There is a sea change happening in the way in which pension funds are re-examining fiduciary duty. I wrote about the changes on the IPO front here.http://thevaluealliance.com/Blog/?p=60

But there are larger changes happening that provide hope as well.

Over the course of 2012, it’s become evident that social policies are receiving increasing attention by boards and by investors who care about responsible investing.

Tragedies seem to be driving some of the change. Newtown represents the most recent in this scrutiny of corporate social issues but the momentum this year was already growing. Think Apple/Foxconn, Hershey — and more recently, the Wal-Mart supply chain disaster responsible for the deaths of 112 people trapped in a Bangledesh factory fire last month.

In the wake of the Newtown massacre, CalSTRS received some press for its Cerebus’ investments in a gun manufacturer.

Chief Investment Officer, Chris Ailman, through his press office wrote me that “CalSTRS has been screening investments through its ESG [environmental social governance]standards and the 21 Risk Factors since their passage in 2008. CalSTRS has also developed an ESG committee with representatives from all the asset classes. They vet all our investments for compliance with CalSTRS’ ESG standards.  Since 1978, CalSTRS has used a written policy, the Statement of Investment Responsibility (SIR), to navigate the complex landscape of ESG issues. The long history of this document is testimony to the national leadership of CalSTRS among pension funds in addressing ESG matters through a written policy.”

Many pension funds, like CalSTRS, are still in the race in clearly defining what the S means (as well as the E and G in some cases) and in establishing strong monitoring systems. But today there are many more pension funds working toward that goal than in the past.  (See also http://thevaluealliance.com/Blog/?p=56) Members of ICCR are among those leading the pack.

In 2010, Geoffrey Mazullo, Principal at Emerging Markets ESG, and I attempted to conduct research on pension fund monitoring of socially responsible investing for the Journal of Environmental Investing. We came away with the distinct impression that there was more emphasis and discipline needed.

Both boards and investors of other peoples’ money need to recognize the standards to which they should be holding companies.

The second pillar of the UN guidance on human rights addresses “corporate responsibility to respect human rights, which means that business enterprises should act with due diligence to avoid infringing on the rights of others and to address adverse impacts with which they are involved.”

How many boards and investors make a standard practice of holding companies accountable to addressing the adverse impacts with which they are involved? For example, layoffs in a town or pollution in a corner of it?  Or other adverse effects that they haven’t caused but are involved with?

More on what is being done is here:http://management.fortune.cnn.com/2012/12/19/newtown-business-leadership/?section=magazines_fortune

I welcome your comments at ebloxham@thevaluealliance.com

The Value Alliance and Corporate Governance Alliancehttp://www.thevaluealliance.com/
Copyright 2012 The Value Alliance Company. All rights reserved.

Board members should be combing through their books for insider trades — and re-examining their stock and option awards programs — after the Columbus Dispatch’s reports on the Big Lots case and the WSJ report on that case and four other companies where executives are under investigation for insider trading.  The WSJ report that at least 4,185 executives may have engaged in suspicious trades since 2004 should be giving board members and shareholders pause.

The use and spread of insider information damages our capital markets - and hurts the reputations of firms that do not comply with rules to keep our markets fair. Morgan Stanley paid $5 million for the part they played in providing information to favored analysts in the Facebook IPO. Netflix has also come under scrutiny for potential leaking of material information to a select group.

Regulation FD (fair disclosure) has been important to our capital markets and was designed to stop insider trading in its tracks so that there is a (more) level playing field for all investors. It’s important that companies comply.

Please read the article here.  (I welcome your comments atebloxham@thevaluealliance.com)

http://management.fortune.cnn.com/2012/12/17/why-netflix-got-into-hot-water/

The Value Alliance and Corporate Governance Alliancehttp://www.thevaluealliance.com/
Copyright 2012 The Value Alliance Company. All rights reserved.

Over a dozen large banks have been implicated in the Libor scandal. And the harm created by the manipulations has impacted communities across the US in the billions of dollars.

Boards at the companies involved in Libor manipulation have already paid out bonuses based on inflated earnings. Will these bonuses be clawed back?

At the same time, there are those who continue to advocate the use of bonds or interest rate swaps as a way to pay bankers. It doesn’t make sense.  The prices of those instruments can be altered by manipulating interest rates. Should we provide additional incentive for manipulations given the Libor mess?

Clearly, large banks are not fully disclosing the risks in their compensation schemes.

It’s also difficult to see how paying for fraud and harm comports with reasonable business judgment.

Here’s the article. 

http://management.fortune.cnn.com/2012/12/13/libor-and-banker-pay-an-unfortunate-marriage/

The Value Alliance and Corporate Governance Alliancehttp://www.thevaluealliance.com/
Copyright 2012 The Value Alliance Company. All rights reserved.

Some good things are happening.

Initiatives led by Anne Simpson (CalPERS) and Ann Yerger (Council of Institutional Investors) are blazing a path to address stocks that should not be in investment management portfolios - and that as a fiduciary, investment managers should not purchase with other people’s money.

The first stop on this journey is addressing IPOs.

Some issuers too are recognizing that a race to the bottom governance-wise will not serve them.

This article represents an update on these initiatives and the current landscape. I welcome your thoughts: ebloxham@thevaluealliance.com

http://management.fortune.cnn.com/2012/12/06/2013-a-year-of-investor-class-warfare/

The Value Alliance and Corporate Governance Alliancehttp://www.thevaluealliance.com/
Copyright 2012 The Value Alliance Company. All rights reserved.

Who heads the Treasury and SEC going forward will matter. The decisions on “who” will impact not only our economy and the capital markets but also public perception of government’s value.

Here is an article with my criteria and some possible picks. I would welcome your thoughts at ebloxham@thevaluealliance.com

http://management.fortune.cnn.com/2012/12/04/treasury-sec-leadership-choices/

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Copyright 2012 The Value Alliance Company. All rights reserved.

Although most board members don’t suffer much personally if sued, no one wants the kind of publicity HP’s board is experiencing related to its Autonomy purchase. But now taxpayers are on the hook to sort this all out.

Here’s my recent article on red flags at HP. It provides a short roadmap for boards and investors that don’t want to burn through cash. And provides the inside scoop, for those who don’t know it, into phraseology that means more than one might suspect.

http://management.fortune.cnn.com/2012/11/30/hp-meg-whitman-autonomy-2/

Clearly, long term holders would benefit from some transparency into the company’s process as part of signing off on deals.

In due diligence, smart boards don’t rely just on multiple auditors or investment bankers. They use internal resources or hire outside parties to look behind the numbers and determine what’s really going on.

One CFO who recently went through an acquisition expressed it as “connecting the numbers to the business,” explaining their use of outsiders to help them get an understanding of what was really happening with the numbers, in order to arrive at a fair valuation. In contrast, the investment banks they hired just took the numbers “as is”. As a result, their valuation analyses didn’t provide much value. (Not to mention the bias related to the lack of independence/inherent conflicts of interest.) And although they hired auditors as well, they only hired them to do what they do best. They did not use them to analyse what was going on behind the surface to arrive at a solid valuation.

Certainly outside reports from analysts, short sellers and the press — and information on the web should be de rigueur reading material for the board of any company seeking to acquire another firm.

