Posts Tagged ‘board leadership’

Generational Dynamics in the Boardroom

October 13th, 2014 | By

During today’s keynote address at the 2014 NACD Board Leadership Conference, Chuck Underwood—founder and principal of The Generational Imperative, a consulting firm that provides training and research on generational demographics to businesses and governmental officials—shared some key takeaways on how generational demographics affect corporate governance. He began by sharing three key points about generational dynamics.

  1. “Between birth and the late teens or early 20s, individuals form core values molded by teachings and personal experiences, and those core values are by and large kept for life. People who are approximately the same age group and who have been shaped by similar teachings and experiences are considered to be a generation.
  1. American life in the last 100 years has changed frequently and sharply, and life expectancy has increased because of advances in medicine and improved overall wellness. Individuals now live an average of 30 years longer in 2014 than in 1914. The increased life expectancy, coupled with frequent cultural changes, means there are now five living generations in the United States.
  1. The core values held by each generation exert powerful influence over that generation’s core choices, career decisions, lifestyle preferences, and behaviors—including leadership behavior in companies and in the boardroom,” said Underwood, who hosts the PBS national television series “America’s Generations With Chuck Underwood.”

Boards and company management can benefit from learning the core values of the five living American generations and by understanding how to relate to each generation in the marketplace and in the boardroom. The five generations are:

  1. The G.I. Generation, born from 1901 to 1926, is shaped by the experiences of economic prosperity during the roaring 1920s followed by the setbacks of the Great Depression;
  2. The Silent Generation, born from 1927 to 1945, is more financially secure than any other generation that has reached their age;
  3. Baby Boomers, born from 1946 to 1964, currently account for 25 percent of the U.S. population and 50 percent of its wealth;
  4. Generation X, born from 1965 to 1981, is shaped by a materially comfortable childhood that was also emotionally difficult because of divorced and career-driven parents; and
  5. Millennials, born from 1982 to 1996—possibly longer, depending on whether individuals born after 1996 hold to the same core values of Millennials—and living an extended adolescence while also wanting to change the world for the better.

Underwood said that each generation has its own leadership style that is shaped by its unique experiences. He has found there are four general points about generational leadership:

  1. Each generation leads for about two decades.
  2. Each generation’s unique core values determine America’s direction.
  3. Some generations deliver good leadership, some deliver bad.
  4. A generation’s leadership era begins when the oldest are about 65 years old.

The United States is currently undergoing a transition, Underwood said, from one leadership era–that of the Silent Generation—to another: the Baby Boomers.

“Silent Generation white males (minorities and women were allowed the same opportunities) came into an environment in which the corporation was the highest priority, rather than employees. Team players were valued more highly than mavericks,” Underwood said. The value of conformity was stressed to this generation.

They enjoyed lifestyles their G.I. Generation parents never were able to receive because of the Great Depression, and they measured their value based on their material wealth.

The Silent Generation had the expectation that if they conformed and put the company’s needs above their own personal needs, they would be rewarded. Their strong desire for reward, however, led in some cases to corporate corruption.

“This,” Underwood said, “is why eyes are focused on the incoming generation of corporate directors and managers—Baby Boomers, who in their youth helped bring social change through the civil rights’ and women’s rights movements, for example—to help set corporate America back on a solid track.”

NACD Chairman’s Address

October 12th, 2014 | By

Following their inspiring message of peace and love, Dr. Reatha Clark King, chairman of the National Association of Directors, thanked the World Children’s Choir, for “reminding us who holds the future.” She remarked that the numbers at the NACD Board Leadership Conference continue to grow, “tracing diverse participation in every way.”

Dr. King focused her remarks on the idea of the future saying that we are “watching entirely new landscapes rushing to us at lightning speed.” She took William Gibson’s quote: “The future is already here, it is just not evenly distributed yet” and applied it to the audience by stating that “the future is here and having a direct affect on our companies and boardrooms every day.”

Dr. King observed: “New times call for updated challenges for board leadership” and recommended five areas of focus for the updated agenda:

  1. World class excellence in board governance functions: Emphasize the basics. If we don’t take care of the basic functions we won’t have time to take care of the next compelling need.
  1. Innovation: Enable value creation to benefit shareholders, investors, customers, communities, and other stakeholders.
  1. Harness the transformational effects of new discoveries: Mitigate the risks and potentially harmful effects from these discoveries.
  1. Understand and embrace a broad view of our companies’ contributions to society: We need to shift away from being “place-bound” thinkers to being “global” thinkers.
  1. Communicate and keep the public’s trust: The challenge is to communicate clearly with stakeholders.

