Hank McKinnell on Boards and Public Confidence

Hank McKinnell, chief executive of Pfizer and a director at ExxonMobil and Moody's, argues that CEOs and boards must either rebuild public confidence in their governance model or face further shareholder and activist assaults that. Ultimately, they could lose control of their own decision-making, he told a conference organized by Boardroom Consultants in New York . Here are excerpts from his remarks:

I think the heart of the issue we're facing is "who decides?" There are those of us who believe in free markets and competition, and a system where independent boards make decisions on behalf of their companies and their shareholders.

There are others who don't like that. Environmentalists think boards should act, not in the interest of the companies and the shareholders, but rather for the global environment. Union leaders think there should be some connection between union pay and CEO pay, and they ought to have a stake in how much the CEO is paid. There are hedge funds that think you should leverage your balance sheet and pay more money to them. There are all sorts of activists who have come together trying, ultimately, to be the decision-maker. I don't think that's in anybody's interest. And if you really think the best way to do this is to have more regulation, and to have CEO pay set by an act of Congress, it's almost certain they will decide that nobody should earn more than they do.

So I think the burden is on us who serve on boards to insure the continuing viability of a system which is under attack. We tend to think of our day-to-day issues, day-to-day problems, such as access to the proxy one season, and it's CEO pay the next season. But if you string all this together, you begin to realize that what's really at stake is who decides, who controls the corporation. If you want the corporation controlled by special interests or regulators and Congress, that's a world that I for one don't want to live in. That gives us a great obligation to make sure that we do our job in a way that's defendable and supported by the public. To some extent, we're failing in that duty. I don't think we have the broad support of the general public which is necessary to insure the system that we support continues in place.

What I'm worried about is how directors get elected. Majority vote is a way to get a director elected, although probably not terribly effectively, but there are some next steps here. The one I'm worried about is something that the public may think is perfectly reasonable. Before you put in a poison pill, or re-introduce a poison pill, you need a unanimous vote of the board. That doesn't sound crazy. If all the directors agreed we shouldn't accept this hostile offer but we should fight it and we need a poison pill, that sounds all right.

Now, the next step, of course, is, well it's not just the poison pill, it's major decisions by the corporation, including environmental policy and 10 other things we can think of. So now you've not only got a dissident in the room, you've got a dissident with a veto right. And you can't run the company any more, unless you happen to then say, "Well okay, the only way to run this company now is to accept the position of each of the special interest directors, and that's what we'll do." But boy, you don't want to go there. It's worse than just having somebody with a different point of view in the board room. That can be helpful, as we all know, if the behavior is right and it's turned into something constructive. But I think there is a different end point in mind here by a number of the activists. And remember, they spend all of their time thinking about this stuff with some very good lawyers. Even though nobody's written down a game plan or a strategy here, I think the strategy is pretty clear, and it really does get to that director elected by special interests.

I think there are three parts of defending the system:

BOARD STRUCTURE
I was quite surprised when Sarbanes-Oxley came into place by just how many public companies there were, some 17,000, but also by how many did not have a majority if independent directors, did not have an audit committee and had insiders on the audit and compensation committees. So there clearly were some structure issues that needed to be resolved. But I don't think that's the issue any more. Structure is the easy part of it.

BOARD BEHAVIOR
Behavior is the frontier. How do you behave in this wonderful new world where you have executive sessions and nobody's ever been in an executive session before? That's a learning experience. So how do you behave? And there's two things that matter there. One is the business judgment rule. It's what protects us from liability.