The Value Alliance and Corporate Governance Alliancehttp://www.thevaluealliance.com/
Copyright 2012 The Value Alliance Company. All rights reserved.

Is looking behind the numbers a lost art? M&A transactions might be more accretive if the reviews were more rigorous. So too, it’s easy to accept earnings as is when paying CEOs. But boards need to look beyond that. We need incentives that work to increase the size of the pie and make our country more prosperous.

Here’s an article on the fiscal cliff based on a recent Institute for Policy Studies report. Should CEOs be paid bonuses for changes in the tax code?

http://management.fortune.cnn.com/2012/11/26/fiscal-cliff-ceo-pay/

If you have comments on this blog post email me directly at ebloxham@thevaluealliance.com

 

The Value Alliance and Corporate Governance Alliancehttp://www.thevaluealliance.com/
Copyright 2012 The Value Alliance Company. All rights reserved.

ESG stands for Environmental, Social, Governance. It’s a catchy way in three letters to sum up some of the issues that concern responsible owners and overseers (i.e. board members).

Today, the number of long term investors that care about all three letters (ESG) is growing. The U.N. Principles for Responsible Investment outline some of the ways long term investors use ESG. http://www.unpri.org/principles/  Today, the signatories to the principles represent nearly 1000 asset owners and investment managers across the globe.  See the list here. http://www.unpri.org/signatories/

(1) From time to time, I like to take the temperature of board members on these topics.  My latest article suggests that while many board members today are savvy on environmental concerns - and more aware on governance, directors’ awareness around social concerns is highly variable. The lack of awareness on S (as it does on E and G) pushes the locus of ethical leadership outside the organization.

The article posted on Friday is here.http://management.fortune.cnn.com/2012/11/16/hershey-child-labor-suit/

(2) On the governance front, special deals between management and companies should be avoided (think Enron and Chesapeake) and if undertaken, deserve full transparency. This article discusses the lack of disclosure of such a deal at Citi. http://management.fortune.cnn.com/2012/10/29/citigroup-pandit/

(3) Bloomberg news last week had a story on Morgan Stanley hiring a Goldman trader accused in a US suit.  http://www.bloomberg.com/news/2012-11-09/morgan-stanley-hired-goldman-trader-accused-of-hiding-position.html

Vetting executives and key personnel is imperative.

This article discusses Goldman’s decision to promote to CFO a sales person who was involved in Timberwolf, passing up two women who by all accounts were well qualified for the job.  http://management.fortune.cnn.com/2012/09/25/goldman-sachs-cfo-board/

(4) Board effectiveness can, in part, be evaluated based on compensation practices. Here’s a link to a panel discussion at the Brookings last month discussing compensation governance. http://www.brookings.edu/events/2012/09/27-executive-compensation

If you have comments on this blog post, please ignore the comments are closed notice below and just email me directly at ebloxham@thevaluealliance.com

The Value Alliance and Corporate Governance Alliancehttp://www.thevaluealliance.com/
Copyright 2012 The Value Alliance Company. All rights reserved.

The JP Morgan trading issues reflected a lapse in governance. But beyond risk oversight, they also called into question the way in which top executives at the largest banks are paid. Here’s a link to my article on Fortune.com.

http://management.fortune.cnn.com/2012/06/14/j-p-morgans-debacle-its-time-to-talk-exec-pay/

 

I had the opportunity to design incentive programs using risk based measures in the mid-90s. Implemented properly, these kinds of pay programs can work very effectively to focus executives and managers on the right measures of success. I have written on this topic over the last 15 years, including further information on the regulatory requirements of the sound compensation guidance.  (Seehttp://www.thevaluealliance.com/publications.htm.)

Related to the New York Fed Staff report, the issues raised in the article today include issues on pay I have elaborated on in more detail in these recent articles.

http://management.fortune.cnn.com/2012/04/16/the-terrible-cost-the-u-s-pays-for-derivatives/

http://management.fortune.cnn.com/2012/01/30/ceo-pay-us-economy/

The implications for our economy are clear. The solutions may not come easily, but it is important that we work together to find them.

If you have comments on this blog post, please ignore the comments are closed notice below and just email me directly at ebloxham@thevaluealliance.com

The Value Alliance and Corporate Governance Alliancehttp://www.thevaluealliance.com/
Copyright 2012 The Value Alliance Company. All rights reserved.

If public company investors or other stakeholders wanted to find out the good, the bad and the ugly, would they have to go to one place to find the good – and other places to find the bad and the ugly? Is good news given prominence and bad news downplayed or even hidden? What are the impacts of corporate communications policies on corporate trust?

Part of what struck me in researching my recent article on Olympus published by Fortune.com was the openness with which Olympus is now providing information about the scandal, front and center on their global website’s home page.

That kind of openness, along with other actions Olympus has taken in recent months, builds trust.

Yet how many boards have fully considered how the company might best handle communications with stakeholders in a crisis and what mediums they’d use? It’s an important decision that can impact survival, one that is preferably not put off until the company is in the midst of crisis trying to juggle all the decisions requiring immediate attention.

And what about run-of-the-mill ups and downs? How to handle communications during a huge crisis like Olympus’ isn’t the only question directors need to be concerned with. What is the company’s policy more generally on where, when and how it reveals good news versus bad or ugly news? Every company has hiccups. How does the company use its communications to build trust?

HP has been a company that has seen more than its share of governance woes and faltering trust (which I discussed most recently in this article published by Fortune.com). And taking a look at how HP has handled boardroom turnover as just one example provides food for thought.

This time last year, Ray Lane, HP’s current executive chair, directed the process that resulted in the removal of four directors and the addition of five others. HP issued apress release to mark the event. The changing of the guard caused quite a hullabaloo and ISS, a proxy advisory firm, objected to the process which did not follow HP’s disclosed procedures for independent nominations.

Last June, the board announced with a press release, that a company executive, Ann Livermore, would become its newest member. Presumably to calm investors as well as to garner his expertise, shareholder activist Ralph Whitworth was appointed to HP’s board in November and HP again issued a press release to explain the appointment.

But in September, following approval of a controversial HP strategy and just two weeks before Whitman’s appointment as CEO, Dominique Senequier, one of the January 2011 appointees, notified the board she would not stand for election for a second year. In this case, HP did not an issue a press release to explain her decision, instead burying the announcement in an SEC filing.

Just last month prior to the filing of the annual proxy, two directors decided to join Senequier and not stand for re-election. Those directors included Sari Baldauf whonotified the board on January 18 and Larry Babbio who did so less than one week later according to SEC filings. The company issued no press releases to explain the departures.

Several years before she took the top spot at the SEC, Mary Schapiro and I discussed the importance of corporate transparency. The following is an excerpt from that conversation.

Schapiro: I think companies do well in the marketplace when they’re honest, and the analysts and the business community, Wall Street, know that they can rely on what that company is saying, either in its filings with the SEC, or in its comments to the analyst community, or in its press releases. And, so, for board members, I think it’s absolutely essential that companies have an ethos and a culture to be fulsome in their disclosure.

Bloxham: And to be forthcoming.

Schapiro: Absolutely.

Bloxham: Good news and bad news.

Schapiro: Good news and bad news. If it’s only good news, when the bad news comes, it will be reflected very rapidly in your stock pricing and people will be skeptical of what comes out in the future. So, it’s absolutely critical that companies be as forthright with the bad news as they are with the good news.

