gold standard to avoid inflationary levels of money supply. Like the way he ran Forbes, Steve’s political vision was to set firm boundaries, invoke a moral force to guard against overreaching, and then let the natives do their thing.

Kip Forbes, the vice chairman at the time, has the virtues of a professor of Renaissance studies combined with an aristocratic bearing (it helps that he is, in fact, an aristocrat)—ideal for wining and dining all manner of VIP, which he does beyond brilliantly. But few know how precisely trenchant he can be about things, sizing up people and situations instantaneously. He is the ultimate consigliere to the high and mighty and instinctively knows their weaknesses and their tastes, which make him both compelling and a confidante. Steve and Kip make a great team, and in the past decade Bob and particularly Tim also came into their own and pushed the business in very important directions, such as launching Forbes.com, one of the most highly trafficked financial websites, and Forbes Life, a glossy publication whose tagline might well have been “living well is the best revenge.”

So, what ultimately cost the sons part of their patrimony? It wasn’t bad management, as Pinkerton alleges. In fact, like so many other challenged empires from Rome to Britain, in the end it was timing. The Internet was meant to liberate us, but it also liberated us from one another and, in many respects, from our long-cherished habits. Magazines no longer had a call on people’s time because there were now so many other things to do, watch and listen to.

As for Forbes.com, it did move the needle significantly, but the loss of magazine revenues and prestige could not be undone in the span of only several years. Which is why, as of this writing, Elevation is understandably taking a harder look at the asset and its lofty valuation, and the Forbes brothers have had to step aside even further.

Who knows where that ends? Covenants will always trump common sense. But the sons are still associated with the business that carries their name, and the business itself is well regarded by a new generation not wedded to the gilded era of magazines. Steve still writes his column. Kip travels the world on behalf of the company. Noblesse oblige. Sometimes you accept the role graciously and wait for another day, and if the timing still isn’t right, sell another asset. Be grateful you have assets to sell. Malcolm would agree.

Consider two recent studies.

Richard Levick

One report by the Havas Media Lab underscores this transformation with a list based on a survey of 50,000 consumers worldwide who identified the companies they feel have the most “meaningful” CSR. The 10 top names included Unilever and Bimbo, Ikea and Leroy Merlin, as well as consumer technology companies like Samsung and Sony. As the Lab’s director Umair Haque quips, they’re not “necessarily the do-gooding corporate entities you might expect.”

This article originally appeared on Richard Levick’s The Communicators Blog on the Forbes website.

In lieu of such “do-gooding,” Haque talks about CSR as a way to connect to the personal well-being of customers. Nike+ is a prime example. “Instead of putting up another campaign of billboards with celebrities saying, ‘Buy our shoes’…Nike+ actually helps makes you a better runner,” he says.

In other instances, companies underscore their commitment by taking substantive risks. Early last year, for example, Unilever CEO Paul Polman really spoke the language of CSR as value – not just donations – when he made an ambitious sustainability and anti-hunger plan an investment prerequisite. “If you don’t buy into this [program], I respect you as a human being, but don’t put your money in our company, he said.

It’s easy for consumers to read this resolve as a personal message to them: that we as a company are guided by the same determination to produce beneficial impacts for you – not just the direct beneficiaries of our CSR largesse – even at the cost of a few big shareholders.

Many of the highly ranked CSR programs on the Havas list predictably feature green initiatives, often, as with Leroy Merlin, highlighting how the company’s own employees personally volunteer in repair and recycling efforts around the world. Here too, with this volunteerism, we’re a long way from the passive check-writing that defined the old CSR.

The message to consumers is, again, personal. Since these Leroy Merlin people commit themselves, their own time and sweat, to these responsibility programs, it’s no reach to infer that they do the same when they manufacture the home improvement products that have a direct impact on our lives.

In another report, Pike Research found that “the closer the company’s business is related to consumer electronics, the higher its CSR score.” Companies like IBM, HP and Texas Instruments topped the charts for transparency and reported results. For starters, their sustainability initiatives have impressed consumers, the report suggests.

These sector-leading companies have pushed hard to highlight their greater focus on enhanced sustainable design, manufacturing, distribution, use, and end-of-use management. The message is, our products are socially responsible across a broad spectrum of consumer needs, beginning with the benign impact they have on the world in which they’re used.

In your book, Without Hesitation, you were deeply critical of Secretary of Defense Donald Rumsfeld’s Iraq war planning. What was wrong with his thinking?

General (Ret.) Hugh Shelton

In Iraq, we have seen that while you can extrapolate lessons from other military engagements, you can’t take a cookie cutter approach. We had a very successful operation going into Afghanistan and it was successful because on the ground in Afghanistan was the Northern Alliance, the indigenous fighters, and they had been at war for years. They could get close to winning against the Taliban but they could never quite get over the hump, so the idea [Former CIA Director] George Tenet and I had was take our special ops guys who were the only troops in the world trained to go in and take over an indigenous force and fight with them, and bring the high-tech pieces of the battle to them.

When we went into Iraq, Secretary of Defense Donald Rumsfeld took some of that logic but applied it to a very different set of circumstances when he said in effect, “We don’t need all these troops so we’ll pare down this war plan that’s on the shelf and get it down to almost nothing and go in and we’ll kick Saddam [Hussein] out.”  But as King Abdullah of Jordan told me, ”what you need in order to stabilize Iraq is an individual that has some of Saddam Hussein’s ability to manage these different religious and cultural factions but who is a good leader who doesn’t abuse his people—if you can find someone like that. But you’ve got to have a strong man to keep them apart because if you don’t, they’ll go to war with each other.” Rumsfeld just didn’t want to hear that, he had a different mission and that was to prove to the world that he could go in and win this war with a small force. As he and [General] Tommy Franks [Commander of the United States Central Command] both found out, it fell apart days after we beat Saddam because no one could keep these factions apart. We also took out their police, dismantled their military, and now we wonder who runs the country? If you break it you own it!

You were critical of the detainee program in Guantanamo. The flip side says the federal courts will tie it up forever. What’s the right way to deal with this?

It’s not a simple issue but the problem I have with Guantanamo is we should not bring people, terrorists or anyone else, into Guantanamo and let them serve the rest of their life there without some kind of due process. I fully agree with bringing prisoners, of bringing individuals that have been captured like in Afghanistan that we think are terrorists, into Guantanamo, try them and dispose of them in a just manner, whether it’s to the gallows or whether it’s to freedom, but not keep them there for five or ten years without some kind of process. That bothers me. I picture myself, for example, being thrown into an Iranian prison…

Meaning what happens when the tables are turned…

Yes. And I think it’s the same thing when it comes to water boarding. I don’t want to see our own troops water boarded. I think we need to comply with the Geneva Convention and the rules of land warfare.

This commentary was originally published by the authors as a PDF and sent via email from Weil Gotshal & Manges.

All corporate governance participants—boards, executive officers, shareholders, proxy advisors, regulators and politicians—have both an interest and a role to play in rebuilding trust in the corporations that are the engine of our economy. In our annual reflection, we offer thoughts on how, without the need for regulatory intervention, boards and shareholders can seize the opportunity to rebuild trust and, by doing so, help resolve some of the tensions that are stalling our economic recovery.

Part I – Opportunities for the Board to Rebuild Trust

1. Focus on the long-term. Boards carry out their fiduciary duties in the face of pressures from the market and short-term traders for immediate results, pressures that too often undermine the long-term planning and investment required for a sustainable enterprise. While management must focus on the day-to-day operations of the company, the board has the ability and responsibility to look forward and consider what is in the best interests of the corporation and its shareholders over a time horizon notably longer than the quarter at hand. The board should bring its objectivity and judgment to issues ranging from dividend policy, strategic direction, risk and executive compensation to corporate social responsibility and ethical culture. When coupled with a clearly articulated strategy, the board’s commitment to the long-term should help a company withstand undue short-term pressures. This requires effective disclosure of board decisions and policies and concerted efforts at shareholder relations and communications, both areas where boards often could focus more attention.

