Restoring Trust in Corporate Governance: The Six Essential Tasks ...
Post on 12-Feb-2017
222 Views
Preview:
Transcript
Restoring Trust in Corporate Governance:The Six Essential Tasks of Boards of Directors
and Business Leaders
Policy Brief
January 2010
Policy and Impact Committee of the Committee for Economic Development
Restoring Trust in Corporate Governance:
The Six Essential Tasks of Boards of Directors
and Business Leaders
POLICY BRIEF
Policy and Impact Committee of the Committee for Economic Development
iii
Contents
EXECUTIVE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi
I . INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
II . RESTORING TRUST WITH SIX ESSENTIAL GOVERNANCE TASKS . . . . . . . . . . . . . . . . . . . . . . 3
1) RedefiningtheMissionoftheCorporation—andtheRolesoftheBoardofDirectorsandtheCEO . . . . . 3
2) RevampingtheLeadershipDevelopmentProcess . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3) RefocusingtheProcessforCEOSelection—andforOtherPromotionsinto HighCorporatePositions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
4) ReformulatingOperationalObjectivesforPerformance,RiskandIntegrity . . . . . . . . . . . . . . . . . . . . . . . . . 5
5) RevisingCompensationfortheCEO,SeniorExecutivesandOtherKeyEmployees . . . . . . . . . . . . . . . . . . 9
6) Re-aligningtheBoard’sOversightFunction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
III . OBSTACLES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
1) LaborMarkets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2) DifferingInternationalStandards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
3) ChangingBoardCompensationAdvisors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
4) Short-TermismofInstitutionalInvestors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
5) ManipulatingtheNumbers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
6) TheReductionofPressureforChange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
IV . ACCOUNTABILITY AND LEADERSHIP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
1) TheMarket . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2) ShareholderInvolvement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
3) GovernmentRegulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
4) BacktotheFuture:TheDutiesofBoardsofDirectorsandTopBusinessLeadership . . . . . . . . . . . . . . . . 18
ENDNOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
iv
v
Policy and Impact Committee
Chairmen
PATRICK W. GROSSChairmanTheLovellGroup
WILLIAM W. LEWISDirector Emeritus, McKinsey Global
InstituteMcKinsey&Company,Inc .
Members
JOHN BRADEMASPresident EmeritusNewYorkUniversity
BETH BROOKEGlobal Vice Chair - Public Policy,
Sustainability and Stakeholder Engagement
Ernst&YoungLLP
GERHARD CASPERPresident Emeritus and ProfessorStanfordUniversity
MICHAEL CHESSERChairman & CEOGreatPlainsEnergyServices
RANJANA B. CLARKExecutive Vice President, Global Payments
and Global StrategyWesternUnion
ROBERT COLSONPartner - Institutional AcceptanceGrantThornton
W. BOWMAN CUTTERManaging DirectorWarburgPincusLLC
KENNETH W. DAMMax Pam Professor Emeritus of American
& Foreign Law & Senior Lecturer, University of Chicago Law School
TheUniversityofChicago
MICHELLE DENNEDYChief Governance OfficerSunMicrosystems,Inc .
HOWARD FLUHRChairmanTheSegalCompany
PATRICK FORDPresident and Chief Executive Officer, U.S.Burson-Marsteller
CONO R. FUSCOManaging Partner (Retired)GrantThornton
BEN W. HEINEMAN, JR.Senior FellowHarvardUniversity’sSchools
ofLaw&GovernmentFormerGESeniorVicePresidentforLawandPublicAffairs
RODERICK M. HILLS , ESQ.ChairmanHillsStern&MorleyLLP
PAUL M. HORNSenior Vice President (Retired)IBMCorporation
EDWARD A. KANGASChairman and Chief Executive Officer
(Retired)DeloitteToucheTohmatsu
JOSEPH E. KASPUTYSChairman, President and Chief Executive
OfficerGlobalInsight,Inc .
DAVID H. LANGSTAFFFormer President & CEO, Veridian Corp.;
Chairman, Wildheart GroupVeridianCorporation
JOHN C. LOOMISVice President, Human ResourcesGEInfrastructure
BRUCE K. MACLAURYPresident EmeritusTheBrookingsInstitution
MARGERY W. MAYERPresident, Scholastic EducationScholasticInc .
WILLIAM MCDONOUGHVice Chairman and Special Advisor to the
ChairmanMerrillLynch&Co .,Inc .
ALFRED T. MOCKETTChairman & CEOCorinthianCapitalLLC .
LAURENCE G. O’NEILPresident and Chief Executive OfficerSocietyforHumanResource
Management
STEFFEN E. PALKORetired PresidentXTOEnergyInc .
DONALD K. PETERSONChairman and Chief Executive Officer
(Retired)AvayaInc .
LOIS E. QUAMPresident and Chief Executive OfficerTysvar
NED REGANProfessorTheCityUniversityofNewYork
DANIEL ROSEChairmanRoseAssociates,Inc .
LANDON H. ROWLANDChairmanEverGladesFinancial
KENNETH P. RUSCIOPresidentWashington&LeeUniversity
DONNA E. SHALALAPresidentUniversityofMiami
CHRIS SHAYSFormer Member of Congress
JOHN C. SICILIANOSenior Managing Director and CEO,
Investment BoutiquesNewYourLifeInvestmentManagement
PETER P. SMITHSenior Vice President, Academic
Strategies and DevelopmentKaplan,Inc .
JON STELLMACHERExecutive PresidentThriventFinancialforLutherans
FREDERICK W. TELLINGVice President, Corporate Policy & Strategic
Management (Retired)PfizerInc .
vi
PATRICK TOOLEVice President & Chief Information OfficerIBMCorporation
VAUGHN O. VENNERBERGSenior Vice President and Chief of StaffXTOEnergyInc .
JOSH S. WESTONHonorary ChairmanAutomaticDataProcessing,Inc .
JOHN P. WHITERobert & Renee Belfer Lecturer, Kennedy
School of GovernmentHarvardUniversity
JACOB J. WORENKLEINChairman and Chief Executive Officer,
(Retired)USPowerGeneratingCo .
vii
Corporate Governance Subcommittee
Chairman
BEN W. HEINEMAN, JR.Senior FellowHarvardUniversity’sSchools
ofLaw&GovernmentFormerGESeniorVicePresidentforLawandPublicAffairs
Members
MORTEN ARNTZENPresident and Chief Executive OfficerOverseasShipholdingGroup,Inc .
DEBORAH HICKS BAILEYChairman and CEOSolonGroup,Inc .
LYDIA I BEEBECORPORATE SECRETARYChevronCorporation
CATHERINE BROMILOWPartnerPricewaterhouseCoopersLLP
BETH BROOKEGlobal Vice Chair - Public Policy,
Sustainability and Stakeholder Engagement
Ernst&YoungLLP
HYE-WON CHOIVice President and Head of Corporate
GovernanceTIAA-CREF
MARTIN COHENManaging DirectorMorganStanley
ROBERT COLSONPartner - Institutional AcceptanceGrantThornton
EDWARD F. COXOf CounselPattersonBelknapWebb&Tyler
STEPHEN A. CRANEChairmanInsuranceandReinsuranceStrategies
MICHELLE DENNEDYChief Governance OfficerSunMicrosystems,Inc .
WILLIAM H. DONALDSONChairmanDonaldsonEnterprises
MAUREEN ERRITYDirector Center For Corporate GovernanceDeloitteLLP
MARGARET FORANVice President, Chief Governance Officer
and SecretaryPrudentialFinancial
PATRICK FORDPresident and Chief Executive Officer, U.S.Burson-Marsteller
BARBARA HACKMAN FRANKLINPresident & CEO and Former US Secretary
of CommerceBarbaraFranklinEnterprises
CONO R. FUSCOManaging Partner (Retired)GrantThornton
PATRICK W. GROSSChairmanTheLovellGroup
ADAM J. GUTSTEINChief Executive Officer and PresidentDiamondManagement&Technology
Consultants,Inc .
HOLLIS W. HARTDirector of International OperationsCiti
RODERICK M. HILLSChairmanHillsStern&MorleyLLP
PHILIP K. HOWARDPartnerCovington&BurlingLLP
ROSEMARY M. KENNEYDirector, Corporate Governance &
CommunicationsPfizerInc
JOHN LIFTINGeneral CounselD .E .Shaw&Co .,L .P .
IRA M. MILLSTEINSenior PartnerWeil,Gotshal&MangesLLP
MICHAEL G. MORRISChairman, President and Chief Executive
OfficerAmericanElectricPowerCompany
NELS OLSONManaging Director, Eastern Region; Sr.
Client Partner, CEO & Board Services Practice
Korn/FerryInternational,Inc .
LAURENCE G. O’NEILPresident and Chief Executive OfficerSocietyforHumanResource
Management
DEBRA PERRYManaging MemberPerryConsultingLLC
DONALD K. PETERSONChairman and Chief Executive Officer
(Retired)AvayaInc .
MARK PREISINGERVice President, World Wide Public Affairs
& CommunicationsTheCoca-ColaCompany
NED REGANProfessorTheCityUniversityofNewYork
LANDON H. ROWLANDChairmanEverGladesFinancial
JOHN C. SICILIANOSenior Managing Director and CEO,
Investment BoutiquesNewYorkLifeInvestmentManagement
SARAH B. TESLIKSr. Vice President, Policy and GovernanceApacheCorporation
viii
Corporate Governance Subcommittee
VAUGHN O. VENNERBERGSenior Executive Vice President and Chief
of StaffXTOEnergyInc .
FRANK VOGLPresidentVoglCommunications
JOHN C. WILCOXChairmanSodaliLtd .
HAROLD M. WILLIAMSPresident EmeritusGettyTrust
Guests
MICHAEL CLAESManaging Director, Corporate PracticeBurson-Marsteller
JUDITH SAMUELSONExecutive Director, Business and Society
ProgramTheAspenInstitute
Staff
ELLIOT SCHWARTZVice President and Director of Economic
Studies
STUART KOTTLEResearch Associate
ix
PREFACE
InaseriesofPolicyStatementssince2006oncorpo-rategovernanceissues,theCommitteeforEconomicDevelopmenthasanalyzed:first,howcorporationscouldregainthepublic’strustinthewakeoftheEnron-WorldComscandals;second,howcorporatedirectorscouldpromotethelong-termenduringquali-tiesoftheirenterprisesratherthangiveintofinancialmarket“short-termism;”and,third,howcorporateleadershipcouldberebuiltbylinkinglong-termperformancewithsocietalgoals .
Sincethesereports,thenation(andtheworld)hasbeenhitbytheworsteconomiccrisissincetheGreatDepression .Onecausewaspoorbusinessdecision-makingbyboardsofdirectorsandseniorexecutivesinboththefinancialandindustrialsectors .Corporatecompensation,inparticular,hasbeensharplycriticizedaspoorlystructured,acauseofexcessiverisk-takingandoutofproportiontogoodjudgmentandcommonsense .Thesedevelopments,combinedwithaconstantmediabarrageofstoriesaboutbusinessissues,havecombinedtodrivepublicconfidenceinbusinesstoaverylowebb .Criesformoreregulationofbusinessarecomingfrommanyquarters .
Inaperiodofeconomicturmoilandpublicpolicyfer-ment,thisPolicyBriefseekstoidentifythesix essential and seamlesstaskswhichboardsofdirectorsandseniorexecutivestogethermustdischargetocreatelong-termvaluethroughstrongeconomicperformance,soundriskmanagementandhighintegrity .Tohelprestoredeservedtrustincorporategovernanceandaccount-ability,itseekstoprovideanactionableframeworkonthefundamentalsforprivate-sectorleadership .Corporateleadersmustbalancerisk-taking (innovationandcreativity)withrisk-management(financialandoperationaldiscipline)andfusehighperformancewithhighintegritytocreatedurable,sustainablegrowingeconomicenterprisesthatbenefitshareholdersandothercriticalstakeholders .
Restoring Trust in Corporate Governance:The Six Essential Tasks of Boards of Directors
and Business Leaders
ThisPolicyBriefisreleasedwhennecessary,spiritedandextensiveregulatorydebatesaretakingplaceonthesafetyandsoundnessofthefinancialsystemandongovernanceissuesapplicabletoallpubliclyheldcompanies(e .g .,disclosureoncompensationandrisk;enhancedshareholderrole) .But, the Policy Brief purposely focuses exclusively on private sector self-determi-nation, not public sector regulation.Thereasonforthisapproachisstraightforward:adeep-seatedbeliefthat,whatevertheoutcomeofthemanypublicinquiriesandvariedpublicpolicydebates,onlytheleadershipofcorporations—boardsofdirectorsandseniorexecu-tives—canmakethecomplexdecisionsthatwillyieldsustainable,durablecreationofvaluewithsoundriskmanagementandhighintegrity .Becausethisroleofcorporatedecision-makingisenduringandcriticaltoournation’seconomicwell-being,thePolicyBriefencouragescorporationstofocusontheseessentials,whicharefundamentalregardlessofpolicyoutcomes,aswemoveacrossthebusinesslandscapealteredbytheGreatRecession .
ThisPolicyBriefseekstobuildon,addtoandtightlyfocustheworkofCEDandotherleadinggovernancegroupsontoday’sproblems .ItalsointegratesinsightsfromBenW .Heineman,Jr .’songoingresearchandwritingoncorporateintegrity .Itisintendedtobeanactionable,practicalideal .Itisintendedtostimulatediscussionontheessentialsofcorporategovernance .Itis,ofcourse,hardlythefinalwordonthistopic .But,forthosewhomustfocusonmakingreal-worlddeci-sionsaboutthedestinyofpubliclyheldcompanies,itisaninvitationtofocuseddebateoncorporateleaders’mostfundamentaltasks .