Bloxham: Well, and I guess that goes also to the relationship between the board and management, too. That the board welcomes bad news in hearing it earlier rather than later.

Schapiro: You might not like what you’re hearing, but you absolutely want to hear it, there’s no question about it. Nothing more important, frankly, as a director, in having confidence in management, in knowing that they will tell you everything that’s going on, whether it’s good or bad.

Bloxham: Right. And then for the board to react appropriately, and recognize that things won’t always go well.

Schapiro: That’s right. Nothing goes well all the time. We’re only human. Companies make mistakes, individuals make mistakes. The real crime, in my view, is covering it up or not being honest about it.

Bloxham: Right. And I think, you know, that goes to transparency in the capital markets, too, because the more that companies are forthcoming with the good and the bad, the more investors will understand that’s part of natural cycles that businesses go through.

Schapiro: That’s exactly right. And if we’ve learned anything in the last five years of corporate scandals, it’s that the markets are very unforgiving if you’ve been dishonest about your financial results or anything else that’s going on in the corporation.

Recent cases and the impacts of poor communication invite us to explore a number of questions that deserve thoughtful answers: How do we as board members prefer to find out the bad and the ugly – by having to dig for answers or by having management let us know about problems early on? How would shareholders prefer to learn about problems? What are the current approaches to communications at our company? How do we want important board and company communications handled? And how can we use our communications processes to build trust?

If you have comments, please email them to ebloxham@thevaluealliance.com

The Value Alliance and Corporate Governance Alliance www.thevaluealliance.com 
Eleanor Bloxham www.eleanorbloxham.com
Copyright 2012 The Value Alliance Company. All rights reserved.

It is time, as a nation of business leaders, to roll up our sleeves and get to work on the very real economic problems the U.S. is facing – to finally move the needle on the economy, wages for our workers and jobs for the un- and under-employed.

We need to address our issues as a nation of business leaders and stop what has been termed “economic development”, a zero sum game of regions pulling jobs from each other with expensive, unproductive tax incentives, instead of working to maximize the U.S. economy as a whole.

As a nation of business leaders, we need an approach to our problems that involves real expertise, where success can be measured, cross-fertilized and replicated from one location to another.  And we need an approach that is agile, productive and cost effective. In short, we need a solution that makes sense.

A new plan, right in front of us, will roll out soon. An “enterprise development and market competitiveness project” is being launched with specific goals in mind.

“The project is designed to raise incomes and employment…. Focusing on the role of small and medium-sized enterprises … the [project] will facilitate the development of competitive enterprises … by stimulating innovation, enhancing workforce skills, accelerating new enterprise formation, improving access to finance, and addressing shortcomings in the business environment. The [project] will provide technical assistance, training, and grants to … [expand] sales in new and existing markets. The [project manager] and [the U.S. government] will mobilize additional resources from other sources to accelerate growth.”

The manager for this project has been chosen. And work will begin soon.
In Armenia.

Armenia (in rough figures) has a population one-hundredth the size of the U.S. (3.2 million people versus approximately 311 million here). The workforce is roughly 7.1% unemployed versus our July figure of 9.1%.

As all experienced leaders know, one way to solve big problems is to break them down into smaller ones. Another way to solve problems is to copy concepts that work in one arena and apply them, with some adjustments, to other situations.
If we can define a project like this for Armenia with a population one hundredth the size of ours, why not define 100 regional projects of this type for the U.S.?

Of course, to move on such an undertaking requires agility, expertise, funding and a minimum of bureaucracy. The projected cost for those running the project in Armenia is $17 million. The U.S. would need 100 Armenia-type projects; $17 million times 100 is $1.7 billion.

As a benchmark, similar projects have been done in the U.S. for $10 - $15 million in the past. One such example is the Oklahoma City miracle which noted economic development expert Ed Morrison, now Economic Policy Advisor at the Purdue Center for Regional Development, spearheaded with the involvement of business leadership — in particular, Charles Van Rysselberge, who headed the Oklahoma City Chamber at that time.

Where could we get $1.7 billion?

Just as Van Rysselberge did in Oklahoma City, the initial cash could come from business leaders. If CEOs of the Fortune 500 each pledged $1 million per year over the next five years, that would amount to $2.5 billion , more than enough to take on the task. Then, any infrastructure spending could come, just as it did by the efforts of Van Rysselberge in Oklahoma City, from passing local sales taxes to fund those programs. (If you think sales taxes can’t be raised for the right efforts, think again. Van Rysselberge, who moved to Charleston to head up the Chamber there, says that Charleston just this last November passed a one cent sales tax to build new schools and create jobs there.)

Before Oklahoma City, Van Rysselberge had used Morrison to help turn around Shreveport, La, when he was CEO of the Chamber there, and the plan Morrison built was “recognized as the most creative economic development plan in the U.S., for which Morrison won a national award” says Van Rysselberge.

Following his experience at Oklahoma City, Morrison, a Yale graduate and former strategy consultant for Telesis, a spinoff from the Boston Consulting Group, sat down to figure out what had made Oklahoma City and his other successes possible.

He recognized that there was a methodology and, if he could teach it to others, his work could be replicated. (His approach is called “Strategic Doing”.) Strategic Doing is a “lean and agile approach to strategy development”, Morrison says. The process is “open source” and Morrison has established a certification program in “strategic doing” at Purdue University. The idea is to have a way to guide complex adaptive systems, like open networks of people, to take action along the lines of the rules that guide software development in open source environments.

Morrison recognizes that what makes real progress possible in the knowledge economy is not hierarchies nor specific institutions. What makes it possible are networks of passionate individuals supported by passionate leaders. “In a knowledge based economy, networks are the curators of wealth, not hierarchal systems,” he says. “We need collaborative investments, horizontal networks. Entrepreneurs get it,” he says. “Strategic doing” helps these collaborations of individuals “quickly move to co-create value and measurable outcomes” he says.

Strategic doing has now been adopted by an entire network of universities interested in economic development. The initial brainchild for meetings between the universities came from Tim Franklin, director of the Office of Public Partnerships and Engagement at Pennsylvania State University and his wife Nancy, director of Outreach sustainability initiatives and assistant director of Penn State Institutes of Energy and the Environment (PSIEE). They set out to create a national model and make it replicable. Tim Franklin, who is passionate about regional economic development and whose own work in Virginia has won recognition, worked with Morrison to “not just focus on policy” but build a network of universities focused on economic development called TRE Networks, “a system with capacities”, Franklin says. “Now the network provides a neutral space where collaboration can occur and a set of resources for anyone wishing to tap into it”, Morrison says. “The Presidents of the Universities participating have been key. They are the passionate leaders supporting these efforts.”

Several weeks ago a solar summit was held in the football stadium at Arizona State University using the strategic doing approach under the leadership of Todd Hardy, Arizona State’s Associate VP of Economic Affairs in the Office of Knowledge Enterprise Development. “Using the approach, facilitated by Morrison, a group of 120 people met and 40 have signed on to help move forward an agenda to develop Arizona’s leadership and expand its business opportunities in solar energy development”, Hardy says. Hardy was impressed that so much could be accomplished in such a short time. It provided Morrison “a reaffirmation of his approach” Hardy says. “We made a great deal of progress in just a day and a half”.

