As MF Global collapsed and anti–Wall Street protesters occupied nearby Zuccotti Park, more than 300 directors and corporate governance experts gathered to share best practices in leading within our unique economic situation, and to honor the NACD Directorship 100, the most influential people in corporate governance. The 2011 NACD Directorship 100 Forum at New York’s Waldorf Astoria emphasized efficient risk monitoring while opening up new lines of communication with shareholders.
Ed Breen (photos by David Nicholas/Longview)
“People don’t understand the effort directors have to put in. We continually educate ourselves, we are extremely involved in our companies that we’re on the boards of, and it’s just great that you’re doing this on behalf of your companies,” said Edward D. Breen, Tyco chairman and CEO, who was the keynote speaker at the D100 tribute dinner. “It’s amazing all the critics that we have against the business community the last couple of years, and it’s been building and building. If they saw the work we’re doing here and in the boardroom, they’d have a different opinion of Corporate America.”
Breen is no stranger to widespread criticism, joining Tyco in July 2002, as the stock price was plummeting, former executives were being marched off to prison for stealing from the company, and employee morale was virtually nonexistent. Breen was tasked with leading Tyco’s recovery. “You’ll always have these defining moments when you’re in a company, and it’s usually the big events that are the defining moments,” he explained.
Indeed, making the best of defining moments was a common theme among forum speakers and attendees alike. With virtually every company in the country still reeling from the financial crisis, and aiming a weary eye toward the snowballing European sovereign debt crisis, many boards are seeking to learn from the previous few years and shore up their companies to better withstand what may be waiting in the wings. Of the varied sources of success, one thing was clear: boards must collaborate, utilizing all members’ strengths, individual skills and experiences, to bring about the most effective change.
Rehabilitating HealthSouth
Jon F. Hanson
Carrying on in a highly critical environment was exactly what B. Kenneth West Award Winner Jon F. Hanson faced when he took the helm of the HealthSouth board. At the time, the rehabilitation hospital operator was making front-page headlines for overstating earnings, resulting in five of its former CFOs pleading guilty to criminal fraud charges. Hanson noted that some of the keys to leading his company’s turnaround included establishing a non-executive chairman, rotating committee chairs and establishing term limits. The award’s namesake was called in during HealthSouth’s crisis as an advisor; West instructed Hanson to have the “courage to encourage.”
Hanson was joined onstage by HealthSouth CEO Jay Grinney for a panel titled “Board/C-Suite Relations: Working Together for Shareowner Value,” underscoring to attendees that a united leadership does not necessarily stem from having the same person in the chair and CEO roles. “I think that paradigm is shifting,” Grinney said. “I suspect that the next generations of CEOs will be more collaborative, and we’ll see more companies moving down this road of separating the roles. It’s very hard to take it away from somebody once they’ve got it,” so the change is more likely to come as current CEOs retire or move on to new positions.
While Grinney and Hanson emphasized clear and open communication as one of the essentials for their success, this was also cited as necessary when addressing say-on-pay programs, successful M&A ventures and strategic planning.
A Salute to the Director of the Year
Jenne K. Britell
When United Rentals CEO Michael Kneeland introduced Jenne K. Britell, NACD’s Director of the Year, he described her as “intense” and a “master with a pen.” He said that when he pictures Britell’s leadership style, he sees her emphasizing the tone at the top “with a safety vest on and a hard hat under her arm, with a big smile on her face, because she walks around and she really engages our employees.”
Britell, who is chairman of the United Rentals board, makes it a practice to get into the field as part of her board service. “As we all know, it has become very convenient to disparage public companies, their boards and their leadership. As the stewards of good governance, we must respect that, but we all must also carry on,” she said. “Directors understand the need to face the cogent issues of the day while staying true to the core values of good governance.”
Directors need to keep these core values in mind while expanding their realm to include social responsibility issues. She cited fellow board director Dick Parsons and other colleagues for creating “the right environment” as being key to her success in the boardroom.
Value vs. Responsibility
Particular attention should be paid to the effects company operations have on surrounding communities. Veronica (Ronee) Hagen, a director at Newmont Mining, worked with the company’s independent work group to establish corporate social responsibility standards. “I’ll never forget the first meeting where we sat there with the NGOs, the work group and the board, and we’re all looking at each other like we don’t know where this is going, this is pretty scary, but it’s something that needs to be done,” Hagen said, noting that once the group found its footing they were able to make a difference. “I think that certainly this kind of transparency, this kind of dialogue, was really enlightening for the management, for the NGOs and certainly for the board. A lot of practices improved. It doesn’t solve everything overnight, it is huge amounts of work, but I think that it really brought the company through a very difficult time to a much better place.”
(From left) Mark Preisinger, Anne Sheehan, Veronica Hagen and Ron James
“For a long time it was believed that we in business faced a really stark trade-off between shareowner value and social responsibility. All of us sitting up here today are aligned in our belief that that was a false choice all along,” said Coca-Cola Director of Corporate Governance Mark Preisinger.
“Companies need to structure themselves in the most appropriate way for their operations,” said Anne Sheehan, CalSTRS’s director of Corporate Governance, during the forum’s panel on strategy and sustainability. “So we don’t want to dictate to them [that] they need to be structured this way, but rather that the board take on that responsibility on our behalf, making sure they’re overseeing the implementation and management is carrying out these responsibilities for us.”
The High Cost of Pay
Boards must take care to ensure their compensation plans are justifiable to shareholders, particularly in situations where pay may seem high to an outsider. Beth Bronner faced just this scenario as compensation committee chair at Assurant, where the company needed to retain its head of HR to weather an SEC investigation.
