Moderator:
Willow Shire - Director, TJX and Vitesse Semiconductor
Panel:
Gerry Miller - Managing Director, DolmatConnell & Partners
Win Priem - Director, EMC, WPI and Lahey Clinic
Eileen Rudden - Director, Agilysys, SoundBite, Brown University
Gerry Miller was the prime presenter before Q&A. He outlined major issues and trends, saying focus on "say on pay" would continue but stressed a partial "wait and see" approach relative to how companies are responding. He recommended that a competent and safe response is to clearly explain all compensation actions and the philosophy underlying these actions with more emphasis on content and less on prose.
Win Priem talked about his experience as Chair of the EMC Compensation Committee and how they focused on the performance metrics of revenue, earnings per share and free cash flow. He noted that while stockholder price was not included, it might be a metric in the future.
Eileen Rudden talked about the directors' goal of retaining key executives while simultaneously delivering shareholder value. She also touched briefly on the potential problem of the increasing executive pay at nonprofits, especially where coaches and director of medical schools earn more than CEOs.
While "say on pay" is receiving significant press coverage, it is not a new issue. Historically in the 1970's and 1980's, Congress encouraged employee stock options, which became a dominant factor thereafter. In the Reagan years, a million dollar cap was put on base salaries which then quickly rose to that level. Conclusion: whatever takes place, the max could very well become the standard.
The target today is severance, especially as it relates to change of control and termination for sub par performance. A total severance cap of just under three times total compensation may become the norm.
Another issue is "clawback" of compensation which was paid for performance that over time is below expectations. This concept may receive active shareholder and union support. Also, compensation "gross up" to cover extraordinary tax events will probably be eliminated.
Unjustifiable perks may not be a major factor with shareholders but make great stories in the media. Correspondingly, compensation that is earned or vested over time sends a positive message. Review all contracts and don't base decisions solely on your own opinion but insist on quality data from your comp consultants.
Caution was urged relative to utilizing proxies that are beautiful prose but short on details and transparency. The reference cited was the style of Enron, Bear Stearns and Lehman Brothers.
The sentiment was expressed that shareholders in general will not have specific pay recommendations because they do not thoroughly understand the equity portion and at the same time the media has not been helpful in clarifying it.
Comp Committees are often meeting mid-year to simply discuss business strategy. Underwater stock options were discussed at length with specific reference to how attractive to the company, from an accounting expense standpoint, a low-priced stock could be, thereby making options more desirable to the company than restricted stock.
Stock option exchanges raise a red flag when top executives are included.
The opinion was expressed that total compensation for senior executives had peaked and will go down. Part of this adjustment will be driven by the SEC getting tough on Wall Street where compensation in recent years was driven by short-term and transaction-based activities, not an increase in long-term value.
The panel did not see a broad trend in director pay going down because of the increased workload. Many boards are going from simply an oversight role to a performance review one. Additionally, there is more responsibility and more liability.
In summary, executive compensation in these challenging times will be performance-based with an emphasis on long-term rather than short-term results, and with the goal of retaining key personnel while simultaneously creating shareholder value.
Deferred Compensation Tax Provision (409A) - This provision requires deferred compensation plans to satisfy several criteria in order to avoid immediate taxation of all compensation from the plan for the current year and in past years, and to avoid an additional 20% excise tax and interest.
Golden Parachute Payments Provisions (280G) - This provision sets a limit on change-in-control severance payments to certain executives at a multiple of 3x their base amount (defined as 5-year average W-2 income). If the severance payment to a covered executive exceeds this threshold, then an additional tax of 20% is imposed on any severance payment greater than 1x their base amount. In addition, the severance payment becomes non-deductible to the company.
Internal Revenue Code Section 162(m) - This IRS rule allows a company to deduct, as an expense, any executive pay up to $1 million as well as executive pay above $1 million if it is related directly to performance.
Panel Members, Partial Bios
Grace Fey served as Chair UMass, Dennis Walsh partner KPMG and Audit Chair NEVets Shelter, David Healy CFO Mt Ida College previously CFO Milton Academy and Williams, Moderator Frank Libby founder legal defense firm Libby Hoopes
Grace Fey discussed the demands of being on a Nonprofit Board with publicly appointed members. She described how she reached out not just to the board but throughout the University to learn but also build relationships which proved most useful in demanding times.
