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To Split or Not to Split?

February 21st, 2013 | By Kate Iannelli

In the last year alone, JPMorgan Chase has been in the news for the “London Whale” trading losses, executive compensation packages, and simply because of its size. Further adding to the company’s media exposure, this week several institutional investor groups—including the American Federation of State, County and Municipal Employees (AFSCME), the Connecticut Retirement Plans and Trust, Hermes Equity Ownership Services, and several New York City pension funds—announced their support for a proposal requesting that JPMorgan’s board name an independent chair.

This announcement is one of many actions recently undertaken by AFSCME to alter the governance structures of publicly traded companies. Last week, the employee union announced its 2013 shareholder proposals, targeting “too big to fail” financial firms and “imperial CEOs.” AFSCME submitted shareholder proposals at 11 companies, including General Electric, Lazard, Lockheed Martin, and Wal-Mart. This is not the first time JPMorgan Chase has been the subject of a proposal to split leadership roles. Just last year, AFSCME submitted a similar resolution, which fell short with 40 percent support.

Despite its failure to attain majority support at JPMorgan, AFSCME claimed victory in 2012 following Goldman Sachs’ appointment of a lead director—a compromise from the union’s original proposal to name an independent chair. Nevertheless, the charge to separate the chair from CEO positions at large financial institutions is an uphill one. According to data from NACD’s 2012-2013 Public Company Governance Survey, just 38 percent of responding companies combine the chairman and CEO positions. At large and mega financial companies, this percentage jumps to 48 percent.

Board leadership has proven to be a divisive topic in the corporate governance sphere. Many investors and governance experts view the combined CEO/chair leadership position as an inherent conflict of interest, as the board—charged with oversight of the CEO—is chaired by the CEO. Additionally, the role of CEO requires a significant time commitment, compounded by the oversight responsibilities of the chairman.

Not all are convinced, however, that separating the leadership positions is the optimal structure for every board. Other governance experts note that the dual sources of authority created with the independent chair may undermine the CEO’s ability to run the company, or may allow the other directors to overly rely on the work of the non-executive chair.

Interestingly, in an announcement earlier this week, Norges Bank Investment Management—the world’s largest sovereign wealth fund—recognized that governance codes cannot be substituted for judgment. It still advocated, however, for separation of the chairman and CEO roles, despite what it sees as a need for additional study.

Tags: 2012-2013 Public Company Governance Survey, Afscme, board leadership, Combined Chairman/CEO position, Hermes Equity Ownership Services, Independent chair, Jamie Dimon, JPMorgan Chase, NBIM, Norges Bank
Posted in Corporate Governance, Leadership | 3 Comments »

NACD Directorship 100 and the Directors of the Year: Legacy of Hon. Juanita Kreps and the Power of Chemistry

October 19th, 2012 | By Alex Lajoux

Oct. 19, 1987—aka Black Friday—was noted for an historic 500+-point market plunge. But that day was not all bad. That evening, before a small crowd of staunch supporters impervious to market panic (including yours truly), the Hon. Juanita Kreps, past secretary of commerce, received recognition as the Director of the Year by the National Association of Corporate Directors (NACD)—the first award of its kind.

If the crash that resounded 25 years ago showed the fragility of capitalism, NACD’s recognition of Kreps showed its strength. One was all about alchemy; the other all about chemistry. Let me explain:

In his classic book the Alchemy of Finance, released shortly after the crash of 1987, financier George Soros cites the event as an example of “reflexivity.” Soros told us that in stock markets, as in the universe (per Dr. Werner Heisenberg’s uncertainty principle) perceptions influence reality. Soros calls this “alchemy,” referring to the old pseudoscience of the Dark Ages. He wanted to highlight the element of mystery behind markets. One cannot grasp them through science alone, Soros correctly implies.

By contrast, NACD’s choice of Kreps in 1987, as well as many other honored directors over the following 25 years, could be better compared to chemistry than to alchemy, given the significance of chemistry in the boardroom and governance community.