2. Redefine board priorities. The part-time nature of director service combined with ever-expanding expectations about the board’s role and increasing regulatory mandates may lead to an unfocused and overly long board agenda. Boards should delegate to board committees, corporate management and advisors those matters that do not require the attention of the full board so that the board can focus on key priorities. Defining board priorities is the board’s task, one that should be undertaken in an informed manner with advice from management and counsel but not be delegated to them. We suggest that boards consider an 80/20 rule: Approximately 80 percent of board time should be spent on those issues that are reserved by law to the board, that will benefit from the exercise of fiduciary judgment or as to which management has inherent conflicts, such as corporate strategy and the major risks to that strategy, material transactions, management performance and succession, and executive compensation. The board should also reserve “quality time” for matters of its own performance and composition. This is a simplified list and of course every board will need to work it out based on its own challenges and characteristics, but the key is to maintain significant time for the significant and difficult issues. Leading the effort of redefining board priorities and ensuring sufficient agenda time for priority matters are roles for the board’s independent leader – either a separate independent chair or a lead director. We note that the number of companies with separate independent chairs is continuing to rise, and it is now well-accepted that public companies should either have an independent chair or have a lead director with a role that is defined to include a number of tasks that would otherwise typically fall to a board chair.

3.  Apply objectivity and “backbone” to fiduciary judgments. Directors must decide for themselves what is in the best interests of the company. Clearly, management has a view that it will advocate, but the board needs to test the underlying assumptions and come to its own conclusion. While undue deference to management is not appropriate, neither is abdication of fiduciary decisions to shareholders. Fiduciary decision-making cannot be abdicated, even if a majority of shareholders have a definite preference on an issue. This may pose challenges when significant shareholders have strongly held views, or when a proxy advisor takes a stance and in effect serves to coordinate support for that stance among its client shareholders. The bottom line is that directors need to be willing to do what they believe is right, even if doing so jeopardizes re-election.

4. Listen to and communicate with (“engage”) shareholders. Success in withstanding pressures for actions that the board does not believe are in the company’s best interest depends on the board’s ability to communicate effectively with shareholders. The starting point is knowing who your significant shareholders are and what concerns them. (It helps to maintain open channels of communication with the persons who have voting and investing authority, and these roles are often split in large institutional investors.)

Encouraging feedback generates goodwill and can elicit good ideas. Obtaining a preview of concerns also provides opportunity to avoid acrimony by working through issues in advance. Directors should listen hard to what shareholders have to say and consider any disconnects between the views of shareholders and the board, for example, where a management proposal or a director receives a negative (or not overwhelmingly positive) vote at the annual meeting. Boards should work with management to ensure that board decisions are adequately explained to investors, regulators and other users of corporate information. Disclosure documents should be reviewed with a critical eye towards enhancing understandability and slashing boilerplate. Communication with shareholders(and employees) will become even more critical once the SEC adopts new disclosure requirements relating to internal pay equity and pay-for-performance as required by the Dodd-Frank Act of 2010.

5. Be self-critical. If shareholders are to give boards the time and space to take the long view, and generally defer to and support their judgments, they need assurance that boards will bring objectivity and backbone to judgments about the board’s own effectiveness. Re-nomination decisions need to be based on an active assessment of director performance and whether the director continues to be a strong fit. All directors need to have skill sets that continue to be not only relevant but necessary to the evolving direction of the company’s business and be engaged in board and committee activities at a high level.

Board “refreshment” mechanisms such as age limits and term limits should be carefully considered. While they can help to assure compositional change, they are imperfect substitutes for active assessment of individual performance, and they may set an inappropriate expectation of long tenure. Similarly, the annual self-evaluation of the board and its committees provides an opportunity for reflection about areas for improvement. This should not be allowed to become a rote exercise. Consider changing up the methodology from time to time, for example, by every several years taking a deeper dive through an interview method rather than relying on paper questionnaires. No matter what method is used to gather viewpoints from directors, every year the evaluation should result in a focused board discussion of areas for improvement.

6. Pay special attention to “hot button” issues. Boards should make decisions about “hot button” issues in the best interests of the company and persuasively communicate the reasons for those decisions. Proactively discuss any anticipated negative feedback from the proxy advisory firms on relevant issues. The issues requiring special attention will depend on the company, but for most companies will include strategic direction, risk oversight, executive compensation, proxy access, board composition, succession, board leadership, political contributions disclosure, corporate social responsibility and structural defenses.

• Corporate Responsibility. The 2012 presidential election year is likely to bring heightened attention to issues related to corporate responsibility generally and to corporate political power in particular. In 2011, both the number of social and environmental proposals brought by shareholders and the support for these proposals increased. Boards should be prepared for particular scrutiny of their oversight of corporate political spending and should be sensitive to that issue. In addition to calls for greater disclosure of board policies and decisions with respect to political spending, boards should expect calls for greater disclosure regarding corporate impact on natural resources, with an emphasis on water and air quality and supply chain sustainability. Boards should ensure that these topics receive appropriate attention on the board agenda and should keep tabs generally on public sentiment as it relates to the company and issues of corporate responsibility generally. This is an area where the board may be particularly well positioned to assess the general environment and advise management.
• Executive Compensation. Say on pay acted as a “release valve” allowing shareholders to let off steam in 2011, resulting in fewer “withhold” and “against” campaigns targeting individual directors in elections. It will still be high on the shareholder agenda in 2012. To bolster support in the coming year, boards and compensation committees should recognize that many shareholders are looking for them to demonstrate restraint. Expect pay for performance to continue as the primary factor in obtaining shareholder approval, with shareholder sensitivity to pay levels relative to peers and pay increases out of proportion to performance trends. Consider the shareholder perspective on (and public perception of) the company’s executive compensation program and related disclosures, including, how the program matches up the new ISS guidelines (given its influence). Don’t just read a final draft of the proxy statement – advocate early that it explain the company’s compensation philosophy, and the alignment between pay and performance in clear and understandable terms. Finally, be willing and available to follow-up with key shareholders to discuss the board’s approach to say on pay. Boards of companies that failed to receive a majority vote in favor of executive compensation or received a high proportion of negative votes (even though receiving a majority vote in favor) should identify the primary shareholder concerns and take a hard look at whether changes are called for, based on fiduciary judgment.
• Majority Voting. Boards should expect a concerted effort from shareholders to extend majority voting to the remainder of the S&P 500 and beyond to the next tier of companies in 2012. Boards at companies that have not yet adopted a majority voting standard, or a director resignation policy in the event a director fails to receive a majority of the votes, should be prepared to address this issue with shareholders.
• Proxy Access. 2012 is the first year in which shareholders may bring proposals seeking bylaw changes to allow proxy access for shareholder nominations of director candidates in competition with the board’s own nominees. (Any adopted bylaw changes will not be applicable until the next year.). While public pension funds and union funds are expected to bring a relatively focused set of proposals concentrating on high-profile companies that have had significant governance, compliance or performance issues, individual shareholders involved in the U.S. Proxy Exchange (USPX) and the Norwegian Pension Fund Global (NPFG) have already submitted a dozen or more proposals. The non-binding USPX proposals generally ask that the board adopt a bylaw to permit proxy access for director nominees from shareholders that have held continuously for two years percent of the company’s eligible securities and/or any party of 100 shareholders each of whom satisfy the basic SEC Rule 14a-8(b) eligibility standards (holding a $2,000 stake for one year). The NPFG’s proposals are reportedly binding proposals and also have a low threshold, requiring that a shareholder hold a minimum of 1% of company stock for year. Boards should follow developments in this area closely. Maintaining strong relationships with significant shareholders and understanding and, as appropriate, addressing their concerns continues to be the best preparation for a potential proxy access proposal.
• “Vote No” Campaigns. Boards may see an up-tick in the number of campaigns against directors up for re-election. ISS has a fairly long list of circumstances that will cause it to recommend voting against a director in an uncontested election. In addition, “vote no” campaigns may target compensation committee members at companies where shareholders and proxy advisors deem the committee and board unresponsive to the 2011 say on pay vote even where the proposal “passed”. Boards should review ISS’ recently revised policies early to understand where vulnerabilities may lie so that they can take appropriate action, including, if necessary, targeted shareholder outreach.

