Category Archives: Board Level

Here you find our thoughts on reaching the top: the senior leadership team, or the board of directors, and what it means for your career.

Executive pay: Be careful what you wish for

One can sense change in the air as sentiments on CEO and executive compensation becomes an even bigger front-and-center issue during proxy season this year.  Global economic uncertainty certainly has not helped perceptions of some high-profile pay packages.  Pay for performance?  “What performance?” many are asking these days, especially pension funds and other groups where average-wage workers predominate.

In the US, the Dodd-Frank Act required boards to provide greater transparency, and by giving shareholders a nonbinding say-on-pay vote, offered boards a more precise touchstone as to what shareholders are thinking.  Prior to this year, smaller companies (with a public float of less than $75 million) were exempt from adhering to separate shareholder advisory votes.  With this gone, smaller companies will now come under scrutiny, adding to the concerns of those directors.  Simple, direct, plain language on how executives and directors are compensated will also increase scrutiny because, after all, disclosure is exposure.

Like the US, the EU is also addressing issues of accountability vs performance bonus payouts.  Just last week, the European Parliament and EU States reached an initial agreement that would restrict bank executive bonuses to a “fixed” salary with flexible pay (a.k.a. bonus) fixed to no more than twice their fixed salary — and only with shareholder approval.  The rationale behind this proposal is to increase the financial ‘cushion’ for institutions and to discourage the high-risk behaviors of the past.  Regional and global economies have had their challenges, and individual household financial pressures have increased over the years.  Watching how companies are paying their leaders, especially in the financial community, has caused unrest among many labor and investment groups.  We’ve seen increasing resistance to the remuneration of our financial and business leaders, giving EU leaders new strength in approving new rulings to restrict banker bonuses at twice their base salary.

As a number of large companies had moved their corporate headquarters to Switzerland to gain better tax advantages, such moves may turn out to have been in vain.   As of March 1, 2013, the Swiss endorsed a new a plan (Minder Initiative) with even greater restrictions on how both executives and directors are compensated. This includes binding shareholders’ says on compensation, bans on bonus awards for executives signing on to or leaving a company, and annual re-elections for all directors.  Violators will face stiff penalties: three years in prison, and  fines of up to the equivalent of six years’ salary.  The proposed plan (also dubbed the “rip off initiative” by the media), would entitle shareholders to block salaries, ban golden parachutes, and require more transparency on loans and pensions granted to both executives and directors alike.  Such regulation would impact on all publicly listed companies based in Switzerland, and would be expected to be implemented by 2014 – 2015.  The UK has also been working to increase transparency for shareholders while putting some restraints on how performance bonuses are doled out.

The above only scratches the surface of the issues on executive compensation. There are positive ways to build compensation plans and incentives for good performance. Ideally, good performance should not need to be encouraged solely by financial incentives. From where we stand, the efforts of different governing bodies in responding to investor and shareholder concerns seems well intended if they succeed in shedding more light on the business behaviors of executives and directors, and encourage good governance. We can always hope that the good folks spearheading these initiatives are not doing this for the pay alone, but are working towards what they are convinced is right.

We’ll have more to say on this over time, so stay tuned.

What is Diversity and Do Boards Really Care?

With this post, I’m probably jumping into a boiling cauldron of trouble with some people. As most involved in some way with governance already know, there is a huge push, domestic and international, to recruit women to boards. The topic of diversity on boards (and even in the workplace) evokes a lot of emotion. In the boardroom, when directors are asked independently if diversity is important, I’ve heard:

  • It’s important for many reasons (none specified, though)
  • It’s important, but it takes five to six years to make an impact on a board
  • I think so, but our board is still all male and will probably be slow to change
  • Or board doesn’t care and it’s not a topic of discussion
  • Diversity of thought is more important
  • Do you mean male/female? I’m not in favor of quotas you know
  • We’ve tried, but we can’t find any
  • It took us two years to find a diverse director the last time around
  • I’m the lone female on the board and I’m concerned that when I leave, the issue will be moot . . .

On and on and on . . Of all these comments, the one with the most legs seems to be “Diversity of thought is more important.” However, it is more difficult than it seems to achieve this while demonstrating that such diversity exists when speaking to stakeholders. But more on that in a moment.

When speaking with executive management on board diversity, replies from women typically differ from those of men. Men most often respond positively, but then add a caveat such as: but we’re really more concerned about finding the right person. A good percentage of women in management quietly state (as long as the conversation is confidential — they say “don’t quote me”) that their CEO and Directors don’t care and aren’t concerned about the issue of diversity in the boardroom. Those who believe they already have a diverse board, on average, tend to be quite cognizant of the diversity differential.

Some, or all of the above, may make some of you squirm, or at least feel a wee bit uncomfortable. For me, (as a female, a director, and a board advisor) that’s not the case at all. I see such conversations as opportunities to learn what’s important to boards. Unfortunately, it seems to me that, at this point in time, diversity doesn’t rate front-burner status with a number directors. This is because, thus far, when all is said and done, much more has been said than done.

Why?