While the capability exists, funding remains an issue. And that’s where business leaders need to step up, as they did in Oklahoma City.

In 1927, the Shreveport Chamber of Commerce set out a plan for renavigation of the Red River. They held firm to that goal. 68 years later, persistence paid off and it was accomplished, Van Ryssellberge says.

Holding fast and being nimble. As a nation of business leaders, we need both to confidently meet our future and contribute to our future prosperity. Some university leaders have stepped forward. Where will the next crop of Van Rysselberges, from the business community, come from to support these important efforts?

Another version of this article is published here.http://management.fortune.cnn.com/2011/08/23/what-would-real-economic-stimulus-look-like/

The Value Alliance and Corporate Governance Alliance www.thevaluealliance.com

Eleanor Bloxham www.eleanorbloxham.com

Copyright 2010 The Value Alliance Company. All rights reserved.

Privacy issues. Directors need to understand the privacy concerns of consumers and potential long term hits to reputation. How is management weighing the risks of aggressive short term access to consumer information?
Wired (Ryan Singel): Researchers Expose Cunning Online Tracking Service That Can’t Be Dodged
“Researchers at U.C. Berkeley have discovered that some of the net’s most popular sites are using a tracking service that can’t be evaded — even when users block cookies, turn off storage in Flash, or use browsers’ “incognito” functions.”
http://www.wired.com/epicenter/2011/07/undeletable-cookie/

The economy.
MarketWatch (Steve Goldstein): ISM manufacturing gauge falls to two-year low
“U.S. manufacturing activity barely grew in July, according to a key index released Monday in a demonstration of an economy struggling to expand.”
http://www.marketwatch.com/story/ism-manufacturing-gauge-falls-to-two-year-low-2011-08-01?link=MW_latest_news

The economics of directorship. At the largest companies, directors get paid over $1,000 per hour.
WSJ (Joann Lublin): Directors see Uptick in Compensation
http://online.wsj.com/article/SB10001424053111903635604576476514268460994.html?mod=googlenews_wsj

Steep decline in the market today. Are market prices indicative of CEO value creation?  (No.)

The Value Alliance and Corporate Governance Alliance www.thevaluealliance.com
 
 Eleanor Bloxham www.eleanorbloxham.com
 
 Copyright 2010 The Value Alliance Company. All rights reserved.

Time to eliminate stock based compensation?
FT (Diane Coyle): A couple of remedies for pay excess
 ”I would … like to see investors call time on share incentive schemes altogether.”http://www.ft.com/intl/cms/s/0/18c572e6-b973-11e0-89ee-00144feabdc0.html#axzz1TV6Z7nO5

NYT (Floyd Norris): Usual Growth Leaders Absent From Recovery
“WHY has the job picture been so bleak in the current recovery? A large part of the problem can be traced to unusual weakness in two categories: construction jobs and government jobs.”

NYT (Paul Krugman): The Centrist Cop-Out
“I joked long ago that if one party declared that the earth was flat, the headlines would read ‘Views Differ on Shape of Planet.’”
http://www.nytimes.com/2011/07/29/opinion/krugman-the-centrist-cop-out.html?src=ISMR_AP_LO_MST_FB

Krugman’s commentary is a commentary on the practice of journalism. Of course, what should happen is for the reporter, whenever possible, to go the extra step — get a picture of the earth taken from above the earth and use it in the article too or put it in front of the leaders of the flat earth party and ask the flat earth party to explain why in the face of the picture they say the earth is flat.                Of course many reporters do this - analyze the statements of respondents not just take them down. This takes time and requires the reporter to eschew the short-sightedness and/or pressures of his/her “bosses” (i.e. whoever they are trying to please or follow).

Psych Today (Nassir Ghaemi): Where are the new ideas?
“One of my Harvard teachers …Leston Havens… used to say: ‘Be careful about institutions. Between your boss’s needs and your eagerness to please, you can create a prison stronger than Alcatraz.’”
http://www.psychologytoday.com/blog/mood-swings/201011/where-are-the-new-ideas

When the focus is on satisfing one institution or one person rather than a larger purpose and higher values, neither ethics nor true innovation will flourish.

The “Where are the new ideas?” article discusses the weaknesses in the current state of academic research.  So does Paul Smalera’s article which focuses on economists.

Reuters (Paul Smalera) Krugman says Thoma’s right, except when he’s wrong
“Thoma rightly argues that too many of their academic colleagues don’t risk engaging at all — they are the ones that need to be coaxed out into the conversation, to shed some light on the dark corners of the economy before some other solid-seeming sector (technology, anyone?) implodes and nearly sinks the ship, yet again.”
http://blogs.reuters.com/paulsmalera/2011/07/26/krugman-says-thomas-right-except-when-hes-wrong/

I was invited early last decade as the only non-academic and non-FDIC executive to an FDIC conference to speak on market signals that might provide warnings of a run up in default at banking institutions. In my speech, I offered/encouraged the pure academics to reach out to practioners (like me) to select their research topics and make them relevant. (After all, that was part of the reason I was invited to speak.) No one called.

Regarding techology - technology is one of the only sectors looking to create jobshttp://thevaluealliance.com/Blog/?p=47 which makes technology an even more important sector to watch.

Reuters (Felix Salmon): Chart of the day:Techs vs Industrials, Why Tech Stocks Deserve to be Cheaper than Industrials     “in an area where change is unlikely to massively disrupt your business, income streams are more predictable and therefore more valuable.”            http://blogs.reuters.com/felix-salmon/2011/07/22/chart-of-the-day-techs-vs-industrials/ http://blogs.reuters.com/felix-salmon/2011/07/25/why-tech-stocks-deserve-to-be-cheaper-than-industrials/

Besides the obvious difference in business models between industrials and tech companies, another explanation of lower P/Es at tech firms may be the governance at tech vs industrial firms. Good governance can act as a buffer and prevent issues spiraling out of control. The market places a premium on this stability. (The issue of governance which Buffett doesn’t mention is something he faced earlier this year.)http://management.fortune.cnn.com/tag/warren-buffett/ http://finance.yahoo.com/echarts?s=BRK-A+Interactive#chart1:symbol=brk-a;range=1y;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined

WSJ (Nassir Ghaemi):Depression in Command
“the sanest of CEOs may be just right during prosperous times, allowing the past to predict the future. But during a period of change, a different kind of leader—quirky, odd, even mentally ill—is more likely to see business opportunities that others cannot imagine.”                “As for Churchill, during his severely depressed years in the political wilderness, he saw the Nazi menace long before others did.”              “Depression … has been found to correlate with high degrees of empathy, a greater concern for how others think and feel.”
http://online.wsj.com/article/SB10001424053111904800304576474451102761640.html?mod=djemITP_h#articleTabs%3Dcomments

I highly recommend this novel in which Churchill (and the black dog of depression) are featured protoganists. Mr. Chartwell : a novel by Rebecca Hunt.http://www.amazon.com/Mr-Chartwell-Novel-Rebecca-Hunt/dp/140006940

 
The Value Alliance and Corporate Governance Alliance www.thevaluealliance.com
 
 Eleanor Bloxham www.eleanorbloxham.com
 
 Copyright 2010 The Value Alliance Company. All rights reserved.

