How were you able to avoid the siren call of the mid-2000s that was the subprime mortgage market?
In the early 2000s, Fannie Mae and Freddie Mac were very, very competitive and basically were reducing the profitability of the basic mortgage business, so that you couldn’t generate a good return. At that point the industry was starting to move toward subprime. We looked at how subprime worked over a long period of time. The assumption we made is that even if you assumed you got your money back from the house, the operating expenses during foreclosure and foreclosure-management in a downturn eliminated any profitability. In other words, our analysis was that it would end in tears. As a result, we elected to sell our mortgage business and stay away from subprime. That was a key decision we made in 2001 and 2002.

Walk us through the decision to become involved in the TARP program.
The regulators encouraged us, as you know, to participate in the Troubled Asset Relief Program, (TARP) and take TARP money. If you recall—and everybody forgets this—the TARP investment was originally designed to only go to the strong banks. It wasn’t to go to the weak banks. In that promotion, if you didn’t take TARP money, then you could be perceived as a weak bank.
For example, National City didn’t receive TARP money and they got a lot of notoriety about being a weak bank.

Do you think there will be a permanent change on how executives are compensated or how compensation is communicated?
When I look at our proxy statement, it’s extraordinarily transparent on how the CEO and others are paid. And we’ve essentially eliminated all of the perks. There is no country club or airplane usage. Any airplane usage has to be fully reimbursed at 100 percent basis. So that’s very important. That’s a good trend. I think the government will continue to stay involved, but the philosophical statements that they’ve made will get down at some point to the specific ratios. But we expect to repay TARP, so I don’t think we will be significantly impacted by it. I think the way people are paid will change, and I think transparency will continue to be very bright. The way we pay our people around here, much of it is long term and much of it—two thirds of it—is incentive based. So you win when the shareholder wins, and we think that’s the way it should work.

What about the rules being considered to provide greater transparency on some of the more complex financial products?
I think the derivative world is a world that clearly needs more transparency, as do the players that are in it. The hedge funds are now a major part of our financial system. To the extent you want to understand systemic risk, you need to understand the positioning of the hedge funds as well as the insurance companies because they are so large.

We’re dealing with this new, much lower yield environment. What will be the unintended consequences of people trying to chase ways to get more yield?
People will always look for yield, but I think people will look more on a risk-adjusted basis than they did before. People chased yield throughout the early 2000s and, to some extent, lost their company. It’s interesting; people say the market didn’t work, so we need stronger regulation. I do think we need stronger regulation, especially in the area of systemic risk. I don’t think there’s any question that we—as a country or an industry—didn’t understand or manage the systemic risk as well as we should have by far. There’s no question about that. But the idea that people went out on the risk curve in the credit space the way they did with subprime, for example, they’re not going to go back out there. We were talking to a newspaper and the reporter said, “The market didn’t work.”
The market didn’t work? You want to go ask Lehman Brothers whether the market didn’t work? You want to ask Bear Stearns or Merrill Lynch? People took too much risk, and nobody could have foretold that the housing market would have fallen the way it has. But I think if you step back, you can tell there was too much risk and if you leverage yourself 38 to 1, you have too much risk. And people won’t go back to that. This market taught a lot of people a lot of lessons.

Do you think Lehman Brothers and Bear Stearns  and some of the other large banks that had problems were handled fairly by the Treasury and the Fed?
I think the Fed and the Treasury did an extraordinary job. I think there was more systemic risk in play than anyone knew. When Bear Stearns was sitting on top of a massive swap book I don’t think anyone wanted to know or could fathom how the failure of that book worked its way around the world. I think by putting Bear Stearns in safe hands it clearly saved us from a tremendous amount of damage. And I will tell you, if AIG had failed I think all of Wall Street would have failed the next day.

How should a board like yours be looking at risk?
You’ve got a significant portion of the talent on the board on the risk committee, and that has worked very well for us. We have a number of risk committee meetings—more than any other committee—and we give them a tremendous amount of information. There’s a lot of discussion at the risk committee, and they probe management regularly, but they’re not trying to tell us what to do. We have answers to the general questions that they have and that’s important.

