Pay Alignment
Farient Advisors Founder and Executive Chair Robin A. Ferracone offers in-depth research into fair compensation practices in her new book, Fair Pay, Fair Play: Aligning Executive Performance and Pay (Jossey-Bass, 2010). This is a book compensation committee chairs could love. It provides data by industry and company as well as case studies, while offering insight into director pay levels, how directors should approach pay issues and prognostications for pay. Ferracone’s research led her to the conclusion that “shareholders weren’t concerned so much with the level of executive pay, but rather, with the alignment of performance and pay.” Fair or aligned pay is both “sensitive” to company performance over time and “reasonable,”relative to the relevant market for executive talent and for the performance delivered.

In addition to aligned pay, Ferracone emphasizes the need for directors to be on the “company’s page when carrying out their pay oversight responsibilities.” When considering pay, directors sometimes attempt to apply models from companies they work with that operate in different industries. However, Ferracone cautions, those models “may or may not be applicable to the company on whose board they sit.” To better equip directors on the subject of executive pay, Ferracone’s statistical database looks at whether pay is aligned with performance. By speaking to compensation committee chairs, CEOs, heads of human resources and shareholder advisors, she is able to bring research on alignment to a specific company level.

In many cases, poorly performing companies continue to dole out big paychecks, Ferracone says, because in troubled times “boards are jittery and in the mood for buying some ‘insurance’ to retain their top talent.” She concludes that the retention issue is “generally overblown, particularly for the CEO.”

Mattel Chairman and CEO Robert A. Eckert, who is quoted in the book, put the question into perspective, asking directors: “How many of your top fifty people have left in the last three years? If nobody has left in the past three years, why do you think they’re all going to leave now? So I think the retention argument is a weak one and is frequently abused.”

When assessing performance, Ferracone urges directors to set goals. She believes that with conventional goal setting, a company sets targets in accordance with its budget and those may not necessarily be in line with shareholder interests. “If the budget is down from the prior year, shareholders likely won’t be rewarded by down performance, even if it is good performance relative to competitors or general economic conditions,” Ferracone says. “I support a goal setting methodology—at least for earning above-target incentive awards—that requires long-term and sustainable improvements in performance. Threshold goals should be motivational, but maximum goals should be shareholder accretive.”

Analyzing Risk
The authors of Surviving and Thriving in Uncertainty: Creating the Risk Intelligent Enterprise (Wiley Books, 2010), Frederick Funston and Stephen Wagner delve into why and how boards can help companies become more risk intelligent.

“It became pretty clear to us that there was quite a bit of focus on protecting existing assets, but very little focus on management and oversight of risk for building value for the company,” Wagner says. Funston was managing partner of governance and risk oversight services at Deloitte & Touche LLP while Wagner was the managing partner of Deloitte LLP’s Center for Corporate Governance. Over the past two years, the authors’ vision of the book has evolved, adjusting to the precariousness of the global economy after the crash of Wall Street in 2008. “Turbulent times give rise to high levels of uncertainty,” Wagner notes. “We realized it was the perfect opportunity to talk to boards about their role in risk oversight.”

Crises are going to happen, but Funston says that once-in-a-lifetime crises appear to be occurring about every three to four years. The team began to look at why such crises occur in an effort to illuminate how directors might better approach risk oversight both to avoid loss and also to create gain. Funston advises boards to become more involved in the oversight of risk as it relates to strategy. “Boards are starting to get too involved in operational details and compliance at the expense of competitiveness,” Funston says.

Don’t Be Left Behind
The way of doing business is in flux, as technology makes communication instant and consumers are increasingly able to “pull” what they want when they want it. As Google and Netflix have so ably demonstrated, harnessing the benefits of the power of pull can result in more efficient business practices. In The Power of Pull: How Small Moves, Smartly Made, Can Set Big Things in Motion (Basic Books, 2010) by John Hagel III, John Seely Brown and Lang Davison, write about two challenges: “Making sense of the changes around us and making progress in an increasingly unfamiliar world.”

The authors, all executives at the Deloitte Center for the Edge, advise even successful executives to understand what they describe as the “big shift.” Methods of communication and conducting business that did not exist just 15 years ago are making an enormous impact on consumer consumption today. The authors reason that businesses—and the executives running them who don’t embrace the shift—are trapped in “push” mode. “Push programs represent a top-down approach to dictating activities…variances from the plan aredeeply suspect and great effortsare made to eliminate them,”they point out.

