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D100 Advances Governance Dialogue While Honoring This Year’s Leaders

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The recent NACD Directorship 100 Forum brought together more than 300 governance experts, C-suite executives, journalists and corporate directors from around the country to share insights on the most important issues facing boards today.

For those attendees weathering global economic uncertainties for their organizations while mitigating media and public scrutiny, the importance of good governance in today’s business world could not be stressed enough. This year’s B. Kenneth West Lifetime Achievement Award Winner, Jon F. Hanson, founder and chairman of The Hampshire Real Estate Companies and chairman of HealthSouth, might have summed it up best when he explained that he looks at his role in the boardroom as being a “part-time job with full-time responsibilities.”

The responsibilities tied to a directorship cannot be understated. Through the forum topics, which ran the gamut from “Building a Better Board” to “Audit Committee Hot Topics,” NACD worked to ensure that directors came away from each course with added insights from peers who are moving the ball on strategy and leading the way in governance.

Each D100 session was tailored to provide maximum value to attendees. Designed by directors for directors, they offered specific insights into not only what is expected of a boardroom leader, but also how to go above and beyond the minimum expected requirements. Promoting this type of exemplary board leadership has always been one of NACD’s explicit goals, and the D100 Forum used every opportunity to highlight those who continually work to enhance the professionalism of those in the boardroom, maximize shareholder value and supply confidence to investors.

This type of open exchange by governance leaders is one of the factors that make NACD education events so valuable to real world directors. New directors and those with decades of board experience can all find something to take away from these events.

Given the turbulent economy, managing risk oversight shone through as one of the major themes at this year’s event. Forum host WilmerHale provided expert insights on avoiding the high-profile missteps that can consume boardrooms, using real world examples and instances where crises could have been averted and good governance maintained.

Meanwhile, forum discussions, such as “Corporate Strategy and Sustainability: Driving Long-Term Value,” focused on how directors can look beyond financial metrics and learn how “responsibility” and “sustainability” are key in driving long-term shareholder value.

Thanks to all who made this event such a valuable resource for our community of professional directors, and we look forward to seeing you at next year’s D100 Forum.

SEC Begins Collecting Whistleblower Tips

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On Wednesday, the Wall Street Journal reported on the first submitted claims following the Securities and Exchange Commission (SEC)’s final rule on whistleblowers. From August 12, 2011, when the rule became effective, through the end of the government’s fiscal year on September 30, 2011, the SEC has received 334 whistleblower tips. Of those tips, the most common complaints allege market manipulation (54 tips), fraud in securities offering (52 tips), and fraud in corporate disclosures and financials (51 tips).

To date, due to the specifics of the rule, the SEC has not paid any whistleblower awards. However, this will soon change as more cases are resolved and awards are able to be processed. By the end of fiscal 2012 (October 1, 2011 through September 30, 2012), the SEC will no doubt distribute some awards.

The full impact of this new rule is currently unclear. Some governance experts have argued that the rule will weaken corporate ethics and compliance programs by allowing whistleblowers to bypass these very systems. Others see the rule as a critical tool in stopping fraud. Directors of public companies have maintained a neutral outlook on the rule. According to the NACD’s 2011 Public Company Governance Survey, 52.1 percent of respondents indicated that the SEC’s whistleblower rule will have no significant effect on their company’s overall ethical climate. A small percentage of respondents (29.4 percent) do not know how the rule will play out, and an even smaller number (13.6 percent) believe it will weaken their ethical climate. Only 4.9 percent think the rule will strengthen their ethical climate.

Only time will tell how this rule will affect corporations and their compliance programs. For now, boards of directors should reinforce an ethical tone-at-the-top and continue to review the activity of internal ethics hotlines and/or other means of assessing risks to the organization.

Keeping an Eye on Golden Parachutes

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This week, NACD Directors Daily has featured several stories noting an uptick in merger and acquisitions activity, as well as the executive severance packages that ensue. According to the Wall Street Journal, several current CEOs stand to earn over $50 million from pending acquisitions. An additional four CEOs could potentially receive severance packages worth up to $30 million.

“Golden parachutes” guarantee compensation to executives who lose their position. First established in the 1970s, they evolved into a tool used to encourage executives to agree to profitable takeovers, rather than oppose an offer that could potentially impact their job security. Excessive golden parachutes have long been the subject of investor scrutiny. In 2007, NACD addressed golden parachutes in its Report of the NACD Blue Ribbon Commission on Executive Compensation. In order to avoid severance from becoming excessive, the Commission recommended packages be tied to base pay only—not stock options as well.

In addition to say on pay, the Dodd-Frank Act included an advisory shareholder vote on golden parachutes. However, the “say-on-golden-parachute” rules did not take effect until April 25, resulting in few votes during the most recent proxy season. According to the 2011 U.S. Postseason Report from Institutional Shareholder Services (ISS), 14 companies from the Russell 3000 conducted golden parachute votes. Of those 14 companies, six received more than 89 percent support. Unsurprisingly, shareholders tended to vote against severance packages that included excise tax gross-up payments. According to ISS, “many investors do view the golden parachute proposal separately from the underlying change-in-control transaction, meaning that they might still oppose the golden parachute payments while supporting an underlying transaction.”

In addition to the cost of the awarded golden parachute, large compensation packages for departing executives can leave the directors and/or the company to potential liability claims if the awards are not based on sound business judgment and careful committee and board deliberations. Especially in the current period of increased public scrutiny on the boardroom, directors should carefully consider the terms, triggers and potential costs of various exit scenarios—including M&A activity—with executive compensation packages.