Jeff Cunningham (left) and Robert Greifeld (photo by David Nicholas/Longview)

As Nasdaq OMX celebrates its 40th anniversary, what aspect of the global financial markets concerns you most?
When you’re looking at the markets around the world, they have routinely done a very good job with large companies. With the advent of electronic trading, with fair access standards, which Nasdaq pioneered back in 1971, you see the actively traded cycles treated very well. Where we have issues on a global basis is the SMEs, the smaller companies. We have not yet solved what is the proper market structure and what is the proper ecosystem to make sure those companies have truly the best capital markets experience possible.

What is the upside of all the exchange merger activity, cost synergies or revenue enhancement?
When exchanges went to electronic markets, they became dictated by the laws of the transaction-processing business. With the technology I built in our data center in New Jersey I have enough computer power today to process every single equity transaction in the world. So obviously, as we put more volume against that relatively fixed cost platform, the marginal revenue tends to drop to the bottom. There are fairly valid reasons for exchanges to want to come together. What has not worked with exchange transactions in any noticeable fashion are revenue synergies. Our transaction in the Nordics happened four years ago, and we’re only now seeing some real revenue synergies from that. So revenue synergy is somewhat uncertain; expense synergies are fairly straightforward.

After your attempted takeover of the New York Stock Exchange, what did you discover about the way our antitrust laws work?
With our approach to the New York Stock Exchange, we certainly went into it with our eyes wide open—it was opportunistic. Working with the antitrust process—and it wasn’t my first time through—you realize there is typically more art than science. At the end of the day, especially in the U.S., there is one person who has the vote. Depending on who that person is, there are different ways to take a look at the elephant.

The credit crisis was an opportunity to lay blame at the feet of many constituents. Do you have any advice for directors whose role is to reduce risk?
What you see evolving is the concept of risk being managed on a holistic basis. We at Nasdaq OMX have clearly evolved in the last two to three years, and we have our clearinghouse risk, but then we also have business risk. We produce a report to our audit committees and our directors. If we come out with a new product, we put it through a risk filter today, and a lot of these projects are not things you intuitively think about from a risk point of view, but every activity has the opportunity to introduce a new incremental risk into the organization, so you have to have that kind of discipline. When you look at our product release schedule, the risk component of it is as important to us as the product management. I think you’ll see that as an emerging best practice. It’s up to directors to insist upon that. It’s another area of frustration for line management because they feel like they are giving up some autonomy with a risk committee. Like anything else, the risk committee has to be balanced in their viewpoints. It’s the same thing with information security—that’s its own topic right now, and we’ve got our own army of people trying to protect everything we do so the overall risk committee doesn’t have to spend a lot of time on that. It’s about finding pockets of latent risks that people have not thought about before.

As a clearinghouse, you do take on some of your customers’ risks? How do you manage that less transparent aspect of the equation?
We’re at a certain tension with our customers. The clearinghouse services we think of as a fundamental reduction of risks that takes the notional and gets it down to a net number. It demands margin— there’s just no way around that. So when you look at the large over-the-counter market that exists in the world today, the large banks have increased their notional risk by 50 or 60 percent on these over-the-counter derivatives. The question is what percentage of those are actually margin, because a lot of times they are done in the context of an overall relationship. So we’re self-interested when we say that we believe the financial players are misadvised to be having this type of off-balance-sheet risk. For us who run a clearinghouse, we’ve obviously had some interesting calls as we went through 2008. It’s about managing the margin properly by taking signals from the market. As we’ve just had the MF Global situation, we’ve assessed our margin that we had against that, and that margin was, in a sense, assessed against how liquid and deep the market was for us to liquidate positions. We said, “Okay we’re fine.” So clearinghouses bring that discipline all day, every day.

To what extent is the U.S over-regulated relative to the rest of the world?
I’m a little different than most on this. I’m calling for some changes to Sarbanes-Oxley, but a lot of that is about the perception and not the reality. My personal view is that Sarbanes-Oxley has been a net benefit to our corporate governance standards. Boards are more fruitfully engaged. When you look at the developed markets around the planet, they have all basically followed our lead with Sarbanes- Oxley. The notable exception is Section 404. I certainly believe that if we were to have Section 404 for those companies that have successfully negotiated in the past be an every two-year requirement, just the publicity around that would address the perception issue. I think it’s a proper modification of the 404. We called for 404 [to exempt] companies below the $700 million market cap, and I think we’d be happy to see that the presidential commission’s even thinking about a billion dollars. Clearly, the European folks back in the day were using that against us, and that’s fine enough, but that wasn’t really where our international market was. We’ve done particularly well in Israel and China. Those markets were not as developed, and they’re anxious to come to the U.S., and I never heard of SOX being an item of substance against us.