ThisPolicyBriefisauthoredbyBenW .Heineman,Jr .,formerGESeniorVicePresidentforLawandPublicAffairs .HeisaCEDTrusteeandchairoftheCEDSubcommitteeonCorporateGovernance,seniorfellowatHarvardUniversity’sLawSchoolandKennedySchoolandmemberoftheadvisoryboardoftheMillsteinCenterforCorporateGovernanceand
x
PerformanceattheYaleSchoolofManagement .HeistheauthorofHigh Performance with High Integrity (HarvardBusinessPress,2008) .ThePolicyBriefwaswrittenwiththeactiveengagementandadviceofCED’scorporategovernancesubcommittee .
ACKNOWLEDGEMENTS
Wearegratefulforthetime,effort,andcareputintothisPolicyBriefbyMr .Heineman,theCEDTrusteesandotherparticipantsintheSubcommitteeonCor-porateGovernance,andotherexpertsandcolleagueswhocommentedonearlierdraftsofthisreport .WethankElliotSchwartz,CEDVicePresidentandprojectdirectorfortheSubcommitteeonCorporateGovernance,andStuartKottle,CEDResearchAssociate,fortheirassistance .WearealsogratefultobothStephenM .DavisandIraM .MillsteinoftheMillsteinCenterforCorporateGovernanceandPerformanceattheYaleSchoolofManagement,StephenB .YoungoftheCauxRoundTable,andRoderickHillsoftheHillsProgramonGovernanceattheCenterforStrategicandInternationalStudiesfortheirendorsementandsupportofthisPolicyBrief .
PatrickW .Gross,Co-ChairPolicy and Impact CommitteeChairman,TheLovellGroupFounder,AMS,Inc .
WilliamW .Lewis,Co-ChairPolicy and Impact CommitteeDirectorEmeritus,McKinseyGlobalInstituteMcKinseyandCompany,Inc .
xi
Thebusinesscommunityfacesacrisisinconfidence .Manyareasking:howcancorporationsgovernthem-selvesmoreeffectively?
—This Policy Brief describes six fundamental, inter-related tasks which boards of directors and senior executives should discharge in governing publicly held corporations in order to regain the vital trust upon which business is based.Ithopestomakeasingularcontributionbydefiningthesixessentialgovernancetasks,byemphasizingtheirinterrelation-shipandbyshowingthattheseseamlesstasksarethetouchstoneofcorporateaccountability .
Boardsofdirectorsinparticularshouldfocusonthesesixtasksinclarifyinga“right-sized”rolegoingforward .Thiswillrequirefocusedintensity .But,theCEOandotherseniorcompanyexecutivesmustmakethesetasksthecoreoftheirleadershipandmanagementeffortsasthey“govern”thecompanyonaday-to-daybasis .ThisPolicyBriefisnotjustabouttheroleofboardsofdirectorsbutalsoabouttheimportanceofapowerfulboard/business-leaderpartnershipindirect-ingthedestinyofpubliclyheldcorporations .
Byshowinghowclosely,indeedseamlessly,thesesixtasksrelatetoeachother,thisPolicyBriefhopestoprovideanaffirmative,actionableframeworkwhichboardsandbusinessleaderscanapply,asappropriate,intheirowncorporations(totheextenttheyarenotdoingsoalready,whichsomecertainlyare) .Althoughwritteninaprescriptiveform,thispaper,preparedintheaftermathofthegreatesteconomicdown-turnin60years,isintendedtostimulateanimportantdiscussionontheessentialsofcorporategovernance,nottoexhaustorendit .Itencouragesdebateonthesubstanceofwhatcorporationsshoulddo,notjustontheprocessesforhowtodoit .
Thesixseamlesstasksare:
1) A redefinition of the mission of the company—and the role of the board of directors and the CEO tocreate
durablevalueforshareholdersandotherstakeholdersthroughsustainedeconomicperformance,soundriskmanagementandhighintegrity .Thisrequiresthatleadersmustfindasoundbalancebetweenrisk-taking(innovationandcreativity)andrisk-management(financialandoperationaldiscipline)andmustfusethishighperformancewithhighintegrity(commit-menttolaw,ethicsandvaluestoreducelegal,ethical,reputational,publicpolicyandcountryrisk) .Theemphasisonshort-termmaximizationofshareholdervalueshouldbereducedsignificantly .
2) A revamped internal leadership training process builtontheseintegratedessentialsofperformance,riskandintegrity—andonacultureinwhichallarehonoredandexemplified .
3) A refocused CEO selection process,flowingfromarevisedleadershipdevelopmentprocess,whichseeksabroadersetofskillsappropriatetoaredefinedmission .
4) A restatement of fundamental but operational finan-cial and non-financial measurements for performance, risk and integritythatexpressesthenear,mediumandlong-termcorporategoals—withprimaryfocusoncreationofsustainablevalueforshareholdersandotherstakeholders,suchasemployeesandcustomers,essentialtothecompany’swell-being .
5) A revision of compensationfortheCEOandtopbusinessleaders—andforotheremployeeswithsignificantimpactonthecorporation—whichisbasedonrealperformanceagainstthoserestatedoperationalobjectivesintheperformance,riskandintegritydimensions .Althoughtopbusinessleadershipwillreceivesubstantialannualcashcompensation,asignificantproportionofcompensationinaparticularyearwillbevariablecashandvariableequitywhichwillbepaidoutorheldbackovertimeasobjectivesaremet,exceededormissed .
6) A re-alignment of the board’s fundamental oversight functionwiththehighestpriorityperformance,risk
Executive Summary
xii
andintegrityissues—thoseoperationalobjectiveswhicharecentraltoattainmentofcorporatemissionandtocompensationbasedontheimpactofactionsoverbothnearerandlongerterms .
Corporations’currentstatementsofpurposemaymakereferencetothesesixfundamentaltasks .But,thetasksmayeitherbelostamidstmanyothercorporategoalsormaynotbematchedbyrobustpractice .Theharshrealityisthatbusinessorganizationsmustbedesigned—byboardsataconceptuallevelandbusinessleadersatbothaconceptualandoperationallevel—tocheckshort-termism,greedandcorruptionandtochannelcapitalism’sinnovationand“animalspirits”intosustained,durablecreationofrealeconomicvaluewithinaframeworkoffinancialdiscipline,law,ethicsandvalues .
Arelentlessfocusonthesixfundamentaltasksisanimportantguidetocreationofsustainableshareholderandstakeholdervalue .Moreover,developingappropri-ateexecutivecompensation—thegovernancetopicgeneratingthemostpublicheattoday—canonlyflowfromdefinitionofcorporatemissionandarticulationofrelatedoperationalgoalsandmeasurements .
—This Policy Brief also identifies difficult, real-world problems which boards of directors and busi-ness leaders must candidly confront because these issues can undermine a corporation’s will and ability to discharge the six, seamless tasks in a meaningful way. Theseproblemsinclude:competitioninthelabormarketfortopexecutiveandotherbusinesstalent;dif-feringregulatorystandardsandtheriskofregulatoryarbitrage;thelimitationsofmanycurrentcompensa-tionconsultants;theincreasingshort-termismofmanyinstitutionalinvestors;andthedangersofgaminganysystemofmeasurements .Eachcompanywillneedtodeviseitsownresponsetotheseissues .Thisreportbrieflynotessomepossiblesolutionstotheseproblemsintheinterestofstimulatingdebateandhighlightinggovernanceagendaitemsforfurtherresearchandanalysis .
—Finally, the Policy Brief discusses the ultimate governance question: how can corporate account-ability be assured?Thepricingsignalsfromthestockmarket,anenhancedshareholderroleingovernanceandincreasedgovernmentregulationallmayhavea
role .Butallhaveimportantimperfectionsinassuringaccountability .Allarethesubjectofstrenuousdebate .
ThemostdirectaccountabilitymechanismissoundstewardshipbytheCEOandseniorexecutivesunderthedirectionandoversightofhard-working,independent-mindedboardsofdirectorswhoarebestpositionedtobalancethemanycompetinginterestsatplayinallsignificantcorporatedecisions .Criticsarguethatthisaccountabilitymechanismisweakbecauseboardscanbeself-perpetuatingandinwardlooking,incapableofaskingCEOshardquestionsandignoringimportantshareholderorotherstakeholderconcerns .
Buttheothermethodsofaccountabilityare,inmanyrespects,allaimedatthefundamentalgoalofthisPolicyBrief:strong,energizedboardsandbusinessleadershipdedicatedtothedischarge,ingoodfaith,ofthesixessentialfunctions,inpartthroughmeaningfulconsultationwithshareholdersandotherimportantstakeholders .
* * * * *
Manyreports,likethisone,addresshardproblems,withdeepstructuralroots,bycallingforleadership .Toooftenthatpleagoesunanswered—orthestruc-turalproblemsaretoointractable .Buttoday,withagovernancecrisisinconfidence,itisintheinterestofcorporationsandofcapitalismitselfforpeopleinleadershippositionstrulytoaddressthegovernanceproblemsoftheeraandprovideaclear,credibleandpowerfulprivatesectorresponse .
1
Thebusinesscommunityfacesacrisisinconfidence .Manyareasking:howcancorporationsgovernthem-selvesmoreeffectively?
ThisPolicyBriefdescribessixfundamental,inter-relatedtaskswhichboardsofdirectorsandbusinessleadersshoulddischargeingoverningpubliclyheldcorporationsinordertoregainthevitaltrustuponwhichbusinessisbased .
Asdiscussedinmoredetailbelow,thefirst taskistoredefinethecorporatemissionawayfromshort-termmaximizationofshareholdervaluetowardsthreereinforcingobjectives:creationofdurablevalueforshareholdersandstakeholdersthrough—
a . sustainedeconomicperformance b . soundriskmanagementand c . highintegrity .
Fromthisgeneralrestatementofmissionflowthefive other tasks:
2 . revampedleadershipdevelopment; 3 . refocusedCEOselection; 4 . reformulationofoperationalgoalstoreflect
thebroadermission; 5 . revisionofcompensationtorewardattain-
mentofthoseoperationalgoals;and 6 . re-alignmentofboardoversighttotrackthe
highestpriorityperformance,riskandinteg-rityissues .
Boardsofdirectorsinparticularshouldfocusonthesesixtasksinclarifyinga“right-sized”rolegoingforward .Thiswillrequireenergyandintensitywithinthenormaltimeparametersofboardservice .But,thislaser-likeboardfocuswillonlybepossibleiftheCEOandotherseniorcompanyexecutivesalsomakethesetasksthecoreoftheirleadershipandmanagementeffortsasthey“govern”thecompanyonaday-to-daybasis .ThisPolicyBriefisnotjustabouttheroleofboardsofdirectorsbutalsoabouttheimportanceofa
powerfulboard/business-leaderpartnershipindirect-ingthedestinyofpubliclyheldcorporations .
Byshowinghowclosely,indeedseamlessly,thesesixtasksrelatetoeachother,thisPolicyBriefhopestoprovideanaffirmative,actionableframeworkwhichboardsandbusinessleaderscanapply,asappropriate,intheirowncorporations .Suchaframeworkisofspecialimportanceinorientingthecompanytowardstheessentialinanerawhenanycommonalityamongshareholdershasbrokendown—indeedshareholdershavemanyconflictingobjectivesandagendas—andwhenstakeholders,too,makemanycompetingdemandsonthecorporation .Theforwardtrajectoryofcorporationsinvolvesabalancebetweenmanycompetingobjectivesandclaims—notpursuitofonesimplegoal—and,attheendoftheday,onlyboardsandseniorexecutivescanmakethecomplexdecisionstofindtherightbalance .
Althoughwritteninaprescriptiveform,thispaper,preparedintheaftermathofthegreatesteconomicdown-turnin60years,seekstostimulateanimportantdiscussionontheessentialsofcorporategovernance,nottoexhaustorendit,byarguingfortheprimacyofthesixfundamentaltasks .Itencouragesdebateonthesubstanceofwhatacorporationshoulddo,notjustontheprocessesforhowtodoit .Itdiscussesillustrativeconceptstoprovidecontextbuthopestoavoidmind-numbingorrotebox-checkingdetail .
Thiscrisisofconfidenceincorporategovernancehasmanyorigins .Majorfinancialinstitutions(banksandinvestmentbanks)andindustrialcompanies(automobiles)havegonebankruptwithsignificantinjurytoallstakeholders .Importantfinancialservicecompaniescontributedtothecreditmelt-downandsevererecession(through,amongotherthings,poorriskmanagement,highleverage,inadequateliquidity,creationofill-understoodproducts) .High,poorlystructuredcorporatecompensationhasdrawnsharpcriticismasacauseinexcessiverisktakingandas
I. Introduction
2
outofproportiontogoodjudgmentandcommonsense .Andothercorporationsinboththefinancialandindustrialsectors,eventhosewhicharewell-run,arenotimmunefromgeneralreputationalharmtobusinesscausedbyalmosttwoyearsofheadlinesaboutcorporateproblems,excessesandfailures .
Toaddresstheserealandperceivedissuesaboutcorporateleadership,aboutcorporations’abilitytogovernthemselveseffectivelyandaboutcorporateaccountability,therearetwobroadoptions:
• morepublic-sectorregulationtolimitprivate-sectorself-determinationeitherinthefinancialsectororacrossallpubliclyheldcorporations;and
• morebroad-gauged,transparentandeffectiveprivate-sectorleadershiptoarticulatethecorepurposesofpubliccorporationsandtocarrythemoutwithrigor .