Part II – Opportunities for Shareholders to Rebuild Trust

1. Focus on the long-term. Shareholders should give the board and management freedom to make decisions over a long-term time horizon. Focusing on the long-term is particularly critical during a downturn. While plowing resources into R&D and other job creation and growth strategies may restrain the bottom line in the near-term, such investments are necessary to reap rewards for the company and its shareholders—and society—later on. Shareholders may need to evaluate their own decision-making structures and ensure that they are not rewarding high-risk behaviors, whether through direct investments or through the monies they invest through other entities.

2. Refine shareholder priorities and reduce “noise.” Boards of public companies are bombarded with a wide array of viewpoints about corporate governance and social and environmental issues. Institutional shareholders should identify the two or three issues (in addition to return on investment) that are most important to them and then clearly and consistently articulate their views. Laundry lists of concerns should be prioritized to ensure that the board can hear and focus on the things that are most important to shareholders. These priorities can also help shareholders to ground their approach to voting analysis (see below).

3. Vote responsibly. With power comes responsibility. Where shareholders do not have the resources to become informed on an issue on a company-specific basis, it makes sense for them to generally defer to the board’s recommendations. We note that many may consider this heresy, but presumably most shareholders have invested in a company because of faith in the direction that the board and management are taking the company. Alternatively, they are investing because the company has been included in an index that the shareholder invests in, deferring to the judgment of others. Deference to board recommendations in most instances would allow shareholders to focus scarce voting analytic resources on companies where a significant performance or other red flag issue is apparent. In such instances, shareholders should apply their resources to becoming well informed prior to voting.

4. Delegate and/or rely on others responsibly. A corollary of the admonition to “vote responsibly” is to delegate or rely on others responsibly. When choosing advisors to assist with voting analysis and recommendations, do so on an informed basis after performing due diligence as to their capabilities. Consider whether they have the resources to provide informed and tailored advice specific to portfolio companies or are unduly reliant on a set of fairly rigid voting guidelines. The more reliant they are on junior seasonal workers who turn over every year, the less likely that they are able to provide rigorous, sophisticated and tailored analysis. If you are having the advisor tailor policies specifically to your specifications, consider using a performance screen and instructing the advisor that so long as the company is performing well and there are no significant red flags (and mere failure to adopt a particular governance policy favored by the advisor shouldn’t count as a red flag), to vote as the board recommends.

5. Speak up, but be willing to listen. Shareholders should share their concerns with boards and should also provide feedback when requested. Shareholders should also be prepared to listen to what boards have to say – communication is a two-way street. Communication can take various forms, from formal meetings conducted in accordance with Regulation FD, to posts on Twitter or other social media tools. Remember in communicating with a board that other shareholders may have different—and even conflicting—views. Also recognize that some means of communicating lack nuance. An example is the up-or-down vote on say on pay resolutions which provides shareholders with an imperfect forum in which to let the board know how it is doing on compensation and, indirectly, on performance generally. Follow up with concrete suggestions and give the board the opportunity to respond. Recognize that it takes time to make significant modifications to a company’s compensation program. Also, remember that while shareholder views about appropriate compensation should be considered, executive compensation is fundamentally the board’s responsibility.

6. Carefully consider private ordering options. Shareholder proposals relating to proxy access—whether by way of precatory resolution or binding bylaw amendment—should include meaningful ownership thresholds and other qualifications to ensure that director elections proceed in an orderly manner and are not hijacked by special interest groups. Proxy access should be viewed as a last-resort mechanism. Engagement with the company’s nominating committee on board composition should always be the preferred course.

Ira M. Millstein is a senior partner at the international law firm Weil, Gotshal & Manges LLP, where, in addition to practicing in the areas of government regulation and antitrust law, he has counseled numerous boards on issues of corporate governance. Holly J. Gregory is a partner in corporate governance at Weil, Gotshal.

But the cumulative effect of uncounted governance decisions can be tremendously important. Are boards — and the corporate officers who report to them — focused long-term gains or short-term goals? Are systems in place to allow effective communication between investors and the management and boards of the companies in which they share an interest? Do shareholders have effective mechanisms to ensure that their voices are heard and their opinions are considered? Do boards respond in a thoughtful and comprehensive manner? And is the disclosure that companies provide to shareholders and potential investors sufficient — especially in terms of risk management?

This commentary is an excerpt of SEC Chairman Mary Schapiro’s remarks at the Transatlantic Corporate Governance Dialogue.

In short, are shareholders and boards, along with management, sufficiently engaged to ensure a quality of corporate governance commensurate with the demands of managing a public company?

When the answer to this question is, “yes,” we believe that economies broadly benefit as well-run companies flourish and grow, and that investors in particular benefit from quality information and insight into management’s priorities, allowing investors to balance risks and to allocate their capital accordingly.

Effective engagement is a strong positive. But, in attempting to foster effective engagement we face a challenge: the definition of “effective engagement” is imprecise. In fact, the definition of effective engagement can vary significantly from company to company, as investors and boards interact in very different ways, but achieve similarly positive financial results and equally satisfying relationships between shareholders and boards.

There is no exact formula. I do, believe, however, that engagement lies at the crossroads of communication and responsiveness. And that, as a regulator, my goal should be not to detail the type of communication or the level of responsiveness, but to put in place structures that encourage governance practices characterized by these attributes.

Accurate disclosure of material financial information is, of course, a first principle of this type of regulation. And here, we do not shy away from detailed disclosure requirements.

But engagement is more than disclosure. Shareholders should have a voice and a straightforward and transparent process for engaging with companies on issues that are important to them. Shareholders and boards should have clear conversations about how the company is governed — and why and how decisions are made. As a general rule, interested, aware and active shareholders are good for public companies, and I believe that more shareholder engagement is better.

But here, detailed prescriptions are more difficult to write.

And so, as regulators, we do not see our role as quantifying “appropriate” levels of engagement or laying out precise steps to reaching it. The SEC is not interested in determining the communications strategies of individual companies.

What we are interested in is breaking down barriers that may prevent effective engagement, impact investor confidence and, ultimately, diminish financial performance to the detriment of shareholders.

As a regulator and as a former board member, I believe that it is vital that shareholders and board members become more engaged in the shared pursuit of high quality governance. And, as chairman of the U.S. Securities and Exchange Commission, I have made crafting a regulatory framework that facilitates effective engagement a priority.

As you already know, we are moving toward a framework in which investors have better information, qualitatively and quantitatively, and more effective ways of expressing their reaction to the information that is disclosed.

Generals Hugh Shelton and Stanley McChrystal

Their career highlights speak volumes: Shelton, who has served in Vietnam, Haiti, Kosovo and the Gulf War, was commander in chief of the United States Special Operations Command (units include Delta Force, Seal Team 6 and Army rangers), which focuses on major covert and clandestine missions, and was chairman of the Joint Chiefs of Staff under Presidents Clinton and Bush. McChrystal served as commander, United States Army Central in Camp Doha, Kuwait. He led the Joint Special Operations Command and later directed all NATO forces in Afghanistan. His successes include the capture of Saddam Hussein and the death of Al Qaeda’s Abu Musab al-Zarqawi.

No board has a corner on crisis management skills. And yet, having this degree of experience on hand assures whatever threats lurk ahead for a company, they will be seen as just another skirmish on the road to victory.

Jeff Cunningham is managing director and senior advisor to NACD. He is nationally known for his views on boards and corporate governance. Prior to starting Directorship magazine, he was publisher of Forbes and managing partner of the U.K. private equity firm Schroders. He has served as an independent board chair or director of 10 public companies.

The impact of the crisis was severe, as each of you and the people you represent know all too well.

Robert Khuzami

Our job, our challenge, in the Division of Enforcement was to investigate and hold accountable those who had contributed to the financial crisis.

We took that challenge head on.

This is the December 1 address by Robert Khuzami before the Consumer Federation of America’s Financial Services Conference in Washington, D.C.

We immediately set to work investigating violations of the securities laws that may have contributed to the financial crisis.

At the same time, we launched an ambitious plan to reform the organizational structure of the Enforcement Division, and to forge better tools with which to do our job, so that we could work smarter and more efficiently.

This effort has yielded impressive results.  I’m going to talk about that in more detail in just a moment.

But I know that, despite our improved performance, some question the adequacy of our efforts, and in particular the terms of some of the settlements we have obtained in cases against financial institutions arising out of the credit crisis.

