Tag Archive: Enron

NACD Directorship 2020™

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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.”

NACD Chairman’s Address: Restoring Faith in Capitalism

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After a visually stunning acrobatic performance by members of Cirque du Soleil, NACD Chairman and former U.S. Secretary of Commerce Barbara Hackman Franklin opened the 25th NACD Board Leadership Conference with a call to restore public trust in capitalism.

With conference attendees representing nearly all 50 states, all of NACD’s 22 chapters and 10 countries ranging from Kuwait to Jamaica, Franklin noted that “governance is indeed global.” However, her focus on capitalism was focused specifically on the American style of market capitalism. From a historical perspective, capitalism generally falls under attack following economic crises and scandals. The Enron and Worldcom scandals resulted in the enactment of the Sarbanes-Oxley legislation one decade ago. Today, directors are in the process of incorporating the many provisions to come out of the 2010 Dodd-Frank financial reform legislation.

In her speech, Franklin noted that public distrust of business executives is at an all-time high. As such, businesses are operating under the “new normal.” No longer are public companies expected to just make a profit for shareholders. According to the NACD chair, the smartest companies are paying attention to such areas as the environment, sustainability, and diversity.

Franklin listed five ways directors can support a restored faith in capitalism:
1. Be the best [directors] can be.
2. Stress the tone at the top: The critical ingredient for long-term ethical behavior is culture.
3. Build a strong board that values openness and candor.
4. Push for corporate social responsibility actions to be embedded in the company strategy.
5. Stay current: Continuing education for corporate directors is a necessity.

The time to act, according to Franklin, is now. If companies do not step up, the government will step in.