Feb 26, 2013

Boards must ask questions to avoid front-page headlines like this

Board members of any organization must keep in mind that their oversight responsibilities require them to ask tough questions to avoid having their names reported in the lead story by any news media.  The lead, upper-left article on page one of the Sunday, February 24, 2013, The Columbus Dispatch, headlined “Columbus School Board gave Harris all the Power,” began: If it looks like the Columbus Board of Education hasn’t been paying close attention to the details of running a $1 billion-a-year enterprise, it’s by design. In 2006, the board took a hands-off approach to governing the school district with its “policy governance” model, handing Superintendent Gene Harris unprecedented control to run the district with minimal board oversight. Now, Harris is heading for the exit, leaving the board concerned for its survival. The Columbus Board of Education apparently believed it was following John Carver’s “policy governance” described by The Dispatch as: Policy governance was created by an Atlanta educational psychologist, John Carver, for corporate boards. Describing his governance model on a YouTube video, Carver said that a board sets its values in broad terms and then lets management “use any reasonable interpretation of those words” to run the operation. “At that point it’s turned over, for the most part, to the CEO,” Carver says. In other words, Harris actually runs things, as long as she can cite a policy somewhere in the manual that the board approved. And there usually is a policy that lets Harris decide just about anything.  Board members of any organization, whether or not they’re following Carver’s policy governance, have the legal duty to oversee the health of their organization from all viewpoints, including business, financial, legal, governance and reputational.  Board members are required to do so in the same way that an ordinarily prudent person, acting in the best interest of the organization, would oversee his or her business, financial, legal, governance and reputational health.  A board member of any Ohio non-profit or for-profit corporation is not entitled to rely upon formations, opinions, reports or statements of the corporation’s officers or employees unless the board member reasonably believes the officer or employee is “reliable and competent in the matters prepared or presented.”  Courts hold that this right of reliance requires a board member to assure that sufficient questions are asked to form a reasonable belief about the officer’s or employee’s reliability and competence on each such matter.  This can be done with respect to any matter by the board member asking his or her own questions; relying upon questions asked by other directors whom the board member has confidence regarding the matter; or by the committee having the designated authority for oversight of the matter.  This should not be done on important matters, such as annual budgets, “without debate on a ‘consent agenda,’” as The Dispatch reported was being done by the Columbus Board of Education.  It must be done at a meeting at which a quorum is present.  The questions, at a minimum, should include: How does this action further the organization’s best interest?  Both board members and management have a duty of loyalty to act in the best interests of the organization.  If you are not clear from management’s presentation on a matter, appropriate questions for your protection and to assure management’s reliability include, “How does this further the best interests of the organization.”  More specifically, “How does this action benefit shareholders as a whole?” for stock organizations; or “members,” for a membership organization; or “stakeholders of the organization’s mission,” for non-member charitable organizations. Who else benefits from the action?  Directors are held to higher scrutiny of transactions in which another director, officer or other insider may have a personal or economic interest.  Accordingly, appropriate questions could include, “Who other than the organization benefits from this transaction?”  Also, “Is the transaction fair from an economic point of view to the organization despite any interest of such insiders?” How does this further the organization’s strategic direction?  As an organization’s highest corporate authority, the board is ultimately responsible for the strategic direction of the organization.  Accordingly, appropriate questions could include, “Is the action consistent with the overall strategic direction of the business of the organization?” If not, “Is the strategic direction being changed as a result of the action?” What is being asked of us as the board?  Directors, as well as management, have a duty of care to act as an ordinarily prudent person in a like position would act under similar circumstance.  Accordingly, appropriate questions could include, “What is the nature of the action we are being asked to take?” and “What is our role going forward?”  Equally important is the extent to which continued board oversight is necessary or appropriate. What is to be expected of management?  Management also has the same duty of care with respect to matters delegated to them.  Accordingly, appropriate questions could include, “What discretion does management have to execute or not execute the action?”; “What additional authority does management need from directors in the future and when?” and, “What is expected of management in terms of reporting back to the board?” What if things don’t go as expected?  As a director, you should take into account the premise of Nassim Nicholas Taleb’s book, “The Black Swan: The Impact of the Highly Improbable,” that policy makers such as board members must consider all of the possibilities, especially those that could have a high impact, albeit remotely probable, and not just the normal.  The current “Great Recession” is likely the result of a failure to take into account the highly improbable, but high impact, occurrence:  “What happens if real estate prices fall?” Accordingly, the most important questions that a board should ask are “what if,” most importantly, “What happens if things don’t go as expected?” and, “What financial, legal, ethical, strategic and reputational issues are involved?”