ThisPolicyBrieffocusesonthesecondoption:enhancedcorporateself-governanceatallpubliclyheldcompanies .1Itbuildsonpriorpolicystatementsfromleadinggovernancegroups2andonrecentreportsaboutthecausesandcuresofthefinancialandauto-mobilecompanymelt-downs .3
It hopes to make a singular contribution by defining the six essential governance tasks, by emphasizing their interrela-tionship, and by showing that these seamless tasks are the touchstone of corporate accountability.
Acompanyculturethattrulymakesthesixintercon-nectedtasksarealityisnecessarywhetherornotthereisadditionalpublic-sectorregulation .Somecompaniesdischargesomeofthesetasks;somemaydischargeall .But,tomeetthedemandsofthetimes,allcompaniesmayfindithelpfultore-assesstheircurrentapproachagainstthesesixpriorityactions .Attheendoftheday,whatevertheresultofthepublic-policydebatesaboutgovernancestructureandprocess,onlyout-standingboardsofdirectorsandoutstandingbusinessleadershipcantogethermakecorporationswork .
3
II. RESTORING TRUST WITH SIX ESSENTIAL GOVERNANCE TASKS
Inthisperiodofeconomicupheavalandchange,boardsofdirectorsandCEOsarebuffetedfrommanysideswithconflictingdemandsaboutwhattheyshoulddo .Acommonboardlamentisbeingoverwhelmedwithtoolittletimeandtoomuchcomplexity .
Inarguingthatboardsofdirectorsandbusinessleadershipmustdischargesixcoretasksinordertoregainpublictrust,thisPolicyBriefunderscoresthattheseareseamless,buildinguponandreinforcingeachother .Whilethedetailsofdischargingthesetaskswillnecessarilyvarywithcompany,industry,geographyandcompetition,focusingonthemtogetherasaction-able,corefunctionswillhelpanswerthepressingquestionaskedbyboardsandbusinessleaders:whatshouldbeourprioritytasks?
Attemptingtodrawthelinebetweenboard-of-directorandbusiness-leaderresponsibilityisnotthepurposeofthisPolicyBrief .Thelong-standingpropositionthattheboardofdirectorssetsthecorporation’sdirectionandoverseesimplementation—andtheCEOandseniorexecutivesleadandmanagethecorporationit-self—continuestoapply .Toomuchofthegovernancewriting,especiallysinceEnron,hasemphasizedtheboard’sroleinbeingacheckandbalanceonmanage-ment,asiftheyarenecessarilyinperpetualopposition .
But—and this must be emphasized—iftheboardcorrectlydefinesthejobsoftheCEOandtopbusinessleadersandchoosestherightpeople,theprimaryrelationshipshouldbeaquestioningbutaffirmativepartnership .Thatpartnershipcriticallybutconstruc-tivelyteststhereasonablenessofboth thefundamentalsystemsandprocessesinstitutedbymanagementand thehighprioritydecisionsandresultsflowingfromthosesystemsandprocesses .
1) RedefiningtheMissionoftheCorporation—andtheRolesoftheBoardofDirectorsandtheCEO .
Fartoomuchemphasishasbeenplacedinrecentyearsonthesinglecorporategoalofmaximizingshort-term
earningspershare,stockpriceandshareholdervalue .Asdiscussedbelow,thisisdue,inimportantpart,topressuresexertedbythechangeininstitutionalinves-torswhoareincreasinglypreoccupiedwithshort-termresults,withbeatingcompositeindustrybenchmarksandwiththeirownabsoluteprofitability,ratherthancompanyfundamentals .
Astatementofthemissionofpubliclyheldcompanies,appropriatetothesetimes,iscreationofdurableshareholderandstakeholdervalueby:
• Attaining high performancewhichmeans:strong,sustainedeconomicgrowth;throughthecontinuousprovisionofhighqualitygoodsandservices;whichinturnprovidedurablebenefitsforshareholdersandotherstakehold-ers(creditors,employees,customers,suppliers,communities,regulators)uponwhomthecompany’shealthdepends .
• Highperformanceentailsanessentialbalancebetweenrisk-taking(thecreativityandinnova-tionsoessentialtothegrowthofoureconomy)andeconomicrisk-management(thefinancial,commercialandoperationaldisciplinessoessentialtothesoundnessanddurabilityofbusinessinstitutions) .
• Creating a culture of high integritywhichmeans:robustadherencetothespiritandletteroftheformalrules,legalandfinancial;adoptionofglobalethicalstandardswhichareinthecompany’senlightenedself-interestandwhichbinditanditsemployeesasiftheywereformalrules;andsecuringemployeecommitmenttothecorevaluesofhonesty,candor,fairness,reliabilityandtrust-worthinessinallinternalandexternalrelationships .
• Highintegrityhaspositivebenefitsinsidethecompany,inthemarketplaceandinaglobalsocietybutitalsoaddressesseriouslegal,
4
regulatory,reputational,communicationsandpublic-policyriskswhicharealsoimportantfacetsofcontemporarybusiness .
• Fusing high performance with high integrity .Thisfusionofsustainedeconomicperformancewithastrongcommitmenttolaw,ethicsandvaluesisthefoundationofthecontemporarycorporation .
• Properly addressing business-in-society issues. Inbalancingrisk-takingwithriskmanagementandinfusinghighperformancewithhighintegrity,contemporaryCEOs,andtheirtopbusinessassociates,needtopaysystematicattentiontobusiness-in-societyissues:howsocietycanandwillaffecttheconductofbusiness;howbusinesshasanimpactonsociety;andhowbusinessleadersshouldshapeandcommunicatethealignmentofbusinesswithsocietalintereststhroughtheconceptofcorporatecitizenship .4
Asemphasized,eachcompanywillgivedetailedmeaningtotheseconceptsofperformance,riskandintegrity,buttogethertheyconstitutethecoremis-sionofthecontemporarycorporationanddefinethefundamentalroleoftheboardofdirectors,theCEOandotherseniorexecutives .
2) RevampingtheLeadershipDevelopmentProcess .
Corporationsoftenprovidehighlyspecializedtraininginsuchbusinessskillsassales,marketing,finance,IT,businessdevelopment,manufacturing,engineeringandproductortechnologydevelopment .Theyalsomayprovidelessspecialized,moregeneraltrainingforP&L(profit-and-loss)managers,whoarepromotedfrompositionsofnarrowexpertisetoassumebroaderoperationalresponsibilities .Suchgeneralmanagertrainingcustomarilyfocusesonachievingcommercialgoalsindifferentenvironments .
• But,withcarefulboardoversight,theCEOandothertopbusinessleadersmustinstitute management development processesforcorpo-rateP&Landfunctionalleadersthat,atearlystagesintheircareers,putstrongemphasisnotjustondevelopingspecializedexpertiseoronachievingcommercialgoalsbutondevelopingtheexperienceandskillstodothisthrough
balancedrisk-managementandperformancewithintegrity .Thisemphasisonriskmanage-mentandanintegritycultureshouldbeatalent-managementimperativeasindividualsrisewithinthecorporationandfaceincreas-inglybroaderchallengesrequiringintegrationofallthreedimensionsofcorporatemission .
• Suchdevelopmentwillinvolvebroader and different educational courses offered by the corporation during an individual’s career ontheinterrelationshipbetweenperformance,riskandintegrityinthecontextofaglobalsociety .SuchcoursesmaybeofferedinsidethecompanyorinexecutiveMBAorexecutiveeducationprograms—butarethinkingofsuchcourses,bothinthecompanyandinacademia,maybenecessary,givenabroaderdefinitionoftheCEOandbusiness-leaderroleandtherobustdebateaboutnecessarychangesinbusi-nesseducationasaresultofrecentbusinessfailures .5
• Suchleadershipdevelopmentwillalsoentailgiving high-potential individuals a broader range of assignments earlier in their careers—e .g .,workingonateamscrubbinganewproductlineforitsrisks;beingintegraltoamajorinternalinvestigationofpotentialwrong-doing;helpingtoascertainthegeopoliticalissues,aswellasthebusinessissues,inlocatinganewmanufacturingfacilityinoneofthreeorfourSoutheastAsiannations;assessingsupply-chainrisksandopportunities—andthird-partysuppliers—inemergingmarkets .Establishingthetheoryandpracticeofsystematicallyimplementingcross-functionalassignmentsforup-and-comingleadersisavitalrolefortheCEOandseniorHRleaderworkingwiththemanagementdevelopmentandcompensationcommitteeoftheboardofdirectors .
3) RefocusingtheProcessforCEOSelection—andforOtherPromotionsintoHighCorporatePositions .
Theultimateresultoftheinitialtasks—redefiningthemissionofthecompanyandtheCEOandrevampingleadershipdevelopment—shouldbeaCEO-succession
5
processwhichexpresslysearchesforandthenselectsanewleaderforthecompanywhosepersonalityandcareerreflectthecombinationandintegrationofthenecessaryperformance,riskandintegritydimensions .
• Asitbeginsthissuccessionprocess,theboardofdirectorsshouldrestateandreiter-atethemissionofthecompanyandthekeycharacteristicsofbalancingrisktakingwithriskmanagementandfusinghighperformancewithhighintegrityinacompany-specificarticulationofpurposeaimedatbothinsideandoutsideaudiences .
• Inexercisingthisfunction—whichhashistori-cally(andproperly)beenviewedasitsmostimportanttask—theboardshouldhopefully(ideally)beabletochoosefromastrongtalentpoolinsidethecompany .
• Similarly,promotionstoseniorcorporateleadershipjobswhichtheCEOrecommendsandtheboardofdirectorsapprovesshouldbeawardedtoindividualswhohavethebroadconstellationoftalentsandskillsrequiredbythecontemporarycorporationwitharedefinedmission .
Theneedforcoreeconomicperformanceskills—fi-nancial,commercial,operational,strategic—areasimportantaseverintheCEOandtopbusinessleaders .Nothingsaidhereisintendedinanywaytodiminishtheprimacyofhigheconomicperformanceinabusi-nessorganization .Butfailuresofbusinessleadershipintherecentpasthavefrequentlybeenduetoseriousweaknessesinriskassessmentandmanagement,ortoseriouslapsesinadheringtolegal,financialorethicalstandards .
Thesefailureshavehadsignificant,evencatastrophic,impactsonshareholders,creditors,employees,custom-ers,suppliersandcommunities .Theyhave,overtime,erodedthetrustuponwhichsuccessfulconductofbusinessdepends .AcontemporaryCEOmusthaveprovenskillsinriskmanagement,increatingacultureofintegrityandinunderstandingbusiness-in-societyissueswhichposeboththreatsto,andopportunitiesfor,thecorporation .Strengthincommercialopera-tionsandstrategyisabsolutelynecessary,butnotsufficient,intoday’sbusinessenvironment .
4) ReformulatingOperationalObjectivesforPerfor-mance,RiskandIntegrity .
Howthecompanymeasurescommitmenttoitsfunda-mentalmissionovertheshort,middleandlongtermis,ofcourse,acriticaltaskindrivingdesiredbehaviorandsettingthetermsforcorporateaccountability .6Boardsofdirectorsandbusinessleadershipmusttogetherdefineaconcise,comprehensiveandrobustsetofoperationalobjectivesacrossthedimensionsofeconomicperformance,riskmanagementandhighintegritywhichcanbeclearlycommunicatedinsideandoutsidethecompany .Somewillbeenduring,likefundamentalsystemsandprocesses .Otherswillneedmodificationasthecompetitive,regulatoryandgeopo-liticallandscapechanges .
Thisannualprocessoftranslatingthebroadarticula-tionofmissionintooperationalobjectivesrequiresgreatcareandsustainedattention .Itshouldmeasurebothfinancialandnon-financialfactors .Itmustbecomeacorefeatureoftheboard/business-leadershiprelationship—ajoint“deliverable”attheendofoneyeartoprovideanaccountabilitytestinthenext .
Someimportant,illustrativemeasuresfollow .Eachcompanywill,ofcourse,explicitlyarticulateandclearlyexplaintheoneswhichitchoosestousebecauseeach,byitself,cancreateorhideproblems .7
a . Sustained Economic Performance. Thesemeasure-mentsshouldbeinsulatedasmuchaspossiblefrombook-keepingmanipulationandshort-termstockpricefluctuations .
• Theefficientuseofcapitalthroughsuchmeasurementsasreturnonassetsandreturnoninvestedcapital .
• Operationalexcellenceasreflectedincashfloworoperatingmarginsorproductivityincreases .
• Strongconnectionstocustomers,throughsuchmeasuresas:marketshare,increasesinrevenues,repeatcustomerpercentages,assess-mentsofcustomersatisfaction,newproductsaspercentageofofferings,brandstrength .Forallthepastfocusonshareholders,thecoreactivityofthecorporationissellingqualitygoodsandservicestocustomers,the
6
stakeholdersuponwhomthecompanytrulydepends .
• Employeemotivation,satisfactionandindi-vidualproductivity .
• Themoretraditionalperformancemeasuresofnetprofits,earningspershare,stockpriceincreases,totalshareholderreturnandreturnonequity .Whilethesemetricsofeconomicperformanceshouldnotoverwhelmallothers,theywillcontinuetobeimportant .Oneofthechallengesishowtogivethemtheirdue,notmakethemdominantandthusputthemincontextwiththemanyothermeasuresofperformancewhichmakeforastrong,growingcompany .
• How,andtowhatdegree,changesinnewtechnologies,newproducts,newacquisitions(ordispositions)andnewgeographiesposi-tivelyimpacteconomicperformance .
