Directors Forum 2015 Opening Reception
Directors Forum 2015: Sunday
Tom Ridge
Thomas J. Ridge, CEO
Ridge Global, LLC
The Honorable Tom Ridge is the CEO of Ridge Global, which helps businesses and governments address risk management issues. He was the first Secretary of the U.S. Department of Homeland Security, another call to service for the former soldier, congressman and governor of Pennsylvania.
40B devices connected to the Internet by 2020. Flies do not visit an egg with no cracks but most companies and governments have plenty. The Darwinian struggle wasn’t about survival of the fittest, it was about adapting to change. Wants a safe harbor to be able to share information on attacks with government, while limiting liability. Reminded directors of the need for due diligence for cyber vulnerabilities in M&A.
Cybersecurity is a major permanent business risk. The sun will never set on that risk. Ridge noted SEC Guidance Concerning Cyber Security Incident Disclosure, issued in 2011, as well as President Obama’s Executive Order on Improving Critical Infrastructure Cybersecurity, issued in 2013. We need standards of care because there will be lots of litigation.
As if we weren’t already scared enough, he asked the audience to imagine signing a cybersecurity certification similar to that required under Sarbanes–Oxley Section 302 to verify internal procedures designed to ensure accurate financial disclosure are in place. I imagined directors and CEOs reaching for the antacid, or something stronger.
ISO standards are important. Here’s a page from DHS and we still had a whole panel on the topic coming up. Some advice from the FBI, FCC and some simplified advice from Ready.gov. “We have the watch; they have the time.” They aren’t going away. The way I see it is that it is always easier to destroy than to build. One of the big takeaways was to not just emphasize the perimeter. Some will get inside, so you need ways to safeguard movement inside your systems as well.
Directors Forum 2015: Monday
Plenary Session 1: Shareholder Hot Topics: A look at current, top-of-mind issues for shareholders.
Moderator: Anne Sheehan, director, corporate governance, California State Teachers’ Retirement System (CalSTRS)
Panelists: Bess Joffe, managing director, corporate governance, TIAA-CREF Financial Services
Michelle Edkins, managing director, global head of corporate governance & responsible investment, BlackRock
John Keenan, corporate governance analyst, American Federation of State, County & Municipal Employees (AFSCME)
James Allen, head, Capital Markets Policy, Americas, CFA Institute
Proxy access and diversity are big concerns. Quality of the board is critical; they are best placed to contribute to the success of the company over time. Increasing level of contact between investors and boards. Dialog should be kept private. Risk governance and cybersecurity… are boards playing catch up? Environmental and social impacts, understand risks and how managed.
Political spending and trade association involvement/payments. are reputational risks. What process oversees it? What gets disclosed gets managed. 100 or more proposals this year. 160 companies have begun to disclose. 2011 petition to the SEC from Bebchuk and others on the top has over a million favorable comments. Human rights risk assessments in supply chains is another issue. 10 are going to a vote this year. Proxy access, compensation, and political contributions are all hot.
Proxy access analysis by CFA. Event study around announcement of ruling and court decision provided evidence that access is not going to create disruption. Access provides accountability. Encourages engagement between shareowners and boards. Interest in report by SEC Commissioners.
Compensation – model CD&A template. Original 4 years ago being updated now. Examples from 35 companies. Listing of disclosure requirements. Survey of US members on political contributions. Needs to be able to be utilized by shareholders beyond the top 10-15. BR supportive 3/3. Has voted for 5% by mgt. Right in many countries. Board has clear sense, therefore doesn’t get used much. In emergency break glass. Needs mandate. Supportive of rule. Supportive of SEC final rule. 3/3 Put up both proposals. Broadridge can structure proxy so that shareowners can be forced to vote one or the other proposal.
CFA members believe political contributions and policies should be reported. Concerns about lack of turnover, need outside independent analysis and evaluation. Big proponents of diversity. Tipping point on discussion but not representation. Blunt instrument. Voting against Nom/Gov where hasn’t increased diversity. Developing talent. 30% club UK group where CEOs signing up their companies. War for talent. 80% of board nominees come through personal networks.
TIAA-Cref has survey process to decide priorities. Board quality and accountability to shareholders. Look at analyst recommendations.
Plenary Session 2: “Can We Ever Get to Consensus on Pay for Performance?”
Shareholders continue to be vocal about not getting clear pay for performance plans and directors want to have discretion to avoid homogenized plans—is there a middle ground?
Moderator: Dane E. Holmes, head of investor relations, Goldman, Sachs & Co.
