Peruse any bookstore business section and you’ll find a number of works by authors highlighting the maladies of Wall Street and the destruction of the global economy. With every setback, there are lessons to be learned. Directors and C-suite executives need to stay focused not on what was, but on what can be. This summer, keep abreast of hot topics such as compensation, risk and growth with newly published books from authors who both know and are known inside the boardroom.
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.”
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.