Warren Bennis has said: “Lleadership is the capacity to translate vision into reality,” and Dr. King pointed out that a major challenge for directors is, “to lead when the rate of change is accelerating rapidly.” She continued by noting that the concept of change is not new; to keep businesses fresh there must always be change. Now, however, simply keeping up with the pace of change is not enough, it is a matter of wholesale reinvention. She mentioned a number of companies and ideas embracing change such as Uber, Lyft, Zipcar, Airbnb, Coursera, Bitcoin, and Square that exemplify the idea—“revolution is relevance.”

Dr King concluded by observing that we cannot wait for the future; the future is here now. There are four things that directors must do in order to ensure their organization’s relevance:

  1. Learn what is coming;
  2. Observe where others are headed;
  3. Envision possibilities; and
  4. Inspire progress.

Proxy Season Paradoxes

June 19th, 2014 | By

As corporate fiduciaries, directors represent shareholders. But what should boards do when their sense of corporate good conflicts with resolutions advanced by specific owners? It is easy to say that boards need to do more to oversee risk, or to improve strategy, but without real-world testing, these statements become platitudes. Let’s take a look behind the headlines surrounding six recent proxy season conflicts—starting with five Fortune 500 companies (Bank of America, Darden, Staples, Target, and Walmart) and closing with a mid-market real estate investment trust (REIT) family (Ashford). In each case, boards have had to draw the line when confronted by special interests—while still respecting the rights and interests of all shareholders, including activists.

Please click on a company name above to go directly to the case study.

Bank of America: Of Accounts and Accountability

The issue. Is the board responsible for preventing honest administrative errors? On April 28, the Federal Reserve Board announced that it would require Bank of America Corp. to suspend planned increases in capital distributions and resubmit its capital plan. This requirement followed disclosure by Bank of America that the bank made an error in the data used to calculate regulatory capital ratios used in the most recent stress tests conducted by the Federal Reserve. The error was unintentional and, in comparison to the $2 trillion on the balance sheet, small. Nonetheless, the consequences became clear at the annual meeting on May 7, when the California State Teachers’ Retirement System (CalSTRS) pension fund voted against four of five members of Bank of America’s audit committee. “The shortcomings in processes and risk controls underscore the need to make the necessary changes to ensure this sort of issue does not arise again,” opined CalSTRS spokesman Ricardo Duran in an e-mailed statement to the Wall Street Journal. Yet only a minority of investors joined the California giant. Apparently, most investors shared the views of William Smead, chief investment officer of  Smead Capital Management in Seattle, who told the Wall Street Journal that the bank’s CEO Brian Moynihan “is a straight shooter” so his fund would “stay the course.” At the meeting, shareholders elected the full board for another term, approved all the management proposals, and rejected all four shareholder proposals; still, the CalSTRS campaign and commentary fired warning shots heard around the governance world.

The lesson. Boards cannot prevent error, but they can ensure quality of both processes and people. Clearly, this bank (like every institution) can continue to improve its controls. On the other hand, when management is willing to admit mistakes and act quickly, and the board has supported this progressive direction, it’s hardly time to change leadership.

Darden Restaurants (and Pfizer): The Right to Sell (or Buy)

The issue. Should cut-or-keep strategy be decided by boards and management or by shareholders? On May 16, Darden Restaurants Inc. announced a definitive agreement to sell its Red Lobster chain restaurant business and related assets, and assumed liabilities to Golden Gate Capital for $2.1 billion in cash. Red Lobster was failing and the board opted to sell it rather than turn it around. The deal will net Darden about $1.6 billion, of which approximately $1 billion will be used to retire outstanding debt. The deal is expected to close in early 2015 after necessary regulatory approvals. A week later, on May 22, Starboard Value, protesting the sale, put forward a full slate of candidates for Darden’s board of directors to be voted on at the company’s June 22 annual meeting. (Similar questions arose on the buy side at the Pfizer annual meeting on April 24 during the recently ended Pfizer bid for Astra-Zeneca.)