Poisonous procedures and rigid programs end up hindering productivity and the overall bottom line. In order to embrace these changes, a new paradigm, aptly called “pull,” is intended to evoke a thought process to discover that current methods of doing business are “profoundly shifting, generating a set of dynamics that is shaping everything else.” As the world evolves, so too must those living in it.

What makes this book compelling is the story of how others have realized or embraced the tenets of pull. The authors relate SAP CEO Shai Agassi’s thought process as he “challenged SAP to rethink crucial aspects of how it did things in general, and innovation in particular.” The chief executive’s decision to offer SAP’s software for free and charge for IT services was unheard of at the time, but delivered a significant return, helping to reshape the software industry. The authors believe the process of “pulling from the top” allows companies to free the talents and resources from institutional boundaries—and from old ways of doing business.

As the economy recovers, so do those who stumbled before and during the crisis. In Andrea Redmond and Patricia Crisafulli’s Powerful Lessons from Leaders Who Endured Setbacks and Recaptured Success on Their Terms, leaders such as JPMorgan Chase’s Jamie Dimon and former Hewlett-Packard Chair Patricia Dunn, are profiled. Redmond and Crisafulli’s exhaustive research dissects each individual, chronicling the highs and lows that afflicted their characters and helped shape their careers. Former Chairman and CEO of Procter & Gamble, Durk Jager, reminds readers: “There is life after what you experience or what you have gone through. It is not necessarily apparent at that period of time.”

Mark W. Johnson’s book: Seizing the White Space: Business Model Innovation for Growth and Renewal highlights the differences between companies that failed and those that succeeded in their respective industries. He first addresses Apple CEO Steve Jobs’ attempt to “refloat the sinking ship” by wrapping “a good technology in a great business model.”

Johnson provides interesting juxtapositions: the successes and failures of companies such as Southwest and Song Airlines; the reasons why computer manufacturer Dell built a strong following for itself in a market where it didn’t start off as the best quality product; and why Amazon emerged from the dot.com bubble a success story.

Former Massachusetts Governor Mitt Romney in his second book: No Apology: The Case for American Greatness criticizes populist politics, President Obama and outlines his conservative views on everything from healthcare to foreign policy. Romney has not officially declared himself a 2012 candidate for the White House, but political pundits view the book as a platform for just that.

Romney, for example, concedes that increasing the number of insured Americans is preferable. He acknowledges that the Wall Street bailout was essential, praising former Treasury Secretary Henry Paulson. His views paint a sharp contrast to other more conservative or rogue political aspirants.

Parked at his desk at a Boston equity derivatives firm, Harry Markopolos, author of No One Would Listen: A True Financial Thriller, was given a prospectus outlining financier Bernard Madoff’s strategy and asked to replicate a similar outcome. Markopolos quickly realized that the numbers didn’t add up and launched what became a decade-long crusade to incite the SEC to take action.

According to Markopolos, the SEC should have launched investigations that concentrated on the workings of Madoff’s suspect “money management” hedge fund, not his legitimate market-making business, which resulted in only minor infractions. He says the SEC failed to recognize that Madoff’s two businesses were located on two different floors in the same building. His warnings went unheeded the SEC only learned of Madoff’s vast Ponzi scheme after his sons turned him into authorities.   While he thinks that the SEC under Chairman Mary Schapiro has improved, he cautions that investors remain largely unprotected—and he wouldn’t mind taking a crack at Schapiro’s job himself.

This isn’t new. Back in ancient times, talk came with a high price. Saying the wrong things in the wrong way cost Socrates his life. On the other hand, the right words uttered on board ship helped make Odysseus a hero. What is new is that in this era of declining trust in institutions, people are putting more trust in what others like them are saying.

The following excerpt is a chapter from Robert L. Dilenschneider’s new book titled: The AMA Handbook of Public Relations.

Obviously, the goal is to say what will help a career or a product or a brand name, and in a way that maximizes its echo in a world that, thanks to the Internet, operates virally. This chapter presents recommendations for how to achieve that goal and minimize disasters such as putting in play the wrong echo.

Robert L. Dilenschneider

Talk Not Just Talk
When Bob Berkowitz, principal with The Dilenschneider Group, coaches global leaders in public speaking, he advises them about the importance of strategic planning and execution—or what he refers to as the “responsibility to control messages.” Leaders err on the side of caution. Fools on the side of spontaneity.