Will China create a robust, regulated and reliable domestic market?
I’d say China and Hong Kong have tougher listing standards than we do. It comes back to when I claimed Nasdaq invented the modern IPO. What we meant by that is we were successful in letting companies that had an unproven business model come to market, but the absolute requirement was that they had solid accounting and governance behind them. We believe investors should be able to make an investment on the success of the next Apple or Groupon. That investor cannot be making a bet on whether the numbers and accounting are good, and the management honest and ethical. When we look at the Chinese companies, concentrated in one province and in reverse mergers, then obviously they violated that sacred trust, so we had to make sure that we had that much more rigor to the process. We’ve put a seasoning requirement that doesn’t just apply to Chinese companies because we don’t want to be profiling, and it’s a good improvement for all of our companies.

The WCI seeks to measure companies that generate real economic value—as opposed to mere GAAP accounting value. The index relies heavily on the idea of Economic Margin (EM), which measures the degree to which the company is making money in excess of its risk-adjusted capital cost. It’s expressed as a percentage of invested capital and calculated as operating cash flow minus a capital charge all divided by invested capital. Companies with positive EM (greater than zero percent) are creating wealth; those with negative EM are destroying it.

This article originally appeared in Chief Executive magazine. Click here for the article and complete ranking charts.

While no single metric is the Holy Grail in running one’s business, EM comes closer than most, as it looks at a business the way any true owner would. How effectively is every dollar invested in this business working? It’s a discipline that applies to any firm, public or private, from a local chain of dry cleaners to General Motors. Many private equity firms use some variation of EM in doing their own evaluations; it is useful to know how people whose careers depend upon it size up one’s performance. The rankings look at public companies (minus REITs) in the S&P 500, where the CEO has been running the enterprise for at least three years, in order to fairly judge a leader’s impact on the company.

St. Louis-based Express Scripts, a large pharmacy benefit manager (PBM), landed the top position in 2011, following previous years where it was ranked #57 and #47. The company rose through the ranks largely due to to its success delivering growth through acquisitions, notably the PBM business of WellPoint in 2009, while maintaining and improving profitable operations. Express Scripts has proved skillful in integrating acquisitions, something few companies are capable of getting right.

If the proposed Express Scripts merger with Medco Health goes through, it will be a game-changing deal, doubling ES market share to about 35 to 40 percent in this industry—one where scale is everything. Needless to say, there is much potential synergy on costs, once the two are combined and retail pharmacies are potentially squeezed further. [This explains why the National Community of Pharmacists Association (NCPA) has testified before a Congressional subcommittee against the merger.]

CEO George Paz points to two factors that contribute to his company’s performance: its independence from Big Pharma and its diligence in using research to drive out waste and to make medicines safe and affordable in order to optimize health outcomes. “You can look across the healthcare industry and be hard-pressed to find any sector that makes money when it saves its clients money, yet that is exactly what we do,” he says. “We offer clients innovative ways to lower prescription drug costs and, more importantly, improve health outcomes of members.”

Other firms that consistently rank among the top performers in recent years are Aflac, Apple, Autozone, Gilead Sciences and C.H. Robinson Worldwide. Mike Burdi, Applied Finance Group senior analyst, points to several common elements that these enterprises share. “Do your customers care whether you stay in business?” he asks. “It’s one thing to say that one is customerfocused; most claim to be as a matter of course. But would your customers really miss not having access to what you offer?”