• Performanceagainstpeercompaniesinallthemeasurementsmentionedabovewheneverpossible .
b . Systematic Risk Management for Economic Performance.Riskdisciplinesmustbematchedwithdecisionsaboutsettingandimplementingeconomicperformanceobjectives .ThisPolicyBriefdiscusses,inthissection,direct economic risksrelat-ingtocapitaladequacy,leverage,liquidity,interestrates,currency,credit-worthinessofcounterpar-ties,productsandoperations .Othercriticalriskswhichcanindirectly affect economic performancesuchaslegal,reputational,ethical,IT,supplychain,countryandgeopoliticalissuesarediscussedinthenextsection(onintegritymeasurementsandprocesses) .
Thegoal,ofcourse,isnottoeliminateeconomicrisktaking—riskistheverynatureofbusiness .Indeed,thedrumbeatofriskdiscussionsintherecentpast,whileunderstandable,shouldnotob-scuretheessentialroleofbusinessincreativityandinnovation .Ratherthepurposeistounderstandriskstotheextentpossible,mitigatetotheextentpracticableandtoensurethatthereisadequatespreadofrisksoiflargeknownorunknown
adverseeventsoccurthecompanyisprotected,notfromdeclinebutfromdestruction .
Aprefatorynoteonriskorganization:therearemanydifferentwaystoorganizeriskfunctionsbothinsidethecompanyandattheboardlevel .ThisPolicyBriefdoesnotattempttosaywhatisthebestorganizationalform .Thatwilldependoncompanymissionandculture .Asindicatedbelow,itdoessaythat,insidethecompany,thereneedtobeindependentexpertsonvariousdirectandindirecteconomicrisks .Attheboardlevel,eachoftheseindependentcompanyexpertsshouldbedirectlyconnectedtoacommittee(beitAudit,anewRiskCommitteeoraPublicAffairsorPublicResponsibilityCommittee) .Ultimatelypullingallthethreadsofriskstogetherfortheenterpriseis,however,theresponsibilityoftheCEO(the“chief ”riskofficerinaveryrealsense)andoftheboardofdirectorsasawhole .
i. Within the company
• Insidethecompany,theeconomicriskfunc-tionmustbeindependentofoperationalbusinessleadership .ItmusthavedirectaccesstotheCEO—and,onhighestprioritymat-ters,totheboard .Assessingwhethersuchanindependentriskfunctionexists,thequalityofitspeople,andwhereitreportsareallpartofariskmeasurementprocess .
• Thefundamentaljoboffinancialriskmanage-mentdirectedateconomicperformanceistoassessmajor,directanddiscreteeconomicriskdimensionsofthefirm—e .g .,capital,leverage,liquidity,credit,currency,market,opera-tions—throughprocess-mapping,identifica-tionofimportantriskareas,anddevelopmentofrisk-mitigationmeasuresandcontrols .Activitiescoveredrangefromnewproducts,tonewgeographies,tonewcustomers,tomajorareasofexistingoperationalexposure .Companiesmustalsorigorouslyassessoff-balance-sheetrisksaspartofthisactivity .8Thesefundamentalrisksystemsandprocessescanbeassessedandmeasured .
• Asamatterofbusinessdecision-making,theriskfunctionshouldhaveanopportunityin
7
frontoftopleadership(separatefromthebusinessleadersproposingacourseofaction)topresentimportantissues .Theriskfunctiondoesn’tmakethedecision:topbusinessleadersand(onhighprioritymatters)theboardofdirectorsmustexpresslybalancewell-artic-ulatedrewardandrisk .Butboardsandtopbusinessleadersmustunderstandasclearlyaspossiblenotjusttherewards,butalsotherisksthroughcandid,systematicpresentationsbythoseexpertinrisk .A healthy, candid debate is critical.Again,itispossibletoassesswhethersuchinteractiontookplaceduringthecourseoftheyearontherightsetofpriorityissues .
• Riskmanagementmustalsoascertainthesystemicrisktothecorporationfromthecombinationoffinancial,commercialandoperationalrisks .Withoutenteringthevoluminousandspiriteddebateaboutmath-ematicalriskmodels,itisfairtosaythat,whiletheyhaveutilityinmeasuringsometypesofsystemicrisk,theyarenotbetterthantheirassumptionsandthepastdatafromwhichtheyareconstructed—whichcanwellbeinadequateintimesoffuturestressordisloca-tion .Systemicriskassessmentinvolvessomescenario-planningaroundworst-casecriticalissues—suchasleverage,liquidity,currency,creditandoperationalrisks—includingthoseoccasionedbymajorglobaleconomicdislocations .
• Thecompanymustdecidehowtospreadriskprudentlysothatevenanunknown,low-probabilityeventinaparticularareaoractivitycannotsinkthecompany .Articulationofthisspread-of-riskphilosophyandadherencetoitisalsoanimportantriskobjective .
• Similarly,thecompanyshouldinstituteearlywarningsystemsoneconomicrisks—whetherinregularvaluationofassets,orchangesinmarkets,orunforeseenmovesfromcompeti-tors—whichtriggerahigh-leveldiscussionofrisk-taking/risk-managementissuesthatcouldleadtochangesincourse .
ii. At the board committee and full board level
• Thereshouldbeaboardentity—whethertheAuditCommitteeoranewRiskCommit-tee—whichhasthetaskofassessingthedirect economic risksnotedabove(capital,leverage,liquidity,credit,market,operational)confront-ingthecompany .Workingwithmanagement,itshouldreviewandagreeuponthefunda-mentalsystems,processesandmeasuresforassessing,mitigatingandmonitoringrisk,asdescribedimmediatelyabove .Itshouldreceivetimelyupdatesonthestatusofhighrisksfac-ingthecompany .Itshouldalsoreceivereportsfromrelevantriskofficialsinacompanyonwhetherthosereceivingcompensationaboveacertainlevelhaveidentifiedrelevantrisksandtakenappropriaterisk-mitigationsteps .(Thisactivityisrelevantbothtoaccountabilityandtocompensation .)
• Ultimately it is the job of the full board to un-derstand the work of the business leadership and the risk/audit committee on the assessment and management of the high-priority risks associated with economic performance which can seriously injure the corporation.Significantallocationofitslimitedtimeshouldbedevotedtothissubjectofpriorityriskissues .9
c . Promoting High Integrity and Assessing Legal, Coun-try and Geopolitical Risk .Amajorchangeformanycorporationswouldtobeexplicitaboutmeasuringbusinessleadersoncreatingacultureofintegrity,asdefinedabove(law,ethics,values),andassessingintegrityrisksassystematicallyasthecorporationreviewseconomicrisks .10
i. Inside the company
• Acompanycanmeasuretheintegritypromo-tioneffortsofitsCEOandotherseniorexecutivesacrossatleastfivedimensions .Haveleaders:
—adopted key principlessuchasconsistencyandcommitmentinbothwordsandactions;embeddingintegritydisciplinesinbusinessoperations;havingsystematicprocessesforsurfacing,analyzinganddecidingethicalissues;givingemployeesvoicetoexpressconcerns;protectingcompanysecurity?
8
—adopted key implementing practicestomakethosefoundationalprinciplesareality(riskassess/riskmanagefundamentalbusinessprocessesintersectedbyvarietyoflegalre-quirements;insurethatsystemsforpreventing,detectingandrespondingtointegrityissuesarerobustacrossbusinessesandgeographies)?
—created an affirmative culture of integritywhereemployeesarenotjustafraidofviolatingrulesbutaffirmativelywanttodotherightthing?Culturecanbeassessedbyanumberoftechniques,includinganonymousinternalsurveys,externalreputationalsurveysand360evaluationsofkeyleaders .
—performed well against peers(comparisonstootherdivisionsinsidecompaniesortoexternalpeercompanies,in,forexample,environmen-talcompliance)?
—established and met annual goals and objectives(howarehardproblemshandled,keypeoplehired,identifiedweaknessesremedied)?
• Aswithfinancial,commercialandoperationalrisks,companiesshouldestablish“integrity”early-warningsystemstoidentifyimportant,emergingriskswhichcanhaveindirecteco-nomicimpact(aswellasotheradverseeffects):
—Changesinbroadpublic-policyarchitecture(e .g .,tax,trade,environment,healthcareetc .) .
—Changesinimportantbutmorefine-grainedlegalorfinancialrulesthatcanhaveasignifi-cantimpactonthecompany .
—Changingethicalexpectationsanddemands .
—Securitythreatstopeople,facilities,infor-mationandsupplychain .
—Changinggeopoliticalorcountryrisk .Inparticular,anunderstandingofgeopoliticalcontextiscriticalbecauselow-probabilitybuthigh-impactevents(militaryaction,currencydevaluations,politicalupheaval)can,ofcourse,havedramaticimpactonbusinessoperations .
Properlydesigned,suchearlywarningsystemsgatherinformationsystematicallyandpresentissuesonperiodicbasistobusinessleadersfordecision .Isdetailedanalysisbeyondissueidentificationneeded?Businessleadersmustdecide .Ifso,shouldthebusinesstakeanticipatoryactiontogetaheadofthecurve(e .g .,adoptconsumerprotectionsinfinancialservicestoanticipateregulatorychangeandavoidenforcementactionsandconsumerlawsuits)?Boththeprocess(doeseveryappropri-atebusinessunithavesuchprocessesrelevanttotheirproductmix?)andtheresults(werechallengesanticipated,ifnotwhynot?)canbeassessed .
ii. At the board committee and full board level
• Aswithfinancialrisk,acommitteeoftheboardofdirectorsshouldberesponsibleforreviewingandagreeinguponthefundamentalmeasuresforpromotingintegrityandthesystems,processesandmeasuresforassessing,mitigatingandmonitoringintegrity,countryandgeopoliticalrisk .Asnotedattheoutsetofthissection,whetherthisistheAuditCom-mittee,aspecialRiskCommitteeoraPublicResponsibilitiesorPublicAffairsCommitteewillturnoneachcompany’sculture .(Jointcommitteemeetingsmaybeappropriateonsuchtopicsascountryorgeopoliticalriskwhichhavemultiplecausesandimpacts .)
• Finally, as with economic performance, it is ultimately the responsibility of the full board to oversee basic integrity risk-mitigation systems, processes and priority results and assess whether an integrity culture exists.
Insum,thesebasicoperationalgoalsandmeasure-mentsacrossperformance,riskandintegritydimen-sionsareessentialforallocatingresponsibilityandensuringaccountabilityinsidethecorporation .Buttheyalsoshouldprovideapublictemplateforaccount-abilitythatisameaningfulalternativetothereduc-tionist,attimesmisleading,metricofshort-termsharepriceasindicatorofcompanyvalueandperformance .11(Seepage11fordiscussionofaneedforcorporationstoarticulatetheseoperationalgoalspubliclyinordertofixtheirresponsibilityandaccountability .)
9
5) RevisingCompensationforCEO,SeniorExecu-tivesandOtherKeyEmployees .
ArevisedapproachtocompensationflowsfromaredefinitionoftheCEOrole,revampedleadershipdevelopment,anewprocessforCEOselection,anddevelopmentofbroaderoperationalobjectivestoholdexecutivesaccountable .Itshouldreinforceandbereinforcedbythoseothertasks .Thebroaderpurposeistochangecompensationbasedonshort-termresultsthatignorelong-termrisksandtousecompensationtoincentivizeshort,mediumandlong-termvaluecreationattainedwithsoundriskmanagementandwithhighintegrity .Thepurposeofcompensationis,ofcourse,toattractandretaintalent,butwithinthatbalancedframework .Selectcompaniesaremovingexplicitlyinthisdirection .12
ThesettingofcompensationfortheCEOandtopbusinessleadershipisafundamentalroleofthecom-pensationcommitteeandthenthefullboard .But,developmentoftheoverallcompensationphilosophyanditsapplicationtotopcompanytalentshouldbeajointboardandseniorexecutivefunction .
ThisPolicyBriefadvancesthefollowingconceptsforarevisedapproachtocompensation .Theseconceptsareconsistentwiththoseadvancedinotherrecentanalysesandreportsasaconsensusisbeginningtoformonnewpayprinciples(ifnotyetoncriticaldetailsandmethodologies) .13
• CompensationfortheCEOandtopbusinesslead-ersshouldturnonactionsandresultsinthethreeseparateoperationalareascomprisingcorporatemission:sustainable,durableeconomicperfor-mance;effectiveriskassessmentandmitigation;andpromotionofanintegrityculturethroughsystemsandprocessesembeddedinbusinessoperations .Eachshouldbeadiscreteelementinacomprehensivepayregimewhichthenusesthemincombinationtodeterminetotalawards .
• Althoughtopbusinessleadershipwillreceivesubstantialannualcashcompensation,significantcompensationin a particular yearwillbevariablecashandvariableequitywhichwillbepaidoutorheldbackovertimeasperformance,riskandinteg-rityobjectivesaremet,exceededormissed .Theseobjectivesshouldgenerallyreflectrelativeeffort
ofleaders—comparedtopastresultswithinthecompany(positiveornegativetrends)oragainstpeersorboth .Deferredcashhastheadvantageofavoidingstockpricemanipulationandprovidingnecessaryliquiditytoindividuals .Deferredequityhastheadvantageoftyingemployeestothelong-termcreationofshareholdervalue .14
• Variablecashgrantedinasingleyearwillbesomemultipleofannualcashandshouldbepaidoutinincrementsonamulti-yearschedule .Somemissesduetonegligentorintentionalacts—asignificantmisstatementoffinancialsuponwhichcompanyresultswerebasedoraseriousfailuretoweighriskoramajorintegritylapse—canleadtocompletecancellationofthevariableout-yearcompensation .Othersmissesduetoserious,avoidablemistakesmayleadtoadiminutionbutnotcancellationofvariablecompensation .