Some feel the SEC can and should do more, that the penalties we have recovered are insufficient to deter future misdeeds by some large firms.

Some of this frustration – to the extent it is directed at the regulators – is rooted in misunderstandings, including misunderstandings of the SEC’s powers as a law enforcement agency.

And some is the result of limits placed on the penalties we can impose, and on the resources we can deploy.

And so, I thought I should try to clear up some of those misperceptions and talk about proposals that our Chairman has asked Congress to consider.

These are proposals that would give us greater authority to punish and deter, and allow us to more effectively enforce the law against large institutions and against the smaller operations that target the men and women your organizations represent.

Reorganization

Through hard work and innovation, we have now completed what was the most significant reorganization in the history of the Enforcement Division.

What did we do?  We flattened our management structure by taking attorneys out of management positions and putting them back on the front lines to conduct investigations, bring cases and hold bad actors accountable.

We radically reconfigured our organizational structure by creating five new specialized units with nationwide scope, all focused on complex, high-priority areas:

• Asset management and mutual funds.
• Illegal trading and other market abuses.
• Structured and new products including complex mortgage-related products.
• Foreign corrupt practices.
• Municipal securities and pensions.

These units allow us to build specialized, institutional knowledge and experience that allow our attorneys to recognize and respond to suspicious activity more quickly.

We recruited industry experts – non-lawyers with genuine market expertise and specialized experience to assist in our investigations.  These folks know where the rocks are and what is buried underneath them.

Today, if someone is under investigation about improperly inflating the value of bonds in the mutual fund one of your members or clients owns, there is a good chance that sitting across from them is someone from the SEC who used to value bonds for a living.

That keeps the discussion very “accurate” shall we say.

We secured two significant tools that help us gather high-quality evidence quicker than in the past.

First, we established a Cooperation Initiative to encourage “insiders” with knowledge of wrongdoing to come forward early, thus allowing us to bring stronger cases and shut down fraudulent schemes earlier than would otherwise be possible.

And second, we set up a Whistleblower Program – as required by the Dodd-Frank Act – that expands our authority to reward individuals who provide the SEC with early, useful information about securities law violations.

Additionally, we worked with our Chairman, Mary Schapiro, and the other Commissioners to give our attorneys more power to act swiftly and aggressively, opening investigations without having to go through the process of full Commission approval in advance.

And we have been bringing 21st Century IT into the battle, increasing our use of sophisticated analytic tools and data-based templates.

This helps us identify suspicious patterns and activities before they have hatched into full-blown frauds.

Together, these initiatives are designed to allow us to detect much of the fraud to which retail investors are particularly vulnerable – and to detect it sooner than previously possible.

This reduces the number of people who become victims, minimizes the harm to those who unfortunately have already been victims, and increases the odds we will catch the perpetrators, bar them from working in the industry and return the funds to defrauded investors.

Record Productivity and Performance

The conventional wisdom was that the dislocation and distraction that comes with implementing such fundamental organizational changes would cause our productivity to slip.

That did not happen.  A few weeks back we closed the books on one of our most productive years ever.

In fiscal year 2011, the SEC filed a record 735 enforcement actions – a nearly 9 percent increase over the previous year.

While numbers do not tell the whole story, it was nonetheless the most cases we’ve ever filed in the history of the agency.

Equally, if not more important, these record numbers include many highly complex, difficult-to-detect schemes.

During 2011, we continued to aggressively bring actions stemming from misconduct related to the financial crisis.  In fact, since 2008, we have filed 36 financial crisis-related cases and charged more than 80 individuals and entities.

That’s more cases than any other federal agency can claim.  What’s more, nearly half of the individuals we charged in these cases were CEOs, CFOs and other senior officers.

And these were not simple cases.  They involved misconduct such as:

• Concealing the risks associated with collateralized debt obligations (CDOs) and other complex structured products.
• Misrepresentations about the terms of those transactions.
• False valuations of mortgage-related assets.
• Accounting schemes involving those products.

We also filed cases against investment advisers and others who concealed the extent of risky mortgage-related investments in mutual funds and other financial products that were marketed and sold to retail investors.

As a result of our actions, courts have ordered nearly $2 billion in penalties, disgorgement and other monetary relief – most of which has or will be returned to harmed investors.

In fact, we are achieving record results across our entire program.

We filed 57 insider trading cases in 2011, a nearly eight percent increase over the previous year.

Included in that number are additional Galleon-related insider trading cases, where we worked with criminal authorities to break up one of the largest insider trading schemes ever uncovered – one that undermined the integrity of the market and created an uneven playing field for those without inside information.

In addition to the criminal actions, the SEC to date has charged 29 hedge fund professionals, corporate insiders, and others in this one scheme.  And, the ringleader, Raj Rajaratnam, was recently ordered to pay a record $92.8 million civil penalty to the SEC in addition to the criminal penalties imposed.

But it’s not all about hedge funds and investment banks. We’re keeping an eye on the professionals who handle people’s IRAs and their kids’ college funds.

The nearly 150 enforcement actions we filed related to investment advisers and investment companies were a single-year record and a 30 percent increase over the previous fiscal year.

Meanwhile, our 112 enforcement actions related to broker-dealers constitute a 60 percent jump over the previous fiscal year.

Ed Breen

Breen was brought into Tyco in 2002 after the debacle of former CEO Dennis Kozlowski* (now memorialized for throwing a lavish $2 million Sardinian birthday party for his wife) to resuscitate the company that became the poster child for corporate excess. Breen’s low key and affable demeanor belie a razor-sharp focus. One of his first moves as CEO was to ask the entire board to resign—no simple task as they had just hired him. He patiently convinced them this was both the honorable and the right thing to do to set the stage for investors to take a second look at Tyco. He divested businesses, changed managers and downsized for further streamlining. He evinces a modesty that is both genuine and impressive: he parks in the employee lot and eats in the company cafeteria. Breen walks the talk.

*Kozlowski, currently serving a 25-year sentence in Marcy, N.Y., is eligible for parole in early 2014.

Jeff Cunningham is managing director and senior advisor to NACD. He is nationally known for his views on boards and corporate governance. Prior to starting Directorship magazine, he was publisher of Forbes and managing partner of the U.K. private equity firm Schroders. He has served as an independent board chair or director of 10 public companies.

ISS is generally considered the most influential proxy advisor in the US. Recent studies have found that ISS is able to influence shareholder votes by 6 percent to 20 percent. [1] In preparing for 2012 annual meetings, corporate counsel, corporate secretaries and directors (particularly those serving on compensation or nominating and governance committees) should review the ISS policy updates and consider how the changes may affect ISS’ evaluation of director re-elections, executive compensation matters and other matters for shareholder vote. Note that for the 2012 proxy season, ISS has identified over 50 circumstances that may support a negative vote recommendation (either “against” or “withhold”) in uncontested director elections.

This article is an excerpt from a Weil Gotshal client alert, originally posted on the HLS Corporate Governance blog.

Summary of Key Changes for the 2012 Proxy Season

1. Revised Policy on Pay-for-Performance Evaluation
Under a revised policy, ISS has refined its methodology for determining pay-for-performance alignment.

Discussion: Previously, if a company in the Russell 3000 index fell in the bottom half of its GICS industry group in total shareholder return over both a one-year and three-year period, and CEO pay was not aligned with shareholder performance over time (with special emphasis on the immediately preceding year), ISS would recommend a negative say-on-pay vote.

Under the revised policy, ISS will select a narrower peer group of 12 to 24 companies, using as guidelines market cap, revenues (or assets for financial firms), and GICS industry group. Additional guidance on the new approaches for selecting companies for peer groups will be provided in December.

ISS will now focus on: (i) the relative alignment between CEO pay and company TSR within the peer group for a one- and three-year period (with a 40 percent emphasis on the one-year period and a 60 percent emphasis on the three-year period); (ii) the multiple of CEO pay relative to the peer group median, and (iii) the absolute alignment between CEO pay and company TSR over a five-year period. The system for evaluating differences in rates of change to identify weak or strong alignment will be provided in additional guidance to be issued in December.