Has your relationship with your board changed at all as a result of the financial crisis?
I don’t think so. I think the chief executive has an obligation with the board to be totally transparent. A fellow who was on our board years ago told me, “All surprises are bad.” That’s true for the most part in life and it is clearly true with the board of directors. Whether we’re going through good times or troubled times, we’re jointly trying to manage the company, and so if there’s a difference between where the CEO and the board want to go, then you have a significant problem. If you are not keeping the board fully informed about what’s happening in the company, then you have an opportunity to have a gap and then surprises, and those are bad. Communicating with the board is something that’s been important to me since I got the job. Some times are better than others, but communicating and being totally open with the board allows you to build your reputation or your relationship with the board on an integrity basis. To the extent that a board doesn’t trust the CEO or it doesn’t trust the management, then it’s time to make a change.

You recently announced an increase to your dividend. How are you able to do that when many companies are making cuts?
We have a very strong balance sheet and we have a very large capital program. What we try to do is maintain our dividend and have small, incremental growth in it, which is less than the growth in our earnings. And we’ve been able to do that. While earnings have been somewhat flat—like everyone else, we have been affected by the economy—we continue to batten down the hatches and work our way through this downturn in the economy.

What’s the board’s involvement in the planning process as you plot your way through an environment like this?
I just came off our board retreat. We did something different this year. It takes us 10 years to build a nuclear plant, it costs $10 billion, and the plant will operate for 60 to 80 years. So that’s the kind of timeline we have to have in our minds. So what I did with the board that was different than the past is, I said let’s not worry about the next five years. Instead, I suggested that we focus for five to fifteen years out, and try to imagine what the business will look like. We brought in some people that had views that are different from ours, to help challenge us, so that we don’t find ourselves drinking our own Kool-Aid.

You have earned a reputation as an environmentalist energy company CEO. Wouldn’t it be a lot easier to not address the environmental side? Because in some ways, it makes you a target for both sides of the debate.
It really does, and in some interesting ways. But you know, I actually believe, in my role—we’re the third-largest generator of electricity in the country, the third-largest generator of coal, the third largest generator of nuclear power— and part of my mission is to educate the public on these issues. There’s an amazing lack of understanding of how we generate energy in this country. And so one of the things I strive to do is to get out and tell a story. Now the environmentalist part of it is that I actually believe our mission has changed. In the 20th century, our mission was to provide easy access to electricity in the United States. In the 21st century, our mission is going to be to help our communities become the most energy efficient. We’ll have to change our regulatory business model to do that. We are going to retire and replace every power plant we own between now and 2050. But the country—and the scientists believe this is a problem that needs to be addressed—wants us to have a low-carbon generation fleet. There couldn’t be a better time in history for me to make that transformation, because I’m going to have to replace them with something, so let’s replace it with something that’s low-carbon.

Does your board support your stance on these issues?
We have a rich debate on them. Some of the directors approach the global warming issue slightly different than I do. But I welcome such a different view, because it crystallizes the conversation. You have different points of view that lead to robust conversation, but it also leads to a policy that really reflects a lot of optionality and recognition of:  “Well, wouldn’t you do this anyway, without global climate?” or, “Shouldn’t you pursue this option versus that one?” I’m also a big believer in bringing outside speakers in with various points of view. I have a long history of doing that. And I’m a big believer in having diverse points of view on the board and engaging these diverse points of view.

You have a new CFO. What does it require of you and the board when you have a high-level change like that?
I think one of the important things, is that any time you change the CEO, CFO, or COO, it’s really important to have clear communication about why there’s a transition and it’s important to introduce your new person to the primary constituents that they’ll be addressing. So that is one of the things that we did. It was a seamless transition. We had the perfect replacement in Lynn [Good], who was a controller of Cinergy and CFO of Cinergy immediately before the merger with Duke.