Does  CEO compensation in the form of stock and stock options create alignment with company value creation? No.

Current case: The debt ceiling gymnastics.
As the stock market drops, is that reflective of less value creation by a particular CEO? (No.)
Should a CEO receive less income because the stock market is being held hostage by certain members of Congress? (No.)
Conclusion: CEO compensation in the form of stock and stock options does not create alignment with company value creation.

Does enforcement matter? Regarding highway speeds, it does, and one attorney says yes it does matter with companies too.
FT (Richard Waters): Google faces fresh fire over web reviews         “Without proper sanctions, ‘no big company would ever obey the laws, they would do whatever they could get away with until they were caught’, said” Gary Reback, a Silicon Valley lawyer. http://www.ft.com/intl/cms/s/2/561dcd98-b61f-11e0-8bed-00144feabdc0.html#axzz1TP7KiEVv

Just like they predicted in the Weekly Reader in elementary school, fewer work hours are needed today …but then it was just supposed to mean more leisure time not millions unemployed.
FT (John Gapper): America’s turbulent jobs flight           “US manufacturing has a good story to tell but that story is about technology and productivity rather than jobs for the millions of people out of work” http://www.ft.com/intl/cms/s/0/1d467a7c-b883-11e0-8206-0144feabdc0.html#axzz1TP7KiEVv

Civility in America 2011 (See link)http://www.webershandwick.com/resources/ws/flash/CivilityinAmerica2011.PDF
The economics of incivility.
The percentage of people who didn’t buy from a company because of incivility rose 13 percentage points over last year to 69%. The percentage who changed their opinion about a company due to incivility rose 14% (also to 69%). 1 in 5 employees have quit a company due to incivility in the workplace. Company leadership and employees themselves are primarily to blame for incivility according to those surveyed.

The Value Alliance and Corporate Governance Alliance www.thevaluealliance.com
 
 Eleanor Bloxham www.eleanorbloxham.com
 
 Copyright 2010 The Value Alliance Company. All rights reserved.

On the debt ceiling crisis: Don’t we have enough crises to deal with without manufacturing one?

Reading (July 27):
NYT (Steven Davidoff): Proxy Access in Limbo after Court Rules Against It        “How do you quantify the costs and benefits of democracy?”  http://dealbook.nytimes.com/2011/07/27/proxy-access-in-limbo-after-court-rules-against-it/?nl=business&emc=dlbkpma21

WSJ (David Wessel): What’s Wrong With America’s Job Engine?          “Over the past 10 years..The labor force has grown by 10.1 million.But the number of private-sector jobs has fallen by nearly two million.”
http://online.wsj.com/article/SB10001424053111904772304576468820582615858.html?mod=ITP_marketplace_0

WSJ (Willa Plank): CEOs in Their Own Words: Don’t Plan on Much Hiring          ”Outside of rail and technology companies, almost none of them discussed long-term plans to significantly expand their work force.”http://online.wsj.com/article/SB10001424053111904772304576470484142293112.html

Writing (July Fortune):
U.S. jobs crisis: It’s time for corporate leaders to step up          “So the real question is what, without government assistance, can the overseers of U.S. corporations do to help solve the national demand for jobs?”http://management.fortune.cnn.com/2011/07/27/us-jobs-crisis-corporate-leadership/?section=magazines_fortune

Apple’s no-win CEO succession efforts          “Taking the work of the board offline means there is a working problem with the board online — signaling that a problem with process, power, or personalities at the board level needs to be resolved. It behooves any board in such circumstances to try to address the real source of the difficulty, rather than use alternate means to accomplish a goal.”
http://management.fortune.cnn.com/2011/07/25/apple%e2%80%99s-no-win-ceo-succession-efforts/

News Corp directors: Half way out the door?      ”Only time will tell whether support of the stock and support of the management go hand in hand. The company used to have “equity ownership requirements” for directors, according to the company’s 2008 proxy. Those requirements were not included in the company’s 2009 or 2010 proxy reports.”
http://management.fortune.cnn.com/2011/07/19/news-corp-directors-half-way-out-the-door/

What’s in store for Rupert Murdoch?         John M.”Nash thinks that CEOs should not sit on any board, including their own company’s board. The CEO can attend board meetings, but ’shouldn’t have a vote,’ Nash says.”
http://management.fortune.cnn.com/2011/07/19/what%e2%80%99s-in-store-for-rupert-murdoch/

Who can right the ship at News Corp?         The right tone at the top, good governance. None of those words sound so sweet - or powerful - as in the midst of crisis. In the helter and skelter of the every day, they can be brushed off as meaningless. In the midst of an engulfing crisis, though, it is no longer possible to simply repair them, to put lipstick on the pig  – they must be made again whole cloth.    http://management.fortune.cnn.com/2011/07/18/who-can-right-the-ship-at-news-corp/

How to get paid like a U.S. CEO          “The research shows that U.S. CEO pay is higher primarily because U.S. CEOs are awarded high levels of equity compensation, which includes pay in the form of company stock and stock options…When companies have U.S. institutional owners, boards are more likely to offer high levels of equity compensation (and, in turn, total compensation), the research shows.”
http://management.fortune.cnn.com/2011/07/05/how-to-get-paid-like-a-u-s-ceo/

Will Bank of America execs get to keep their bonuses?             “Implement bonus deferrals — so executives have to wait to be paid the full amount of their bonuses. Bonus deferrals help ensure that pay is made on an accurate performance assessment and that there aren’t any billion dollar ‘oops’ moments lurking in the background.”http://management.fortune.cnn.com/2011/07/01/will-bank-of-america-execs-get-to-keep-their-bonuses/

The Value Alliance and Corporate Governance Alliance www.thevaluealliance.com
 
Eleanor Bloxham www.eleanorbloxham.com
 
Copyright 2010 The Value Alliance Company. All rights reserved.

The comment period for a multi-agency proposal on compensation at financial institutions ended yesterday, leaving a gaping hole in the rules proposal. http://www.sec.gov/rules/proposed/2011/34-64140.pdf

Although a large portion of CEO compensation is paid in stock or options, the impact of incentive pay which is paid in equity, rather than cash, is entirely missing in the proposal.

But research by Professors Rüdiger Fahlenbrach and René M. Stulz in 2010, following the crisis, demonstrated why equity as its own component should not be ignored. While the knee jerk reaction is that if equity is held by executives, it will create alignment with shareholders, the research didn’t demonstrate any such benefits.

According to the research, “banks where CEOs had better incentives in terms of the dollar value of their stake [in the company] performed significantly worse than banks where CEOs had poorer incentives.” “The top … equity positions at the end of fiscal year 2006 [were] held by James Cayne (Bear Stearns, $1,062 million), Richard Fuld (Lehman Brothers, $911.5 million), Stan O’Neal (Merrill Lynch, $349 million)[and] Angelo Mozilo (Countrywide Financial, $320.9 million).”   All of those firms fared poorly in the crisis: sold in distress or in the case of Lehman, went bankrupt.http://www4.gsb.columbia.edu/rt/null?&exclusive=filemgr.download&file_id=7214553&rtcontentdisposition=filename%3DStultz_Bank%20CEO%20Incentives%20and%20the%20Credit%20Crisis%2020100508%20RMS.pdf

This finding indicates that the banks of CEOs with poorer equity ownership stakes did better — and that perhaps equity ownership exacerbates rather than ameliorates risk taking on the part of CEOs. Certainly, it is well recognized that high equity stakes would logically tend to dampen full negative disclosures.