Where the alignment is perceived to be weak, ISS will consider how a number of qualitative factors affect alignment of pay with shareholder interests, including:

• The ratio of performance- to time-based equity awards;
• The ratio of performance-based compensation to overall compensation;
• The completeness of disclosure and rigor of performance goals;
• The company’s peer group benchmarking practices;
• Actual results of financial/operational metrics, such as growth in revenue, profit, cash flow, etc., both absolute and relative to peers;
• Special circumstances related to, for example, a new CEO in the prior fiscal year or anomalous equity grant practices (e.g., biennial awards); and
• Any other factors deemed relevant.

Implications: Companies should study the additional guidance that ISS plans to issue in December and assess how their alignment of compensation and performance is likely to be assessed under ISS’ new methodology. Companies should take special care to focus their CD&As on the alignment between compensation and performance, and explain any anomalies.

2. Revised Policy on Board Response to Say-On-Pay Vote

Under a revised policy, ISS will recommend votes on compensation committee members and the current year say-on-pay proposal on a case-by-case basis where, in the previous year, the company’s say-on-pay proposal received the support of less than 70 percent of the votes cast.

Discussion: Previously, ISS would recommend a negative vote for compensation committee members “in egregious situations” or when the board “failed to respond to concerns raised in prior [management say-on-pay] evaluations.” When evaluating ballot items related to executive pay, ISS considered the board’s responsiveness to investor input and engagement on compensation issues (for example, failure to respond to majority-supported shareholder proposals on executive pay topics, or concerns raised in connection with significant opposition to prior year’s say-on-pay vote) on a case-by-case basis.

Under the revised policy, ISS’ case-by-case analysis will take into account: (i) the company’s response to the concerns expressed by shareholders in the previous year, including disclosed engagement efforts with major institutional investors and specific actions taken to address the issues that led to the “low” level of support, as well as other recent compensation actions taken by the company; (ii) whether the issues raised are recurring or isolated; (iii) the company’s ownership structure (for example, significant insider ownership); and (iv) whether the support level was less than 50 percent, which ISS notes will “warrant the highest degree of responsiveness.”

ISS has indicated that the new policy does not establish a bright line test, and that it may apply its case-by-case analysis to companies where the say-on-pay proposal received the support of more than 70 percent of the votes cast, including companies with significant insider ownership.

Implications: Companies whose say-on-pay proposal received a significant percentage of negative votes (even if the proposal was approved by more than 70 percent of the votes cast) should conduct outreach with their large institutional shareholders to discuss compensation concerns that contributed to negative votes and discuss what actions the board has taken, plans to take, or is considering in order to address these concerns (within the confines of Regulation FD). ISS notes that “these specific actions should ideally be new rather than a reiteration of existing practices.” In the CD&A, companies should consider disclosing efforts to engage with shareholders and consider their viewpoints (for example, the percentage of shareholders contacted). There may be instances where the board, after considering all relevant facts and circumstances with due care – including the shareholder say-on-pay vote – may decide that no change is appropriate. Where this is the case, the basis for this conclusion should be presented in the CD&A.

Note that shareholder outreach efforts on compensation concerns may be useful in avoiding a shareholder derivative lawsuit alleging that directors breached their fiduciary duties in connection with a failed say-on-pay vote.

3. New Policy on Board Response to Say-on-Pay Frequency Vote

Under a new policy, ISS will recommend that shareholders vote against or withhold votes from all incumbent directors if the board implements a say-on-pay vote on a less frequent basis than the frequency that received a majority of the votes cast. When no frequency received a majority, ISS will apply a case-by-case analysis if a particular frequency received a plurality of the votes cast and the board implements a say-on-pay vote less frequently.

Discussion: Last year, US corporate issuers were required to afford shareholders an advisory vote on the frequency with which the say-on-pay vote should be held, and will have to revisit say-on-pay frequency at least once every six years thereafter. Under a policy issued last year, ISS recommended voting for annual say-on-pay votes, rather than biennial or triennial say-on-pay votes. It appears that many large companies are opting for an annual say-on-pay vote.

Where a frequency option received a majority of votes cast and the board implements a less frequent say-on-pay vote, ISS will recommend that shareholders vote against or withhold votes from the entire board (except new nominees, who will be considered on a case-by-case basis). In a situation where no frequency received a majority of votes cast in support, and the board implements a less frequent say-on-pay vote than the frequency that received plurality support, ISS will take a case-by-case approach and consider additional factors in determining its recommendations, including the board’s rationale, the company’s ownership structure and vote results, any compensation concerns or history of problematic compensation practices, and the say-on-pay support level from the prior year.

Although ISS’ rationale for the new policy states that “[m]ajority support for a particular frequency should be viewed as a mandate to the board,” ISS will not issue negative vote recommendations where even though the shareholder’s “mandate” is for a frequency other than annual voting, the board implements a more frequent say-on-pay vote.

Implications: Companies that have disclosed they plan to implement a less frequent say-on-pay vote than the frequency option preferred by their shareholders should consider outreach efforts aimed at explaining why a less frequent say-on-pay vote is best for their circumstances. Some such companies may wish to revisit whether to implement the shareholder-preferred say-on-pay frequency.

4. Revised Policy on Incentive Bonus Plans and Tax Deductibility Proposals (Post-IPO Companies)

This year, ISS will apply a more rigorous analysis for the initial approval of equity plans under Section 162(m) of the Internal Revenue Code.

Discussion: Generally, ISS has recommended that shareholders support equity plan proposals solely for compliance with Section 162(m) of the Internal Revenue Code, due to the favorable tax deduction companies may take on performance-based compensation paid to named executive officers. Under the revised policy, ISS will evaluate, on a case-by-case basis, equity plans that are to be voted on for the first time following an IPO even if only for the purpose of obtaining favorable Section 162(m) treatment. ISS will perform a full analysis, taking into consideration total shareholder value transfer, burn rate (if applicable), repricing, and liberal change in control. If appropriate, ISS may also consider other factors such as pay-for-performance or problematic pay practices (such as perquisites).

ISS’ rationale for the policy update explains that the revised policy aligns with the recently proposed Treasury rule related to Section 162(m). The proposed rule would require newly public companies to obtain shareholder approval before awarding certain performance-based restricted stock units to named executive officers before the end of the standard post-IPO transition period to qualify as performance-based compensation.

Implications: Newly public companies seeking initial shareholder approval of an equity plan for Section 162(m) purposes should expect ISS to perform a full analysis and should not consider a favorable ISS recommendation to be a foregone conclusion. Companies should consider this policy change in both plan design and pay practices.

5. Revised Policy on Proxy Access

ISS’ revised policy expands and refines the factors it will consider in determining recommendations on proxy access proposals, and broadens the policy to apply to management proposals as well as shareholder proposals.

Discussion: Until now it had been ISS’ policy to recommend that shareholders vote case-by-case on shareholder proposals asking for proxy access, taking into account (i) the ownership threshold proposed in the resolution, and (ii) the proponent’s rationale for the proposal at the targeted company in terms of board and director conduct.

On September 20, 2011, the SEC’s amendment to Rule 14a-8 took effect, [2] providing that companies may no longer automatically exclude from proxy materials shareholder proposals seeking to amend company by-laws to require future inclusion of shareholder-proposed director nominees in company proxy materials on the ground that such proposals relate to director elections. Of course, companies may seek no action relief for exclusion of such proposals on other grounds pursuant to Rule 14a-8, and some companies may decide to pre-empt shareholder action through management proposals on proxy access.

ISS’ revised policy will apply a case-by-case approach to recommendations on proxy access proposals, taking into account a range of company-specific and proposal-specific factors, including: (i) the ownership thresholds proposed in the resolution, (ii) the maximum proportion of directors that shareholders may nominate, and (iii) the method of determining which nominations should appear on the ballot if multiple shareholders submit nominations. Because ISS supports proxy access in principle, the revised policy de-emphasizes the proponent’s rationale for the proposal. ISS has indicated that its company-specific review will focus on the company’s size and shareholder demographics, rather than the company’s corporate governance profile and practices. ISS has also indicated that its analysis of the appropriateness of the core features of proxy access proposals will be more exacting in the case of binding bylaw amendments than for precatory requests for board actions, since precatory requests permit boards an opportunity to review and revise the proposed procedures and thresholds for proxy access prior to adopting a policy.

