Discretion vs. Judgment
Swinford said that he believes “discretion” is often a negative term, and suggested that “judgment” be considered as a substitute. “It allows people to say, after the fact, [if] it turns out that the performance goals were too easy, either because the economy was better than expected, or vice versa. It means executives would commit to never coming back and asking for special exceptions to the way the plans work,” he said.
James D. Gerson, director of FuelCell Energy, raised the concern regarding the various constituencies within a company. “So you have some constituency who is truly long-term focused, and is interested in seeing the company invest, provided that it explains how it’s investing, and another constituency, which is interested in short-term results in the stock market, which is often inconsistent with long-term investment,” Gerson said. “How do you deal?”
Cunningham reminded Peer Exchange participants of constituencies that seek the decline in the company’s stock price. “We can’t leave them out as well,” he added. “Who’s the shareholder? And who do you [directors] work for?”
Swinford responded: “I don’t think there’s any argument for balance at all. I think in this analysis lies the roots of schizophrenia.” He added that as soon as a board attempts to appeal to one particular group, the result is a situation where a board is trying to manipulate results to meet the needs of that particular group—and it can’t be done. “You cannot manage for maximum share price appreciation in one year, two years, three years,” Swinford said. “I mean—you can try. But in the long run, you will not succeed at doing that.”
ValueClick CEO Tom A. Vadnais noted that “you can’t pick your partners in a public company game, and I found that activist shareholders tend to be the value investors. The challenge we have…is to treat them like every other shareholder—despite the fact that they want to be treated in some special way. They want more disclosure…more meetings with the executives and the operations people, and lots of things that we just can’t provide for all our other shareholders.”
Rather than adjust strategy at the behest of activist shareholders, Vadnais believes directors should “deal with what our strategies are, what we’re doing in the industry and try not to be very speculative, despite all the requests that I would get for that.”
A Closer Relationship Between Risk, Compensation
Risk is often generalized and as a result, regulations on risk may seem unclear. Fred G. Steingraber, chairman of Board Advisors, doesn’t believe that it’s necessarily the audit committee’s point of focus. “I think we have to just wait until we really get some better tools and understanding of what the subject of risk is before we start to tie it too closely to the compensation numbers” he said.
Louis Lipschitz, director of Finlay Enterprises, said he was concerned “that there’s been so much focus on risk—and rightfully so—that people are going to be shy of making business decisions that are so important. That’s what made this country great. Risk is becoming a bad word and it should not be a bad word. It’s a very good word, if used right.”
Cunningham responded by addressing the notion that CEOs are losing power and authority. “Perhaps some of it’s good for the CEOs, because they can do their job and not worry as much about corporate governance—but I don’t know that it’s all good,” he added.
Raymond S. Troubh, director of Diamond Offshore Drilling, took a different angle to the C-suite power structure. “I don’t think we’re losing chief executives because the boards are getting a little tougher. Boards are getting tougher,” he said. “We’ve [boards] gotten stronger. We’re no longer intimidated by the imperial CEO, and we haven’t lost CEOs because it’s been tough.”
Allan Grafman, president of All Media Ventures, and chairman of the board of Majesco Entertainment, agreed with Lipschitz. “It seems to me that unfortunately, something that was clearly disastrous —financial risk, which is a 30-to-1 time leverage—has now bled into business risk.” Grafman also indicated that the disclosure of risk can be beneficial to an executive team’s compensation because the agenda is being driven by “outliers.”
Swinford concurred with Lipschitz’s concern about a “one-size-fits-all” solution to mitigating risk. He added that depending on the company and industry, a different pool of talent is necessary. “You tend to hire young people—they can go on to the next job. That’s how Silicon Valley was created. You will need to attract investors who have got the ability to diversify their investments, and they can create their own risk profile.”
According to Cole, boards should be focusing on strategy, not just risk. He believes a risk committee, or a chief risk officer, is “a really bad idea, because it should be everybody’s job, and there are so many different flavors of risk that I don’t think it should be put into one person’s hands.”
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