How has the role of CEO, generally, changed over time? Do you think there’s a new paradigm for the CEO’s job?
I do. And the advantage for me is that I’ve been a CEO for so long, I have a good sense of the operation, but probably more importantly, I have incredibly strong people in operating roles that really complement my capabilities, but also complement the demands that I have—on me. I’ve started to think that I have two roles: One is the traditional running the business—in military terms, it’s “the general.” I also think that another aspect of my role is external. And this role is about building relationships and collaborating. Business people are used to talking to other business people, but I think the real alliances of the future is when businesspeople are reaching out with NGOs, with environmental groups, with consumer groups, with people outside and with differing points of view. I think that collaborative, working-together role is a key part of what I do. I think the other part, and what I really enjoy now in this very transformative period, is looking at new technologies. I believe I’m a “scout,” so part of my mission is to look at new value propositions and make sure we understand these disruptive technologies and are incorporating them in our business model.

There’s a lot of effort underway to give shareholders more say in what’s going on. Is there a danger that the pendulum swings too far?
The pendulum is swinging, and there is a risk that it swings too far. And a lot of this is a reaction to the economy, and returns are down, and stock prices are down, and it’s a reaction to some excesses that occurred primarily in the banking industry, and bank boards didn’t perform particularly well; in fact, they didn’t understand the products they were selling and investing in. So I think this is a natural thing, and I think we need to be careful to keep it centered.

What are your thoughts on CEO pay and the debate over compensation?
I think it’s changing and I think you will see a push to tie pay more closely with performance. I just signed a contract for five years; I get no cash salary, no cash bonus, and most of the stock I get paid is at the end of the five-year period. And, the way that it works is that part of my stock compensation doesn’t occur until two years after that. So I’m incented to make sure I have a really strong team performing well after I leave.

Ludwig, former U.S. Comptroller of the Currency during the Clinton administration, is the founder and chief executive of Promontory Financial Group, which counsels financial services companies on meeting regulatory requirements, strengthening credit and other risk controls, analyzing liquidity needs, and more. Prior to being appointed comptroller, Ludwig was vice chairman of Bankers Trust/Deutsche Bank.

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There is, of course, a competing view that favors a single person serving as chair and CEO, but with a separate lead independent director. Respected business leaders, corporate attorney Marty Lipton, for example, express a more traditional view that the chair/CEO model is better for driving long-term shareholder value in many companies. Supported by historical data that purportedly shows little correlation between splitting the roles and shareholder value, proponents of the merged role have a point when they suggest that the chemistry needs to be right to split the roles—or else risk adversity between board and management.

With that said, government and shareowners are forcing the issue.  Legislation introduced by Sen. Charles Schumer (D-NY) and Rep. Gary Peters (D-Mich.) would prohibit CEOs from serving as board chairs, while investors have been submitting resolutions with this proscription.  The Securities and Exchange Commission (SEC) is moving to require that companies justify their board leadership structure, and the New York Stock Exchange and NASDAQ have also considered adopting listing rules that would require separate positions with the goal of making boards more independent.  We have only to look at this year’s general meeting of Bank of America—where shareowners re-elected CEO Kenneth Lewis as a board member but stripped him of his chairmanship—to know that a sea change is fast approaching.

The independent chair model has been adopted successfully in Europe, Canada, and Australia as a surefire approach to creating an independent, and empowered, board.   Increasingly, US boards are concluding that separating the chair from the CEO is the right thing to do—to underscore commitment to best governance practices and to ensure a more accountable, more transparent organization.

A non-executive board chair offers several distinct benefits, including:

• Curtailing conflicts of interest

• Ensuring that the CEO is accountable for managing the company in alignment with shareholder interests

• Serving as an objective conduit for the board to express its views on management

• Enabling the board to better fulfill its regulatory requirements and manage risk

• Ensuring that the CEO is effectively guided and mentored in his or her performance

• Gaining clearer focus on corporate succession plans

Whether forced or voluntary, the use of an independent board chair is becoming a reality. If the reality is here, what are the implementation issues and implications?   This article explores immediate questions and practical considerations in separating the roles and managing a smooth transition.