ISS’ revised policy does not include any guidance on specific terms in a proxy access proposal that it considers to be favorable or unfavorable, noting that “the access debate is fluid and likely to gain more attention in 2012.” ISS’ executive summary of the updates, however, indicates that “[i]n January 2012, as part of [its] policy update process, ISS expects to provide additional guidance (via FAQs and/or through other reports) based on an examination of the specific proposal texts.”

Implications: It remains to be seen how frequently proxy access shareholder proposals will be brought, whether they will be structured as precatory requests for board action or as binding bylaw amendments, and the range of ownership thresholds proposed in the resolutions (i.e., percentage and duration). Companies should closely monitor proxy access shareholder proposals, as well as corresponding ISS recommendations and shareholder support. As of November 15, 2011, two precatory shareholder proposals seeking proxy access had been filed by Ken Steiner, an individual shareholder involved with the U.S. Proxy Exchange (USPX), a coalition of individual retail shareholders. The proposals, submitted to Textron and MEMC Electronic Materials, were the first 2012 access proposals to be publicly disclosed. The Steiner proposals (which are substantially identical) provide a lower threshold of stock ownership for shareholder nomination of directors than that contemplated by the SEC’s vacated Rule 14a-11, which required ownership of three percent of a company’s outstanding shares for a period of three years in order to nominate one or more director (with a 25 percent cap). The Steiner proposals recommend that the company’s proxy include nominees of “any party of one or more shareholders that held continuously, for two years, one percent of the Company’s securities eligible to vote for the election of directors” or any party of 100 or more shareholders that satisfy SEC Rule’s 14a-8(b) eligibility requirements ($2000, or one percent of a company’s securities eligible to vote, continuously held for at least one year). Companies and boards should follow these developments closely.

Hundreds of students gathered, some chanting "We want Joe! We want Joe!". (AP Photo/Matt Rourke)

The public relations lesson I learned in my years as publisher of Forbes was to resist the rush to make an irreversible decision while the accusations are flying. The story is bound to change. Going dark is better than going blind. So despite the board’s overtures and mea culpas the self-appointed media moral brigade continued to lash out at Penn State as an example of institutional ethical failure. The media likes to throw a quick punch at a story like this, so they cover all their bases by damning the entire organization and especially anyone high profile. With blame assigned, they move onto the next crisis while the reality plays out and the board is left to deal not only with the original misdeed but the impact of their own precipitous action.

Think first, shoot second.

Jeff Cunningham is managing director and senior advisor to NACD. He is nationally known for his views on boards and corporate governance. Prior to starting Directorship magazine, he was publisher of Forbes and managing partner of the U.K. private equity firm Schroders. He has served as an independent board chair or director of 10 public companies.

Richard Levick

So far media attention and public reaction have naturally been driven by the vagaries of the news cycle and by a few predictable preoccupations. First, of course, there are the daily breaking events, from the termination of 1,066 MF Global employees to the role of examiners from CME Group Inc. who reportedly knew of the $900 million client fund shortfall just before the regulators learned of it.

This article is excerpted from Richard Levick’s Forbes blog.

The public’s interest remains personality-driven as well because MF Global is still very much a story about Jon Corzine. One plaintiffs’ law firm has even promoted its case online as the “Jon Corzine Lawsuit” and, in the process, successfully topped the Google news listings for MF Global. It’s worth noting that Corzine was a generally controversial politician long before this current debacle, arousing misgivings among many loyal New Jersey Democrats for campaign spending that was flagrant by any standards. His ambiguous public brand now shadows all perceptions of this latest financial services scandal.

At a more substantive level, there has already been intelligent commentary on what MF Global means in terms of the real role and efficacy of market regulation, and the purportedly uncoordinated roles of the various agencies. Early commentary also distinguishes this case from those involving larger institutions that cannot engage in proprietary trading as a result of Dodd-Frank. There is now speculation as to whether a post Dodd-Frank regulatory environment will include significantly greater purview over the practices of smaller firms, with closer attention to their leverage ratios (31-1 at MF Global) and more aggressive disclosure standards.

Strictly from a news perspective, MF Global has real legs because, importantly, the collapse occurred at a uniquely sensitive moment. First, there will be no government bailout, which means that people – some very sophisticated, powerful people – cannot rely on the taxpayer to recover their money. The JP Morgan flap is likely just a minor shot across the bow in terms of the highly public imbroglios ahead as the asset recovery saga goes forward. The story is all the more caliente as Corzine’s personal fortune is an alluring target for future lawsuits, especially if those who say his liability insurance won’t likely cover his exposure are correct.

News cycles aside, the enduring legacy of the MF Global collapse will play out on two larger fronts that speak to both public policy and investor perception.

First, MF Global revives old unresolved debates – not just on how effective the regulatory system is – but on the actual value of aggressive regulation as a response to financial crisis. Significantly, MF Global’s place in history is assured because it is the first post Dodd-Frank collapse. This dubious milestone begs the questions, what have we gained from the new law when behaviors still aren’t changed, when disclosure still appears insufficient, when risk-taking is still excessive, and when marketplace confidence is still abysmally low? Could effective enforcement have made any difference?

So we’re back to Square One in the great policy debate: “we must have new laws and tougher laws” versus “we must let the marketplace self-correct and be wary of the unintended consequences of legislating correctives that don’t even correct.” This fundamental ideological division will likely slip into next year’s election. (Corzine’s state, New Jersey, could be a prominent battlefield with Democratic senator Robert Menendez up for reelection.)

Second, MF Global is…well, global. Because its collapse is directly tied to the European economic crisis, MF Global is a direct reminder to already jittery investors that foreign entanglements expose all of us to unforeseeable, often instantaneous risk. There’s no longer a floor to that exposure for those who may not have a direct stake in MF Global but whose 401(k)s are loaded with assets that can go south in a single Athenian heartbeat.

For both financial services companies and for regulators, the takeaway in such a market can only be heightened disclosure based on communications policies that fully articulate risk as well as credibly provide safer alternatives. The regulators will have a voice in how such communications are made, but the funds and financial firms themselves must be equally committed to full transparency if only as a matter of their own survival.

These prescriptions are by no means new. The insistent demand – either via legislation or as a best business practice – for real accountability was a public discourse mantra well before the 2008 crisis. But it is a demand that must not abate, however old-hat it sounds, until the Jon Corzines of the world actually start complying.

Every economic crisis (in this case, Europe) will likely savage some brand-name financial firms and jolt world markets. In many ways, the debate on more versus less regulation in the aftermath of such panic is a healthy one. The best equilibrium of government action and inaction cannot be determined in a day or in a generation. Ongoing debate likewise assures that neither side will gain too much of an upper hand but maintain instead a salutary balance of power.

Yet the debate must be framed soberly. In an atmosphere of fear, where so many investors live in dread of imminent loss, shrill rhetoric on either side can only further diminish confidence whether we tilt toward or away from additional regulation.

Follow Richard Levick on Twitter @richardlevick.

Richard S. Levick, Esq., is the president and chief executive officer of Levick Strategic Communications, a crisis and public affairs communications firm. Mr. Levick is on the prestigious list of “The 100 Most Influential People in the Boardroom,” He is the co-author of The Communicators: Leadership in the Age of Crisis and Stop the Presses: The Crisis & Litigation PR Desk Reference, and writes for Bulletproofblog.  Reach him at rlevick@levick.com.

Executive compensation continues to be an American issue for a second straight year. Only for North America, a majority of both investor (60 percent) and issuer respondents (61 percent) cite the perennial issue of executive compensation as one of the top three governance topics for the coming year, similar to last year’s survey results.

Carol Bowie

On a global basis, investor respondents focused on board independence. Across every region, board independence was identified among the three most important governance topics by approximately 40 percent of investor respondents.

This article originally appeared on the Harvard Law School Forum on Corporate Governance and Financial Regulation blog. This post is based on the key findings of the complete ISS Policy Survey, available here.

Issuers focus on risk oversight in North America and Europe. For issuers, the second most commonly cited topic in North America was risk oversight. In Europe, risk oversight was commonly cited along with board competence.

Engagement

Engagement between issuers and investors remains strong. A majority of investor respondents (57 percent) indicated more engagement activity with issuers in 2011. Regarding engagement activity with institutional shareholders, issuer respondents almost equally cited “about the same as in 2010″ and “more engagement in 2011.”