A strong negative correlation between equity stakes and bank performance such as the research finds would seem to be a compensation mechanism that the regulators should be curious to understand in setting policy, given the apparent risk to bank performance and the huge consequences to stakeholders.

So why don’t the regulators examine the issue more closely or address it in their rules proposal?

This isn’t the first time I’ve written on the topic. Here’s what I wrote to the SEC on this in September 2009 http://www.sec.gov/comments/s7-13-09/s71309-107.pdf and to the Federal Reserve on this in November 2009http://www.federalreserve.gov/SECRS/2009/December/20091214/OP-1374/OP-1374_112709_25335_596100224676_1.pdf.

And it’s not as if equity is a miniscule part of CEO pay. A quick review of the summary compensation tables in the latest proxies shows that the current CEOs of JP Morgan, Bank of America, Citigroup and Wells Fargo, through the crisis (over the last three years) received $127 million in equity and option awards, on average 80% of their total pay. It would appear the 80/20 rule would clearly apply warranting a look at the impact of equity.

To address compensation at financial institutions, regulators need to re-examine all the reasons equity may create these perverse effects including the fact that payments in equity may exacerbate the tendency to overpay (because of the false notion that equity and options are funny money and not real cash to the corporation). It may also encourage managers to take risks, increase the volatility of returns, extract potential windfall benefits from timed sales, and manipulate stock prices. And equity pay may do all this while diluting other shareholders and diminishing accountability to them and distracting managers from the real business of managing the business.

If regulators examine the issue carefully and reflect the impact in the rules proposal, maybe history won’t repeat itself. If they don’t, there is no reason to expect we won’t see the same movie once more.

The Value Alliance and Corporate Governance Alliance www.thevaluealliance.com

Eleanor Bloxham www.eleanorbloxham.com

Copyright 2010 The Value Alliance Company. All rights reserved.

Why do regulation and public policy and legislative efforts too often fail to do their intended job?

For some time, I’ve argued that one reason is that the inputs are flawed and that there needs to be more inclusiveness in the decision making pool for legislation and regulatory initiatives.

In this article for Fortune I discussed the issue in a particular case related to control frameworks in the Sarbanes-Oxley implementation.http://money.cnn.com/2010/07/16/news/economy/COSO_SEC_flaws_Sarbox.fortune/

I have also written directly to the regulators at the FDIC and SEC about my concerns in this arena, encouraging them to draw in and expand the pool of resources they consult with — in order to combat regulatory capture and make better regulations.

Legislators need to do this also. When I attended a meeting at the Academy of Sciences a few years ago, a congresswomen told the green energy industry members in attendance there that if they hoped to succeed they would need to hire more lobbyists. Clearly, that is the antithesis of a free and open democracy.

In my letters to the regulators I have recommended making greater use of independent experts to supplement industry lobbying. I was pleased therefore to run across this recent working paper on regulatory capture by Professor Lawrence Baxter whcih advocates these ideas.  http://scholarship.law.duke.edu/faculty_scholarship/2355/

The issue of how laws and rules are made is not a small issue and it should be of interest to everyone. Let’s hope when Baxter’s work is published, it will make a difference in encouraging more inclusiveness and as a result better legislation and regulation for all.

The Value Alliance and Corporate Governance Alliance www.thevaluealliance.com

Eleanor Bloxham www.eleanorbloxham.com

Copyright 2010 The Value Alliance Company. All rights reserved.

 

Corporate Valuation is a topic of importance to not only shareholders but all stakeholders: managers, employees, creditors, communities, customers and suppliers, etc.

Jim McRitchie, publisher of corpgov.net, recently reviewed Alex Lajoux and Bob Monks’ new book on Corporate Valuation which should be in your library if valuation topics matter to you (and they should).

Please see Jim’s excellent post and review here: http://corpgov.net/?tag=valuation

The book Corporate Valuation provides a view on all the major methodologies of valuation. Here’s a link to Monks and Lajoux’s book if you don’t have it:http://www.amazon.com/Corporate-Valuation-Portfolio-Investment-Governance/dp/1576603172/ref=sr_1_1?ie=UTF8&s=books&qid=1304871947&sr=1-1

One of the surprises for Jim in the book was to find that I was credited with the development of one of the valuation methodologies featured in the book, a relatively new valuation methodology (which I wrote about and documented in the book Economic Value Management published in 2002http://www.amazon.com/exec/obidos/ASIN/0471354260/thevalueallia-20).

In case you are also unfamiliar with my work in this area, the valuation methodology I developed  takes into account the two-way value exchanges between the corporation and all its stakeholders as well as the valuation of the separate entities themselves, something I describe as the three-way mirror.

My methodology can be used by anyone and all stakeholders because unlike other approaches, it is much more comprehenisive in its thinking - and provides a toolset for a variety of stakeholders to assess the corporation from their own and multiple perspectives.

The methodology and approach go into enough detail that it can be especially useful for managers who already are close to the issues but need a framework to ensure they aren’t ignoring very important, relevant factors in the valuation process.

Recently I wrote for the inaugural edition of the Journal of Sustainable Finance (a peer reviewed journal) showing how the valuaton approach I had developed early in the last decade was essential for approaching corporate sustainability in a comprehensive and holistic way. http://www.ingentaconnect.com/content/earthscan/jsfi/2011/00000001/00000001/art00007;jsessionid=5d3nlijhk67dq.alice

Historically speaking, Alex Lajoux and Bob Monk’s reference to my work in their book on Corporate Valuation highlights the fact that my work pre-dates more recent shared value concepts and provides greater depth in laying out a specific valuation framework. Of course, I am very grateful  to Lajoux and Monks for recognizing my work in modeling the corporation and valuation in this way.

If you haven’t yet read it, I know the book Corporate Valuationhttp://www.amazon.com/Corporate-Valuation-Portfolio-Investment-Governance/dp/1576603172/ref=sr_1_1?ie=UTF8&s=books&qid=1304871947&sr=1-1 will surprise you as it did Jim in numerous ways - with information on valuation approaches, insights and methodologies with which you may not yet be familiar.

Certainly, it will get you to rethink what you may have thought you knew on this very important topic.

The Value Alliance and Corporate Governance Alliance www.thevaluealliance.com

Eleanor Bloxham www.eleanorbloxham.com

Copyright 2010 The Value Alliance Company. All rights reserved.

2 Responses to “Corporate Valuation”

1. on 08 May 2011 at 8:32 pm1.Alexandra R. Lajoux said …

    

   Dear Eleanor:
   It’s high time that you got the recognition you deserve from your pioneering work in corporate valuation. Bob Monks and I, along with Jim McRitchie, salute you!
   Sincerely,
   Alex
   Alexandra R. Lajoux
   PS: Thank you for mentioning our book.

    

2. on 06 Jul 2011 at 9:24 am2.Dave Guerra said …

    

   I just read your new Fortune Money article How to Get Paid Like a CEO and it is truly astonishing. Greed and Selfish Leadership is super-alive and well at the top of especially U.S. companies. We need servant leadership more than ever. I would have to concur with Alexandra - great job!