The award received by Kreps has grown to honor more than one category of director. NACD also recognizes a director each year for the B. Kenneth West Lifetime Achievement Award in honor of our late chair Ken West, who had been the CEO of Harris Bank and who at the time oversaw governance research at TIAA-CREF. In 2012, this highest accolade goes to Jack B. Lowe Jr., chairman, Zale Corp. and TDIndustries. The NACD Director of the Year awards, once given to one director per year, have expanded to recognize additional directors. In 2012, there are two recipients: William S. Ayer, chairman, Alaska Air Group and Puget Sound Energy; and Linda Rabbitt, lead director, Towers Watson and chairman/CEO, Rand Construction.

Additionally, the NACD Directorship 100 annually recognizes and honors both corporate directors and governance professionals. The number 100, unlike the 118 chemicals currently in the periodic table, is arbitrary, but the number is fitting, given the importance of “chemistry” in the boardroom and in the governance world. People rarely accomplish things in and of themselves. They interact with other individuals and institutions to create valuable compounds. Nominees for the NACD Directorship 100 and the NACD Director of the Year are evaluated for integrity, mature confidence, informed judgment, and high performance standards for the work of the board.

As I look back on that night, I remember how surprised I was that Kreps had invited her entire family to the event. At the time, I envisioned the successful woman as an Amelia Earhart flying solo. Not so for Kreps. In fact, she had resigned her commerce post early to attend to a crisis involving her husband, Dr. Clifton Kreps, who was despondent over the fact that their careers were forcing them to live apart. Unless my memory is playing tricks with me, Clifton Kreps and their three children were all at her table for the event. Compound chemistry indeed.

In the modern chemistry of the boardroom, we would have said the fundamental elements Kreps brought to her work, as a woman who rose from Kentucky coal town poverty to national leadership, were grit, integrity, and a sharp mind—as witnessed by her peers in the boardrooms. They too were there that night 25 years ago. I recall seeing representatives of some of her boards, which were no less than the teams overseeing corporations that brought us the enduring brands of AT&T, Citi, Chrysler, Deere, Kodak, Penney, Nabisco, and Zurn—as well as the investments of TIAA-CREF.

It’s a search to look beneath the surface of appearance to see the reality of character. That’s what makes the right chemistry in the boardroom and the right decisions for our long-term economic future. Stay tuned for more NACD Director of the Year and NACD Directorship 100 profiles in future blogs.

Tags: Alchemy of Finance, boardroom chemistry, George Soros, Jack B. Lowe Jr., Juanita Kreps, Linda Rabbitt, NACD D100, William S. Ayer
Posted in Corporate Governance, Leadership | 1 Comment »

Diversity as a Business Imperative

October 16th, 2012 | By Kate Iannelli

The last day of the 2012 NACD Board Leadership Conference is packed with panels of leading minds in business. Managing Director and CFO Peter Gleason opened the day by introducing a session on the new Blue Ribbon Commission Report on board diversity, released to attendees yesterday.

The session, moderated by NACD Chairman Barbara Hackman Franklin, featured two of the commission’s co-chairs: Curtis Crawford, president and CEO of XCEO; and Cari Dominguez, the former chair of the U.S. Equal Employment Opportunity Commission and director at Manpower. The panel also included Commissioner Solomon Trujillo, corporate responsibility chair at Target and Bonnie Gwin from Heidrick & Struggles.

Franklin, also a commissioner, provided an overview of the report’s highlights. First and foremost, diversity in the boardroom is a business imperative–a means to competitiveness. A board’s performance relies on knowledge of the company and its operating environment. As such, board composition should reflect the company’s stakeholders, particularly employees and customers. While each board will approach diversity differently, the report outlined four tasks that are essential to any process:

1. Review and evaluate board composition.
2. Expand horizons for seeking candidates.
3. Improve director evaluations.
4. Preserve, enhance, or consider adding tenure limiting mechanisms.

The panelists went on to discuss the business case for board diversity. According to Crawford, to have the best board, it is necessary to seek out the best talent available. To find where the best talent resides, the board should not limit itself to only seeking certain dimensions. Dominguez agreed, noting that diverse demographics represent an increasing segment of purchasing power. However, just as ketchup and salsa are both popular condiments, including diversity in boardroom composition “does not shrink the pie, it grows the pie.”

From his experiences as a business leader globally, Trujillo observed that differentiation and diversity are critical in obtaining a competitive advantage. “Directors have a fiduciary duty” to place diversity as an item for discussion. From the vantage point of an executive recruiter, Gwin noticed that at companies that embrace diversity, it is advocated for by the CEO and the most senior independent director.