Director Qualifications

Director’s recent experience a key issue when evaluating board nominees. When evaluating director nominees, a director’s recent industry/sector experience was cited as either “relevant” or “very relevant” by most investor respondents. For issuer respondents, this was the only category of information that received a strong majority (61 percent) for “very relevant.”

Other categories that strongly appeared relevant to both investor and issuer respondents include director biographic information; performance of companies where director serves (or served) on boards; and governance track record for firms where directors serves (or served) on boards.

As indicated by both issuer and investor respondents, ISS recommendations at other public companies where the director serves and whether directors were subject to continuing boardroom education were least relevant when evaluating director nominees.

ES&G Issues

Environmental, social and governance issues are significant for a second straight year. Similar to last year’s survey results, a strong majority of both investor and issuer respondents indicated that a company’s performance regarding ES&G factors can have a significant impact on long-term shareholder value.

U.S. Compensation Practices

Pay levels relative to peers and a company performance’s trend are relevant for both investor and issuer respondents when determining pay for performance alignment. When determining whether executive pay is aligned with company performance, an overwhelming majority of investor respondents considered both pay that is significantly higher than peer pay levels and pay levels that have increased disproportionately to the company’s performance trend to be very relevant. Most issuer respondents, on the other hand, shared a similar sentiment with that of investors, but appeared to tone down the response by indicating both of these factors to be “somewhat relevant.”

Discretionary annual bonus awards can sometimes be problematic: investor and issuer respondents agree. A majority of investor respondents (57 percent) and 46 percent of issuer respondents agreed that discretionary annual bonus awards (i.e., those not based on attainment of pre-set goals) to be sometimes problematic if the awards are not aligned with company performance.

Investor and issuer respondents diverge on opposition levels to a say-on-pay vote that should trigger a board response to improve pay practices. The most commonly cited level of opposition on a say-on-pay proposal that should trigger an explicit response from the board regarding improvements to pay practices is “more than 20 percent” for investor respondents (36 percent) and “more than 50 percent” for issuer respondents (48 percent). However, on a cumulative basis, 72 percent of investor respondents and 52 percent of issuer respondents indicate that an explicit response from the board regarding improvement to pay practices should be made at opposition levels at “more than 30 percent” and “more than 40 percent,” respectively.

Less appetite from investor respondents in taking into account positive factors to mitigate cost of an equity plan. Responses from investor and issuer respondents varied as to whether positive factors (above median long-term shareholder return; low average burn rate relative to peers; double-trigger CIC equity vesting; reasonable plan duration; robust vesting requirements) mitigate an equity plan where shareholder value transfer (SVT) cost is excessive relative to peers. Most investor respondents were reluctant to indicate that any of those factors would “very much” mitigate the cost. For certain factors, e.g., above median long-term shareholder return and low average burn rate relative to peers, there was a strong showing from issuer respondents that these factors should “very much” be taken into account to mitigate the cost.

On the flip side, where SVT cost is not excessive and whether negative factors (liberal CIC definition with automatic award vesting; excessive potential share dilution relative to peers; high CEO or NEO “concentration ratio”; automatic replenishment; prolonged poor financial performance; prolonged poor shareholder returns) weigh against the plan, a majority of investor respondents indicated all of the factors, with the exception of high CEO/NEO “concentration ratio,” should “very much” weigh against the plan. Of all of these factors, a vast majority of investor respondents (73 percent) cited prolonged poor financial performance and prolonged poor shareholder returns.

While it did not appear that issuer respondents were emphatic about these factors weighing against the plan, a majority of the issuer respondents indicated that liberal CIC definition with automatic award vesting, excessive potential share dilution relative to peers, and automatic replenishment (“evergreen funding”) should “somewhat” weigh against the plan.

Investors indicate post-IPO equity plans seeking Section 162(m) tax deductibility should be evaluated under same guidelines as a standard equity plan. According to a vast majority of investor respondents (80 percent), equity plans coming to a shareholder vote for the first time after an IPO (in order to quality for Section 162(m) tax deductibility) should be evaluated under the same guidelines as a “standard” equity plan, even if no new shares are requested. While 59 percent of issuer respondents disagreed, a substantial minority (41 percent) shared the same view with investor respondents.

“Single-trigger” equity vesting in the context of equity plans elicits differing views from issuer and investor respondents. An overwhelming majority of investor respondents do not consider automatic accelerated vesting of outstanding grants upon a change in control or accelerated vesting at the board’s discretion after a change in control to be appropriate. The vast majority of issuer respondents disagree, and consider both scenarios appropriate. However, both issuer and investor respondents agree that accelerated vesting in certain circumstances after a change in control (e.g., if awards are not converted or replaced by a surviving entity) are appropriate.

So here’s my list of “tipping points” in board history—one for every year of service. Of course, it’s tempting to list the many accomplishments of NACD’s many illustrious board members, chapter leaders, and dedicated employees past and present—shout outs to great leaders John Nash, Roger Raber, and Ken Daly—and those who served in interim periods—but I’ll keep this list general. I’ll also resist the temptation—well, maybe not—to tell you a little more about me—in particular about a day in my life in 1978, when I worked briefly at my father’s publication, Directors & Boards. (This was before the visionary Rock family acquired it and the most excellent editor Jim Kristie took the helm.) On that fateful day, a colleague and I decided to spice up our Monday by tracking down Susan Sontag, a famous female intellectual of the era, to see if she might want to write us a little think piece on corporate boards. “Boards?” she responded incredulously. “Boards?” she repeated, adding “How dreadful!” She clearly believed that boards were boring!

Was Ms. Sontag right? Let’s take a journey through time, and you can decide for yourself. Here are 25 top headlines for governance—starting just a bit before my time but continuing to present.  

1977: The National Association of Corporate Directors (NACD) launches association and publication. NACD, founded by directors and headed by John Nash for its first 20 years, gave corporate directors an unprecedented way to obtain board-focused education and research, and to engage in networking and advocacy. In its first year the Association faced a significant challenge: implementation of the Foreign Corrupt Practices Act of 1977, which required boards to oversee internal financial controls. That same year, the New York Stock Exchange (NYSE) required its listed companies to have independent audit committees. During NACD’s earliest days, the Securities and Exchange Commission (SEC) was headed by the wise Harold M. Williams, who urged directors to take the lead in governance reforms.

1981: Ira M. Millstein wrote The Limits of Corporate Power (McMillan). This book, explaining such subjects as the duties of loyalty and care, would be the first of many influential Millstein publications.

1982: Martin Lipton invents a new kind of shareholder rights plan – the “poison pill.” This controversial mechanism allowed boards to buy time when facing an unsolicited takeover.

1983: Agency theory comes of age through Michael Jensen’s article on “The Separation of Ownership and Control” (Journal of Law and Economics). This article brought awareness of the issue first raised in 1932 by Adolf Berle and Gardiner Means in The Modern Corporation and Private Property. They noted that in the large modern public corporation, shareholders are widely dispersed and must rely on directors to represent them.

1984: Congress creates the U.S. Sentencing Commission to issue guidelines on corporate sentencing. Eventually published in 1987, these guidelines, applied to “white collar” crimes, among others. They offer reduced sentences to corporations with strong compliance programs. This development put compliance on the map for boards. The same year, the American Bar Association would undertake a major revision of its Model Business Corporation Act, a guide for state corporation law including model statutes for director and officer duties.

1985: The Delaware Supreme Court decides Smith v. Van Gorkom. This decision made it clear that the decision-making processes of directors would be subject to increased scrutiny. This same year saw the founding of the Council of Institutional Investors (CII) and Institutional Shareholder Services (ISS), both of which put more “heat” on boards to perform well on behalf of shareholders. Smith v. Van Gorkom began a long line of Delaware cases exploring the dimensions of fiduciary duties—too numerous to list here.