• Variableequityshouldalsobegrantedinoneyearbutonlyvestinout-yearsdependingonattainmentofperformance,riskandintegritymeasurements,althoughthemixmightbetiltedmoretobalancedeconomicperformance(inthedifferentcategoriessummarizedabove,efficientuseofcapital,opera-tionalefficiencies,relationshipswithcustomersetc) .Stockpriceincreasesandtotalshareholderreturnshouldbeafactorbutnotthefactor .15Again,theseperformanceoptionsorRSUsshouldbewithheldorclawedbackforseriousnegligentorintentionalactssimilartothecancellationofvariablecashgrants .So,too,lessermistakesmayleadtodiminution,notcancellation .Tominimizemanipulationofbusinessforshort-termstockgainsevenintheout-yearsaholdingperiod,beyondthevestingperiod,maybeappropriate .
• Variablecashandvariableequityawardsmayalsobedesignedintheyeartheyaregrantedwithincentivesforsustainedperformanceintheout-years .Forexample,iffutureoperationalobjectivessetinyearoneareexceededinsubsequentyears,thencashandequityawardsfromyearonewhicharevestinginthosesubsequentyearscouldbeincreased .
• Incancellingvariablecashorvariableequityawardsforperformance,riskorintegritymissesduetonegligentorintentionalacts,boardsshould
10
utilize“hold-backs”and“claw-backs .”A“hold-back”occursduringthevestingperiodoftheaward:thecashorequitynevergoestotherecipi-ent .Ahold-backoccursatthediscretionofthecompany,andemployeeshavetobringanactioniftheybelievethecorporateactionwasimproperorunfair .A“claw-back”occursafterthevestingperiodandrequiressometypeofformalcompanyactiontodemonstratethatclearlyarticulatedstandardstriggeringaclaw-backwerebreached .16
• Similarly,compensationplansmustriskassessjobsbelowthetopbusinessleadersandapplynewcompensationdesignforindividuals,notjusttopofficers,withtheabilitytocommitresourceswithsignificantlong-termopportunitiesandrisksforthecorporation(e .g .,thosewhosellinstrumentscreatinglong-termobligationsforthecompany) .Compensationdesignwillturnonspecificperfor-mance,riskandintegrityparametersapplicabletothoseindividuals .But,thevariablecashandequitycompensationwilloutweighannualcashcompensation .Heretoo,theboardshouldhavethepowertohold-backorclaw-backvariablecashorequityfornegligentorintentionalmisseswithinadefinedsphereofresponsibility,aswellasprovidingfordiminutionoraugmentationoftargetcompensationintheoutyearsdependingonenhancedorpoorresults .
• But,evenforthoseindividualsimportanttocompanyperformance,compensationshouldhaveanimportantelementbuiltoncompanyanddivisionresults,notonsolocontributionsalone,tohelpcreateastrongandloyalculture .
• Applicationoftheseprincipleswouldsharplyreducetwoproblematiccompensationmechanismswhich,intheviewofanumberofcommentators,droveshort-termismandexcessiverisk-taking:
—the“naked”stockoptionwhichrewardsasimpleincreaseinsharepricedisconnectedfromattain-mentofpriorityoperationalgoals;and
—thehugeannualcashbonusawardedwithoutregardtoriskconsequencesintheout-years .
• Suchacompensationredesign—likeestablishingmeasurementsforrisk,performanceandintegrity
accountability—requiresnewthinkingandhardwork .
—Oneproblemisdevisingmulti-factormea-surements(performance,risk,integrity)intherightproportionsthatreflectthemissionofthecompanybutarenotsocomplexastobeconfusingoropaquenorsosimplisticastobeadistortionofreality .
—Aseconddifficultyisascertainingwhencompanyleadersorindividualperformershavemadeadifferencebytheirefforts—thekindofdifferentiationwhichshouldbeatthecoreofallcompensation—orwhetherexogenousconditionshaveaffectedresults,eitheronthepositiveorthenegativeside .Leadersandkeyemployeesshouldnotbepenalizedforeventsbeyondtheircontrol,butneithershouldtheyberewardedexcessivelyforsuchoccurrences .
—Athirdcriticalissueispayequity(whichhasdrawntremendousfireinthefinancialsector):boththeabsoluteamountandtheamountrelativetootherkeypersonnelinsidethecorporation .Companiesneedtofaceintothequestion:howmuchistoomuch?
Alltheseissuesshouldbeaddressedinarevisedcompensationregime .
• Therevisedapproachtocompensationsshouldbecommunicatedinclear,understandabletermstoshareholdersandothers .Meaningful,nuanceddiscussionwithappropriategroupsabouttheap-proachtocompensation,includingbutnotlimitedtoshareholders,ismoreimportantthanablunt“advisoryvote”ofcompensationphilosophy,mea-surementsandresultsatshareholders’meetings .
6) Re-aligningtheBoard’sOversightFunction .
Thecriticaloversightfunctionoftheboardofdirec-torsshouldbealignedwiththeperformance,riskandintegritymeasurementswhichindicatewhetherthecompanyisattaininghighperformance,soundriskmanagementandhighintegrityandwhichwillbeusedindeliveringcompensationtotheCEOandtopbusinessleadershipoveramulti-yearperiod .
Thisalignmentshouldhelpdirectorsfocus,intheirlimitedtime,onwhatisessential .
11
• Properlyseen,“strategy”fromtheboardperspec-tiveisnotjustcommercialstrategy,butthemostimportantperformance,riskandintegrityissuesfacingthecorporationbothinthecomingyearandoveralonger-termplanninghorizon(3-5years?) .
• Attheendofeachcalendaryear,theCEOandtopbusinessleadersshouldpresenttotheboardofdirectorsalistofkeyperformance,riskandintegrityissues .Fromthislistandfromtheirownassessmentofcorporatechallenges,theboardwillchoosethepriorityboardmeetingissuesforthecomingyear .Thischoicewillsetthecoreboardagenda,subject,ofcourse,totheemergenceofnewhigh-priorityissues .Arobustdirectordiscussionofthesepossiblepriorityissues,notjustaquickrubberstamp,shouldoccuratthiscriticalend-of-yearevent .
• Theindependentboardchairorpresidingdirectorwillensurethattheseissuesare,infact,coveredindepthduringthecourseoftheyearandthatthecoretrade-offsandconsiderationsarefairlyandcandidlydiscussedwiththeboard(whetherinwrittenmaterials,oralpresentationsorsomecombination) .Requiringboardstogiveapprovalsorconsideredviewsonhardissuesafterjustonemeetingshouldberesisted .Structuringsequentialdiscussionsofcomplexandimportantissuesoverseveralmeetingsmayhelptheboardmorefullycometogripswithprioritymatters .Theboard’staskistoreview,appraise,critiqueandenrichtheanalysisanddecisionrelatingtotheseissues .17Thebusinessleadersshouldstrivetopresenttheboardwithhigh-qualityinformationfocusedonthepriorityissuesandtherealchoicesoroptions .Quality,notquantity,andabsolutecandoronthehardissues,notvaguedescriptionsofthedecision,shouldbethetouchstones .
• Attheendofeachyear,theCEOandbusinessleadersshouldprepareareportforboardofdirec-tor’sreviewonhowthecompanyhasperformedonthevariousmeasurements—andwhether,inlightofexperienceandemergingdevelopments,themeasurementsforthefollowingyearshouldbemodified .Suchasystematicreview,coupledwiththeagenda-settingexerciseforsubsequentboardmeetings,canrequiresignificantboardattentioninthefourthquarterbothtoassessthecurrentyear
andtoplanforthesubsequentone .Itishardtoimagineabetteruseofboard/managementtime .SuchareviewmayalsorequireintensediscussionsbetweentheboardleaderandtheCEOinadvanceoftheboardmeetingtoimprovethecandorandcompletenessofthepresentation .
• Toincreaseaccountability,theboardofdirectorsandbusinessleaderscouldconsiderhowtomakeareportavailabletothepublicwhichinclear,conciseformdiscussestherecordoftheyearagainstoperationalgoals—andtheoperationalgoalsandissuesforthefollowingyear .Atpresent,discussionsatend-of-yearanalysts’meetings,inProxyStatements(e .g .,onexecutivecompensation)andinAnnualReports(CEOletter/ManagementDiscussionandAnalysis)maynotpresentaclear,comprehensibleaccount—inplain,understandablelanguage—ofpastgoals,presentrecord,futuregoals .AnewjointBoard-CEOstatementorrecastingoftheCEO’slettertotheshareholdersintheAnnualReportcouldconstitutesucha“plainEnglishreport .”18
* * * * *
Carryingoutthesesixfoundational,interrelatedgovernancetasksisthecoreofaright-sized,criticalbutconstructiverelationshipbetweenacorporation’sboardofdirectorsanditsCEO/seniorbusinessleadership .Carryingthemoutwellshouldhelpcreateastrong,durablegrowingcorporation—andcouldaddressthecurrentcrisisofconfidenceinthegovernanceofcorporations .
13
Boardsofdirectorsandbusinessleadershipmusthonestlyconfrontkeyobstaclestothisbasicreorienta-tionofcorporategovernance .Abriefenumerationofsalientproblemsfollows,whichisintendedtoraiseissuesforfurtherdiscussion,action,researchandanalysis .
1) Labor Markets. Canindividualcorporationswhichdefineshort,mediumandlong-termperformance,riskandintegrityoperationalobjectives—andbasesignificantdeferredcompensationontheirattain-ment—competeinthelabormarketforbusinesstalent?Otherbusinessentitieswillingtouselargeamountsofcashandoptions,withfewerpay-outrequirements,mayseektoattracttopleadersandperformersinaverycompetitivelabormarket .
—Oneapproach,beyondindividualfirminitiativesandwellshortofcomprehensivepublicregulation,isforcorporationsinaparticularindustrygroup(orinamoregeneralbusinessassociation)todevelopacodeofcompensationprinciples(inamannerthatmustavoidantitrustconcerns) .Acorporation’scommitmenttosuchacodeandsubsequentimplementationcouldbereportedinsequentialProxyStatements .Suchcodesmusthaveprincipleswhicharespecificenoughtoguideaction .Theymustalsoavoid“leakage”eitherthroughaninabilitytoascertainclearlywhethersignatoriesarekeepingtheircommitmentsorthroughtherefusalofpeerentitiestosignupinthefirstplace .
—Alessdifficult,moretraditionalapproachistorelyoninstitutionalloyaltyspawnedbystrongleadership .Suchleadershipcancreateexciting,empowered,growingcorporationsservingcustom-erswithgreatproductsandservicesandmeetingfascinatingchallengesintheglobalmarketplace .Manypeoplehaveimportantvalues,otherthanmoney,thatneedtobeservedinaninstitution—andgreatleadershipcanmakethosevaluescome
alive,cancreateloyaltyandcan,thus,attract,retain,promoteandchallengeoutstandingindi-vidualsfromallovertheglobe .Forthoseemploy-eesmotivatedsolelybygreed,littlecanbedonebyanindividualfirmdedicatedtothechangesinmeasurementsandcompensationdescribedabove .
2) Differing International Standards. Becauseofitscentralitytotheeffectivefunctioningoftheglobaleconomy,thefinancialsectoristhesubjectofproceduralorsubstantiveregulatorydebatesad-dressingsomeorallofthegovernanceissuesraisedabove—aswellasimportantquestionsrelatingtobroaderissuesofsafetyandsoundness .(Seenote1 .)Forexample,theG-20recentlyannouncedasetofbroadprinciplescoveringriskandcompensa-tionpracticeswhichshouldbesubjecttonationalregulation .19But,theprospectsforgenuinehar-monizationofnationallaws—orevensignificantconvergence—aremixed,atbest .20Untilthathappensacrossmajorcapitalmarkets,thereisagenuineriskthatcompaniesortalentedindividu-alsinthefinancialsectorwilltakeadvantageof“regulatoryarbitrage”toavoidgovernmentalpressuresforthetypesofchangesoutlinedabove,evenifthosechangesareundertakenvoluntarilybyfinancialinstitutions .Similarregulatoryarbitragemayoccurwithnon-financialpubliccompaniesasaresultofdifferentregulatoryregimesacrossthegloberelatingtogovernance(andotherimpactful)regulatoryissues .
—CompaniesconcernedabouttheissuesinthisPolicyBriefneedtoconsiderpoliticalactionintheirmajormarketstourgeasmuchuniformityaspossible .Suchpoliticalactioncouldbedirectedatregulationwhichtheybelieveisanecessaryfloorunderprivateaction .Butitcouldalsobeaimedatregulationswithwhichtheymaydifferbutwhichwillhavegreateradverseimpactiflackinginuniformity(e .g .,capitalrequirementsorliquidityprotections) .
III. Obstacles
14
3 Change in Board Compensation Advisors .Manycompensationadvisorstoboardsareexpertincomparingexecutivecompensationdeliveredatonecompanytocompensationdeliveredat“peer”companies .Theyareexpertindesigningvariousmechanismsfordeliveringthatcompensation—salary,bonus,deferredsalary,deferredbonus,stockoptionsorrestrictedstockunits .But,forboardsofdirectorstorevisecompensationofseniorexecutivesandtooverseebroadercompanycompensationregimes,theyneedtheirownadvi-sorswithadditionalexpertise .Manyreportsfocusontheadvisers’independence .Thatisimportant .Butarevisedskillsetisofequalimportance .