The lesson. Boards have a right to exercise judgment on whether a struggling company should turn around or sell off part of the business—or, conversely, whether a market leader should grow via merger. Analyst John Maxfield, writing about Red Lobster for the popular investment site Motley Fool, observed that turnarounds rarely succeed. He cited wise words from Warren Buffet, who wrote the following back in 1980: “When a management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact.” The Darden board apparently believed that the fundamental economics of Red Lobster were unfavorable so they sold it. (On the buy side, the Pfizer board made a similarly justified strategic decision—not to let go of a division, but instead to chase, and subsequently let go of, a dream.)

Staples: A Matter of Discretion

The issue: Can the board justly exercise discretion in pay in order to retain executives during a turnaround? The Staples board believed so, and proceeded in good faith to pay accordingly, but shareholders disagreed. On March 3, the Staples board rewarded executives for their added workload in turning the retailer around by approving a “2013 Reinvention Cash Award.” The board also approved an extra reward cycle to retain executives and staff who had not received a bonus in two years due to dragging financials caused by the poor economy for consumer discretionaries. Institutional Shareholder Services (ISS), a proxy advisory firm, urged investors to reject the plan in their advisory “say-on-pay” vote at the annual meeting on June 2. ISS carries considerable influence in the proxy policy-setting and voting processes, and in this case apparently they did, as a majority of shareholders (53.64%) voted against the Staples plan. At that same meeting, 50.66 percent of shareholders cast advisory votes to split the chair and CEO roles at the retailer.

The lessonWhile directors should make every effort to comply with their policies when awarding pay, they should reserve and defend the right to exercise discretion; similarly, directors are the ones who should determine the independent leadership structure for their boards. When boards exercise compensation discretion, for example by making an award that did not appear in a plan, they need to clearly communicate early on their reasons for doing so. This is a key finding of the NACD Blue Ribbon Commission (BRC) on Executive Compensation, convened in 2014, as well as previous BRCs on the topic. Communication, not compensation, may be the core issue here. (Then again, communication of any point requires two parties—the speaker and the listener. In some cases, however, it simply may be that shareholders are unwilling to hear management’s reasons for a nonroutine pay decision.)

Target: Expecting the Impossible?

The issue. If a board knows that a particular risk exists and takes action to defend against it, are directors to blame if the defense does not function well enough to prevent harm? In mid-2013, anticipating hacker problems, Target began installing a $1.6 million malware detection tool made by the computer security firm FireEye; yet due to a break in the chain of alerts during the most recent holiday season, the defense did not work and Target suffered an attack at the height of the holiday shopping season. Subsequently—despite swift response to the problem (replacing the chief information officer and strengthening security)—ISS recommended that shareholders vote against 7 of the company’s 10 directors at the company’s June 11 annual meeting, urging rejection of the members of the audit and corporate responsibility committees. The day before the meeting, Luis Aguilar, a commissioner at the Securities and Exchange Commission, mentioned the Target incident in a speech at the NYSE, and observed that “effective board oversight of management’s efforts to address these issues is critical to preventing and effectively responding to successful cyber-attacks.” Shareholders did vote by a majority on June 11 to keep the full board, but concerns linger. More than 90 lawsuits have been filed against Target by customers and banks for alleged “negligence,” and they are seeking compensatory damages as well.

The lessonThe line between the board and management is still distinct, but it is no longer bright; it will vary by company, so it is up to each board to find it. IT risk oversight is not easy. NACD’s Director’s Handbook Series on Cyber-Risk Oversight recommends that boards approach cybersecurity as an enterprise-wide risk management issue, and encourages directors to understand the legal implications of cyber risk as they apply to their company’s specific circumstances. Boards can encourage them to build that arsenal. Meanwhile, boards can and should vigorously defend themselves against voting campaigns that would disrupt board continuity at the expense of various stakeholders, including not only shareholders but also employees and their communities.

Walmart: What Price Integrity?