Apple (#5) is a poster child for using these elements, as is Amazon.com (#87). Meanwhile, Netflix (#25) will soon find out where it stands on that front. Apple’s challenge will be to maintain its allure after the loss of Steve Jobs. “In most research on what high-capital-return companies have in common, the common thread is the ability to consistently fulfill an unmet customer need, often when the customer didn’t really realize the need was unmet,” notes Burdi. “This is equally true whether one is big cap or small cap.” – J.P. Donlon

Top 10 Wealth Creators

1. Express Scripts, CEO George Paz
2. Exelon, CEO John W. Rowe
3. Priceline.com, CEO Jeffery H. Boyd
4. Varian Medical Systems, CEO Timothy E. Guertin
5. Apple, [former] CEO Steven P. Jobs
6. Philip Morris, CEO Louis C. Camilleri
7. Halliburton, CEO David J. Lesar
8. Gilead Sciences, CEO John C. Martin, Ph.D.
9. Linear Technology, CEO Lothar Maier
10. MetroPCS, CEO Roger D. Linquist

Top 10 Wealth Destroyers

1. Monster, CEO Salvatore Iannuzzi
2. Alcoa, CEO Klaus Kleinfeld
3. Dean Foods, CEO Gregg L. Engles
4. PerkinElmer, CEO Robert F. Friel
5. Micron Technology, CEO Steven R. Appleton
6. Nasdaq OMX Group, CEO Robert Greifeld
7. Tenet Healthcare, CEO Trevor Fetter
8. Stanley Black & Decker, CEO John F. Lundgren
9. Nisource, CEO Robert C. Skaggs, Jr.
10. Electronic Arts, CEO John S. Riccitiello

Ranking CEO Wealth Creation by Drew Morris and Michael Burdi
Our ranking is based on the performance of companies in the S&P 500 Index (and their CEOs) for the three years ending on June 30, 2011. It considers reported financial results during that period and estimates for the next 12 months. Only companies whose CEOs were in their roles for the entire July 2008 through June 2011 period were ranked. Not ranked are the 13 REITs in the 2011 S&P 500.

The four components of the ranking, explained below, were developed and calculated by the Applied Finance Group (AFG), an independent equity research advisory firm, using their proprietary metrics and data. An again-proprietary weighted combination of each company’s component rankings, taking into account the industry the company is in, is used to produce an overall score: 100 is awarded to the best wealth creator; 1 to the worst. (The list itself shows these overall scores as a sequential ranking.) The component rankings are shown as letter grades with companies in the top 20 percent of each component metric receiving an A grade; the bottom 20 percent receiving an F.

Market (or Enterprise) Value/Invested Capital (MV/IC)
This measure shows the degree to which investors consider the company’s assets valuable, relative to their cost. Market value is what a buyer would have to pay to buy the company outright, that is, to purchase all of the stock and pay off all of the loans, leases and other obligations. Note that market value depends on the stock price. Invested capital is the inflationadjusted total of all of the investments in the business. It does not depend on the stock price. So by its nature, MV/IC reflects the market’s take on the value of the investments made in the business.

The Average of the Past Three Years’ Economic Margins
Economic Margin (EM) measures the degree to which the company is making money in excess of its risk-adjusted capital cost—riskier businesses get relatively higher capital costs. EM is expressed as a percentage of invested capital. It’s calculated as (Operating Cash Flow – the Capital Charge)/Invested Capital. Companies with positive EM (greater than 0 percent) are creating wealth; those with negative EM are destroying it.

EM Change
This is a 12-month forecasted EM, based on the ratio of the most recent EM to the 3-year average.

Management Quality
This AFG-proprietary measure rewards a company with positive EM for growing its asset base, and penalizes one with negative EM for doing the same thing. In other words, if a company is making money and it adds assets in such a way that it can make even more, that’s good. So is selling off a money-losing division. That said, it’s also valid that adding scale can dramatically increase profitability in a business with high fixed costs.

A Validity Check on the Ranking Method
The top 50 companies in the ranking delivered an average Total Shareholder Return (TSR) of 68.5 percent between January 2008 and June 2011 (the period covered in the reported financials). The bottom 50 companies’ TSR averaged -9.3 percent, while the S&P 500’s average was 14.9 percent (without its 14 REITs). The top 50’s median TSR was 40.7 percent; the bottom 50’s was -11.7 percent.

Total Shareholder Return

As the table above shows, the top 50 companies in the wealth creation ranking far outperformed the bottom 50 companies and the S&P 500 between July 2008 and June 2011. Note: TSR = (Change in Share Price over Period + Dividends)/Start-of-Period Share Price.