—Compensationadvisorstoboardsneedtohaveadetailedunderstandingabouthowthecompanyworksinthecontextofglobalmarketsandglobalsocietysothattheycanhelptheboardhaveitsownperspective,whenworkingwithmanagement,todefinetheoperationalperformance,riskandintegrityobjectiveswhichareappropriatetothecompanyanduponwhicharevisedcompensationregimemustbebuilt .Findingsuchanadvisor—withbusinessaswellascompensationexpertise—mayrequireboardstogobeyondthetraditionalcompensationconsultingfirms .Eventually,anewcadreofindependentconsultantscanemerge,butonlyifboardsofdirectorsmakeclearthattheywantadvisorswhocanhelpanalyzethebusinessgoalswhichmustnecessarilyprecedecompensa-tionsounddesign .
4) Short-Termism of Institutional Investors. Perhapsthemostdifficultofthesedifficultissuesishowdocorporationsresisttheshort-termismofcertain,importantinstitutionalinvestors?Suchinvestorstodayownmorethan60percentofU .S .equitiesanddrivethedirectionofthestockmarkets .Institutionalinvestors—whethertraditionaloneslikepension,insuranceandmutualfundsornewermoreoneslikehedgefundsormicro-secondtrad-ers—maybeprimarily,evenexclusively,interestedinshort-termprofitstobeatcompositebench-marksortoattainhighlyremunerative“2-and-20”absolutereturns .Individualinvestorsplacetheirfundswithinstitutionalinvestorsandarelikelytocaremoreabouthowtheinstitutionmanagestheirmoney,thanabouttheunderlyingperformanceofthecompaniesownedbyvariousfunds .There
isnowsubstantialdebateaboutwhether(oroverwhatperiod)thestockmarketaccuratelyreflectsthe“value”and“performance”ofacompany,especiallyastheaverageholdingperiodforequitiesisnowlessthanayear .21
Thesefinancialintermediariescancreatepres-suresforbehaviorsthatarenotintheinterestofsustainedvaluecreation .Indeedtheycaninjurethecompanybyforcingbadbusinessdecisions(ill-consideredrisk-taking,improperleveragetoboostearningstemporarily,deferredinvestmentsormaintenancecosts,delayofR&D)orbycreatingpressuresforillicitones(fraudulentaccounting,improperpayments) .Theseintermediariesmaycarelittleforacorporation’sotherstakeholderswhohavealong-termfinancialinterestinthecompany(e .g .,long-termshareholders,creditors,employees,customers) .Althoughempiricalresearchisneededtounderstandtheirimpactonthemarketinnear,middleandlong-termtimeperiods,thereislittlequestionthatinstitutionalinvestorswithashort-termorientationareanincreasinglypowerfulforceintheequitymarkets .
Twoseasonedobserversdescribetheproblem .Inanewbook,economistHenryKaufmansays:“Mostinvestmentrelationshipstodayareveryfickle .Portfolioperformanceismeasuredoververyshort-termhorizons… .Daytradesandport-folioshiftsbasedonthepricemomentumofthestock—ratherthananythinghavingtodowiththeunderlyingfundamentals—arecommonplace .”22IraMillstein,apioneerinthegovernancemove-mentandproponentofshareholdervoice,hasrecentlyexpressedsimilarviews .23SohavetheFederalReserveandregulatorybodiesinEurope .24
—Oneansweristobeginamuchcloserexamina-tionofthegovernanceofthesevarioustypesofinstitutions,thecompensationoffundmanagersandtheneedforgreatertransparency .25But,giventhevarietyofinstitutionalinvestors,itmaybealongprocesstoevaluategovernance,fundmanagerincentives,thedifferentmarketimpactofdifferenttypesofinstitutionalinvestorsand,ultimately,whetheranyprivateorpublic,substantiveorprocedural,“governance”reformsarenecessaryorappropriate .
15
—Asecondresponseistoconsideradjustmentstocurrenttaxandotherpublicpolicyprovisionswhichmaypromoteshort-termism .26
—Athirdapproachisforboardsandcorporateleaderstoresiststronglytheclaimsof“short-term-ers”where,inthebestexerciseoftheirjudgment,actionstopumpupshort-termearningsandstockpricewouldbeharmfultocreationoflong-termvalue .Instandingupinsuchcircumstances,businessleadershipneedstoestablishmeaning-fulengagementwithotherinvestorswhohavealongertime-frame,eithertosecuresupportforthecorporation’smission,objectivesandmethodofcompensationortomakeappropriatechangessuchlong-terminvestorssuggest .Obviously,companiestalkwithmajorshareholdersandholdanalysts’meetings .Butitisworthexaminingwhetherthisprocesscanbeenhancedbymorecomplete,transparentdiscussionofthesixseam-lesstaskswithadvisorycouncilsofshareholders,consistentwiththestricturesoffairdisclosuretoallinvestors .Aquestionofgreatmomentiswhetherthoselonger-terminvestorsconcernedaboutdurablegrowthofcorporationscancountertheinfluenceofotherfinancialintermediariesfocusedonlyonmarketmovementsandtheirownshort-termprofits .
—TheUnitedKingdomisconsideringtransfor-mationofthethirdapproachintoamoreformal“stewardshipcode”for fund managerswhich,amongotherthings,establishesbestpracticesforinstitutionalinvestorsthatchoosetoengageindiscussionsaboutlong-termstrategy(attimescollectively)withcompaniesinwhichtheyinvest(whilenotprecludinga“sell”decisionifthatisdeemedthemosteffectiveresponse) .Underthisproposedregime,institutionalinvestorschoosingnottocomplywiththe“stewardshipcode”wouldneedtoexplaintheiralternativebusinessmodelandreasonsfornotsubscribingtothe“steward-ship”code .27
5) Manipulating the Numbers.Whileitisimportanttotranslatearedefinitionofmissionintoopera-tionalfinancialandnon-financialobjectivesacrossperformance,riskandintegritydimensions,thesemeasurementsmustbemeaningfulandcarefullyimplemented .Whileitistrue,asageneralmatter,
thatmeasurementsdrivebehavior,itisalsotrue,that,whenconsequential,thereisalwayspres-suretomanipulatethemeasurementstohidenon-performance .
—Boardsofdirectorsandbusinessleadersmustuseauditsandotherchecksandbalancestoensurethatmeasuresaremilestonesonthepathtocorporatevirtuenotnumberstobe“gamed”ontheroadtocorporatehell .
6) The Reduction of Pressure for Change.Althougheffectsofthecreditcrisis,thedeeprecessionandhighunemploymentarelikelytoremainforsometime,signsofbottomingoutorofnascentrecoverymayremovepressureforregulationwhichisalwaysatitsheightwhencircumstancesareattheirworst .Andthethreatofnewregulationisoneofthedriversforprivate-sectorchange .Willcompaniesstillfaceintotheneedforre-evaluatingandpos-siblyrevampingtheessentialsofgovernanceastherecoverygrowsinstrength?
—Allcompanies,even(orespecially)well-man-agedones,shouldviewthisperiodofeconomicdiscontinuityasanappropriatetimetoreviewthefundamentalsofwhatthecorporationstandsforandwhatareitscoregovernancetasks .Infact,improvementintheeconomy,howeverslight,maylessentheneedforfull-timecrisismanagementandfreeuptimetoaddressthesefoundationalissues .
16
17
Thecrisisofconfidenceincorporategovernanceleadstotheultimategovernancequestionofhowboardsofdirectorsandbusinessleadersareheldaccountable .Althoughanumberofmechanismsexist,theyallleadbacktofindingboardsofdirectorsandbusinessleaderswhocancreatesustainedeconomicvalueforshare-holdersandotherstakeholderswithhighperformance,soundriskmanagementandhighintegrity .
Thisissobecause,whilethemainaccountabilitymechanismshavestrengths,theyhavealsohavelimitations .28
1) The Market .Oneanswertotheaccountabilityquestionisstockprice .Maximizationofshareholdervaluehasbeenseenastheultimategoalofthecor-porationandthusthemeasurementbywhichboardsandseniorbusinessleadersareheldtoaccount .Asdiscussed,theeventsofthepasttwoyearshaveraisedimportantquestionsabout“efficient-market”and“rational-choice”theorieswhichpositthemarketaccu-ratelyassessesthevalueofthecompany .Animportantquestionis“when”isthemarketyieldingthe“right”valuationanswer,given,amongotherthings,theriseofshort-terminstitutionalinvestors,theasymmetryininformationascompaniesandproductsbecomemorecomplex,thepossibilityofnon-rationalorirrationalbehavioratanypointintimeandtheperiodiccreationofbubbles?29
—So,eventosaythatthe“long-termvalue”ofacom-pany’sstockisanimportantwaytomeasureaccount-abilityistoraisequestions .Whatis“long-term?”Isachangedvaluationinout-yearsasteadytrendovertimeorsimplya“short-term”valuationatsomefuturepoint?Inlightofthewidelydivergentinstitutionalin-vestortimeframes,objectives,products,riskappetites,incentives,governancestructures—andtheirrationali-tiesandinefficienciesofthemarket—thereareseriousandintensedebatesinthebusiness,economicsandfinancecommunitiesoverwhether,whenandtowhatdegreestockpriceisthepropermeasureforholdingcompaniesaccountable .
IV. Accountability and Leadership
2) Shareholder Involvement .Asecondanswertotheaccountabilityquestionismoreshareholderinvolve-mentinthegovernanceofthecompany .Suchinvolve-mentcanbeimposedbyregulatoryentities(federalgovernment,states,stockexchanges)oradoptedbythecompanyitself(throughvoluntarychangesorthroughresponsestoshareholdervotes) .Onetypeofchangeisaimedatenhancingshareholder“advisory”voice .Recentexamplesare,ofcourse,“say-on-pay”shareholderadvisoryvotesandattemptstomakeiteasierforshareholderstocallameeting .Asecondisdirectlytoaffecttheelectionofdirectors .Onerecentexampleistherequirementthatdirectorswhoreceivelessthan50percentofvotescastshouldresign(orberemovedfrom)theboard .Anotherlong-standingandcontroversialissueinvolves“ballot-access”proposalswhichwouldmakeiteasierfordissidentshareholderstoputadirectornomineeupagainsttheboard’sownslateintheelectionofdirectors .
—Ofcourse,asnoted,thereisnosuchanimalasa“shareholder .”Instead,equityownersareamenagerieoftheindividualandinstitutional;theshort,longorboth;thetechnicalornot .Whethershareholdersarepartofthesolution(becauseboardscanbecomplacentandself-perpetuating)orpartoftheproblem(becauseoftheshort-termismofimportantinstitutionalinves-torsdisconnectedfromanyconcernaboutthefunda-mentalsoftheunderlyingcompany)isalsoasubjectofspiriteddebateregardingshareholder“voice,”“access,”and,ofcourse,therulesgoverningtakeoverandcontrol,theultimateexerciseofshareholderpower .
3) Government Regulation .Athirdaccountabilitymechanismisgovernmentregulation,wherepublicdecisionslimitthediscretionandself-governanceofprivatecorporations .Suchlimitationsinour“mixed”economyhave,ofcourse,existedsincethe19thcenturyandhavecoveredawidearrayofissuesfromtaxestodisclosuretolistingrequirementstoenvironmentalhealthandsafety .
18
Today,inthecaseoffinancialinstitutions,globalregu-latorsareconsideringanumberofsubstantiverequire-ments,whichwouldlimitbusinessdecision-making:e .g .,counter-cyclicalcapitalrequirements,liquidityprotections,accountingstandardrevisions,creditagencyreform,regulationofcomplexproducts,author-itytoaddresssystemicrisk,andspecialoversightforlargecomplexorganizations .Similarly,withrespecttoallpubliclyheldcompanies,variousprocedural/disclo-surerequirementsarealsounderconsideration,suchasincreasedtransparencyabouthowriskismanagedandhowcompensationisdesignedinordertodiscourage“excessive”risk-taking .Organizationalmandates—suchasa“risk-committee”requirement—arealsobeingconsidered .
—Here,too,therearesharpdebatesabout:theshapeofregulation,itseffectiveness,itspossibleunintendedconsequencesanditsimpactonthenecessaryinnova-tionandcreativitywhichdrivecompaniesandtheeconomy .
*****
4) BacktotheFuture:TheDutiesofBoardsofDirectorsandTopBusinessLeadership .Attheendoftheday,thisPolicyBriefnotestheseimportantaccountabilitymechanisms,andsomeofthekeyissuestheyraise .But,becauseofitsfocusonself-governance,itdoesnotaddressthedebatesswirlingaroundthem .Instead,itstressesthatthegoalofaccountabilitymechanismsbrieflydescribedabove(withacaveataboutshort-terminvestorsdisinterestedincompanyfundamentals)is,orshouldbe,aboardofdirectorsandtopbusinessleadershipthatdischargesthesixseamlesstaskswithvision,energyandeffectivenesstocreatelong-termvalueforshareholdersandstakeholders .
Thestockmarket,theshareholders,andthegovern-mentcannotleadandmanagethecorporation .Theultimateaccountability—andresponsibility—stilllieswiththeseniorexecutivesandanengagedboardofdi-rectors .Thisissofortraditionalbutstillfundamental
reasons .Corporatedecisionsrequirejudgmentinmakingtheinevitabletrade-offs .Onlymanagement,underboardoversight,caneffectivelyimplementthecorporatemission .Indeed,outstandingleadershipfromboardsandbusinessleadersanswerstheprob-lemswhichtheotheraccountabilitymechanismsseektosolve—outstandingleadership,notcomplacent,self-protectingboards .
But,asthisPolicyBriefhasargued,boardsofdirec-torsandseniorexecutivesmustexplicitlyaddressthisfundamentalissueofaccountability .Accountabilitycanbeimprovedifcorporateleadershipfocusesonthesixseamlesstasksandifitarticulates,bothinsideandoutsidethecompany,asetofperformance,riskandintegrityoperationalobjectiveswhichareclearandunderstandableandagainstwhichboardsandseniorexecutivescanbemeasuredandheldresponsible .Suchmeasuresflowfromaredefinedmissionwhichshapesleadershipdevelopment,CEOselection,anddefinitionofoperationalobjectives .Thesetasks,inturn,focusexecutivecompensationontherightissuesandre-alignboardoversightontherightpriorities .Candorinassessinghowthecompanyisdoinginrelationtoitskeyoperationalobjectivesisessentialtoaccountabil-ity—andtocreationoftrust .