Daniel M. Wetzel, managing director & office head, Pearl Meyer & Partners
Aeisha Mastagni, investment officer, corporate governance, California State Teachers’ Retirement System (CalSTRS)
Barbara E. Mathews, VP, associate general counsel, chief governance officer & corporate secretary, Edison International/Southern California Edison Company
Michael J. Berthelot, director, Fresh Del Monte Produce Company; CEO, Mission Manager, Inc.
Consensus on pay for performance. Metrics – what is pay – realized, realizable, LTI. ROIC vs TSR. If regulated company, ROIC driven by regulator. Companies are all different.
How does the board balance responsibility to stakeholders against the lure of significantly lower taxes and regulation in the global stage? Is the board obligated to maximize shareholder return/tax savings? Link to things to be done. Boards want to retain high performing employees. Key metrics for business strategies. Accomplish objectives. Understand strategy, including human capital strategy.
IRRCi report similar to EVA of 1990s, crushed under its own weight. How do your metrics add or sustain value. Compensation place need to tie to balance sheets. What assets does it take to generate those profits. Is time measurement too short. Longer term view needed especially at companies that require long-term planning. TSR came from institutional shareholders, not comp committee. Cycles are moving so much more rapidly. Uncertainty of regulatory and tax environment. Need stable tax and regulatory environment. CA increase top income tax rate 30%.
Growth and size do matter. Some variance. Turnaround situations? Hard to attract talent if based in IRRCi model. Need longer period of time in CD&A. Here’s what your peers and S&P 500 do. What companies get bold enough to consider new types of peer groups. Competitive marketplace for talent should be informative not a dictate. Does the pay really come down where there is underperformance.
Some level of accommodation of recruitment side but obviously you want to retain them. Vagaries of marketplace… could get a reset if I go to another company. If you have to pay a huge amount to bring someone in that messes up the culture… indication of lack of succession planning. Retention pay is a big red flag. Employee engagement metrics. Pay ratios should be those you would see on a team. Similar incentive plans throughout the organizations. Workplace satisfaction measures. Credibility of measures questioned. Does’t fit with long-term comp methods. How much detail. Realizable pay depends on when CEO cashes out. Reporters won’t do the work to figure out if CEO actually got the pay the papers reported and if they did, how much value did shareholders get. Want more recognition of realized pay. Forward looking criteria – balance sheet, customer satisfaction.
Severance pay, circuit breaker needed. Boards are handcuffing themselves. Upset about pay of failure. Should be weaned away from severance. Also points to weaknesses in succession planning. Analyst expectation should be driver of fundamental pay and timeframe. Need standardization for realizable pay then shareholders could see alignment better. Lifecycle and other factors need to be factored in. We’ll will never get to consensus. No single metric.
Plenary Session 3: “Should We Stay or Should We Go? At Play on the Global Stag
Kerrii Anderson, chair, Chiquita Brands; former president & CEO, Wendy’s International, Inc.
John Engler, president, Business Roundtable; former governor, Michigan, Inc.
Brandon Rees, deputy director, office of investment, AFL-CIO
Ginger Graham, director, Walgreen Co., Clovis Oncology; former president & CEO, Amylin Pharmaceuticals
Lure os significantly lower taxes elsewhere. Is board obligated to maximize tax-savings. How do we create the greatest value. Chiquita inverted to a company in Ireland. No tax benefit because of tax-loss carry forwards. Important that shareholders understand so engaged with merger. Ultimately sold to a Brazilian company. No longer competing with other states; now competing with other countries. Business judgement rules allow consideration of stakeholders. Statutory rate is higher than effective tax rate. Only 15% of international transactions involved inversions. AFL opposes movement to reduce shareholder rights. Should have some underlying business rationale. Look at adverse impacts on communities. Tax saving often short-term. Reputational risk. Who really benefits. Might have to pay capital gains… therefore wiping out tax benefits. Hedge funds might be primary beneficiaries.
Debate around inversions has changed things and the debate. Walgreens decided not to invert. Would have had to renegotiate deal. Boots alliance. Have to look at possibilities and discuss. Foreign companies buying small American companies and offer huge tax benefits. Repatriated profits – haw should they be invested (disputed). Doing a lot of business with the government deters inversions. Going to get sued either way. Discussed interstate competition. Access to talent important. We act on alerts ASAP. Share cyber risk plan with board long before attack… like disaster. Practice, practice, practice. Print it out with contact information with phone calls. Nation state reading our traffic about the breech. Key decisions as to when you will involve other stakeholders.