Unfortunately, many Millennials may wake up one day and realize that by their ramblings on social networks they have become the economy’s fools. Since the 1970s, when counterculture’s emphasis on personal self-expression and self-disclosure became something good, verbal restraint has been viewed as inauthentic. However, the public aspect and the viral quality of digital media, including the wide availability of cheap digital tools, make the cult of the “unedited me” dangerous.

The old-fashioned reality is that being able to be candid and confide, as parents always said, is a luxury. That’s why human beings hunger for those few authentic, intimate relationships that are possible and are devastated when they end, as with divorce or death. The role of psychotherapists, executive coaches, and attorneys is to provide (for a fee) that guaranteed privacy and safety—or rented intimacy.

This chapter demonstrates how to talk in a strategic manner without coming across as excessively guarded or evasive. There are phrases, body language, and facial expressions that establish quick bonds with others and yet insulate the speaker from verbal recklessness.

What kinds of messages does talk transmit? The number is infinite. At the top of the list is the raw data on which those listening will make decisions about the speaker. They decide on the speaker’s integrity, social class, education, confidence, expertise, worldview, and more. Also, what’s being transmitted could include unique positioning and packaging of information, insight, and inspiration. It’s those qualities of a message that can land the job, account, or political win, or bring unexpected success to a new product or service. During Campaign ’08, the Obama team understood the power of a fresh message custom-made for trying times.

The opening chapters play to the current anti-business populist fervor. There is, for example, the sensational retelling of the Bank of America director who was dropped  from the board after questioning the CEO’s $76 -million pay package the same year in which the bank laid off 12,600 workers.  Then there’s the General Motors board that awarded its CEO a 64-percent raise in 2007, the same year the company reported $39 million in losses. There are other “similar stories of boards and CEOs failing to act responsibly.” The “negligence of many boards” the authors suggest, underscores the need to hold boards equally accountable as management because CEOs theoretically work for the board.

Neither Gillespie nor Zweig have served on a public company board but since becoming friends at Harvard Business School, their individual careers have hued toward public companies and the financial sector. Gillespie worked as an investment banker at Lehman Brothers, Morgan Stanley and Bear Stearns before becoming a CFO for The Mentor Network, a nationwide health-care company. Zweig is a cofounder of Salon.com who has worked  at Time and Dow Jones, and most recently advised corporate executives as a consultant for the World Business Academy. The early impetus for the book was Warren Buffett’s 2002 letter to Berkshire Hathaway shareholders in the post-Tyco-Enron era that asked quite plainly: “Why have intelligent and decent directors failed so miserably?”  A few years later when the pair began reporting in earnest, their story took dramatic, unexpected turns as the financial crisis unfolded and the highly esteemed companies both had once worked for began shedding employees and value. “Trillions of dollars is a terrible thing to waste,” quipped Zweig.

Gillespie makes no bones that the demise of companies for which he had once toiled, and where colleagues and friends lost their livelihoods in addition to assets, ramped up the storytelling and the desire of some business leaders to share their inside-the-boardroom stories. For them, the inaction of some boards is personal. Zweig recounts that in the year before Lehman went bust, the risk committee met just twice. “I think that is shameful,” Gillespie says. “Doing risk at Lehman,” adds Zweig, “is really serious work. And I think it deserved more than two meetings a year. That is a big, big job and I think it should be treated as such, and I want it to be treated as such.”

Their pedigrees helped smooth their introductions to directors and corporate chieftains willing to share their stories in an effort to the shed light on what goes on in the boardroom. “Part of the problem, even for senior executives, academics and some shareholders, is that the boardroom is a black box that’s hidden behind closed doors,” Gillespie said.

Kicking open the boardroom door revealed a culture that in some ways is contradictory. A director’s role is to both monitor and advise and oftentimes to recommend third-party advisors, but the culture of most boards remains one of collegiality. Management and boards tend to hire people like themselves so real diversity—that which reflects cognitive and perceptual diversity instead of mere demographics, Zweig says—doesn’t really exist. The current structure of boards, and the nomination and recruitment of new directors, encourages a selection process that is self perpetuating. “Human nature is to select people who are like yourselves, or who are compatible. If a board needs constructive dissent, you’re unlikely to get that in this process,” asserts Gillespie.