Inthisturbulentera,whendebatesabouttheroleofmarketprices,shareholderactionsandgovernmentregulationareonthefrontburner,itisvitalthatboardsandbusinessleadersstepuptothequestionsaboutthecapacityofcorporationstogovernthem-selveseffectively .
Manyreports,likethisone,addresshardproblems,withdeepstructuralroots,bycallingforleadership .Toooftenthatpleagoesunanswered—orthestruc-turalproblemsaretoointractable .Buttoday,withagovernancecrisisinconfidence,itisintheinterestofcorporationsandofcapitalismitselfforpeopleinleadershippositionstrulytoaddressthegovernanceproblemsoftheeraandtoprovideaclear,credibleandpowerfulprivatesectorresponse .
19
Endnotes
1 Infocusingonself-governanceissues,thePolicyBriefdoesnotintendtominimizetheimportanceofthepublicpolicydebateonhowtoassurethesafetyandsoundnessoffinan-cialinstitutionsinthefuturethroughregulationofsuchis-suesascapitalrequirements,liquidityprotections,systemicrisk,specialregulationoflargefinancialinstitutions,ratingagencyreformandreformofaccountingstandards .
Similarly,thePolicyBriefdoesnotarguetheprosandconsof,norminimizethepotentialimportanceof,moregeneralgovernancepublicpolicyissueswhicharecurrentlythesubjectoflegislativeorregulatorydebates:e .g .compensation(sayonpay,clawbacks,noseveranceforpoorperformance,independenceofcompensationcommittee,independenceanddisclosurerelatingtocompensationconsultants;disclosureofrelationbetweenpayandrisk);directorelections(proxyaccess,banonbrokervoting,abolitionofstaggeredboards,majorityvoteinuncontestedelections);risk (creationofspecialriskcommittee;increaseddisclosureonrisk);other (independentboardchair;disclosureofreasonsforboardchair/CEOstructure) .ThePolicyBriefdoesaddressanumberoftheseissues,butinthecontextofdesirablecorporateself-governanceandself-determination .
2 See,CommitteeforEconomicDevelopment, Built to Last: Focusing Corporations on Long-Term Performance,(Washington,D .C .:CED,2007);CommitteeforEconomicDevelopment,Private Enterprise, Public Trust: The State of Corporate America After Sarbanes-Oxley,(Washington,D .C .:CED,2006);TaskForceoftheABACommitteeonCorporateGovernanceIssues,Report on the Delineation of Governance Rules and Responsibilities(Washington,D .C .:ABA,2009);AspenInstitute,Overcoming Short-Termism: A Call for a More Responsible Approach to Investment and Business Management(Washington,D .C .:AspenInstitute,2009);TheConferenceBoard,The Conference Board Task Force on Executive Compensation, (NewYork,NY:2009);NationalAssociationofCorporateDirectors, Key Agreed Principles to Strengthen Corporate Governance for US Publicly-Traded Companies (Washington,D .C .:NationalAssocia-tionofCorporateDirectors,2009);NationalAssociationofCorporateDirectors,White Paper on Oversight of Risk,(Washington,D .C .:NationalAssociationofCorporateDirectors,2009) .
3 FinancialStabilityBoard,FSB Principles for Sound Compensation Practices: Implementation Principles, (Basel,Switzerland:FinancialStabilityBoard,2009);UKFinan-cialServicesAuthority, The Turner Review: A Regulatory Response to the Global Banking Crisis(London,England:UKFinancialServicesAuthority,2009);U .S .TreasuryDepart-ment,Financial Regulatory Reform: A New Foundation, (Washington,DC:U .S .TreasuryDepartment,2009);DavidWalker,A Review of Corporate Governance in UK Banks and Other Financial Industry Entities: Final Recom-mendations (London,England:UKFinancialServices
Authority,2009);FinancialReportingCouncil,2009 Review of the Combined Code (London,England:FinancialReportingCouncil,2009) .
4 See,CommitteeforEconomicDevelopment, Rebuilding Corporate Leadership: How Directors Can Link Long-Term Performance with Public Goal, (Washington,D .C .:CED,2009) .Corporatecitizenshipmaybedefinedashavingthreeelements:sustainedanddurableeconomicperformancewhichbenefitsshareholdersandotherstakeholders;robustadherencetothespiritandletterofformalrules;ethicalactionsandsharedvaluesbeyondwhattheformalrulesrequirethatareinthecorporation’senlightenedself-interest .Thislastelementmayinvolvevoluntaryactionstakenbythecorporationaloneoritmayinvolvepositionstakenonpublicpolicyinconnectionwithotherparties(notnecessar-ilycorporationsalone)tosecurea“socialgood”thatistoocostlyortoodifficultforonecompanyandthatfairlyweighspublicandprivateinterests .
5 See,forexample,HarvardBusinessReviewOn-LineDebate,“HowtoFixBusinessSchools,”Harvard Business Publishing,April-May2009,availableat<http://blogs .harvardbusiness .org/how-to-fix-business-schools/> .See,also,AspenInstitute’sCenterforBusinessEducation(www .aspencbe .org);LaneWallace,“MulticulturalCriti-calTheory .AtB-School?,”New York Times, January10,2010,availableat<http://www .nytimes .com/2010/01/10/business/10mba .html> .
6 Seegenerally,CommitteeforEconomicDevelopment,Built to Last .
7 Ofcourse,aswithallmeasurements,anover-emphasisononemaycauseunwanteddistortions .Forexample,returnonequityhasbeensharplycriticizedinthefinancialservicessectorbecausethatmetricishigherwhendebtishigher .Returnonassetsmaypromptoff-balancesheetactivity .Increasedmarketsharemaycomeatthepriceofmargin .Andevenpeer-to-peercomparisonsmaybemisleadingifwholeindustriesaremakingthesamemistake(e .g .leverageinfinancialservicescompanies) .Thus,articulationandexplanationofkeymetricsisimportantbothforsoundoperationsandforgeneratingthetrustsoimportanttocorporatehealth .
8 Someofthecommoneconomicriskproblems—whichhavebeenhighlightedinthelastyearandapplytoallcorpora-tions,notjustfinancialinstitutions—shouldreceivespecialandcontinuousattention:lackofliquidityifinthinlytradedmarkets;toomuchleverage;assumptionofmarketcertain-ties(housingalwaysgoesup);failuretocontrolsmallunitwithcapabilityofcreatingbigrisk;securitizationthathidesriskandpumpsupprofits;useofbadlydesigned,ill-under-stoodproducts;lackofstress-testingformajordislocations;lackofdisclosureandtransparencytoseniorleadersandtheboard(letalonetothepublic) .
20
Endnotes
9 Companiesaredesigningstructuresandprocessesformanagingeconomic,legal,ethical,reputational,publicpolicy,countryandgeopoliticalrisksindifferentways .Differentspecialists—anddifferentorganizationalentitieswithinthecompany—mayaddressdifferenttypesofrisks .Asnotedinthetext,thisPolicyBrieftakesnopositiononthedesiredwaytoorganizeriskinsidethecompanybeyondtheprinciplesstatedabove .Bestpracticesatamoredetailedlevelwillemergefromexperience .
10 Foramoreextendeddiscussionoftheintegritypracticesandprinciplesthatcanbebuiltintocompensationregimesseegenerally,BenW .Heineman,Jr .,High Performance with High Integrity(Boston,Ma;HarvardBusinessPress,2008) .
11 “Pay,RiskandStewardship:PrivateSectorArchitectureforFutureCapitalMarkets,”MillsteinCenterforCorporateGovernanceandPerformanceatYaleSchoolofManage-ment,PolicyBriefingNo .5ConsultativeDraft,June11,2009,p .10 .availableat<http://millstein .som .yale .edu/PolicyBriefings .shtml> .(“…theultimatecriterioncorpora-tionshaveusedtodefineandmeasureperformance,namely‘short-termstockpricemovement,’isblatantlyinsufficient .”)
12 See,UBS,“CompensationReport:UBS’sNewCom-pensationModel,”UBS,November17,2009,availableat<http://www .ubs .com/1/e/investors/compensationreport>;CreditSuisse,“CreditSuisseAnnouncesitsCompensationStructurefor2009and2010,”CreditSuissePressRelease,October20,2009,availableat<https://www .credit-suisse .com/news/en/media_release .jsp?ns=41331> .Attheendof2009,twomajorAmericaninvestmentbanks—GoldmanSachsandMorganStanley—announcedincreaseddeferralofcompensationfortopleadersaswellasclaw-backsofdeferredpayundercertaincircumstances:LouseStory,“Goldman’sCurbsonBonusesAimtoQuellUproar,”TheNew York Times, December11,2009,availableat<http://www .nytimes .com/2009/12/11/business/11pay .html>;AaronLucchetti,“MorganStanleytoOverhaulPayPlan,”The Wall Street Journal, December30,2009,availableat<http://online .wsj .com/article/SB10001424052748704134104574624680643054584 .html> .
13 Seenotes2and3,supra.
14 Thetotalofvariablecashandvariableequitymaywellbelargerthanfixedannualcash .Theproportionsbetweenvariablecashandvariableequitywilldependoncompanycultureandtheadvantagesofliquidincentives(variablecash)orincentivestiedtostock(variableequitywhichmayriseorfallrelativetostrikepricesforreasonswhichmaynotrelatedirectlytocompanyperformance) .Bothshouldbestronglylinkedtoattainmentofoperationalobjectivesacrossredefinedeconomic,riskandintegritydimensions;bysodoing,bothshouldpromotecreationoflongtermvalue .
15 TheEfficientMarketTheorywhichsomeusedtoarguesharepriceandmarketcapitalizationwerethekeymeasuresofcorporateperformancehas,especiallyaftertheeventsofthepastyear,beensubjecttovariouscritiques,includingtheshort-termismandotherissuescreatedbypre-occupationwithstockpricealone .See,forexample,RakeshKhurana, From Higher Aims to Hired Hand: The Social Transformation of American Business Schools and the Unfulfilled Promise of the Management Profession(Princeton,NJ:PrincetonUniversityPress,2007);RichardA .Posner,A Failure of Capitalism: The Crisis of ’08 and the Descent into Depression (Cambridge,MA:HarvardUniversityPress,2009);GeorgeA .AkerlofandRobertJ .Shiller,Animal Spirits: How Human Psychology Drives the Economy and Why it Matters for Global Capitalism (Princeton,NJ:PrincetonUniversityPress,2009) .Forreadablesummariesofthedebate,seeJustinFox,The Myth of the Rational Market(NewYork,NY:HarperCollins,2009)andJohnCassidy,How Markets Fail: The Logic of Economic Calamities(NewYork,NY:Farrar,StrausandGiroux,2009) .Fora succinctcritiqueoftheEfficientMar-ketTheory,seeUKFinancialServicesAuthority,Turner Review, pp .39-49 .Giventhecomplexityofourpublicmarkets,thisdebatehasbeenjoined,butishardlyresolved .
16 Designinghold-backsandclaw-backs,wherebenefitsarewithheldorpulledbackbecauseofseriousnegligentorintentionalacts(ofcommissionoromission)isacomplexsubject,beyondthescopeofthispolicybrief .Issuesinclude:definingactswhichwillgiverisetoholdbacks/clawbacks(financialmisstatementsorabroaderarrayofmaterialperformance,riskandintegrityissues) .Iftheindividualisanexecutivewhenisheorsheresponsibleforthebadactsofpeopleworkingforthem?Whointheemployeepopulationwillbeaffected?Forhowlongdoestheemployeeremainexposedtohold-back/clawbackprovisions?Whatprocessisduetheemployee;howwilltheprovisionsbeenforced?
17 CommitteeforEconomicDevelopment,Built to Last.
18 Suchasummarystatementmust,ofcourse,complywithlegaldisclosurerequirements .Itmayhavetobeissuedinthefirstquarterofthesubsequentfiscalyearafterissuanceofthe10-K,theProxyStatementandtheAnnualReportand,asappropriate,incorporatebyreference .
19 StatementoftheG-20Leaders,September26,2009 .Withrespecttocompensationatrelevantregulatedfinancialinstitutions,theG-20endorsedimplementationofcertainFinancialStabilityBoardstandards,suchas“requiringasig-nificantportionofvariablecompensationtobedeferred,tiedtoperformanceandsubjecttoappropriateclaw-backandtobevestedintheformofstockorstock-likeinstruments,aslongasthesecreateincentivesalignedwithlong-termvaluecreationandthetimehorizonofrisk .”Inthefinancialsetting,theG-20alsoendorsedthepowerofregulatorsto
21
Endnotes
sethighercapitalrequirementswhenadditionalrisksarecreatedthroughfailuretoimplementsoundcompensationpolicies .SeesectionofStatementon“StrengtheningtheInternationalFinancialRegulatorySystem,”paragraph13 .
20 InastatementfollowingitsMarch,2009meeting,theG-20emphasizedthat,eventhoughnewfinancialregulationwasprimarilyanationalresponsibility,ithadtobeconsistentacrossboarders:“Regulatorsmustensurethattheiractionssupportmarketdiscipline,avoidpotentiallyadverseimpactsonothercountries,includingregulatoryarbitrage… .”See,FrancescoGuerreraandMeganMurphy,“BankersFearTransatlanticPaySplit,”Financial Times,October29,2009,availableat<http://www .ft .com/cms/s/0/6b7688d6-c4c4-11de-8d54-00144feab49a .html>;JeremyGrant,TomBraithwaiteandAlinevanDuyn,“CracksAreEmerginginTransatlanticApproachtoReform,”Financial Times, January6,2010,availableat<http://www .ft .com/cms/s/0/ad574f78-fa62-11de-beed-00144feab49a .html> .
