October 28, 2011
October 28, 2011
Next year, NACD will turn 35. Wow! Since I’ve been here for 25 of those years, that makes me feel…well, seasoned. Recently, one of NACD’s past chapter leaders, Dann Angeloff (honored as one of five founding members at our 25th anniversary), asked our opinion for the main changes in the boardroom over our past three decades. As I pondered Dann’s question, I could see my professional life flash before my eyes!
So here’s my list of “tipping points” in board history—one for every year of service. Of course, it’s tempting to list the many accomplishments of NACD’s many illustrious board members, chapter leaders, and dedicated employees past and present—shout outs to great leaders John Nash, Roger Raber, and Ken Daly—and those who served in interim periods—but I’ll keep this list general. I’ll also resist the temptation—well, maybe not—to tell you a little more about me—in particular about a day in my life in 1978, when I worked briefly at my father’s publication, Directors & Boards. (This was before the visionary Rock family acquired it and the most excellent editor Jim Kristie took the helm.) On that fateful day, a colleague and I decided to spice up our Monday by tracking down Susan Sontag, a famous female intellectual of the era, to see if she might want to write us a little think piece on corporate boards. “Boards?” she responded incredulously. “Boards?” she repeated, adding “How dreadful!” She clearly believed that boards were boring!
Was Ms. Sontag right? Let’s take a journey through time, and you can decide for yourself. Here are 25 top headlines for governance—starting just a bit before my time but continuing to present.
1977: The National Association of Corporate Directors (NACD) launches association and publication. NACD, founded by directors and headed by John Nash for its first 20 years, gave corporate directors an unprecedented way to obtain board-focused education and research, and to engage in networking and advocacy. In its first year the Association faced a significant challenge: implementation of the Foreign Corrupt Practices Act of 1977, which required boards to oversee internal financial controls. That same year, the New York Stock Exchange (NYSE) required its listed companies to have independent audit committees. During NACD’s earliest days, the Securities and Exchange Commission (SEC) was headed by the wise Harold M. Williams, who urged directors to take the lead in governance reforms.
1981: Ira M. Millstein wrote The Limits of Corporate Power (McMillan). This book, explaining such subjects as the duties of loyalty and care, would be the first of many influential Millstein publications.
1982: Martin Lipton invents a new kind of shareholder rights plan – the “poison pill.” This controversial mechanism allowed boards to buy time when facing an unsolicited takeover.
1983: Agency theory comes of age through Michael Jensen’s article on “The Separation of Ownership and Control” (Journal of Law and Economics). This article brought awareness of the issue first raised in 1932 by Adolf Berle and Gardiner Means in The Modern Corporation and Private Property. They noted that in the large modern public corporation, shareholders are widely dispersed and must rely on directors to represent them.
1984: Congress creates the U.S. Sentencing Commission to issue guidelines on corporate sentencing. Eventually published in 1987, these guidelines, applied to “white collar” crimes, among others. They offer reduced sentences to corporations with strong compliance programs. This development put compliance on the map for boards. The same year, the American Bar Association would undertake a major revision of its Model Business Corporation Act, a guide for state corporation law including model statutes for director and officer duties.
1985: The Delaware Supreme Court decides Smith v. Van Gorkom. This decision made it clear that the decision-making processes of directors would be subject to increased scrutiny. This same year saw the founding of the Council of Institutional Investors (CII) and Institutional Shareholder Services (ISS), both of which put more “heat” on boards to perform well on behalf of shareholders. Smith v. Van Gorkom began a long line of Delaware cases exploring the dimensions of fiduciary duties—too numerous to list here.
1986: The Delaware Supreme Court decides Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc. This case, involving a hostile bid for the cosmetics giant, put permanent pressures on boards to look for best offers once their company was in play. Similarly that same year, the Sixth Circuit court decided in Edelman v. Fruehof Corp. that directors should not accept a management buyout without considering other offers. The next year, in CTS Corp. vs. Dynamics Corp. of America, the U.S. Supreme Court upheld the rights of states to pass antitakeover statutes. But the Revlon decision was not the only notable event in 1986. That same year, Congress removed a real estate tax deduction as part of the 1986 Tax Reform Act, triggering the collapse of numerous banks (1000 closed between 1986 and 1991), resulting in numerous lawsuits against their officers and directors. Also in 1986, the Executive Leadership Council (ELC) was formed with the intent of increasing diversity at the board level through facilitating dialogue among African Americans within corporate leadership. Together with Catalyst, a group founded in the 1960s to promote advancement of women, ELC has been a force for diversity in boardrooms.