Audit committee and IT to work together. Incentivized (it is their job). Board must know IT can understand the risks AND mitigate it. Compliance with audits part of appraisals and audit compliance performance.
Lunch: Martin Lipton, founding partner, Wachtell, Lipton, Rosen & Katz
Short-termism and the shift to a shareholder-centric orientation. These have long been among Lipton’s major concerns. Directors should be free to exercise their own business judgment. Yet, as institutional share ownership has increased, governance gets outsourced to ISS, Glass Lewis and activist funds. ValueAct was cited as an example of a longer-term activist and Lipton quoted them accusing others of being “drive-by activists.”
Value Act focuses on executive compensation and long-term TSR. Boards do need to focus more on the financials and could use ValueAct’s playbook as their own to improve their review. Contrast with scorched earth activism focused on loading up company debt, asset divestiture, sale of assets, layoffs, cost-cuts, etc., increasing future vulnerability.
Lipton is prolific. Rather than reading my interpretation of his thoughts, go to the source and read his recent posts, including
The Threat to the Economy and Society from Activism and Short-Termism Updated.
Plenary Session 4: “Cybercrime Oversight: What is the Role of the Board?”
How tech savvy do CEOs and directors need to be? What should the board be asking of management?
Andrew B. Serwin, partner, Morrison & Foerster LLP, Global Privacy and Data Security Practice Group
Laban P. Jackson, director, JP Morgan Chase; chairman & CEO, Clear Creek Properties, Inc.
Stephen Gold, SVP & chief information officer, CVS Health
Joseph M. Demarest, Jr., assistant director, Cyber Division, Federal Bureau of Investigation
Info is a strategic asset. Data-centric. Data must be in parallel with systems. Stewardship of data. Protection of data. 54% highly sensitive to privacy concerns, 5% low concern. 1 concern is ID theft, brand is core issue. 1/2 attacks organized crime – others foreign states, hactivists. Small to medium easier targets. After financial data, identity, credit card, personal health information. Value of health recursion significant.
Human hacking. facilitate who is working on what technology allows direction of malware via email. Post links to Facebook attractive to employees. Pretending to be from call center of company., getting right-click on something that will download malware. Segmentation of network. Prevent lateral movement. Most investment has been in protecting the perimeter but also need focus on lateral movement inside. Huge reputation risks. Consider how you will communicate with regulators, customers in advance.
Rush now to immediately disclose. You lose control. FBI put in Jail. Company concerned with best risk profile, Proactively engage with federal go. 6 cyber centers, 56 field office. FBI trying to be more proactive Private Industry Notification (PAN). Intelligence indicators based on relationships around the world. Flash notification.
1st responders, FBI can issues subpoena. Where are you in the plan. Got to be transparent your you’ll get hurt in a big hurry. Inherent tension. Attorney General’s often treat you like the criminal. Denial of service attack, controlling your computer Have to pay a ransom to get into your computer. ransomware. MLAP, mutual legal(?) assistance process. Breach prevention guidelines by SANS. Proactively engage 3rd parties to text and engage. Penetration testing in a controlled fashion. FTC can come in and fine company if they don’t come up to speed. Technology should call CEO and chair of audit committee right away.
Sony breach was intended to burn the house down. Think through what is in your e-mails. Manage the risk of what goes into writing.
Plenary Session 5: “The Sweeping Power of Proxy Advisors: What’s a Small-Mid Cap Company to Do?”
The power of proxy advisors to influence outcomes is huge; many companies acquiesce, or go along to get along. What is the best course of action?
Abe Friedman, managing partner, CamberView Partners; former head of corporate governance, BlackRock & Barclays
Daniel Burch, chairman, CEO & co-founder, MacKenzie Partners, Inc.
Donna Jennings, senior VP, Human Resources, DeVry Education Group
Karin Eastham, director, Illumina, Inc.; Veracyte; Geron Corporation; MorphoSys AG
Adam J. Epstein, founding principal, Third Creek Advisors, LLC; former lead director, OCZ Technology Group, Inc.
Sweeping for mediam and small companies. Hard when you get an against recommendation. Big funds don’t have the time to engage with smaller companies. Hard to get recommendation changed, one made. Blackrock, Vanguard can sometimes be swayed. One size fits all? No. 70% of listed companies have less than $1B, 47% below $300M. Only small percent of small companies even have a quick score.
Need to look at disclosures through the lens of proxy advisors. Go in with humility but firm. Offered to meet with directors. Get your team together just like the big guys. War stories. No shortcuts for company savings battle. Difficult to get face-to-face. If approach in right way you can get the attention of ISS and GL. How big we are for you, even though small for us… that can make a difference for large institutional investors. Cost was distracting management. Sometimes management has outsourced too much to outside council… especially of dealing with now experience.