When should we make the split?
In my role as an advisor to boards, I have seen leadership structures transition in a variety of circumstances, some more successfully than others.  One thing that is certain is this:  when the CEO has been recruited for both roles (and, historically, new CEOs assumed that the chair title came with the territory), it is immensely difficult to separate these two functions midstream.  Typically, CEOs are reluctant to relinquish power, and those who do give up the chair role may find it difficult to take direction from a new chair.  Similarly, those who cede the CEO role may be prone to undermining the new CEO’s authority.  Wearing just one hat when one is used to wearing two requires tremendous resolve.

Many companies that have voluntarily split the CEO and chair roles have done so as a result of poor financial performance and pressing shareholder demands.  When the roles are separated due to adverse circumstances, as opposed to a commitment to good corporate governance, the decision to split roles may waver as the financial picture improves.

The most natural transition point is when the current CEO/chair is ready to retire or leave the company.   A leading report from the Millstein Center for Corporate Governance and Performance at Yale University’s School of Management proposes that companies either appoint a separate chair after the current CEO/chair exits—or explain to their shareholders why they chose not to.

Make the division of roles integral to your company’s succession planning and ensure that the issue of board leadership is continuously discussed.  Separation during succession provides the opportunity to carefully evaluate candidates and document the roles and duties of each position—at a time of your choosing when you can implement the process based on good governance rather than in reaction to a negative event.

In the interim, consider strengthening the role of your lead independent director, who can potentially be groomed as the next chair.  Avoid the temptation to have a rotating lead or presiding director, since building relationships and proving leadership qualities over time is crucial to a future transition. Many functions of the chair can be handled by a strong lead independent director. The difference between the two positions may be a matter of time commitment. A non-executive chair may be more effective, however, in reducing what some have perceived as undue influence on the board by a “dual-hatted” chair/CEO.

What is the chair’s role versus the CEO’s?
Once you decide to split these roles, carefully delineate the role of the chair versus the role of the CEO.  This “two-in-box” structure is akin to the CEO-COO structure and similarly adds complexity to the operating structure of the organization. As such, spending time upfront defining roles is critical. Defining the different but complementary duties of these two positions will likely reduce the potential for duplication and conflict between them and reduce the risk of one or both derailing in the role.

In general, the chair runs the board, determines its priorities and meeting agendas (albeit with input from the CEO and other board members), leads board meetings, facilitates communications among board members and the CEO outside of board meetings, builds investor relationships, presides at the annual meeting, and briefs the CEO on issues of concern to the board.  The CEO manages the company and is accountable for corporate performance.  In the split model the chair should not take on company management responsibilities or be involved in company operations, and the CEO should not try to run the board.

What kind of person will make a good chair?
Determine the required experience, skill set, and personal attributes for the chair position.

Look for a candidate who:

• Can lead with confidence
• Can conduct effective meetings and knows where to spend time versus being agenda driven
  • Has emotional consistency and can deal with a crisis
  • Can limit distraction and build consensus
  • Has a Socratic style and can ask hard questions in a constructive way
  • Can solicit viewpoints and listen with sensitivity
• Can be content in the chair role, without a “hidden agenda” of seeking executive leadership in the company
• Can demonstrate continued independence in his or her relationship to management
• Has strong interpersonal  capability and can build “trust” easily with multiple constituencies
• Is a strong communicator and is willing to share information back and forth openly and transparently
  • Has been a CEO (although not required, this is a real plus)

The most important attribute of the chair is the ability to build relationships—among board members, between the board and management, and with the CEO.  Directors must be comfortable in approaching the chair about difficult issues.  At the same time, the chair may at times need to challenge the CEO and must communicate candidly.

The ideal candidate will bring to the table significant leadership experience but at the same time, be content in now playing a less prominent, more supportive role.  Effective chairs have cultivated a collaborative, non-dominating personal style that brings out the most in board members.

How do we delineate the role of chair versus CEO?
Job responsibilities, objectives, and appropriate activities for both positions should be drawn up in writing.  Duties should be clearly spelled out to the board, company employees, and shareowners. The chair job description should also include the amount of involvement and time commitment the position will likely require.  Allocating too much time may increase the potential that the chair will get immersed in daily management activities.  Yet allocating too little time may limit the chair’s effectiveness, particularly if the company faces a major crisis or change.

