Tag Archive: Marty Coyne

Determining Fair Director Pay

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Because board members set their own pay, director compensation is a wide-open opportunity for shareholder litigation. In this BoardVision interview–moderated by NACD’s Publisher and Director of Partner Relations Christopher Y. Clark—Marty Coyne, experienced director and chair of NACD’s New Jersey chapter, and Dan Laddin, partner at Compensation Advisory Partners, discuss ways boards can limit exposure to litigation when it comes to director compensation:

  • Both the compensation committee and the governance committee are involved in determining director pay.
  • Director compensation aligns with that of company peers.
  • Director compensation is based on the responsibility of directors—which may see little change from small to large companies.
  • Companies may consider adopting a shareholder-approved limit for director compensation.

Determining Fair Director Pay

Here are some highlights from the discussion.

Christopher Y. Clark: Do you think that the [nominating and governance] committee or the compensation committee should [have primary responsibility for setting director pay]?

Dan Laddin: Chris, if we look at the market, it’s pretty mixed—a little bit leaning towards [the] compensation committee versus [the] nom/gov [committee]. At the end of the day, I think it really comes down to the principles you use for compensation of your directors overall. One, you may want to make sure you have an objective committee, which obviously you would [with]…either. You also want to make sure that compensation for directors aligns with the philosophy of the directors, and so in that sense, maybe the compensation committee is a little closer to that. At the end of the day, there’s a lot of cross-pollination usually across those two committees, so either works fairly well. We do see a little bit [of] leaning towards the comp committee though.

Clark: Thanks, Dan. Marty, you’ve been on all types of boards. What is your take?

Marty Coyne: I prefer the compensation committee…mainly because the comp committee is much more familiar dealing with the compensation consultant and much more familiar with the peer group. And so when you look at all of the data inputs, the comp committee understands the source, where the weaknesses are, and the strengths. I think one of the key things, though, is the full board approves director compensation. So regardless of which committee brings it forth, and brings forth the recommendation, the full board has to vet it and approve it.

Clark: In many cases, for leading governance practices, company size does matter. [Companies] are affected by different policies and regulations. The boards are occasionally very different; occasionally they are not. But when it comes to director compensation, it is a hot button and it certainly affects that board’s reputation [and] the company’s reputation, but most importantly, that individual director’s reputation. So, Dan, again, let me start with you. Do you feel that there is a company size factor here when it comes to compensation and reputation?

Laddin: I think reputation risk exists regardless of the size of the company, and that’s somewhat borne out by the compensation data we would take a look at. … [T]here’s a basic responsibility of directors that doesn’t really change, regardless of company size, and that’s really reflected in the compensation data.

Coyne: There is a scale that the bigger the company [is], the more the directors are paid. The exposure potential for larger-company directors is far greater than the smaller-company directors because they just make better news than the smaller companies. There is a point though; it’s almost like a minimum size where, when you hit it,…the director workload is pretty much the same regardless of the size of the company. And, to attract and retain good directors, you’ve got to pay a fair compensation for those individuals.

Clark: Many companies have director compensation limits. My question would be why, and what is a fair compensation limit?

Laddin: Sure. So this concept of the limits really [has been] coming to play in the last few years, as there were a few lawsuits against companies that said directors are inherently conflicted when they are setting their own pay. And in those specific companies, the view was that they set it well above any credible norm… The attorneys came in and said, “We can basically put in a shareholder-approved limit on directors’ compensation,” which then gets us back within this business judgment rule.

Clark: For the shareholder-approved limit, what’s the status today?

Laddin: We’re seeing most companies, as they go back to shareholders to renew their plans in the normal course, that that’s when they go back and put in a limit. When they go back for new equity plans or just general approval from shareholders, that’s when it’s happening. I wouldn’t say there’s a mad rush to do it, but it is normal course.

Clark: Well, Marty, what has been your experience? You’ve been on public boards, [and] you’ve been on private boards.

Coyne: I think…having a limit is very, very valid—and it’s necessary. I don’t see any resistance to putting limits on directors’ compensation. If I were a shareholder, I would expect my compensation plan that I’m approving to have limitations for director compensation.