Dennis Walsh described when he joined the Shelter board he did not conduct the due diligence regarding management, other directors and the financial status of the organization that he would carry out and recommend today.
David Healy spoke of the differences in service on higher education boards that deal with a much longer time frame i.e. decades. He described how a college and possibly a hospital deals with a more complete spectrum of client needs and highlighted the unique situation of college tenure.
Nonprofits despite the name must be run as a business and generate profits, surpluses or retained earnings or they will not survive.
Boards should become familiar with the Unrelated Business Tax (UBIT) for any commercial activities.
Communication to all stakeholders is at least as important in the nonprofit area due to its tax-exempt status.
The new IRS 990 forms are considerably more demanding putting a new emphasis on transparency, a full board review, executive compensation justification and good governance policies especially related to conflict of interest. Federal and state review is becoming more common
The Massachusetts law putting a liability cap on a nonprofit organization and their directors of $20,000 can be breached if there is a violation of the duty of care {such as failure to be adequately informed regarding the operation} or a violation of the duty of loyalty {a conflict of interest}. Either could be justification for a charge of gross negligence.
Directors would be well advised to carry a personal umbrella liability policy that provides coverage for director or trustee service.
Board membership which is based solely on contributions is a practice that is disappearing. Significant contributors, who are not qualified or who do not desire board service are often recognized by membership in a separate organization such as "The President's Advisory Board"
Joining a board simply for prestige purposes it is usually a mistake. Directors and trustees should be engaged, understand and be interested in the organization's mission as well as know their expected board role and required contribution, thereby avoiding future embarrassment.
New directors should insist upon and boards should provide a comprehensive orientation procedure. This could involve director interviews, background checks, financial statements, D&O coverage description, Bylaw review and meetings with senior management.
Troublesome directors involved in activities such as shadow boards or meeting dominance should be brought to the attention of the leadership, specifically the governance committee or the chair. If the situation remains unresolved your resigning should be considered. Trustees and directors must be allowed to debate and differ, but speak as one externally.
While the responsibilities and risks related to being on a nonprofit board have expanded in recent years the satisfaction that is received from service can be substantial.
Panel Members, Partial Bios:
Sandy Moose has served in three lead roles on 3 different corporate boards. Sandy has been a Lead Director of a New York Stock Exchange company, a Presiding Director of another New York Stock Exchange company and a Non-Executive Chair of a mutual fund. Jack O'Brien is a Non-Executive Chair at Cabot Corporation and the Lead Director at TJX. Ken Sichittano currently is not a Lead Director but serves as chair of the Audit Committee. George Anderson of Tapestry Networks moderated the panel.
George Anderson reported that
Sandy Moose stated that the Presiding Director role was really limited to only chairing executive sessions but her Lead Director/Non-Executive Chairresponsibilities were more extensive. As a chair, she attends meetings once per month and spends time with operating members of management and does attend a number of committee meetings. Ken Sichittano discussed ways in which the board members can work effectively with the Lead Director/Non-Executive Chair and gave examples of the valueof a Lead Director/Non-Executive Chair in management succession and in crisis planning. The panel agreed that having a Lead Director/Non-Executive Chair job in place and having the board comfortable with that role made it easier to deal with the crisis when it occurs rather than create the role and deal with the crisis at the same time.
George Anderson presented a list of Lead Director responsibilities that often appear in the board charters:
The Sarbanes Oxley Act and shareholder demands after Enron and other accounting scandals created pressure to install either a Non-Executive Chair or a Lead Director in order to strengthen the authority of the independent directors. The New York Stock Exchange listing requirements, recommendations from organizations such as ISS, NACD and Calpers and other governance organizations all favor separation of some of the powers of the CEO by electing a Lead Director or Non-Executive Chairman. The panel stated that they thought that the current financial turmoil and the problems with risk management oversight would only increase the pressure for boards to appoint a Lead Director or a Non-Executive Chairman.
