Kullman: Tactics for Winning a Proxy Fight

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Former DuPont CEO Ellen Kullman spoke with National Association of Corporate Directors’ (NACD) President and CEO Peter R. Gleason at the 2017 Global Board Leaders’ Summit. Kullman—known for leading the DuPont management to victory in the 2015 proxy battle against Trian Fund Management’s Nelson Peltz—shared insights into oversight of long-term value creation and tactics for succeeding in a proxy battle. 

Before discussing the finer points of DuPont’s proxy battle, Kullman addressed the company’s relationship with its stakeholders. Kullman once said that DuPont adheres to stakeholder theory by focusing on four areas: engaging employees, satisfying customers, supporting the community and, in turn, providing success for shareholders. “As a company that operated all around the world, many times our manufacturing plants were the biggest employer in the area,” Kullman said. “If we wanted to be successful, we had to support the citizen.”

Gleason compared DuPont’s relationship with Wilmington, Delaware, to Corning and the company’s headquarters in his own hometown of Corning, New York. “Attracting the right talent is an investment by the company,” Gleason said. “Corning had a philharmonic orchestra in a town of ten thousand people. However, investments in the community may have been seen as low-hanging fruit to shareholders more interested in seeing direct returns.”

In the case of DuPont, its small hotel and golf course in Wilmington became activist targets despite the sense of community they created with the citizens of the town. “Young people today have a choice about where they work,” Kullman said. “If you want to attract the best and brightest, you have to make the community something they want to be a part of. Why does Google have free food and good infrastructure? It’s not a historic appendage, it’s to keep employees working hard. The question is how much [do you want to invest to retain talent] because you can never calculate a return on it.”

Tell Investors Your Story

Kullman shared a number of tactics that helped DuPont emerge victorious in its proxy fight.

1. Keep Telling Your Story to Investors: “We understood our investors and our strategy, and I don’t think [Trian] did. A board member that had been [with DuPont] for three years did a better job explaining our strategy [to investors] than I did. He kept it to the points that were important and was helpful in making the connection as a shareholder.” 

2. Get Ahead of the Activist by Communicating Early and Often with Regulators: Kullman pointed out that activists’ communications tactics have a time advantage over their target companies because public companies must file shareholder communications first with the Securities and Exchange Commission (SEC). I constantly rewrote letters to the SEC and filed responses [in order to be able to communicate with shareholders in line with the SEC rules for solicitation]. Going to CNBC would have been a no-win situation. That’s how we got that transparent information out to the investor and news community to make sure it wasn’t a one-sided innuendo from the activist.”

3. Trust the Management Team to Run the Business: “You have to have a top team. The CFO, regional vice presidents, vice presidents, and general managers of our businesses had to focus on running the company, while we took a small group of people to focus on the fight. I had to have a foot in both camps: I ran the fight during the day and the company on nights and weekends.”

4. Maintain Constant Board-CEO Communication: “You need to spend a lot of time with your board and you need to know where each board member is individually. Whenever I had an interaction with the activist, I would summarize it to the board right away. Say you want help and ideas from your board members because they have a lot of experience. At that point [in our proxy fight with Trian] there were no bad ideas.

5. Engage Retail Investors: “Proxy advisory firms came in to talk to the board and me about what we needed to do to protect ourselves. They said that retail investors vote for management, but they don’t vote. So we identified shareholders that owned more than $1 million in stock. I called them personally and some of them actually called me back.”

6. Use Social Media: “I was new to social media, but I had to learn quickly. With such a large retail base, we couldn’t assume they were all retired investors—and they weren’t. We had to use as many vehicles as possible to get our story out there.”

Learn more about the 2018 NACD Global Board Leaders’ Summit and register here.

Setting the Right Tone: The Lead Independent Director’s Role

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“Tone at the top,” a phrase that’s bandied about a lot these days, tends to surface any time a scandal arises. When something goes bump in the night, the tone of the top tier of management—i.e., the CEO and his or her chief lieutenants—suddenly comes under scrutiny. As a long-time corporate executive and member of numerous boards, I would submit that we ought to examine the leadership style and tone set not only by the management team, but also by the board.

Wisdom has it that when it comes to long-term performance, culture beats strategy. I happen to agree, which raises the question, “Are we spending enough time on tone at the top at the board level?”

Below I reflect on some of what it takes for a board to practice oversight with a guiding tone of continuous improvement.

What Does Tone Mean for the Board?