Clark: When we look at the umbrella of business judgment and compensation, I’ve got to ask you, is the litigation environment lukewarm or is it red hot?

Laddin: I would say it’s lukewarm at this point. The lawsuits have really been at the extremes where director compensation was well above the norm.

Coyne: I think…there’s been a quantum step forward on the nom/gov side in choosing the right directors sitting around the table. I think the next step is going to be how do you compensate your directors? What is your philosophy to attract and retain good directors? How does director compensation correlate with company performance? Is there potential pay at risk? I think there will be some…comparisons of director comp to the TSR. And if a company is not performing well, I think directors are going to have to answer a lot of tough questions about why are we paying you when the company performance is so poor? But I don’t see any dramatic changes in the next couple of years.

For further considerations on director pay practices, please review the Report of the NACD Blue Ribbon Commission on Director Compensation.

Additional NACD Resources

2015–2016 Director Compensation Report

2015–2016 Director Compensation Report: Appendices

Report of the NACD Blue Ribbon Commission on Director Compensation

Skepticism Lessons Learned

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I’ve always been a trusting soul. One of my earliest lessons involved me diligently removing debris from a stream for someone in exchange for the official deed to the stream. The problem was, he didn’t own it.

I did not possess the skill of skepticism—defined in Audit Standard (AU) 316 as “an attitude that includes a questioning mind and a critical assessment of … evidence.” If I had, I would have observed that the shiny gold seal I was given was the kind you can buy at Woolworth’s 5 &10, and that the stream ran not only behind the deedor’s property but contiguous ones as well.

Yet there’s hope for us all. On October 1, NACD launched a unique new webinar series on Skepticism as part of an ongoing Anti-Fraud Collaboration with the Center for Audit Quality (CAQ), Financial Executives International (FEI), and The Institute for Internal Auditors (IIA). Along with many at NACD, I was involved in this exciting project, and had a chance to review the upcoming episodes.

“Skepticism” relates to a search for the truth. The term comes from the Greek skeptikos used some 2,300 years ago by disciples of the philosopher Pyrrhos. The verb skeptesthai means “to reflect, look, view.” The earliest self-declared skeptics emphasized the importance of the senses in confirming reality. Over time, the word’s meaning expanded to include the notion of reasonable doubt. Today, the “skeptic” is perceived as a doubter—someone who may trust, but must always verify.

It’s an attitude we all need. And perhaps no one knows this better than series moderator Michele J. Hooper, president and CEO of The Directors’ Council, and board member of NACD and CAQ’s governing board. Through questions and comments based on her considerable experience on a variety of public company boards she brings out the best in the six-part series, outlined as follows:

  1. A brief introduction.
  2. The Etiquette and Ethics of Skepticism with Mary M. Mitchell, president, The Mitchell Group, and Bill White, professor at Northwestern University and experienced director.
  3. Professional Skepticism and the External Auditor with Cindy Fornelli, executive director, CAQ; and Greg Weaver, CEO and chairman, Deloitte & Touche.
  4. Skepticism and the Audit Committee with Marty Coyne, lead director and audit committee member, Akamai Technologies; and Ken Daly, president and CEO, NACD.
  5. Skepticism and the Financial Executive with Marie Hollein, president and CEO, FEI; and Greg Kabureck, chief accounting officer, Xerox Corporation.
  6. Skepticism and the Internal Auditor with Richard Chambers, president and CEO, The IIA; and Paul Sobel, vice president and chief audit executive, Georgia Pacific.

In addition to these webinars, NACD will release a white paper with in-depth background and additional resources on skepticism in December.

Why skepticism? It’s a great way to break the fraud triangle—composed of incentive, opportunity, and rationalization—which can cost businesses so dearly. Financial reporting fraud, the focus of this series, is responsible for a significant percentage of the $3.5 trillion that businesses lose to fraud every year, according to a recent study by the Association for Certified Fraud Examiners.

The value of the labor I devoted to cleaning out that stream for a fake deed may not be worth much in dollars, but whenever trust is violated the cost is too high.

Fraud is unfortunately a fact of life; therefore skepticism is a skill we all need.