Jon Lukomnik (left), Beth Bonner, Steven Hall and Leo Higdon
“We did it in a way where we were totally transparent at the end of the day in the CD&A. This person had postponed her retirement to stay. So at the appropriate time, with her retirement, it was important to reward her. It was important to do it in a way that met guidelines,” Bronner explained.
Before Betting the Farm
As business has seen such major bet-the-farm deals in the past decades as the AOL Time Warner or Sprint/Nextel mergers, many are well aware of the risks of participating in an unsuccessful merger or acquisition deal. A group of M&A advisors and directors who had been through such events discussed best practices in ensuring a smooth process. “We’re seeing through the past several years very large-capital companies moving to make major acquisitions. You saw Pfizer do it right in the midst of the crisis, buying Wyeth. There have been many, many follow-up deals that have occurred around that. Every company in the health care sector had to say, ‘Am I a buy or a sell, or am I okay standing still?’” said Paul Parker, Investment Banking Executive Committee chairman and head of Global M&A at Barclays Capital.
Jeff Cunningham (left), Paul Parker, Dave Dorman and William McGuinness
Added CVS/Caremark Board Chairman Dave Dorman, “The boards I’m on, we generally have been insistent that management provide a strategic context that is living and ongoing whether a deal is imminent, almost as exactly as Paul described,” where the company would have an ongoing valuation process that includes educating the board on where the company stands in relation to its peer group and whether it is a private equity target. He also noted the value of bringing directors from both companies onto the board in a merger, as occurred with CVS/Caremark, to help maintain experienced perspectives from both sides of the transaction.
“On the M&A horizon right now, the most activity is on how to address risk,” said William McGuinness, chair of the litigation department at Fried Frank. “I think this is a period of a lot of opportunity.” One notable development McGuinness cited was the evolution of the reverse breakup fee, where a seller receives a payment because the buyer is unable to close the deal. “It’s a recognition that the downside risks of the failed transaction to a selling company are potentially enormous,” he said. Also in flux is the definition of material adverse changes (MAC), and the development of the “deemed MAC” which expands the rights to back away form a deal to include, for example, commodities cost changes.
Directors must keep a pulse on M&A trends regardless of whether they predict involvement in a transaction as a form of protection in the event a deal does turn sour. “The question is did you do the best thing under the circumstances to achieve the highest value. That’s the correct test,” said McGuinness.
“As in everything in business the answer is, it depends,” observed NACD Managing Director and Senior Advisor Jeffrey M. Cunningham, who moderated the panel.
The Face of Global Risk
While each company must decide what works best for its situation, the forum offered key takeaways that can apply throughout the business world. One came from Stuart M. Grant, co-founder and managing director of Grant & Eisenhofer, who reminded attendees of the need to focus on the future. “We’re always reacting to yesterday’s crisis, a crisis hopefully that continues to happen someplace somewhere else and not our institution,” he said.
David Kistenbroker (left), Hon. Mary Bush, Laura Stein and Stuart M. Grant
Fellow panelist Laura Stein had a similar wide-reaching view of the risk environment: “We want to make sure that every director is well aware of what we identify as our top ten key risks, and knows how we perceive those risks.” Having a separate risk committee from the audit committee, or having the whole board oversee risk, is a decision that should be made by each company given their size and industry.
Controlling the Narrative
Blockbuster Director Gary Fernandes, United Rentals Chairman Britell, Levick Strategic Communications CEO Richard S. Levick and Paul Weiss Chairman Brad Karp offered attendees advice from past experiences or advisory roles on handling problematic situations in the session “Turnaround: Dealing with Distress.”
Brad Karp (left) Gary Fernandes, Jenne K. Britell and Richard Levick
Early preparation, before a crisis is even on the horizon, is essential for a successful turnaround, explained Levick, who says clients often ask him, “We’re in the boxing ring and I’ve only prepared for the ballet—how do I win this fight?”
Karp noted that companies need to be ready to jump into the ring: “In today’s world of rapidly evolving technology, entire industries can face obstacles at a moment’s notice, and industry conditions can change without warning.”
A solid social media monitoring and response team can both anticipate and mitigate problems as they begin to germinate, rather than when they go viral. Levick compared the responses of Bank of America to its WikiLeaks threat and Taco Bell to a suit claiming the fast-food chain used drastically subpar meat products. Taco Bell flooded major markets with advertising asserting the validity of its recipes, while Bank of America chose to prepare teams to respond once WikiLeaks unleashed its information.
“It is not about us responding with particularity. For those of you who still use the term ‘spin,’ you might as well use it as often as you use the term ‘buggy whip.’ This is not about spin; it is about how we control the narrative,” Levick said. “We need to be thinking differently.”
Going Deep to Avert Risk
Mary Pat McCarthy, executive director of the KPMG Audit Committee Institute and vice chair of KPMG LLP U.S., advised audit committees to pay more attention to IT and data opportunities and risks. “It used to be you knew which companies were technology companies and they sold hardware or licensed software,” McCarthy said. “Now, arguably every company is a technology company.”
Pat McCarthy (left) Ann C. Berzin, W. Neil Eggleston and Patricia Russo
Constellation Energy Group faced a crisis in the fall of 2008 that unfolded in mere hours, Ann C. Berzin, a member of its audit committee, recalled during the panel “Uncertainty, Volatility and the Risk Agenda,” but sometimes, she said, “the best way to make a change is to be standing on the burning bridge.”
“If you go through board meeting after board meeting and you’re hearing from the CEO, CFO, the general counsel, the COO, you are not penetrating the organization and you will not learn a descending view. You won’t really get much beyond a fairly high level, and high levels aren’t where your problems are going to come from,” explained Debevoise & Plimpton Partner W. Neil Eggleston. “Figure out ways to penetrate further into the organization.”