Originally tone at the top was narrowly defined as a company’s internal financial controls, but today it refers more broadly to general corporate culture or ethical climate. It’s a normative system of values that’s very personal to each company. Simply put, “It’s the way we do things around here.”

Every company has a “way,” but what is it? Is it articulated? More narrowly, does your board’s way mirror the same tone that has been identified as the greater tone of the company? Conversely, does the board’s tone set the right tone for the rest of the company? While it can be difficult to articulate tone in words, you know it when you see it. Make time to describe what you observe and commit it to policy or collective memory.

As a lead independent director, the tone set by the board should matter. First and foremost, an ethical, positive culture prevents your company from getting into trouble, but more importantly, it helps the company perform well if the standards, rules, and expectations are cleared understood. The same should stand in your boardroom, and the lead director can help articulate the tone to his or her peers.

Get Tough On the Soft Stuff

The average board spends a lot of time on administrative tasks, firefighting, and worrying about management. Often times the soft stuff gets neglected as a result. There’s a huge emphasis on financial results, to be sure, but how much time in each meeting does the board spend on leading indicators versus trailing indicators? Given how hard it is to develop a strategy that lasts more than a minute and a half in today’s dynamic world, we need to ask what the company is doing to prepare for what’s completely unexpected.

Imagine, for a moment, that you’re leading a mining company in the 1850s. Gold has been discovered, and you know you’ve got to get to California, but because it’s such new territory, you’re not quite sure how to get there. There’s not enough room in the wagon train for all the food, water, and bullets that you think you’ll need along the way to sustain and protect your crew. How do you decide what to take? What bets are you going to make?

Boards do talk about bets and the risk and reward trade-offs related to their business, but does your board talk about who should be on the wagon train? Do they discuss what kind of leadership DNA (not resume or skills) they need as independent directors and how to find them? Do they ask hard and honest questions about the roles, responsibilities, and performance of directors?

The lead director of your board is uniquely positioned to guide his or her peers through tough conversations about performance, whether current directors are embodying the right tone, and how to get tough when hard decisions about staffing have to be made to get to the proverbial gold at the end of the road.

Culture Rules

Ours is a rapidly changing world. Boards still may be putting too much emphasis on “knowing the business,” meaning knowing today’s business model and how to provide oversight of that model accordingly. But many (maybe most) of those business models are going to be extinct soon. Consequently, companies would be better served by boards that spend more time on the key business processes that are germane to any business, as well as on—you guessed it—corporate culture.

It is up to the lead director to spearhead this effort by working closely with the board’s individual directors and committee leaders to find the right people and ensure that they work together productively—with each other as well as with management.

How Do You Know You’ve Gotten it Right?

Do research. Very few companies spend time understanding what their “tone at the top” is and then improving it on more than an ad-hoc basis. Tone at the top is not what the board thinks or management thinks. Rather, it’s what employees, customers, and whole communities think about the actions and performance of the whole body of the company—including the board. Companies routinely do 360 reviews of management to “see how we’re doing.” Why not ask the same questions of the board?

This is another place where the lead director can make a difference. He or she should have the courage to measure the performance of the board and its members.

As directors, we wouldn’t dream of neglecting to measure the performance of management. Shouldn’t we be just as rigorous and demanding of ourselves?

 

Roger O. Goldman is chair of the board of American Express Bank, lead director of Seacoast Bank, and former chair of the board for Lighthouse International. Opinions are his own.

Interested in learning more about the role corporate culture plays in value creation? Download a complimentary copy of the NACD 2017 Report of the Blue Ribbon Commission on Culture as a Corporate Asset

NACD Remembers Roger W. Raber

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Dr. Roger W. Raber

The National Association of Corporate Directors (NACD) mourns the loss of our past president Dr. Roger W. Raber, who died peacefully at home on the evening of October 10, 2017, after a long and valiant struggle against an illness. No mere summary can express the value he brought NACD, the nation, and the world. The details of his extraordinary life of service can be found in his obituary notice below, and members can read more about his dedication to NACD here.

Peter Gleason

President & CEO, NACD


OBITUARY NOTICE

Dr. Roger W. Raber

November 28, 1942 – October 10, 2017

Dr. Roger W. Raber, whose advocacy work helped to usher in the modern era of corporate governance, died peacefully at his home in Washington, DC, on October 10th. He was 74. The cause was complications from Alzheimer’s disease.

Dr. Raber was born in Jamaica, New York. After attending Saint Anthony College in New Hampshire, he received a BA in Philosophy and an MA in Theology and Religious Education from Manhattan College. He later received an MA and doctorate in Administration in Higher Education from Teachers College at Columbia University.