For more on Economic Margin and how companies scored, see http://www.economicmargin.com/moreinfo.htm.

Delaware Court of Chancery
The new chief judge of the Delaware Court of Chancery is, like his predecessors, expected to adhere to tradition. “The court’s role is traditional,” Leo E. Strine Jr. told a New York Times reporter in June shortly after he was sworn in as chancellor of the most powerful business court in the United States. “The core concept of the Delaware court is, what are the fiduciary duties that directors owe to shareholders? Markets are dynamic, the core concept is constant.”

Strine is the 21st chancellor since the court was established in Delaware in 1792 to provide a more balanced judgment for equity cases than less-sophisticated common-law courts—previously the state’s only alternative to its courts of statutory law. (Common plea and equity courts apply principles, while statutory courts apply laws.) Today, Delaware’s Court of Chancery is a rarity. All states have courts of law, but only a few—Arkansas, Delaware, Mississippi, New Jersey and Tennessee— have chancery courts as well.

No other state court impacts business law to such a profound degree. While Delaware’s size is disproportionate to its dominance of American business law, in fact, Delaware was a latterday convert to the chancery model. Other states formed equity courts in the pre-Revolutionary period under the supervision of royal governors, which later led to questions about their independence. Delaware’s timing just three years after ratification of the U.S. Constitution and the election of President George Washington assured that its court would be seen as independent, and it thrived while other chancery courts were abandoned. As a result, the Delaware Chancery Court is based on a unique body of law dating back 200 or more years in corporate dealings and disputes. For other states looking longingly at Delaware’s dominance in business law, there appears to be no catching up.

Prior to being confirmed as chancellor, Strine had served as a vice chancellor since 1998. He graduated magna cum laude from the University of Pennsylvania Law School, and received his bachelor’s degree summa cum laude from the University of Delaware.

The NACD Directorship 100:

Introduction

Directors and Officers

Corporate Governance Hall of Fame Class of 2011

NACD 2011 Public Company Director of the Year and B. Kenneth West Lifetime Achievement Award Winners

People to Watch

Sam Glasscock III was sworn in as vice chancellor in August after having served as master in chancery for 12 years. Glasscock was appointed to fill the vacancy created by the ascension of Strine to chancellor. He received a BA in history from the University of Delaware in 1979, a JD from Duke University in 1983 and a master’s degree in marine policy from the University of Delaware in 1989.

J. Travis Laster was sworn in as vice chancellor in 2009. Laster received his AB summa cum laude from Princeton University and his JD and MA from the University of Virginia, where he served on the Virginia Law Review and was a member of the Order of the Coif.

Donald F. Parsons became a vice chancellor in 2003. He is a 1977 graduate of the Georgetown University Law Center and received a BS in electrical engineering from Lehigh University.

A vice chancellor since 2000, John W. Noble holds a BS magna cum laude in chemical engineering from Bucknell University and a JD cum laude from the University of Pennsylvania Law School. He served as a federal district court law clerk and then practiced with Parkowski, Noble & Guerke in Dover, Del.

The Delaware Supreme Court
Like the Chancery Court, the Delaware Supreme Court has a worldwide reputation for rendering concise opinions concerning corporate law, which generally (but not always) grant broad discretion to corporate boards of directors and officers. The Supreme Court consists of a chief justice and four justices who are nominated by the governor and confirmed by the Delaware State Senate. Justices are appointed for 12-year terms. Myron T. Steele is the seventh Chief Justice of the Delaware Supreme Court. His term ends May 26, 2016. He presides with Justices Carolyn Berger (July 2018), Randy J. Holland (May 27, 2023), Jack B. Jacobs (June 4, 2015) and Henry duPont Ridgely (July 22, 2016).

Before his appointment as Chief Justice, Steele was a Supreme Court Justice from 2000 to 2004 and a vice chancellor of the Court of Chancery from 1994 to 2000. Steele graduated from the University of Virginia (BA, foreign affairs, 1967) and the University of Virginia School of Law (JD, 1970; LLM, 2005). He served on active duty in the U.S. Army and retired as a colonel in the Delaware Army National Guard. Before being appointed to the bench, he was a litigation partner in Prickett, Jones & Elliott of Wilmington and Dover. He also served as outside counsel, director and chairman of the Central Delaware Health Care Corp. In addition to his judicial activities, Steele has been appointed to the Judicial Conference Committee on Federal-State Jurisdiction by U.S. Supreme Court Chief Justice John Roberts.