The panel focused their discussion on the role of the Lead Director/Non-Executive Chair with regard to the following:
The panel stated that in most cases they met separately with the CEO and the Legal Department to establish the agenda for the board meeting. The Lead Director generally did not chair the board meeting but the Non-Executive Chairperson did chair the actual board meeting.
The panel stated that the Lead Director/Non-Executive Chair always led the independent executive session when management was not present. In somecases, ideas developed at the executive sessions were utilized to establish the agenda for the next meeting or, in some cases, even changed the agendafor the current board meeting. Many companies seem to be having 2 executive sessions; one before the board meeting to highlight the important things that were going to be discussed that day and one at the end of the board meeting to develop a list of follow-up items that the CEO should address in response to directors' concerns. The panel members stressed that it is important not to let the executive sessions run too long unless there are really serious problems because the sessions can create unnecessary apprehension on the part of management and squeeze the amount of time for prepared management presentations.
George stated that some Lead Director/Non-Executive Chairs attended all committee meetings but that some others felt the attendance was not necessary and, in fact, should be avoided in order to insure that they were not taking away authority from the committee chairs. Jack and Sandy did state that they do attend as many committee meetings as they can and they felt that their attendance helped them direct the flow of information at the board meetings and helped them provide recommendations to the CEO on items to be discussed later. The panels indicated that in most cases the Lead Director/Non-Executive Chair did not participate as actively in the committee meetings as the regular members. Some Lead Director/Non-Executive Chairs also served as chairman of a committee. In cases there they did serve as chairman of a committee, they were usually chairs of the Compensation or the Governance Committees.
The panel felt that the Lead Director/Non-Executive Chair could add value to the company and to the performance of the board by making sure that the directors and the CEO stay aligned with their communications. Criticism or suggestions made during the executive session by directors for follow-up activity should be communicated in a manner that minimizes tension between the directors and the CEO. In some cases the panel felt it was better to have the CEO speak to the directors immediately following the executive session about issues that were raised rather than wait until the next board meeting. In some cases, directors' questions that occur during the board meeting can be more effectively addressed by the establishment of the agenda for the next board meeting.
The panel felt that a Lead Director/Non-Executive Chair working with the CEO to handle difficult or underperforming directors is a more effective procedure because the responsibility is better defined and shared. The Lead Director/Non-Executive Chair should talk to a director that is having a problem with the board. If handled properly, the probability of improving the relationship and the contribution of the director is higher then if the CEO just dealt with the problem directly or waited until a formal board evaluation takes place.
The job descriptions do not formally deal with the relationship with the CEO but the panel stressed that it was one of the more important responsibilities of the Lead Director/Non-Executive Chairman. It may not be necessary to become the CEOs good friend but, on the other hand, it is important to have a good relationship with the CEO before important issues arise in order to develop a good sense of trust. Having a good relationship allows the director to guide the discussion and seek consensus on issues. It is also important to provide feedback to the CEO so that he or she can weigh how much consensus there is on the board on key issues. In some instances, the Lead Director/Non-Executive Chair can serve as a mentor to the CEO, especially if it is a new CEO and/or a CEO who has not dealt with Wall Street before. While it is not necessary for a Lead Director/Non-Executive Chair to be an ex-CEO, that experience can be helpful.
At board meetings the Lead Director/Non-Executive Chair may have a role in the presentations but if he or she does have a role, it should only be a minor role. If the Lead Director/Non-Executive Chair does deal with shareholders, communications should be coordinated with the CEO, investor relation's person and corporate counsel. The members of the panel believe that, to the extent possible, shareholder communications of all types should be directed to the members of management rather than to the members of the Board but acknowledge that in some cases the Lead Director/Non-Executive Chair, Audit Committee Chair or the Compensation Chair may be required to communicate directly with the shareholders or a shareholder group.
Most Lead Director/Non-Executive Chairs do direct the process for the CEO evaluation each year.
The panel stated that they felt that the position is becoming a permanent part of board governance. They were skeptical of the benefits of the European model of splitting the Chairman and CEO role and giving the Chairman very significant responsibilities. The panel did not think that the European model would ever be appropriate in the United States but did state that the Lead Director/Non-Executive Chair role has assumed increasing management responsibilities over the last two years and will probably continue to increase the scope of responsibilities again in 2009.