1986: The Delaware Supreme Court decides Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc. This case, involving a hostile bid for the cosmetics giant, put permanent pressures on boards to look for best offers once their company was in play. Similarly that same year, the Sixth Circuit court decided in Edelman v. Fruehof Corp. that directors should not accept a management buyout without considering other offers. The next year, in CTS Corp. vs. Dynamics Corp. of America, the U.S. Supreme Court upheld the rights of states to pass anti-takeover statutes. But the Revlon decision was not the only notable event in 1986. That same year, Congress removed a real estate tax deduction as part of the 1986 Tax Reform Act, triggering the collapse of numerous banks (1000 closed between 1986 and 1991), resulting in numerous lawsuits against their officers and directors. Also in 1986, the Executive Leadership Council (ELC) was formed with the intent of increasing diversity at the board level through facilitating dialogue among African Americans within corporate leadership. Together with Catalyst, a group founded in the 1960s to promote advancement of women, ELC has been a force for diversity in boardrooms.

1987: The National Commission on Fraudulent Financial Reporting releases its report on the subject, sponsored by the Committee of Sponsoring Organizations (COSO). The work of this group, chaired by James Treadway (aka the Treadway report) gave directors their first set of guidance on their role in the detection, prevention, and oversight of fraud. Global contemporaries included the Cadbury Committee report in England (1992, with sequels in 1995 by Greenbury and Hempel), the Dey Report in Canada (1994), the King Report in South Africa (1994), and the Vienot Report in France (1995). Also in 1987, NACD held its first Director of the Year dinner, honoring Juanita Kreps before a packed audience. Unfortunately, the next morning, directors awoke to news of the stock market plunge on Black Monday. The meeting room that had been full the night before was mostly empty, except for John Nash and a few governance diehards.

1988: The Department of Labor issues a set of guidelines, now known as the “Avon Letter.” The Department-directed Employee Retirement Income Security Act (ERISA) required fund managers to vote proxies with the same diligence as they would when making other fiduciary decisions, thus placing more scrutiny on proxies and on boards.

For more than a quarter century, the mantra, of course, has been that corporations’ primary focus should be on shareholders and the primary goal should be to “maximize shareholder value.” The famous Michael Jensen and William Meckling article in 1976 argued that the solution to the principal-agency problem — business leaders advance their own interests not those of shareowners — was to make the goal of the corporation the highest return to shareholders and to align shareholders and business leaders through stock options grants.

This article was originally published on the Harvard Business Review blog.

Although many business people and business school professors would still say that maximizing shareholder value should be the goal of the corporation, there have also been many critics over the years. Among the questions they raise: shareholder value over what time frame? Does stock price accurately reflect intrinsic value? How does the concept help business people make critical trade-offs between short and long term or between competing, legitimate concerns of stakeholders — employees, suppliers, customers and shareowners?

One of the most recent and most trenchant critiques comes from Roger Martin, dean of the Rotman School of Management at the University of Toronto, in his book Fixing the Game (Harvard Business Review Press 2011). In essence, Martin argues that agency theory and the goal of maximizing “shareholder value” have had significant and harmful side effects. Pressures from institutional investors for stock price increases, as well as stock-based compensation for executives, have led many business leaders to manage to the “expectations market” of the public stock exchanges. This in turn has led to narrow short-termism, accounting manipulation, cutting of ethical and legal corners, failures to invest in the long-term, and to the financial crisis. (For my co-authored account of problems raised by the rising power, and new types of, institutional investors see “Are Institutional Investors Part of the Problem or Part of the Solution.”)

Martin argues that, instead, the primary purpose of the corporation should be a return to management in the “real market,” not the “expectations market,” and that this means “customers are the focus, and the central task of companies is to find ever better ways of serving them.” Martin’s manifesto is: “We must shift the focus of companies back to the customer and away from shareholder value. In other words, we must turn our attention back to the real market and away from the expectations market. This shift necessitates a fundamental change in our prevailing theory of the firm.” (Emphasis mine.) Martin cites Thomas Edison and Henry Ford as people who created customer value through “innovations in products, services and business models.

And, of course, Steve Jobs. Without repeating the hundreds of thousands of words written about Jobs and Apple since his death, there can be no question that his deep commitment was to make innovative, robust and beautiful products that delighted customers. He took the time necessary to meet his own exacting standards. He spent extra funds to ensure that the product was right (replacing plastic with glass on the iPhone, for example). He believed deeply in his own capacity to define new products that customers didn’t even know they wanted, in the process overturning other real markets in, for example, personal computers, music, cell phones, tablet computing and animated movies.

At least in my view, there can also be no question that Jobs was not focused on shareholders or taking short-cuts or short-term actions to maximize shareholder value. Apple has paid no dividends since 1995. It hasn’t used leverage. It holds $76 billion in cash with nary a thought of a buy-back. It is hard to argue that fundamental business decisions were driven by stock options (although there is the issue of options back-dating in the debit column).

Obviously, Apple shareholders have done just fine, with Apple and Exxon Mobil today changing places back and forth as the U.S. Company with the highest market cap. Yet this has been a long process of product design, introduction and success. Ten years ago, Apple was not even in the top 100 U.S. companies by market cap ($7B then; around $340B now). And dramatic increases have occurred in the last five years as the suite of Apple products gained popularity (with share price quadrupling in that period).

But this is at it should be. Those, like Roger Martin, who argue that the purpose of the company should be to create goods and services that serve important customer needs — and to do so with efficiency, risk management and integrity — would further say that the long term shareholder value will follow, as it has in Apple’s case.

So, as people reflect on Steve Jobs’ legacy, surely one fundamental issue should be his attitude toward corporate purpose — with his devotion to customers, not shareholders, and his ability to withstand short-term pressures in the name of product excellence. As he enters the pantheon of great business leaders, it is hard to argue against his vision of the purpose of the corporation, given his remarkable success in carrying it out. Future debates on this fundamental subject must put Jobs’ conception at center stage.

Ben Heineman has held senior positions in business, law and government, is a senior fellow at Harvard’s Law and Kennedy Schools, and is author of High Performance With High Integrity (Harvard Business Press, 2008).

ASSOCIATED PRESS

But skeptics are saying a brilliant résumé isn’t enough; she also needs relevant enterprise experience. Let’s get real. Whitman doesn’t need to know how to write enterprise software to run HP, and in her career she has done little else but run large enterprises. She was chosen at the discretion of an HP board that includes such enterprise and technology luminaries as Marc Andreessen, inventor of the first widely used Web browser; Lawrence Babbio, former vice chairman of Verizon; Rajiv Gupta, former chairman and CEO of Rohm and Haas; John Hammergren, chairman and CEO of McKesson; Ann Livermore, an HP legend who has an insider’s grasp of company strategy; and Patricia Russo, former CEO of Alcatel-Lucent. In short, the “A” team. If the chorus is balking at such an early stage, it may be looking more to the past than to the future. The naysayers need to review not only the bidding, but the caliber of the bidders.

Public vs. Private
Hewlett-Packard’s new executive chairman, Ray Lane, is coming under scrutiny for his role as inside chairman—or, as some wags have called it, a second CEO—and for having overseen the hiring of Léo Apotheker. Take them one at a time. Lane is the kind of director you find in the private equity world: brilliant, brash and brutally honest. You don’t bring his kind on the board to be collegial, but to fix things. Lane knows instinctively that making the wrong decision is one thing, sticking with it is far worse. Second, Lane’s a former No. 2 to Larry Ellison of Oracle, king of the enterprise software geeks, and can provide deep background in the business that Meg Whitman will be able to put to great use. His role as inside chair gives him leverage with the troops, particularly the engineering talent that can make or break a technology company. Unlike a traditional director who might be more concerned about “spin,” these venture and private equity directors think about one thing: value. Create it, and you get more rope. Destroy it, and no one is your friend.

Whitman is the third-richest woman in California and a billionaire. She has nothing left to prove or to earn. If Lane is her inside chair, it’s because she felt convinced that it would be in the company’s best interests. With Whitman at the helm and Lane as her wingman, HP has a chance of a turnaround and a brighter future—not necessarily as the same company, maybe in different pieces, maybe part of another giant, but a future nonetheless, which was a far sight better than only a few weeks ago.

Jeff Cunningham is managing director and senior advisor to NACD. He is nationally known for his views on boards and corporate governance. Prior to starting Directorship magazine, he was publisher of Forbes and managing partner of the U.K. private equity firm Schroders. He has served as an independent board chair or director of 10 public companies.