From an early interest in theology, his career evolved from educational administration to professional education, this latter area focused at first in banking and later in corporate governance.

Dr. Raber served as director of admissions at the City University of New York in the early 1970s, and as Deputy Provost at the College at Old Westbury, State University of New York, later that decade. In 1980, he became director of education for the National Association of Mutual Savings Banks in New York City, and for the next two decades he would apply his educational expertise in the banking field, moving on to become an executive vice president of the National Council of Community Bankers; president and CEO of the Center for Financial Studies in Connecticut; and managing director, member services, at America’s Community Bankers. While living in Connecticut he chaired the Weston School District, elected by the residents to restore the integrity of the school system following several crises. During the 1980s he served as a director of Starpointe Savings Bank, staying on the board while it integrated into Dime Savings of New York.

In 1999, he began his service as president and CEO of the National Association of Corporate Directors, serving for the next seven years in this capacity, where he built an organization that was strong both financially and culturally.

In his role as CEO, he responded at a personal level to NACD members affected by the tragedy of September 11, 2001, strengthened by his faith. His ability to steer through crisis would be tested at the national level soon thereafter following the December 2001 bankruptcy of Enron, when he testified on the nature of good governance to Congress. His remarks were influential in determining the governance standards later set by the major stock exchanges.

During his tenure at NACD, paid membership grew from 1,800 to 10,000. He developed educational partnerships with a variety of organizations, including Dartmouth College, University of Southern California, Rice University, Duke University, and University of Georgia and created relationships with Association of Corporate Counsels, Financial Executives International, National Investor Relations Institute, America’s Community Banks, Executive Leadership Council, World Bank/IFC) and several governance institutes in Asia, Central Europe, and Latin America. He also established strategic alliances with several leading professional Institutional Shareholder Services, the Nasdaq Stock Market, New York Stock Exchange, major D&O insurers, and leading professional service providers.

Dr. Raber had a special love for the nonprofit sector. He formed a Not-for-Profit Council at NACD, and conducted the first surveys of nonprofit governance. And although he presented boardroom education programs to many of the nation’s largest public companies, his most treasured assignment was his work with the board of the American Red Cross.

He practiced what he preached about governance, ensuring that NACD would have an independent and diverse board and strong bench strength. Many of the employees he mentored are still with NACD, including its current leader. Thus the Raber legacy lives on.

During his years at NACD and after retirement, he served in many advisory roles. He was a member of the board of overseers of Malcolm Baldridge National Quality Program at the U.S. Department of Commerce, and an advisory board member at the University of Delaware, Weinberg Center for Corporate Governance. He also served on the board of Washington Campus, a nonprofit facilitating a better understanding of government. His three professional engagements in the NACD years included service as an advisory board member to CFM Partners in Washington, DC (banking education), James F. Reda & Associates in New York and Atlanta, a compensation practice (now part of Arthur J. Gallagher & Co.), and the Project Management Institute.

In 2007, after stepping down from NACD leadership to serve as a senior advisor to the organization, he continued some of his advisory roles. In 2010, he was diagnosed with Alzheimer’s, and faced the disease with all the energy and good cheer he had given his life’s earlier missions. He agreed to participate in two clinical studies at the Memory Disorders Program at Georgetown University Medical Center. During these seven years as he came to terms with the disease, he continued his volunteer work with the West End Library, as well as So Others Might Eat, and Miriam’s Kitchen, two social service programs for the homeless population in Washington, DC. Always a family man, his final years were full of joy as his beloved children themselves became parents. His last gift of many to humanity was the donation of his brain to Georgetown University Medical Center for further research with Alzheimer’s disease.

He is survived by his wife of 45 years, Dr. Marie Raber, Associate Dean of the School of Social Work at Catholic University; their son Commander Roger W. Raber, Jr., U.S.N., his wife Heather, and their two sons, Jack and Elliot; as well as their daughter, Robyn Borgelt, her husband Nate, and their children Anna and William.

A funeral Mass will be held at Holy Trinity Catholic Church in Georgetown on October 21, 2017, at 10:30 A.M.. There will be a one-day wake at De Vol Funeral Home the day before from 2:00 P.M. to 4:00 P.M., and from 6:00 P.M. to 8:00 P.M. All are welcome. In lieu of flowers, the family asks that donations be sent to Georgetown University, Attn: Memory Disorders Program, Bldg. D, Suite 177, 4000 Reservoir Rd., NW, Washington DC, 20057.