There could be no more appropriate locale in which to assess the current mood of business and what Directorship’s Jeffrey M. Cunningham described as “a cultural regime change on this fragile system called capitalism.” The storied white marble Metropolitan Club on Manhattan’s Upper East Side, built by industrialist J.P. Morgan in 1893, was the site of the 9th annual Directorship Boardroom and Economic Leaders Forum.
Morgan commissioned architect Stanford White to build a private club to trump the city’s other clubs that had, according to lore, blackballed the financier and his friends. Cunningham wryly noted that Morgan certainly didn’t require a subprime loan to build the Renaissance Revival mansion and would be positively mystified by how the tables had turned more than a century later, with government now bailing out business. While building the companies that would become General Electric and U.S. Steel, Morgan twice used personal funds to help shore up the finances of the U.S. government.
Against this backdrop, today’s business elite of executives, board directors, institutional investors, journalists, educators, regulators, and corporate governance gurus gathered on December 2 for this year’s forum: “The Way Forward: Leadership in Challenging Times.”
The annual event also recognized the Directorship 100, the list of the most influential people on corporate governance and in the boardroom, and included a full day of moderated panel discussions, keynotes, and peer-group exchanges that focused on the financial crisis, the new administration and Congress, and the forthcoming proxy season. Speakers—drawn from all spheres of corporate governance—included Congressman Barney Frank, former Congressman Michael Oxley, former SEC Chairmen William Donaldson and Harvey Pitt, Delaware Vice Chancellor Leo Strine, Jr., famed economist David Hale, and renowned directors Marsha Johnson Evans, Charles Perrin, and many others.
The Outlook
An overriding theme for the day was the outlook for regulatory reform. While none of the panelists disputed the need for it, Pitt was the most specific about the reforms required. The 26th chairman of the SEC recommended that the scope of each regulator’s authority be clarified so that when problems arise, there is absolute certainty about who should respond. To provide transparent, fully informed markets, Pitt encouraged regulators to force the disclosure of information about all financial markets, including hedge funds. Longer term, he recommended the consolidation of federal regulators into the Federal Reserve and a single other regulator.
Martin Lipton of Wachtell Lipton Rosen & Katz, warned against looking to the board to do that which it is incapable of doing, asserting that many independent directors lack deep knowledge of their company’s industry. He compared this situation unfavorably with earlier boards that often included the company’s investment banker and commercial banker—people who understood the business and could engage in a robust exchange with other board members.
Donaldson maintained that directors have taken their job more seriously since the passage of the Sarbanes-Oxley Act and urged that investor protection not be overlooked in any reforms. Strine agreed that boards have in recent years become more responsive to stockholder demands, including those made by activist investors who urged management to take more risks to generate higher profits. Strine noted that strong safety and regulation was more, not less, important when the stockholders’ voice was potent, especially given that institutional investors who represent long-term shareholders have generally failed to make monitoring excessive risk and leverage a centerpiece of their activism.
Lipton also cited the need for regulators to understand the products and transactions they regulate. Today, professionals with PhDs often design complex financial instruments and if regulators are to regulate them, they will need to understand the instruments properly, he said, adding that regulatory design should reflect this reality.
CEO Succession and Recruitment
Moderator: Jeffrey M. Cunningham, chairman, CEO, and editorial director, NewsMarkets, publisher of Directorship and Global Proxy Watch. Panelists: Theodore L. Dysart, managing partner, Heidrick & Struggles; Linda Fayne Levinson, independent lead director at NCR, director, DemandTech, Ingram Micro, Jacobs, Engineering Group; Charles Perrin, chairman, Warnaco, director, Campbell Soup
CEO succession is arguably the most critical element of any company’s risk management planning. Most notably, Dysart pointed out that sometimes CEOs aren’t ready to relinquish their roles. “The leader is not ready to leave and the board doesn’t take ownership of the process,” added Dysart. He warned that not taking the reins on succession planning could prove to be dire. “[Boards] need to look through the windshield, not the rear-view mirror.”
Oftentimes, Levinson said, the board is unsure what qualities they are looking for in a successor. “If you know a few years out that you’re making a change, there will be new skill sets needed with the new CEO,” added Charles Perrin, chairman of Warnaco. The needed skill sets for a CEO vary with time and situation. Dysart said that a leader’s shelf life rarely exceeds 10 years. Levinson countered that the tenure of a CEO is situational: “Sometimes even three years is too long.”
The reluctance of companies to look inside for successors is a mistake. “People don’t make good choices when they go outside,” said Dysart. The financial crisis has undoubtedly inflicted additional pressure to find the appropriate CEO to lead during turbulent economic times. “Regal leadership is over,” said Perrin. Levinson agreed: “CEOs are willing to be contradicted.”
The New Pay Paradigm
Moderator: Aaron Bernstein, editor at large, Directorship. Panelists: Marsha Johnson Evans (right), director, Huntsman Corp., Office Depot, and Weight Watchers; Charles M. Elson (below, left), University of Delaware, director, AutoZone, Health- South; Steven Hall, managing director, Steven Hall & Partners
Companies are focused on survival and public scrutiny is fixated on executive compensation. Elson noted that while the Senate did not pass “say on pay,” Obama supports it and boards should expect to see greater government involvement. Evans said that compensation committees need to work on reconciling competing interests. “The comp committee sits down, finds a way to use the limited amount of tools, shares, and options available to them, and crafts them into a package.” Hall warned that thinking quarter to quarter instead of long term indicates something is wrong with the company’s strategy. “I don’t think people will say, ‘You earned $5 million, now you’ll get $3 million,’” said Hall. Rather than giving more shares, the amount of shares should stay the same and as a result, pay will drop, he added.
The Effects of The Credit Crisis
Moderator: Alan Murray, assistant managing editor, The Wall Street Journal. Panelists: Harvard Law School Professor Lucian Bebchuk, and former Congressman Michael G. Oxley, vice chairman of Nasdaq OMX
Oxley, the former Ohio congressman and co-author of the reform legislation that bears his name, contrasted the current regulatory environment with the conditions prevailing in 2001 when the Sarbanes-Oxley Act was adopted, pointing out that the current crisis could not be characterized as a scandal involving criminal misconduct. Oxley raised doubts that criminal behavior would be found to have contributed to the crisis; it is more likely, he said, “that bad decisions had been made by good people.”
Bebchuk suggested that flawed compensation practices have been an important driver of the short-term outlook of corporate managers, which contributed to the current crisis. He described how compensation packages can be redesigned to provide managers with incentives to maximize long-term shareholder value.
Crisis Communications and Wall Street
Moderator: Judy Warner, deputy editor, Directorship. Panelists (from left to right): John Byrnes, executive editor, BusinessWeek, editor-in-chief BusinessWeek. com; Richard Levick, president, Levick Strategic Communications; Greg Farrell, Wall Street correspondent, Financial Times
Richard Levick declared that the battle between new and traditional media is over, and high-authority bloggers are setting the agenda. While the media equation has changed, board behavior has not. “Board members need to be thinking differently about the media. They need to be proactive and they need to be asking themselves how they can work behind the scenes to help,” he suggested.
One way is to cultivate relationships with journalists and correct stories when you see that an error has been made. “The plaintiff’s bar certainly understands what we think of as the new media. FDR had fireside chats on the radio and said we have nothing to fear but fear itself. He was not afraid to embrace new media and neither should we,” said Levick.