Posts Tagged ‘director independence’

NACD Directorship 2020™

October 14th, 2013 | By

According to Confucius, one should “study the past if you want to define the future.”  With that in mind, President and CEO Ken Daly led the session to officially kick off NACD’s future-defining initiative with panelists that have a storied history in the world of governance. The panel comprised Raymond Gilmartin, former president and CEO of Merck & Co., lead director at General Mills, and the newest member of NACD’s board of directors, and Myron Steele, Chief Justice, Delaware Supreme Court.

Based on the observation that capitalism is undergoing a profound shift as a result of shareholder activism, technology, and regulatory activity, work to define and shape NACD Directorship 2020 has been underway for several months. Starting this spring, NACD held three events to discuss and hone the direction of research topics in New York City, Chicago, and Los Angeles. Three areas came to the forefront: information flow, performance metrics, and disruptive technologies. For recaps of these sessions, visit nacdonline.org/directorship2020.

Changes in the Boardroom 

According to Steele, the most significant changes in the boardroom have been the shift in dynamic of ownership from retail to institutional investors, and the dominance of independence in the boardroom. In the past, the majority of investors were retail, now 60 to 70 percent of stock ownership is in the hands of institutional investors.

As a result of Enron and WorldCom, Sarbanes-Oxley required the board to become more independent than ever before. And yet, as Chief Justice Steele observed, without an empirical study to support this requirement, the legislation missed the mark. Of the 17 directors on Enron’s board, 15 were independent and it “still resulted in a massive failure of corporate governance.”

In his remarks, Chief Justice Steele stressed his belief that regardless of who comprises the shareholders, authority, balanced with accountability, rests with directors. “It is still fundamentally the responsibility of directors to manage the corporation with oversight, loyalty, and care. Also the underlying dynamic has changed, the authority and accountability of directors has not.”

TSR and Short-Termism

Continuing off a theme that began last night with keynote speaker Raj Sisodia, Gilmartin addressed the increasing focus placed on generating short-term quarterly results. Maximizing shareholder value above all else has reinforced practices that can be detrimental to society. Although some practices, such as laying employees off, are sometimes required, they are currently being used with a frequency that destroys long-term value and the future survival of an institution.

But directors have an opportunity to change this. NACD Directorship 2020, according to Gilmartin, “allows an opportunity to challenge the conventional wisdom that has developed over the last few years.”

Innovation and Risk Taking

Both Chief Justice Steele and Gilmartin emphasized the need for innovation and risk-taking in boardroom culture. In addition to using incentive systems that focus on the creation of long-term value, Gilmartin suggested using the company’s ability to innovate as a performance metric.

Chief Justice Steele addressed the increasingly litigious nature of directorship, which as Ken Daly noted has become, “not if you’ll be sued, but when you’ll be sued.” According to Chief Justice Steele, the business judgment rule is alive and thriving. Directors should feel free to take the necessary bold steps to create economic value. “Society is dependent upon a board being empowered to take risks on behalf of shareholders—that is what builds the economy.”

Unique Dynamics, Common Issues

February 19th, 2013 | By

As NACD general counsel and head of Board Advisory Services (BAS), I’ve gained tremendous insight interacting with all types of boards from startups to the top of the Fortune 500. Each board comes with its own unique dynamics, incorporating differing personalities, skill sets, advantages, and obstacles. But despite these differences—and regardless of the size and sophistication of the board—there are several common issues with which most boards are grappling.

While I’ve seen just about every scenario one could imagine, BAS is typically engaged for the following reasons:

  1. The company has reached a turning point in its strategy, which has created tension and a need for alignment with the board and management.
  2. The board is struggling with directors’ extended tenure on the board, which has created a stale environment and an obstacle to fresh thinking.
  3. Often related to the second point, the board is wrestling with the thorny issue of succession planning and how to deal with underperforming directors.
  4. The board is composed of strong, experienced directors, but management does not feel they are as engaged as they could be and are not bringing all their skills to the table.

In each situation I’ve found that our clients, despite facing significant pressure points, all have the desire to improve. Even the most sophisticated boards are willing to admit they don’t have all the answers. As such, they bring NACD—as an objective third party—into their boardroom to assist in identifying steps for improvement.

In my next posts, I will drill down further into these common issues. How are companies dealing with underperforming directors? What new succession planning techniques are working? Does extended tenure affect director independence, engagement levels, and the creation of fresh ideas? How can the board and management team be more effectively aligned?