1987: The National Commission on Fraudulent Financial Reporting releases its report on the subject, sponsored by the Committee of Sponsoring Organizations (COSO). The work of this group, chaired by James Treadway (aka the Treadway report) gave directors their first set of guidance on their role in the detection, prevention, and oversight of fraud. Global contemporaries included the Cadbury Committee report in England (1992, with sequels in 1995 by Greenbury and Hempel), the Dey Report in Canada (1994), the King Report in South Africa (1994), and the Vienot Report in France (1995). Also in 1987, NACD held its first Director of the Year dinner, honoring Juanita Kreps before a packed audience. Unfortunately, the next morning, directors awoke to news of the stock market plunge on Black Monday. The meeting room that had been full the night before was mostly empty, except for John Nash and a few governance die hards.
1988: The Department of Labor issues a set of guidelines, now known as the “Avon Letter.” The Department-directed Employee Retirement Income Security Act (ERISA) required fund managers to vote proxies with the same diligence as they would when making other fiduciary decisions, thus placing more scrutiny on proxies and on boards.
1990: Institutional investor ownership of shares hits 53.3 percent mark. This was a big one. Prior to 1990, individuals held most shares of corporate equity. Institutional holders tipped the balance in 1990, according to a report published by the Columbia University Institutional Investor Project that year. The new prominence of institutional shareholders led to sweeping reforms in proxy voting rules in 1992 that allowed freer communications among investors.
1992: General Motors board elects John Smale as independent chairman and the National Law Journal publishes the first article (by Martin Lipton and Jay Lorsch) on the role of the lead director. Before these events, no major public company had an independent chair and the role of lead directors was entirely informal. The Lipton-Lorsch article put lead director on the map. That same year, Robert A. G. Monks and Nell Minow published Power and Accountability, which called for more investor activism and board responsiveness; and Michael Jacobs wrote Short-Term America, warning about the short-termism of investors and managers alike.
1993: NACD releases the first of its long-running series of influential Blue Ribbon Commission reports. This ongoing annual series provides best-practice guidance to directors based on the experiences of their peers, rather than from regulatory or academic sources. The 1993 report on executive compensation was followed by landmark reports on director compensation and “director professionalism,” among nearly 20 topics so far. The report came out just as the Internal Revenue Service passed a tax code rule – 162(m) – which removed deductibility of pay over $1 million, with exemptions for companies with plans approved by independent compensation committees. This new rule had the unintended result of increasing CEO pay because many CEOs and boards saw $1 million as the new floor for CEO pay, rather than as a ceiling.
1994: California Public Employees Retirement System (CalPERS) challenges 400 public company boards to develop corporate governance guidelines similar to the guidelines General Motors had pioneered for publication that year. Before the mid-1990s, boards’ operating principles were largely informal. The advisor for the GM guidelines, Ira Millstein, later became governance counsel to and a director of NACD, and chaired the NACD Blue Ribbon Commission on Director Professionalism. Campbell’s Soup Company and Mallinckrodt Inc. were also pioneers in this vein.
1995: Congress passes the Private Securities Litigation Reform Act. This law, enacted by a pro-business Congress and administration, attempted to reduce the level of private securities litigation against directors under federal law. In that same year, Kennesaw State University in Georgia opened a Corporate Governance Center. Similar centers at Dartmouth College, University of Delaware, University of Tennessee, Stanford University, and Yale University (among others) followed.
1996: The Delaware Chancery Court opines in In re Caremark International Inc. Derivative Litigation in 1996. This was the first court decision to state that directors have an affirmative duty to seek reasonable assurance that a corporation has a system for legal compliance. That same year, NACD formed the Center for Board Leadership to support corporate governance research.
1997: The Coalition for Environmentally Responsible Economies (CERES) starts a Global Reporting Initiative (GRI). Today GRI exists as a framework for reporting on sustainability issues including environmental, governance, and social, enabling directors and investors to track these important nonfinancial aspects of corporate performance.