Contrary to what they say, many believe that like-minded members reduce distracting contention, work to move agendas along faster, and amplify individual members’ strengths. Of course, it also amplifies their weaknesses. Uni-dimensional perspectives, and blithe collegiality, have led countless boards into groupthink, overconfidence, and an unfortunate inability to see risks, issues, and opportunities before (or after) they arise, or to fully grasp their impacts.

True diversity in the boardroom is not just a US-centric challenge. Many foreign companies are helmed by (I like to think, saddled with) homogeneous supervisory and advisory boards. In many cases, this reflects the homogeneity of the societies within which they conduct business. Fortunately, the US is far from a homogeneous country, so this is no excuse.

Back to “thought diversity.” How do you achieve it? It’s easy to make a board look diverse: find a few different colored faces, add some vowel-ending names, one or more women, and … voila! But, if all of these new additions grew up in the same culture, were educated alike, have the same values and interests, where will the real, new perspectives come from? As companies grow and diversify, their boards need new and varied ways of thinking about the business. New opportunities can often be found by viewing the same landscape through different perspectives. Different perspectives develop from experiences and values gained through living in environs and cultures, with all their unique challenges, as natives, not visitors.

Men and women, by the very nature of their different sex, will have some different perspectives. Is that enough? Depends on how many women are added to the board, and the ability of their male incumbents to accept and adapt to them. One of the most striking comments I’ve heard came from a friend (a minority male, actually) who said: “I’ll always have an easier time than any female, because I’m firstly, male, and foremost, ‘one of the guys in the locker room.’ The men in the room are far less guarded in what they might say when I’m at the table.”

Once there’s an understanding as to why a board needs to be diverse (particularly in thought or perspectives), bringing it to the table becomes easier. One director recently told me that, beyond his accomplishments and competencies, the Chairman was interested in his service because of his Latino heritage, and experience working in international markets. That board understood it needed a director whose upbringing and experience would provide additional insight into the values and needs (of at least a portion) of its employees and customers, and how to better conduct business in those fast-growing markets. They understood that the company needed new perspectives to thrive.

So, how does a board find directors who truly have both valued skills, experiences, and variety in their perspectives? We will begin to address that in my next post.

Succession and Due Diligence

Succession and Due Diligence

Over the years, I’ve worked hard to try and let nothing surprise me. Still, a few things always slip by. Where I am most often surprised is in the ways that boards and directors dance around or ignore “due diligence.” I’m still fascinated to watch (and hear through others) how often boards fail to conduct reasonable or even minimal background reviews on the individuals they bring onto their boards. In addition, that same intrigue extends to why so many director candidates don’t check out the other members they’re being asked to serve with.

Granted, board succession practices have not truly advanced much. Many corporate boards, be they public or private, still believe the best source for new directors is to start with their members’ networks first. This ignores the logic that the more you exhaust such networks, the smaller and less fruitful they become. Others still use “the links” or other social outlets as the best way to identify prospects, particularly those who could be “collegial and cooperative” in the boardroom. Directors have often told me they’ve seen or made selections on the basis of a relatively short casual discussion.

When the thought of diversity comes into play here, the approaches they take can also be somewhat. . . odd, considering that these are experienced, distinguished professionals. I’ll share a one example: the Nom/Gov Committee Chairman of a significant public company was dining with a group of about 30 other professionals – maybe five of whom were “diverse” relative to the rest of the group. At one point, he walked from table to table with a marker pen and his business card flipped over asking if anyone knew any women who could possibly serve on an industrial company’s board (withholding his company and specific industry to protect their reputation). Note, the typical business card is a rather small serface on which to take detailed notes – especially with a marker. He also shared that his board was coming down to the wire on getting this done for the company, too.

When when it comes to doing your “due diligence” on those candidates you do find appealing, you might find it helpful to learn why they serve on a board or would want to serve on yours. How they answer can be a confirmation, a revelation, a learning opportunity, or even a deal breaker. We’ve heard such comments as: “I have a lot of extra time,” . . . “It would be a great opportunity for me professionally,”. . . “I’d like to add to my personal vacation travel fund so that such expenses don’t come out of my retirement savings,”. . . “I like being on boards”. . . or . . .”I want my next board to be with an $ XX billion company” (which in this case was significantly larger than the he was on, and the one being discussed).

On the flip side, before joining a board, find out why the other directors are there. What drew them to service? What makes them stay? What is their next personal or professional objective? What do they like best in serving here? And so forth. From the prospective director’s point of view, understanding this lays the groundwork for assessing some of the professional and personal risks in serving on that board. From the board’s perspective, understanding the answers to such questions, and others, gives a better picture of why and more importantly, how the new candidate will serve.

Board service is a long-term commitment that can present very positive or negative outcomes for a company. Knowing what you’re getting into, or with whom, on both sides, is important to you, your colleagues, the company, management and stakeholders served. The complexity of conducting thorough due diligence is much more detailed than what’s just been outlined, but it illustrates how important the process is, on both sides. Doing so helps everyone involved build a clearerer picture on who is and who will be, an exceptional addition to the board. In moving forward on your next board decision, we wish you a positive and productive time together – director, board, company and stakeholders.