Posted by J. Beavers in  Non Profit Governance   |  Permalink

 

Aug 29, 2012

Too Much Emphasis on Stock Price

The results of America's three-decade corporate focus on maximizing stock prices are "not pretty," according to Joe Nocera, New York Times columnist, in an op-ed article published on August 10, 2012, and reprinted in The Columbus Dispatch on August 14, 2012.  I agree. According to Nocera, "Too many chief executives succumb to the pressure to boost short-term earnings at the expense of long-term value creation. After all, their compensation depends on it.  In the lead-up to the financial crisis — to take just one extreme example — financial institutions took on far too much risk in search of easy profits that would lead to a higher stock price." He quotes Lynn Stout, a Cornell University law professor, as saying that "there is nothing in the law that supports the idea that shareholders should be the only constituency that matters." Nocera and Stout are correct.  Most states' laws do require the governing board of a stock corporation to take into account the interest of shareholders in determining what is in the best interest of the corporation, but most states' laws permit governing boards to take into account other interests such as, in Ohio, the interests of:  the corporation's employees, suppliers, creditors, and customers; the economy of the state and nation; community and societal considerations; and the long-term as well as short-term interests of the corporation and its shareholders. Nocera's assertion is that executives' cash-based compensation became too closely aligned with the price of their companies’ stock.  Too much of the focus has been on quarterly revenues and earnings with "far too much risk in search of easy profits that would lead to a higher stock price." Nocera's cites as better corporate stewardship an action by Marissa Mayer, the new chief executive at Yahoo, who ordered "the stock ticker be removed from the company’s internal home page,” and told employees, “I want you thinking about users.” Another executive who "gets it" is Steven Davis, CEO of Bob Evans.  According to Davis, “The first rule of executive compensation is that shareholders get paid first.”  Mr. Davis's point is that an organization’s leaders should not be entitled to performance or incentive compensation or bonuses unless they are leading the operations of their organizations to result in growing net worth, capital or surplus.

Posted by J. Beavers in  Commentary  Executive Compensation   |  Permalink

 

Aug 21, 2012

Business Roundtable releases 2012 Principles of Corporate Governance

The Business Roundtable, an association of chief executive officers of leading U.S. companies and an advocate of best practices in corporate governance, released an updated version of its Principles of Corporate Governance. In summary, the introduction to the 2012 Principles states:  “[t]he Business Roundtable supports the following guiding principles: First, the paramount duty of the board of directors of a public corporation is to select a chief executive officer and to oversee the CEO and senior management in the competent and ethical operation of the corporation on a day-to-day basis. Second, it is the responsibility of management, under the oversight of the board, to operate the corporation in an effective and ethical manner to produce long-term value for shareholders. The board of directors, the CEO and senior management should set a “tone at the top” that establishes a culture of legal compliance and integrity. Directors and management should never put personal interests ahead of or in conflict with the interests of the corporation. Third, it is the responsibility of management, under the oversight of the board, to develop and implement the corporation’s strategic plans, and to identify, evaluate and manage the risks inherent in the corporation’s strategy. The board of directors should understand the corporation’s strategic plans, the associated risks, and the steps that management is taking to monitor and manage those risks. The board and senior management should agree on the appropriate risk profile for the corporation, and they should be comfortable that the strategic plans are consistent with that risk profile. Fourth, it is the responsibility of management, under the oversight of the audit committee and the board, to produce financial statements that fairly present the financial condition and results of operations of the corporation and to make the timely disclosures investors need to assess the financial and business soundness and risks of the corporation. Fifth, it is the responsibility of the board, through its audit committee, to engage an independent accounting firm to audit the financial statements prepared by management and issue an opinion that those statements are fairly stated in accordance with Generally Accepted Accounting Principles, as well as to oversee the corporation’s relationship with the outside auditor. Sixth, it is the responsibility of the board, through its corporate governance committee, to play a leadership role in shaping the corporate governance of the corporation and the composition and leadership of the board. The corporate governance committee should regularly assess the backgrounds, skills and experience of the board and its members and engage in succession planning for the board. Seventh, it is the responsibility of the board, through its compensation committee, to adopt and oversee the implementation of compensation policies, establish goals for performance-based compensation, and determine the compensation of the CEO and senior management. Compensation policies and goals should be aligned with the corporation’s long-term strategy, and they should create incentives to innovate and produce long-term value for shareholders without excessive risk. These policies and the resulting compensation should be communicated clearly to shareholders. Eighth, it is the responsibility of the corporation to engage with long-term shareholders in a meaningful way on issues and concerns that are of widespread interest to long-term shareholders, with appropriate involvement from the board of directors and management. Ninth, it is the responsibility of the corporation to deal with its employees, customers, suppliers and other constituencies in a fair and equitable manner and to exemplify the highest standards of corporate citizenship. These responsibilities and others are critical to the functioning of the modern public corporation and the integrity of the public markets. No law or regulation can be a substitute for the voluntary adherence to these principles by corporate directors and management in a manner that fits the needs of their individual corporations.” The full version of the 2012 Principles is available here.

Posted by K. Kinross in  Board Composition  Executive Compensation  Policies Governing Management  Shareholder Issues/Corporate Elections & Voting   |  Permalink

Recent Updates

Boards must ask questions to avoid front-page headlines like this Feb 26, 2013

Too Much Emphasis on Stock Price Aug 29, 2012

Business Roundtable releases 2012 Principles of Corporate Governance Aug 21, 2012

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