The issue. Does the board have a right to invest heavily in building an ethical culture or should shareholders get more of that money? Sometimes it seems that boards are damned if they do and damned if they don’t. On June 6, Walmart shareholders voted to reelect the entire Walmart board, and to reject a proposal that would mandate a separate chair and CEO, among other votes. This vote occurred despite campaigns against the directors in March; both the CtW Investment Group (on March 19) and ISS (on March 25) issued reports critical of Walmart, recommending that shareholders vote against two existing directors, as well as the company’s executive compensation proposals. They claimed that the company failed to disclose information to shareholders regarding sums spent on investigations into alleged company violations of the Foreign Corrupt Practices Act. In fact, Walmart did publish a global compliance report with details on its programs, so the main reason for the critique seems to be the amount of money spent on compliance. Randy Hargrove, a Walmart spokesperson, has assured the public that “[t]he board has authorized whatever resources are necessary to get to the bottom of the matter.”

The lesson. Boards have the right and, one might argue, the obligation to invest resources to ensure ongoing efforts to improve compliance and integrity. Global companies have many employees and agents to oversee. Policies can go only so far. Perhaps the best guidance here comes directly from the classic Delaware Chancery Court decision in the Caremark case (1996) in which Chancellor William Allen, finding in favor of a defendant board in an insurance kickback case, held that a board as part of its duty of care has an obligation to “exercise a good faith judgment that the corporation’s information and reporting system is in concept and design adequate to assure that appropriate information will come to its attention in a timely manner as a matter of ordinary operations.” If a board fulfills that requirement, its oversight should be praised rather than condemned.

Ashford: A Tale of Two REITs

The issue. Who gets to determine governance—the board or shareholders? The recent history of the Ashford REIT complex provides a real-world laboratory for the issue. It all started in February when the Ashford Hospitality Trust (AHT) board amended AHT bylaws to require board approval of any future bylaw amendments. (Previously, AHT bylaws could be amended by shareholders without board approval.) One reason for this amendment is that the AHT board wants the company to remain under the protection of the Maryland Unsolicited Takeover Act (MUTA). The AHT board also voted to increase the number of shares required to call a special meeting of shareholders. In response, ISS called on shareholders to withhold votes for all but one director at the annual meeting on May 13. At that meeting, all directors were voted in by a majority of votes cast, despite a high amount of negative votes for the targeted directors. Earlier, shareholders of an AHT spin-off, called Ashford Hospitality Prime (AHP), which is advised by AHT, approved two proxy proposals submitted by Unite Here, a union representing workers in the garment and hospitality industries. AHP shareholders voted by a majority of 68 percent to have the company opt out of MUTA—a result that the AHT board hopes to avoid. So far the board of AHT is holding firm in favor of takeover protections and remaining under MUTA protection, unlike its AHP spin-off.

The lesson. Within the bounds of legal compliance, governance is a responsibility of the board, not the shareholders. So when it comes to preserving corporate independence, boards need not give up their corporate shields just because activists accuse them of being too defensive. This may well be a case of rhetoric versus reality. When the MUTA was passed 15 years ago (in 1999), the Baltimore Business Journal hailed it as good for investors: “Corporate takeover bill protects stockholders,” read the news item. In an editorial detailing the law’s provisions to a painstaking degree, the Baltimore Business Journal concluded: Some public commentary on the takeover bill has mistakenly suggested that it takes away all obligations directors have to stockholders. To the contrary, unlike Pennsylvania’s corporate law, which is highly pro-management and provides no relief to investors or stockholders in Pennsylvania corporations, Maryland law now provides some increased procedural advantage to and greater flexibility for directors, while preserving the primacy of stockholder value and providing an escape valve from the most troubling provisions for future investors in Maryland corporations. It seems that with the passage of time, and inattention to statutory language, the anti-MUTA myth has risen again. We will watch this case for further developments.

Conclusion

These developments have involved different issues—financial planning, mergers and acquisitions, compensation, cybersecurity, internal controls, and takeover protection. Nevertheless, these developments point to the need for ongoing director education on risk oversight in all of these areas, not just in a classroom, but also on the job, and with more active monitoring. These stories also show the value of understanding the evolving expectations of governance itself. As directors face increasing pressures to continually know more and do more, they can strive to improve, yet at the same time recognize the intrinsic limitations of the board’s role. Directors should also seek to provide investors with information on the context and rationale behind the board’s decisions, as part of the company’s overall shareholder engagement and communication program. This close look at current struggles has yielded important lessons—and guidance for an ever-challenging future.