   Dave Guerra

 

Nominating and governance processes and independent board oversight: Do they really matter? If so, to whom?

In a Digest publication late last year, I wrote about an ISS policy survey that found that investors, in all markets, ranked board independence as the most important governance topic. http://www.thevaluealliance.com/PDF/CGADigest12012010.pdfhttp://www.issgovernance.com/files/ISS2010-2011_PolicySurveyResults.pdf

Of course, there are a number of ways independence is important. One is the independence of board members (including independent mindedness). Another is effective independent board oversight. Paralleling these are independent processes to nominate directors.

In a January 28 article for Fortune.com, I wrote that “HP’s 2010 proxy explains that the nominating and governance committee, chaired by Lucille Salhany, is in charge of identifying board openings and candidates. The proxy also explains that the committee hires a professional search firm to help it perform these tasks.” “When HP puts out its next proxy filing, shareholders ought to closely examine how the company describes its [director] succession process and the chair’s role,” I advised. With 20-20 hindsight, this advice was not as broad as it should have been: I should have recommended clearly examining the press reports leading up to the annual meeting as well.http://management.fortune.cnn.com/2011/01/28/hp%E2%80%99s-board-shakeup-apothekers-master-plan/ 

More fully, the disclosure in the 2010 proxy read: “The Nominating and Governance Committee uses a variety of methods for identifying and evaluating nominees for director. The Nominating and Governance Committee regularly assesses the appropriate size of the Board and whether any vacancies on the Board are expected due to retirement or otherwise. In the event that vacancies are anticipated, or otherwise arise, the Nominating and Governance Committee considers various potential candidates for director… HP engages a professional search firm on an ongoing basis to identify and assist the Nominating and Governance Committee in identifying, evaluating and conducting due diligence on potential director nominees. On September 17, 2009, the Board elected Mr. Andreessen as a director effective immediately. Mr. Andreessen was identified by the professional search firm.”http://www.sec.gov/Archives/edgar/data/47217/000104746910000369/a2196150zdef14a.htm#cc71401_director_nominees

Are Board Nominations’ Processes An “Internal Policy”? Contrary to many press reports that characterized the HP nominations process as an “internal policy”, (just search on google for: hp internal policy nominations), the nominations process of any public company is not just any old internal policy. It matters in understanding the governance of the firm and how that operates. Clearly SEC mandates spelling out the requirement to disclose board nominations processes elevate them beyond mere policies to be changed on a whim. And the fact that some investors view nominations processes as material should, as well, make characterization of a board’s nominations process as a mere “internal policy” untenable.

Best Practice on Disclosure? That said, although changes to the nominations process may be considered material by some investors, companies can fail to disclose changes to the nominations process until the next proxy, generally with no fear of SEC action or liability.  Is that the best practice? No. The nominations process is a required disclosure. If the process changes, then hopefully the company is proud of the changes and will want to share them with the public. Even if they aren’t particularly proud of the changes, if they want to maintain good relations with a variety of stakeholders, letting them know when the changes have been made, rather than waiting until the next proxy is filed, would be the order of the day.

A board’s nominations process involves decisions on three dimensions: who should go, who should stay (with or without additional coaching) and who should come on to the board. All three are important.

Regarding the process at HP, there have been a number of disclosures. In addition to the proxy, news reports have formed a patchwork of information on the subject. Here are some of the highlights in HP’s own words. ((As background, at HP, Leo Apotheker is the CEO of HP appointed effective November 1, 2010. Ray Lane is the Chair and a new board member effective November 1, 2010.)

In a January 20 interview on CNBC, Ray Lane, a newly appointed director and chair said that “we were fortunate enough to have four board members … we had four board members who voluntarily said, ‘I would step back because I’ve served this board a long time and I’m willing to step off if that’s what’s required’ and it allowed us to go out and look at three or four or five board members to compliment what we need going forward.” (Two of the four directors who resigned had served since 2007.) Regarding the new appointees, he said: “Most of these names were known to Leo [Apotheker, the CEO of HP] or myself.  We have a lot of experience with these individuals. I don’t think we are doing anything new here or surprising because we’ve known these individuals so long.”  He also said that the number one priority on the agenda for the board is “to support Leo, to support Leo in forming his leadership, his strategy for the company, so right now to support Leo.” 
http://video.cnbc.com/gallery/?video=1754895708  
Summary: Four Volunteered to leave, New members known to new CEO and Chair, Top Priority of Board: Support CEO 

Issues: Boards are there primarly to oversee rather than support CEO. (Both are important but oversight and independent judgment takes precedence.) Boards should strive for members independent of CEO, Chair and each other so that each may feel as free as possible to exercise independent judgment. 

According to a January 21 Wall Street Journal article, “Lane said that the four departing board members volunteered to leave and that he ‘couldn’t single out someone who should go.’”http://online.wsj.com/article/SB10001424052748704881304576094330799598962.html?KEYWORDS=h-p
Summary: Four Volunteered to Leave, new Chair couldn’t pick 

In a January 26 Business Week interview, Lane stated the directors “are not there to support Leo or me…They are there to take independent decisions.”http://www.businessweek.com/news/2011-01-26/hp-reshapes-board-with-directors-linked-to-apotheker.html 
Summary: Board not there to support CEO, there to take independent decisions

Good: Boards are there to take independent decisions. 

In its proxy, filed on February 1, HP’s description of its board nominations process waschanged from the prior year to include a role for the Chair and the use of an ad hoc committee which included the CEO. HP did not disclose the other members of the ad hoc committee in the proxy: “The Nominating and Governance Committee uses a variety of methods for identifying and evaluating nominees for director. The Nominating and Governance Committee, with the input of the Chairman, regularly assesses the appropriate size of the Board and whether any vacancies on the Board are expected due to retirement or otherwise. In the event that vacancies are anticipated, or otherwise arise, the Nominating and Governance Committee considers various potential candidates for director… HP engages a professional search firm on an ongoing basis to identify and assist the Nominating and Governance Committee in identifying, evaluating and conducting due diligence on potential director nominees. Two of the seven directors who joined the Board since the last annual meeting of stockholders, Mr. Apotheker and Mr. Lane, were identified by the professional search firm. The other five directors, Mr. Banerji, Mr. Reiner, Ms. Russo, Ms. Senequier and Ms. Whitman, were identified by an ad hoc committee of directors consisting of the Chief Executive Officer and three non-employee directors, which was formed in November 2010 to assist in the identification of new director candidates and to facilitate the process of evaluating those candidates as potential directors.”http://www.sec.gov/Archives/edgar/data/47217/000104746911000421/a2201545zdef14a.htm

Summary: Chair now involved in work of nominating and goverance committee although not a member. CEO on an adhoc committee that identified and evaluated candidates.

Issues: A properly constituted nominating and governance committee should perform its chartered work with as much independence as possible. If the committee needs to be reconstitued, the full board should reconsitute it properly with independent members assigned to the job.