While a good portion of the book is damning to boards, the authors devote a chapter to what they describe as “phoenix companies.” These are companies that have been resurrected from a near-death experience on the strength of reformulated boards and management teams who committed to doing the necessary and hard work to assure a new day for the corporation. “We wanted to show solutions and we do believe there are many boards that are doing a great job, and are models for others, and the same thing with some directors,” says Zweig. Some of these directors—Jack Krol, Ed Kangas, Robert Bowman, Jack Crowell, Charles Perrin, and others—who committed considerable time, energy and intellect to steering a new course, tell the stories of the rebirths of Tyco, Warnaco and Tenet Healthcare.

One of the best-told stories, however, involves Gillespie’s visit to the home of 90-year-old Target founder Bruce Dayton. The retail giant is held up as a stellar example of progressive corporate governance, beginning 30 years ago when Dayton and his brother Ken concluded each board meeting by speaking at length about what they needed to do to create “an ideal system of governance.” Target had one of the first corporate boards to actively recruit women and minorities, separate the chairman and CEO roles and introduce term limits and a mandatory retirement age.

“We wanted to come up with something that would keep the business healthy long after we’re gone,” Dayton, who served as board chairman from 1968 to 1976, then turned the chairmanship over to his brother and remained active on the board until 1983, told Zweig. The foundation laid by the Dayton brothers continues to serve Target and, indeed, many of its practices are incorporated into Money for Nothing’s final chapter, which includes a punch list for how boards can improve their practices and, in theory, their performance.

In addition to writing what they hope will be a bestseller given the title and anti-business Zeitgeist, what do Gillespie and Zweig want out of this seeming crusade to clean up boards? That’s an interesting question. Their website (www.moneyfornothingthebook.com) encourages shareholders to  become better informed so that they can hold boards accountable.  “Boards can play the single most effective role in advancing the future opportunities and prosperity of our families, our communities, and our country,” the book concludes. “If we expect and demand more of them, they will rise to the challenge and answer that call.”

Consider, for instance, the sine qua non of governance–communications. We all do it, all the time, but imperfectly. Sociologist Daniel Yankelovich’s The Magic of Dialogue offers clues on how to improve this fundamental function; how to listen, the importance of body language, tone, and the like.

Before you rush up to the podium, bone up on the best use of the platform by flipping through political scientist George C. Edwards, On Deaf Ears: The Limits of the Bully Pulpit. Pre-empt those who are second guessing the very concept of boards by taking notes from Harvard MBA Professor Jay Lorsch’s Back To The Drawing Board in which he suggests how boards can re-invent themselves to better cope with today’s stifling agendas of new responsibilities.

Rebuttals to pundits targeting CEOs, such as Matthew Stewart in The Management Myth, can be gleaned from Gary Hamel’s The Future of Management offering not pat solutions but raising provocative questions sure to stir the mind.

Steve Forbes, chief of the Forbes media empire, builds on John Bogle’s The Battle for the Soul of Capitalism with his pragmatic thesis How Capitalism Will Save Us, which also neutralizes U.S. Court of Appeals Judge Richard Posner’s A Failure of Capitalism as he effectively rebuts the most egregious raps against our economic process.

On the lighter side, former Coca-Cola President Donald Keough’s The Ten Commandments For Business Failure will give you titillating material for potential op-eds, interviews or conference small talk at coffee breaks.

Finally, if you’re most comfortable with the heavy stuff, leaf through Restoring Trust In American Business by a cast of scholars, gurus and assorted cognescenti gathered up by the Academy of Arts and Sciences.

John F. Budd Jr., chairman and CEO of Omega Group, originally published this article in a year-end letter to readers of his newsletter “Observations.”

Granted, what has occurred amounts mostly to stabilization, rather than revitalization. While the Dow may have (briefly) poked its head above the 10,000 mark, and while industry leaders such as Goldman Sachs may have returned to their glory days, mass unemployment, a weak dollar, and a thoroughly rattled financial sector should serve as proof that the crisis has been averted and there is still work to be done, but the central goal of recovering shareholder value remains unfulfilled. So although turkeys and stockings alike may be less stuffed this year, NACD Directorship readers will also be glad to have made it to another holiday season.

The following titles, according to our editors, contain collectively all the answers that you may want about what happened and how to do it better the next time around: hence, our review of the year’s best business books. If you haven’t yet found time for them, we urge you to do so.