1999: The Organization for Economic Cooperation and Development (OECD) issues Corporate Governance principles – and the New York Stock Exchange, the National Association of Securities Dealers, and NACD release guides for audit committees. The OECD guidelines were the first set of international governance principles for use by directors. In 2000, the World Bank Group launched the Global Corporate Governance Forum to expand use of the guidelines beyond the OECD.
2001: Only months after the tragedy of 9/11, Enron files for bankruptcy. Later, reports by a committee of its own board and a report of Congress identified ways in which the Enron board itself contributed to the problem. Enron filed for bankruptcy in December 2001, an event followed less than six months later by the bankruptcy of WorldCom, creating a public outcry and hunger for corporate reform.
2002: Congress passes the Sarbanes-Oxley Act. Among many other provisions, this law increased the duties of audit committees, mandated whistleblowing systems, and required the stock exchanges to tighten the governance standards for their listed companies. That same year the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) signed the “Norwalk Agreement,” agreeing to work toward the convergence of accounting principles—a move that increased the complexity of serving on board audit committees.
2003: New York Stock Exchange, NASDAQ, and American Stock Exchange publish corporate governance guidelines. The guidelines, an outgrowth of a more general Sarbanes-Oxley mandate, set a series of specific requirements for audit, compensation, and nominating and governance committees. In composing these new list rules, the exchanges heeded suggestions from NACD, based on our Blue Ribbon Commission reports.
2004: NACD co-founds the Global Director Development Circle (GDDC) for the exchange of leading practices among director associations. The earliest members represented director organizations in five continents.
2006: The Delaware Supreme Court upholds the Chancery Court decision on Disney. In the case In re The Walt Disney Company Shareholder Litigation, the Delaware Chancery Court exonerated the board and some senior officers of The Walt Disney Company for using the right process a decade earlier to approve an officer’s pay package with generous severance, even though the officer had not performed well. In its decision, the Chancery Court said that it could not in fairness apply current governance standards to judge an event that had occurred ten years prior. Furthermore the court cautioned that a failure to follow current best practice standards (such as those promulgated by the Council of Institutional Investors (CII) or NACD, both cited in the decision), while lamentable, does not constitute liability.
2007: In a period of strong stock market performance, the SEC issues rules permitting Internet availability of proxy materials. These rules facilitated communications between boards and shareholders—the subject of an NACD Blue Ribbon Commission the following year. The same year, Automatic Data Processing (ADP) spun off Broadridge Financial Solutions, which began developing platforms for more direct communication between corporations and shareholders.
2008: NACD releases Key Agreed Principles to Strengthen Corporate Governance for U.S. Publicly Traded Companies. As the financial panic set in, these principles, endorsed by the International Corporate Governance Network (ICGN), and based on areas of consensus among NACD, the Business Roundtable, and the Council of Institutional Investors show how many areas of agreement there are among managements, directors, and investors.
2009: Lehman Brothers files for bankruptcy, the largest U.S. bankruptcy ever. That same year President Barack Obama signed into law the Fraud Recovery and Enforcement Act of 2009, which mandated appointment of a Financial Crisis Inquiry Commission to explore the causes of the financial crisis. The final report of that Commission, published nearly two years later, found “dramatic breakdowns in corporate governance…at every level.”
2010: Congress passes the Dodd-Frank Wall Street Reform and Consumer Protection Act. This act, especially Title IX (particularly Subtitles E and G) are best known among directors for say on pay, disclosures regarding board leadership structure, increased independence for compensation committees, whistleblower bounties, and private ordering for proxy access. Additional mandates include compensation clawbacks, conflict minerals disclosures, and disclosure of the ratio of CEO to median employee pay. In response to the high level of new board regulations, the Rockefeller Foundation funded a study group on corporate boards, which found the “board gaps” in need of bridging.
As for 2011, it remains to be seen what this year’s big event will be. But meanwhile, I will continue this happy task of tracking highlights—all the events I have heard, written, and discussed, and in many cases, witnessed first hand. It’s a fascinating adventure.
Oh, I forgot one item—a 26th in honor of next year:
2012: NACD celebrates 35 years. See you then!
(Who said boards were dreadful?)