In a February 13 report in the San Jose Mercury News, “Lane stressed that Apotheker is responsible for developing and executing HP’s business strategy”. Lane said “the board’s top priority will be supporting Apotheker”… “in developing a strategy for HP to compete around the world”.  “He described a close working relationship with Apotheker, whom he has known since Lane hired Apotheker as an Oracle consultant in the 1990s” and described “his own role as an adviser to the CEO”. Of the board changes, he said: “This was my job. I have to take full responsibility for leading this,” “although he stressed that directors agreed unanimously to bring on a majority of new members.”http://www.mercurynews.com/ci_17378116?IADID=Search-www.mercurynews.com-www.mercurynews.com

Summary: Board there to support CEO. Chair known the CEO for over 10 and up to 20 or more years. Chair sees self as adviser to CEO. Chair sees self as responsible for board changes.

Issues: Boards should be there primarily to oversee the CEO. Oversight takes precedence over support. A CEO and a Chair with close long standing ties create lack of independence and may cause an imbalance: the CEO may be more powerful with a close Chair ally enforcing his will on the board than a CEO without a separate Chair. The nominating and governance committee, not the Chair, should be responsible for board changes. Chair should be appointed to the nominating and governance committee if he is to have a share of the responsiblity for nominations.   

According to a March 10 Business Week article, “Apotheker was a member of an ad hoc committee, appointed by Lane, that recommended candidates who were later considered by the full board,” Lane said. “The new board members ‘aren’t buddies of Apotheker,’ … ‘I knew these people better than Leo.’”http://www.businessweek.com/news/2011-03-10/hp-ceo-apotheker-board-faulted-over-director-appointments.html
Summary: Chair appointed the ad hoc committee on which the CEO sat which identified and evaluated candidates to the board. Chair knew the candidates better than the CEO did.

Issues: New board member, the Chair, set up a committee to conduct some of the nominations decisions - including idenfication and evaluation of candidates - and put the CEO on that committee. Chair recommended people he personally knew (as opposed to other candidates who would not have ties to CEO and board — and potentially other candidates who might have served the board as well if not better but were not identified because they were not known to them). 

A report by the San Jose Mercury News on March 10 said that ISS had identified the members of the ad hoc committee and that ISS said the nominating committee had been involved: “According to an ISS report last week, HP told the advisory firm that the prospective new directors were identified by an ‘ad hoc’ committee consisting of Lane, Apotheker and longtime directors Larry Babbio and John Hammergren. HP said the candidates were then vetted by the formal nominating committee and approved by the full board.”  “Charging that the nominating committee failed to carry out its proper role, ISS advised HP shareholders to vote against three committee members [of the nominating and governance committee] who are seeking re-election to the board: Sari Baldauf, G. Kennedy Thompson and Babbio.” “In response, HP defended its governance practices and says the firm known as ISS, or Institutional Shareholder Services, misinterpreted the process that led to the selection of five new directors in January.”http://www.mercurynews.com/breaking-news/ci_17584666?nclick_check=1
Summary: The ad hoc committee was made up of the Chair, CEO and two long standing members. ISS did not recommend against the adhoc committee members. Instead ISS recommended against the members of the nominating and governance committee. 

The ISS advice did seem counterintuitive.

Issues: If the long standing members of the nominating committee, Baldauf, Thompson and Babbio were removed from the board as ISS recommended, wouldn’t that likely give CEO Apotheker and Chair Lane even more input into who sat on the board going forward? How would that correct the issues with the nominations process at HP? Instead, it would likely compound the issues in terms of a board with an even larger majority well known to the Chair and CEO.

On March 20, Lane told the Financial Times “that he alone had interviewed his fellow directors and decided who should be asked to leave.” “I was the only one that knew whether this particular board member could work together with the rest or dwell on the past.” “The board unanimously gave me the authority to do what I needed to do.” Regarding the new nominees, he said, “We got some usable names from [Leo], but we only ended up taking one to the committee.” http://www.ft.com/cms/s/2/8a70e850-5328-11e0-86e6-00144feab49a.html#ixzz1HFQ6Ip9m

Summary: Those who left were not volunteers - the Chair picked them out. The CEO only ended up with one of his new picks for the board.

Issues: How did the nominations process work in terms of who exited? Were those who left volunteers or did the Chair pick? 

HP’s Corporate Governance Guidelines effective March 2011, in the “role of the board” section do not mention supporting the CEO as part of the role of the board or supporting the CEO on strategy.  The guidelines do mention oversight and policy guidance. “The Board”…“oversees management”. “The Board also oversees HP’s strategic and business planning process,” the guidelines state. http://h30261.www3.hp.com/phoenix.zhtml?c=71087&p=irol-govguidelines
http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9ODczNDd8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1 Issue: What is the role of the board at HP primarily? To support - or to oversee? 

What did shareholders do with this hodge-podge of information? They voted in all members. According to the SEC filing Baldauf, Babbio and Thompson suffered the greatest no votes while Lane’s no votes were the second to the lowest. (Shareholders also voted No on say on pay.)http://www.sec.gov/Archives/edgar/data/47217/000004721711000007/form8-k_032811.htm     

Less than a week after the annual meeting, it was announced that one of the newly nominated directors, Meg Whitman, would be joining Ray Lane’s firm, Kleiner Perkins.http://postcards.blogs.fortune.cnn.com/2011/03/29/meg-whitman-to-join-kleiner-perkins/    

Issue: Why was the announcement made after the meeting? This even stronger relationship between a new nominee and the Chair would have been of interest to investors voting on board members.

It is now April and HP’s governance remains in the headlines with new issues being discussed. See  http://online.barrons.com/article/SB50001424052970203560404576228773519433708.htmland HP’s response here.http://online.barrons.com/article/SB50001424052970204261904576242891337382926.html?mod=googlenews_barrons Who on the board voted on a recent acquisition seems to be an open issue.                                                       

Lessons for other firms?  Maybe shareholders won’t read the press or the proxy carefully. Even so, why not go above and beyond?    

Independence and Nominations:  Take the independence of board members, the nominations process and of board oversight seriously. Discuss whether you feel comfortable having the process you use to nominate directors and perform the work of the board fully exposed. Once it passes the so called New York Times test, let shareholders know in plain, transparent English what the process is.                                   

Disclosure: Disclose as much as you can before you are engaged in the process and before the proxy is issued. If not known beforehand, disclose fully at the time the proxy is issued.  Don’t wait to disclose important information until after the annual meeting.

Chair: Although separation can be beneficial, independence is important as well.           Separation of the CEO and Chair positions is not the Holy Grail, especially if there are long standing ties between the two. Spell out the limits of the separate Chair’s position carefully and clearly. Do this before choosing the Chair. Consider the basis for choosing someone as Chair and whether it makes sense to choose a Chair who has not worked on the board before.

All Directors: Make sure all current and prospective members understand what the role of director is. This should be reflected in the Corporate Governance Guidelines of the board.                                                                                                                            

Why do all of the above even if shareholders don’t (seem to) care? Lack of trust in companies – and the capital markets – has a corrosive impact on the economy. Anything a board can do to enhance trust benefits everyone in the long run.
(Note: Italics have been added particularly on longer passages for emphasis, in the interest of clarity.)                                                                                                          
 

The Value Alliance and Corporate Governance Alliancewww.thevaluealliance.com Eleanor Bloxham www.eleanorbloxham.com
Copyright 2011 The Value Alliance Company. All rights reserved.