It is essential to ensure that the chair and the CEO have the right chemistry, with complementary skills and leadership styles. Like Goldilocks’ porridge, their fit needs to be just right.   This takes careful thought and planning, not simply filling an empty chair.   If the “Venn diagrams” of the chair and CEO have no overlap, it will be harder for them to gain alignment, and if they overlap too much, they will gravitate to the same things—creating higher levels of friction. Job descriptions will not only provide a blueprint for finding the right person for each role; they will serve as guideposts for how the two roles will interact.  They will also reduce the risk that either leader will overstep their bounds once appointed.

How long a term is appropriate for the chair?
Most directors today are elected annually.  The chair position is typically a three- to five-year term, but the position is reconfirmed each year—typically through a performance review.

How much should we pay for the position?
The independent chair position is a demanding job, so commensurate pay is a reasonable expectation. The main factor to consider in setting chair compensation is the amount of time devoted to the role, and the amount of money that is fair and equitable for the time invested.  The chair should be paid more than a lead director, but less than the CEO.  A study from compensation research firm Equilar finds that the median incremental pay for non-executive chairs in 2008 was $150,000, compared to $20,000 for the lead director. For those who argue there is little difference between a lead director and a non-executive chair, the pay gap suggests otherwise.

The tipping point to consider is this:  At what level of compensation is the chair no longer independent?  Too much compensation can raise questions of involvement in company operations. A compensation consultant can provide benchmarks for setting the chair pay formula, determining the best mix of cash and equity, and ensuring competitiveness with comparable organizations.

Who takes the lead in the selection process?
Increasingly, the Governance and Nominating Committee has become the epicenter for making decisions n board composition.   These members are tasked with making sure that the board is staffed with the right kinds of directors with the right kinds of competencies, including the chair. This committee should lead chair selection, at some distance from the current CEO/chair.   In later stages of the process, the entire board should reach consensus to ensure those chosen for both positions have full board support.

Before posting the chair position to a wider audience, assess the leadership talent already at the table.  Often, the most effective chairs come from the ranks of current non-executive directors.  Those who are on the board know the business well and, ideally, have already earned the trust of their board colleagues.

How do we assess the chair’s job performance?
The board’s responsibility is not only to elect and support the chair, but to assess his or her effectiveness in role execution.    Performance assessment is recognized as a best practice in governance, and the New York Stock Exchange is increasingly requiring it.

Establish benchmarks for chair performance and conduct annual reviews.  Start with a chair self-assessment and include assessment tools, such as 360-degree reviews, that have been validated by research.  Draw on outside expertise, particularly if you are experiencing problems in chair performance.  Outside facilitation can be an effective tool for board and chair performance evaluations alike. Open and  personal appraisals are crucially important. The chair of the Governance and Nominating Committee should be a senior independent director who can effectively lead the performance assessment process and maintain confidentiality

Taking the proactive approach
In today’s financially tumultuous times, the practices of boards of directors and management are being monitored with ever-increasing vigilance.  The government and shareholders are demanding change, and the expectation for boards to improve themselves will continue to grow.  Adopting independent chairs voluntarily, with careful planning and deliberate execution, is a proactive way to promote responsible governance and retain, or restore, market trust.

Tom Wajnert advises senior executives, boards and directors of businesses in transition.  He  has extensive experience leading large, publicly owned companies, including AT&T Capital Corporation, where he served as founder, chairman, and CEO. He has also served on the boards of several NYSE-listed firms and privately owned companies. For more information, see www.twaj.com.

CEOs are much more optimistic about the economy’s future than six months ago in several key areas, according to a survey of 100 CEOs by the Conference Board Measure. The measure moved to 55 this quarter from 30 last quarter but the measure still shows the economy is weak.

When assessing current economic conditions, their own industries and profits more CEOs were more optimistic in the second quarter. A majority of business leaders expect economic conditions to improve in the next six months. However, CEOs disagree about the main cause of profit growth whether it is cost reductions, increased demand, technology, or price increases.

CEO confidence had been steadily deteriorating since the first quarter of 2007. CEO confidence had plummeted to all time lows by the fourth quarter of 2008. The current survey shows the first overall uptick in all categories since the end of 2006.