One of the directors is meeting with an SEC Commissioner or staffer about possible undue influence of proxy advisors. Discussed ISS conflict of interest. Some think ISS/GL should provide copy of reports, esp when negative.
Dinner & Keynote Speaker:
Jeffrey C. Smith, managing member, CEO & chief investment officer, Starboard Value LP. Noted that Starboard’s rate of return has been 27.8% v average of 9% for S&P 500 over the same time-period. Only works at companies where he believes shareholders are disgruntled. Discussed various cases, such as Darden. When they went in, Darden’s EBITA margin was significantly worse than peers when adjusting for real estate ownership and factoring in a rent subsidy. He wanted to get them more focused on a better return for capital than on growth.
Unusual that an activist fund actually opposed a spin-off in this situation, Red Lobster. The reason was that Ted Lobster was essentially sold for free, when the value of real estate was factored in. Starboard ended up getting a clean slate of directors. That should make it easier to work with the management team. He left us with some tips on actions likely to attract activist funds such as Starboard, including:
failure to directly communicate with largest shareholders
failure to effectively align management incentives with the best interest of shareholders
failure to separate chair and CEO positions (control of agenda critical)
lack of management accountability
lack of independent board analysis
boards that have become too comfortable relying on 1 or 2 thought leaders, with the rest falling in line
board-work is considered an honor, not a job and directors don’t ask other directors to leave
Smith stressed the importance of executive sessions, not just at the end of each meeting but also at the beginning and in the middle so the board can se its own agenda and priorities.
Directors Forum 2015: Tuesday
Patricia Russo, lead director, Hewlett-Packard; director, GM, Merck, Alcoa Inc., KKR Management interviewed by Ralph V. Whitworth, founder, principal, and Investment Committee member of Relational Investors LLC; former chairman, Hewlett-Packard
Pat Russo was political science major. Initially hired by IBM. I’ve Been Moved. So, she moved to AT&T for personal and professional reasons. Stories about joining boards, including GM and how being revamped, getting the right people in place. Technology, products, human dimension. Special projects, mentoring people. Influenced by being in business when in really troubled times. Turnarounds. Helped shape what she probes. Going to be chair of HP Enterprises. Caring for and understanding how people will react/be impacted.
Split of HP; both will retain HP in name… employees keep some of their identity. Alcoa being transformed. Shifting into higher value light metals. Heads compensation committee. Focused on cash for a couple of years. (ISS didn’t like just one measure.) That provided basis for turnaround. ISS has helped give some comp com. backbone. Risk is that each company has different circumstances.
Overboarding. She’s on five boards. Bright line, no judgement applied. Likes complex problems. Real believer in the significance of the human dynamic around the board… level of trust, constructive debate. Shareholder engagement… attitudes have changed over time. Proactive engagement can be critical. Mostly listened. Talked about changes in compensation alignment. Making deposits in the credibility bank. Mary beings incredible connection to people at GM. Long-term leader.
Tell us what you think really. Chair one on one interviews to find directors not worth keeping. CEO succession planning. What they are producing as well as how leading.
Plenary Session 6: “Why Do Boards Do What They Do? How Good Directors Make Bad Decisions?”
Experts will address the human dynamics and “group think” at play in the board room.
Frank Partnoy, George E. Barrett, professor of law and director of finance, University of San Diego Center for Corporate and Securities Law
Bonnie Hill, director, YUM! Brands; RAND Corp., former director, The Home Depot; AK Steel Holding Corp.; FINRA; PCAOB
Patricia Russo, lead director, HP; director, GM, Merck, Alcoa Inc., KKR Management
David Batchelder, co-founder, principal, Relational Investors LLC; director, Intuit, Inc.
Dana Carney, Ph.D, professor, Haas School of Business University of California, Berkeley
How good directors make bad decisions. Conversational turn-taking, so all can contribute. Management gives board information it wants to get the decisions it wants. Have to have the knowledge base, transparency, mutual respect. Mindset of chair or CEO has to believe board is value added and wants to maximize transparent input. Time to digest, reflect, react and recycle. People need the time to get in touch with their own thoughts. Going around and asking where are you on this?
Capital budget, cones on one page and needs approved today. What returns on capital being spent? Makes it difficult to hold them accountable. Keep paring it down but prior board members don’t recognize that incrementally the discussion has narrowed to the point that questions and debate and choked off.