To register for the NACD Directorship 100 gala dinner and forum, please click here.

What we also discovered in putting the list together was that in some instances, it became impossible to separate the captain from the team. This year’s D100 is a case in point: Our editors and board of advisors were nearly unanimous in our selection of President Barack Obama as this year’s most powerful corporate governance influence. And yet, to do justice to the seismic shift his policies have brought about in the boardroom, we also had to recognize the many other  “New Voices” in the Administration who are now leading the greatest financial reform of American business since the 1930s.

So, we ask that in the pages ahead you pay more attention to who counts, and less to how we count, in arriving at our final selection of individuals and institutions that have met the requirement to be “most influential.” We think you’ll agree it’s an intricate and impressive mosaic where the whole equals much more than the sum of its parts, which may or may not be greater than 100.

Regulators & Rulemakers

Team Obama
It is often written that reasonable people may disagree, and with Americans and their Presidents, it is practically a way of life. But even an unreasonable person could only conclude that this President and his Administration are having a profound and lasting influence over the boardroom. President Barack Obama has demonstrated an enormous capacity for calm in uncertain times. His relative youth leads to frequent comparisons to John F. Kennedy and his communications skills to those of Ronald Reagan. But it is his aggressive response to the unparalleled economic challenges that greeted him at the dawn of his young presidency that harkens back to an earlier figure of towering influence,  Franklin D. Roosevelt.

FDR’s massive social and financial reform programs—the creation of Social Security as part of the New Deal, the establishment of the Securities and Exchange Commission (SEC) and the Federal Deposit Insurance Company (FDIC)—helped restore confidence in the nation’s banking system coming out of the Great Depression. One could plausibly take major portions of FDR’s New Deal and substitute his name with President Obama’s.  The implementation of the $787-billion American Economic Recovery Act one month after Obama took office, coupled with his handling of the Troubled Asset Relief Program (TARP), which sought to strengthen the financial sector by buying up the assets and equity from troubled banks, has clearly helped the nation avoid further financial disaster and put the economy on the path to recovery.

And finally, turning again to the FDR playbook, Obama assembled a team of wise men and women, formidable economic and business minds, whose decisions are having a lasting effect on the role of the corporate director. Preeminent among them was the choice of Rahm Emanuel as chief of staff. Described as a veritable “influence machine,” within the Administration and Congress, the former Congressman from Obama’s home state of Illinois is known as a hard-charging, brutally candid, sometimes combative, acutely intelligent man who can get things done and knows the ways of the Capitol and the boardroom.

The Enforcers
Perhaps second only to Obama in terms of her influence on boards and corporate governance, career regulator Mary Schapiro heads up the 75-year-old SEC. Before the crisis, the agency’s very existence was in question: “Obsolete,” “out of touch,” and “behind the times” were just some of the many terms uttered by detractors. The Commission, under former chairman Christopher Cox, was pilloried for missing the Madoff scandal.

As former SEC chairman and Directorship 100 Hall of Famer, Arthur Levitt described her: “She has the skills, the intellect, and the character to be a superb SEC chair.” But Schapiro will face a new kind of challenge in the role, not just that of proving her own qualifications, but also instituting a significant remodeling of the SEC itself, as she works to bring it into the new regulatory era.

Moving swiftly to address regulatory concerns in the wake of the financial crisis, the SEC has rolled out a series of proposals that could embody the biggest change to the rules of the game for directors in some time. Schapiro, who is no stranger to the boardroom, having served on the boards of Duke Energy and Kraft Foods, has overseen proposed rule changes on proxy access, broker voting, say on pay, and new requirements for disclosure on executive compensation and director qualifications. It’s now up to her and fellow commissioners Kathleen Casey, Elisse Walter, Luis Aguilar, and Troy Paredes to determine the final regulations that emerge from the proposals.

