CHIEF EXECUTIVE OFFICERS WHO SIT on multiple external boards can absorb crucial knowledge and experience that they can apply to their own companies, says Bob Lane, chairman and CEO of Deere and Co., the $20 billion (sales) manufacturer based in Moline, Ill. He sits on the boards of Verizon Communications (compensation committee) and General Electric (audit.) He also defends CEOs against accusations that they are overpaid and destroy jobs. Here are highlights of a conversation:
Is being an active CEO and sitting on two other boards too much of a time commitment for you?
No. After I had the privilege to be elected chairman of Deere six years ago, because of the Deere name, a lot of companies contacted me about going on boards. But there was a lot of work to do that year, and I had a lot to learn. In consultation with our board, I elected not to go on any boards for four years. It was eventually the Deere board that came to me and said, "We think it would serve Deere well if you served on one or two [other] boards." I ended up following their advice and doing that. I learn a great deal in that process.
Most directors these days are concerned about their CEO being too engaged on too many boards. So what was your board's thinking about that?
You mentioned being on "too many boards," and that is the question. There may have been some excesses when people were serving on too many boards. But in my case, being on two boards, I see it as positive for Deere. I see not only the corporate governance issues and how others deal with those—and that helps me ask the right questions of our own people and helps me lead our own board—but I'm also exposed to [different] kinds of approaches to innovation, to investment, to dealing with the global issues in the world and the global political environment. That contributes a great deal. It's amazing. It would be hard to find ways to be exposed to that kind of input on such a regular and consistent basis.
What have you learned?
I can't be too precise, but I can certainly talk about investments in new technologies. If you think about all the investment that's going on in new technologies at Verizon Communications and GE and how that is going to affect people's lives, I get digital insights that help us accelerate our innovation process.
What have you learned about governance?
I get to sit on an audit committee and a compensation committee. So I'm aware of activities beyond what we do in our own business, which I believe is at the forefront of transparency and appropriate governance of the corporation by the board. This is not about the CEO. It's about the board of directors having appropriate oversight of the CEO. I think Deere does that well, and I think our board thinks so. I think I also have an opportunity to see that demonstrated elsewhere.
How do you manage the time commitment?
It's not that different from the way I manage my entire job. When I went on those two boards, I explicitly discontinued a number of activities. I ended up with a template in writing to people saying I was unable to do this or that. I discontinued six different activities I had been involved in outside the company. So I did make some adjustments.
What have you learned about the role of audit committees at GE? They seem to be the most powerful committees these days.
I wouldn't want to specify about power, but they are important committees and I take the work seriously, as do the other members of the committees. The Deere audit committee is something to be very proud of.
What other lessons have you gleaned? Have you learned about board composition or Sarbanes-Oxley?
All of that. Ultimately, I'm asked by our shareholders to use good judgment and to be able to draw out best judgment from both the management team and from an experienced board. I am anxious—and I don't do it perfectly—to continue to learn how to do what I do, which is lead our board and lead our senior management group more effectively. Watching others do the same thing is like a continual benchmarking exercise.
Are major boards still struggling with the difficult climate created by Sarbanes-Oxley and all the class action lawsuits?
My impression is that there is a very serious attempt to have our businesses be both globally competitive on a sustained basis and compliant with all appropriate laws and regulations in ways that are sustainable over time. Is it perfect? No.
What is the challenge?
The challenge is to balance that out. You don't want to have the world's most well-governed, least competitive businesses. The challenge is to be compliant and have procedures and processes in place that make risks transparent to investors and cause employees to want to make the right decisions. Certainly, work is being done to do that. But at the same time there is a global challenge to competitiveness, which ultimately causes everyone to do better.
As a CEO and a director, how would you describe the relationship between board and CEO?
The board is not the pal, if you will, of the CEO. The board provides an encouraging environment where a CEO is carrying out his responsibilities correctly in the eyes of the board. He or she can be nurtured and developed. But you're also totally accountable to that board. For example, I don't have any contract. The board could say to me tomorrow, "Thank you very much." I serve at their pleasure.
Some would say that relations between CEOs and boards have become less focused on advice. Do you think the pendulum has gone too far toward process? I think that's a possibility. If competitiveness were to slip, that would not be a good sign. I think it's very possible that both can be done at the same time. Ultimately, good compliance supports good competitiveness.
Turning to compensation, are some American CEOs getting paid too much?
I think it's possible. My sense is that the issue is: Is compensation aligned to long-term sustained performance, not just a pop in performance? If it is not tied to that, then maybe there are questions.
What's the key to structuring it in the right way?
In our case, we divided it up into three segments—short-term, medium-term and long-term incentives. It wasn't rocket science. Our short-term incentive applies to all salaried employees, and it's all rooted in operating return on operating assets. It's how we earned on the basis of what we invested. Every employee is rewarded on how well they invested shareholders' money.
Is the problem that some of the compensation packages that have attracted so much attention are based on share price, and that might not be the right criterion?
It could be. Or it could be that it's not based on longenough term results. In our case, the midterm incentive was new to us. It is a payment on the absolute creation of shareholder value. That is based on a sustained four-year performance, and our company has a long history of sometimes doing well for a short period of time and then losing it all. For example, we lost more than $2 billion in shareholder value added from 1999 to 2003. That was more than twice what we had earned in the entire 1990s.
Was your own compensation adjusted downward during that time?
This program was not in effect at that time. But it was impacted. If the share price hadn't come back, a lot of stock options and restricted stock that had been given would not have materialized. But now the new program says that if we lose a lot of shareholder value, then you never get the pay, even though it was fully approved. It's not paid out until you earn it over a rolling four-year period.
Two issues—CEO compensation and the offshoring of jobs—have damaged the image of CEOs. Do you feel you are fairly compensated, and are you doing what's right for the American economy?
I believe the work that we're doing is going to improve the human condition. It's going to contribute not only to the flourishing of people in our own environments where we work but ultimately billions of people around the world. Now, does that mean every single individual is necessarily advantaged? No. It's in the total that it's better. Some individuals may have to make adjustments. When we have to close a factory, I don't enjoy that. But I also know that it's the right thing to do. We explain to our employees that building a sustainable great business is the key that unlocks enormous opportunity for our company and our employees and our customers.