High trust teams. Facilitate. Women and men from collectivist cultures more likely to lead to that interaction. Having a dissenter (even if role play) will help. Ideally organic conflict. Personal conflict low; task-based a bit more. General consensus but losers aren’t upset. Appoint if not happening. Nodding, eye contact. Process of aligning. What’s missing that will better informed getting to alignment. Forcing people to take a stand.
Unconscious linking. Moon, ocean. Name laundry detergent – Tide. How our mind is shaped by our environment. We sometimes make decisions under time pressure that are not out own. Maybe we become aligned in a bad way? Groupthink can be countered with diversity (backgrounds, incentives, skills, interest) Function of tone by CEO or chair re openly expressing what is on their mind. If wrong CEO, most of the significant interactions will be in executive sessions.
Showed a little film clip to show mind bias around cognitive load. Even the smartest can’t see everything. Inattentional blindness. Why eyewitness testimony is problematic. Go with paths of least resistance. Preserve through shortcuts. Mental shortcuts that we take. Very seldom do boards not have no time to make a decision. Wait. The power of waiting. Explore the optimality of delay. Don’t snap react. What is the optional of time? 21 changes in video
Market values the value of the company every day. Maximize future cash-flow stream. Nature of the industries are long-term. Pharma trials take years. Vehicles prototypes built years in advance. Cost curve over several years. Boards need to understand timing, story must get out to the market. NYTimes a week ago. Conversational turn taking., diversity, reading emotional reactions.
Independent mech in company to guard against falling in love with deal, due diligence, systemic look at track record and execution. In a crisis everyone gets accelerated. Create a little bit of time. What is worse that can happen and back into decision. Experts under pressure are different, don’t have same bias.
Plenary Session 7: “Corporate Governance on Trial: Just the Facts Ma’am— What’s the ROI?”
With advocates on opposing sides, the value of changes in corporate governance will be on trial. Each side will make their case (or not) and attendees will vote on whether the changes have been worthwhile.
James Hale, former EVP, general counsel & corporate secretary, Target Corporation; director, The Tennant Company
Margaret M. Foran, chief governance officer, VP & corporate secretary, Prudential Financial Inc.
Steven A. Rosenblum, partner, Wachtell Lipton Rosen & Katz
Atiba Adams, vice president, corporate secretary & chief governance counsel, Pfizer
Carol S. Eicher, president & CEO, Innocor; director, The Tennant Company
Peggy went over several changes in governance, such as transparency. 15 years ago Corp secretaries 89% had observed directors asleep 85%, 2 directors asleep 79%. That has ended. Not so much of a shift in power but better awareness of responsibilities.
Policies and checklists get in the way. Has been a shift in power from boards to shareholders. Governance policies have given power to short-term activists. Sacrifice long-term viability to short-term immediate results. Pay out cash, but introduces risk for future. IR staff or CFO are best people to communicate regularly with shareholders. Goes to quarterly presentations/calls to hear what shareholder questions are.
Soliciting feedback is good. Believe in board centric model but also of value in connecting with shareholders. Any opportunity to have that engagement should be supported. Early warning systems. Any downsides? Investors respectful of time constraints. 12% have poison pills in place compared to almost 50% at their height. Should be put out for shareholder vote, if not in advance, then atlas ratified. Same for use of classified boards. 7% today.
Monolithic policies re poison pill or classified board. Tools, not intrinsically good or bad. Negotiating leverage. Board duty to maximize value in M&A situations. Withhold campaign compared to majority vote requirement. Could lead to situation where entire board could be thrown out in a single election. That is a very extreme situation. Need to have early warnings. 56% vote in favor of majority vote proposals.
Independent chair. Allows CEO to focus on company/business. One-size fits all? No, depends on company and issues being faced at any given time. Very specific to company, size, succession planning. Flexibility argued. Easier to recruit CEO.
Proxy access. Election contests can be extremely disruptive and costly. Proxy fights can become personal and nasty. Risk of dissident director being devicive. ++ proxy fights should be a last resort. Why should company fund such contests? Would primarily be used by minority shareholders. Makes it increasingly challenging to recruit directors. 11 companies have put proxy access into place and the world hasn’t come to an end. Still requires 3/3 threshold and 50+% for passage. average vote was 55%
Forum 2015 sunset
Most in the audience thought governance reforms, such as majority vote requirements, have been good but poison pills, even those unilaterally adopted by the board and not ratified by shareholders, and a combined CEO/Chair can be positive. Mandatory proxy access voted down by audience.
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