Other key players Schapiro has brought into the SEC include Senior Advisor Kayla Gillan, Chief Accountant James Kroeker, and Director of Enforcement Robert Khuzami. Gillan was a founding board member of the Public Company Accounting Oversight Board (PCAOB) and former general counsel to CalPERS. Kroeker joined the SEC as deputy chief accountant in 2007 from Deloitte and Touche where he had been a partner in the firm’s national accounting services group. Kroeker recently said that the proposed road map for the convergence of International Financial Reporting Standards,pushed to the back burner amid the larger issues of market reform, would be restored as another top priority. Khuzami is a former federal prosecutor, has pledged to improve the SEC’s enforcement performance by creating specialized units to provide “structure and resources for staff to ‘get smart’ about certain products, markets, regulatory regimes, practices and transactions.”

TARP Overseers
Another example of Obama’s preference for brains over politics was his reappointment of Sheila Bair to chair the FDIC. Another fiscally conservative Republican, on Bair’s watch alone this year, 94 banks have failed, creating a new challenge:  how to replenish the fund. Bair has also been an integral part of the team overseeing TARP. Neil Barofsky is a former New York assistant attorney general confirmed by the Senate in December as special inspector general. Dubbed the “TARP Cop,” his job is to figure out how and where the $700-billion TARP funds are spent, reporting directly to the President and providing updates to the Congressional Oversight Panel chaired by bankruptcy expert and Harvard Law School professor, Elizabeth Warren. COP’s first report, released in February, casti-  gated then-Treasury Secretary Henry Paulson for his performance and lack of transparency, reporting that the Treasury Department  had overpaid by $78 billion for the assets it bought from banks.

Interestingly, while Obama sponsored and was a strong proponent of  “say on pay” legislation while a senator, since appointing Kenneth Feinberg special master of compensation, he has appeared unwilling to make the issue a top priority. Feinberg, who has immersed himself in some of the country’s most troublesome and high-profile cases, is considered a superb choice, both in terms of skill and temperament, by Capitol Hill insiders. His most noteworthy case was the 33 months of pro-bono work he did following the 2001 terrorist attacks to determine how much each victim would receive from the federal government’s September 11th Victim Compensation Fund.

Feinberg may in fact be perfectly suited for a job that most compensation specialists see as thankless, and possibly as a “no win” situation. As the Obama Administration’s comp expert, Feinberg was called on to monitor the compensation of executives in what were once some of America’s most prestigious corporations, now TARP recipients, including American International Group (AIG), Bank of America, Citibank, Chrysler, GMAC, and General Motors.

Fed to the Rescue
To prevent American capitalism from spiraling deeper into the abyss, nine months after President Obama made his first Cabinet announcement, he re-nominated Ben Bernanke as Federal Reserve chairman. The former Princeton economics professor was selected by Bush in 2005 to succeed Alan Greenspan. In 2008 after the market crashed, Bernanke invoked emergency powers, slashed interest rates, and spent trillions of dollars to right the financial system. Just last month, he declared the recession “likely over.” Though he seldom gives interviews, Bernanke is never far from the public eye and has been a stalwart in the transition between presidential administrations and in the effort to stem the economic slide.

When then President-elect Obama named his economics team, it included players who, like Bernanke, were already steeped in the crisis details, demonstrated a studied understanding of Depression-era economics, or some combination of both. Enter Treasury Secretary Timothy Geithner and Chief White House Economic Advisor Lawrence H. Summers. Geithner, who is currently pushing legislation to provide more systematic regulation of financial institutions, including new limits on executive compensation, recently told one interviewer that he is optimistic major reforms will be passed.

Prior to his appointment replacing Henry Paulson, Geithner was president of the Federal Reserve Bank of New York and part of the team central to the critical negotiations that resulted in Bear Stearns being tucked into JPMorgan Chase, Merrill Lynch going to Bank of America, Lehman Bros. disappearing, and Citigroup and other struggling banks getting a lifeline.

Summers, the former Harvard University economist who became its president following his tenure as Treasury Secretary to President Clinton, is director of the Cabinet’s National Economic Council. The group was established in 1993 to coordinate and ensure that the President’s economic policy agenda is carried out.

Rounding out the team, Paul Volcker, the former Fed chief under Clinton, was selected to chair the president’s economic recovery advisory board. And Christina Romer, a former UC Berkeley economist, who administration sources suggest is well- regarded by both parties, chairs the Council of Economic Advisers. Her appointment was seen as a further triumph of brain over politics in Obama’s approach to talent recruitment.