21 Forexample,averageannualturnoverintheNYSEGrouphasbeenover100percentandtheaverageholdingperiodayearorlesssince2005 .NYSEGroupturnoverisbasedonNYSE&NYSEArcaAverageDailyVolume .SeeNYSE Facts & Figures, NYSEGroupTurnover2000–2009,avail-ableat<http://www.nyxdata.com/factbook>.
22 HenryKaufman,The Road to Financial Reformation, (NewYork,NY:JohnWiley&Sons,2009),p .193 .Seealso,LeoE .Strine,“WhyExcessiveRiskTakingisNotUnexpected,”New York Times,DealbookBlog,October10,2009,avail-ableat<http://dealbook .blogs .nytimes .com/2009/10/05/dealbook-dialogue-leo-strine/> .“…totheextentthe[financial]crisisisrelatedtotherelationshipbetweenstock-holdersandboards,therealconcernseemstobethatboardswerewarmlyreceptivetoinvestorcallsforthemtopursuehighreturnsthroughactivitiesinvolvinggreatriskandhighleverage .”Asurveyof208investmentprofessionals,halffromassetmanagementfirmsandathirdfrom“sustainableinvestmentspecialists”foundthat86percentagreedwiththepropositionthatinstitutionalinvestorsshouldsharetheblameforthefinancialcrisis .NetworkforSustainableFinancialMarkets,“CreditCrisis:BusinessAsUsualforIn-stitutionalInvestors?”availableat<http://www .responsible-investor .com/home/article/over_three_quarters_of_insti-tutional_investors_say_they_should_share_blame/P0//> .Seealso,SophiaGrene,“Institutions‘haven’tlearnt’fromtheturmoil,”Financial Times,October25,2009,availableat<http://www .ft .com/cms/s/0/7eb0ff38-bffd-11de-aed2-00144feab49a,_i_email=y .html> .
23 IraMillsteinandGeorgeVotja,“FinancialDisasterRecovery:APrivateSectorAgendaforRiskManagement,”Directorship,December2008/January2009,p .25 .“Theproliferationofnewownersputsthemodelofshareholderactivism,whichwasenvisionedinthe1980sand1990s,underseverestrain .Institutionalinvestorswereonce
presumedtoshareacommongoalwhenexertingpressureonboardstomonitormanagementandeffectivelyguidefirmstrategy .Thatassumedhomogeneitynowseemslonggone,andheterogeneityiseverontherise .Thisdiversityofshareownershasbroughtawholenewhostofagendas,strategiesandvaluestothetable .Someoftheseownershavelimitedinvestmenthorizonsandareonlyinterestedinrealizingashort-termprofit,andothershavehedgedorshortedtheirpositionsandconsequentlyhaveafinancialinterestinthefailureoftheenterprise .”
24 Themulti-nationalFinancialStabilityBoardandtheUK’sFinancialServicesAuthority,intheirlengthypost-mortemsonthefinancialcrisis,haveanalyzedtheharmfuleffectsofinvestorshort-termism .And,whentheFederalReserveBoardrecentlyannouncedthatitwouldsuperviseandifnecessaryregulateexecutivecompensationatthenation’sbanks,itsproposedrulenotedthatshareholderviewsonpaywereinadequate:“Thusareviewofincentivecompensationarrangementsandrelatedcorporategovernancepractices[asthrough“sayonpay”votes]toensurethattheyareeffectivefromtheperspectiveofshareholdersisnotsufficienttoensurethattheyadequatelyprotectthesafetyandsoundnessoftheorganization .”SeeFederalReserve,“2009BankingandConsumerRegulatoryPolicy,”BoardofGovernorsoftheFederalReservePressRelease,October22,2009,avail-ableat<http://www .federalreserve .gov/newsevents/press/bcreg/20091022a .htm>andtheFederalRegisternotice,p .55228,availableat<http://edocket .access .gpo .gov/2009/pdf/E9-25766 .pdf> .
25 TheMillsteinCenterforCorporateGovernanceandPerformanceattheYaleSchoolofManagementhasaprogramon“PrivateSectorArchitectureForFutureCapitalMarkets”whichraisesquestionslikegovernance,paystructure,incentives,politicalinfluence—androleofbothexecutivesandfundmanagers—inmajortypesofinvestors/financialintermediaries .SeeMilsteinCenterforCorporateGovernanceandPerformance,YaleSchoolofManagement,“Pay,RiskandStewardship .”
26 SeeAspenInstituteBusinessandSocietyProgram,Overcoming Short-termism: A Call for a More Responsible Approach to Investment and Business Management.Thisanalysisarguesthatadverseimpactofshort-termisminthestockmarketisserious:“Intheabsenceofrealchangeinthefocusofinstitutionalinvestorsandrelatedintermediaries,thevariouscorporategovernancereformsareunlikelytoreducethelikelihoodofboardsandmanagersrespondingtoshort-termpressures .”Thepaperrecommends,forexample,creatingagreaterdifferentialontaxesforshortandlong-termcapitalgainsorremovingthe$3,000caponcapitallossdeductibilityfromincomeforlonger-termholdings .
22
Endnotes
27 DavidWalker,A Review of Corporate Governance in UK Banks and Other Financial Industry Entities: Final Recom-mendations, note3,supra,atpp .68-88andAppendix8;FinancialReportingCouncil,2009 Review of the Combined Code, note3, supra,atpp .33-35 .
28 Thisconcludingsectionfocusesonthefour“accountability”mechanisms:themarket,shareholdersaspartofagover-nancestructure(notjustasinvestorstradinginequities),governmentregulationandcorporateleadership(boardsofdirectorsandseniorbusinessexecutives) .Onecould,ofcourse,unpacktheconceptof“accountability”andidentifymanymoreissues:themanydifferenttypesofgovernmentregulationandenforcement,themanydifferenttypesofprivatelitigation,theaccountingrules,thecreditors,thecreditratingagenciesandthemarketsnotjustforthedailytradingofequities,butforinitialpublicofferingsandfortheultimateshareholder-as-investoraccountabilitymechanism,thebattleforcorporatecontrol(obviouslyhedgedinbyvari-ouslawsandregulations) .Thepointofthissectionisthat,whateverthepurposesandeffectivenessofthesevariousaccountabilitymechanisms,onlytheboardofdirectorsandtopcorporateleadershipcan,attheendoftheday,buildandsustainacorporationthatproperlybalancesperformanceandriskmanagementinacultureofintegrity .
29 See,note15,supra .
23
CED Trustees
Co-Chairmen
JOSEPH E. KASPUTYSFounder and ChairmanIHSGlobalInsight
DONALD K. PETERSONChairman and Chief Executive Officer
(Retired)AvayaInc .
Executive Committee
IAN ARNOFChairmanArnofFamilyFoundation
PETER A. BENOLIELChairman EmeritusQuakerChemicalCorporation
ROY J. BOSTOCKChairmanYahoo! Vice-ChairmanDelta Air Lines, Inc.ChairmanSealedgeInvestments,LLC
W. BOWMAN CUTTERManaging DirectorTheCedarsCapitalPartnersandSenior FellowTheRooseveltInstitute
FRANK P. DOYLEExecutive Vice President (Retired)GeneralElectricCompany
EDMUND B. FITZGERALDManaging DirectorWoodmontAssociates
PATRICK FORDPresident and Chief Executive Officer, U.S.Burson-Marsteller
JOSEPH GANTZManaging Director & COOPineBrookRoadPartnersLLC
PATRICK W. GROSSChairmanTheLovellGroup
STEVEN GUNBYChairman, The Americas, and
Senior Vice PresidentTheBostonConsultingGroup,Inc .
RODERICK M. HILLSChairmanHillsStern&MorleyLLP
CHARLES E.M. KOLBPresidentCommitteeforEconomicDevelopment
WILLIAM W. LEWISDirector Emeritus, McKinsey Global
InstituteMcKinsey&Company,Inc .
BRUCE K. MACLAURYPresident EmeritusTheBrookingsInstitution
STEFFEN E. PALKOPresident and Vice Chairman (Retired)XTOEnergyInc .
DONNA E. SHALALAPresidentUniversityofMiami
FREDERICK W. TELLINGVice President, Corporate Policy & Strategic
Management (Retired)PfizerInc
JOSH S. WESTONHonorary ChairmanAutomaticDataProcessing,Inc .
JOHN P. WHITERobert & Renee Belfer Lecturer,
Kennedy School of GovernmentHarvardUniversity
RONALD L. ZARRELLAChairman EmeritusBausch&LombIncorporated
CED Trustees
PAUL A. ALLAIREChairman (Retired)XeroxCorporation
MARIA BEATRICE ARCOChairAmericanAssetCorporation
MORTEN AMTZENPresident and Chief Executive OfficerOverseasShipholdingGroup,Inc .
DEBORAH HICKS BAILEYChairman and CEOSolonGroup,Inc .
EDWARD N. BASHAChief Executive OfficerBashaGroceryStores
NADINE BASHAChair of Arizona Early Childhood
Development and Health BoardBashaGroceryStores
ALAN BELZERPresident & Chief Operating Officer
(Retired)AlliedSignal
DEREK C. BOKProfessor of Law & President EmeritusHarvardUniversity
LEE C. BOLLINGERPresidentColumbiaUniversity
STEPHEN W. BOSWORTHDean, Fletcher School of Law and
DiplomacyTuftsUniversity
JACK O. BOVENDERChairman and CEOHCA-HealthCareofAmerica
JOHN BRADEMASPresident EmeritusNewYorkUniversity
RANDY J. BRAUDU.S. Country ControllerShellOilCompany
WILLIAM E. BROCKFounder and Senior PartnerTheBrockGroup
BETH BROOKEGlobal Vice Chair - Public Policy,
Sustainability and Stakeholder Engagement
Ernst&YoungLLP
ROBERT H. BRUININKSPresidentUniversityofMinnesota
DONALD R. CALDWELLChairman & Chief Executive OfficerCrossAtlanticCapitalPartners
CARL T. CAMDENPresident and Chief Executive OfficerKellyServices,Inc .
24
CED Trustees
DAVID A. CAPUTOPresident EmeritusPaceUniversity
GERHARD CASPERPresident Emeritus and ProfessorStanfordUniversity
RAYMOND G. CHAMBERSSpecial Envoy of the Secretary-General
for MalariaUnitedNations
ROBERT B. CHESSChairmanNektarTherapeutics
MICHAEL CHESSERChairman & CEOGreatPlainsEnergy
CAROLYN CHINChairman and Chief Executive OfficerCebiz/Singlepoint
RANJANA B. CLARKExecutive Vice President, Global Payments
and Global StrategyWesternUnion
JOHN L. CLENDENINChairman (Retired)BellSouthCorporation
MARTIN COHENManaging DirectorMorganStanley
ELIZABETH COLEMANPresidentBenningtonCollege
FERDINAND COLLOREDO-MANSFELD
PartnerCabotProperties,LLC
ROBERT COLSONPartner - Institutional AcceptanceGrantThornton
GEORGE H. CONRADESChairman and Chief Executive OfficerAkamaiTechnologiesInc .
KATHLEEN B. COOPERSenior FellowSouthernMethodistUniversity
EDWARD F. COXOf CounselPattersonBelknapWebb&Tyler
STEPHEN A. CRANEChairmanInsuranceandReinsuranceStrategies
KENNETH W. DAMMax Pam Professor Emeritus of American
& Foreign Law & Senior LecturerTheUniversityofChicago
PAUL DANOSDean, The Amos Tuck School of BusinessDartmouthCollege
RONALD R. DAVENPORTChairman EmeritusSheridanBroadcastingCorporation
RICHARD J. DAVISSenior PartnerWeil,Gotshal&MangesLLP
RICHARD H. DAVISPartnerDavisManafort,Inc .
JOHN J. DEGIOIAPresidentGeorgetownUniversity
MICHELLE DENNEDYChief Governance OfficerSunMicrosystems
RENATO A. DIPENTIMAPresident and CEO (Retired)SRAInternational,Inc .
SAMUEL A. DIPIAZZAGlobal Chief Executive OfficerPricewaterhouseCoopersLLP
LINDA M. DISTLERATHSenior Vice PresidentAPCOWorldwide
WILLIAM H. DONALDSONChairmanDonaldsonEnterprises
IRWIN DORROSPresidentDorrosAssociates
ROBERT H. DUGGERManaging DirectorTudorInvestmentCorporation
T. J. DERMOT DUNPHYChairmanKildareEnterprises,LLC
CHRISTOPHER D. EARLPresident and CEOBIOVenturesforGlobalHealth
STUART E. EIZENSTATPartnerCovington&BurlingLLP
TIMOTHY ELDERDirector of Corporate Public AffairsCaterpillarInc .
ROBERT A. ESSNERExecutive in Residence, Columbia
Business SchoolColumbiaUniversity
WILLIAM F. EZZELLNational Managing Partner - Legislative
& Regulatory RelationsDeloitteLLP
KATHLEEN FELDSTEINPresidentEconomicsStudies,Inc .
ROGER W. FERGUSONPresident and Chief Executive OfficerTIAA-CREF
TREVOR FETTERPresident and CEOTenetHealthcareCorporation
MATTHEW FINKPresident (Retired)InvestmentCompanyInstitute
HOWARD FLUHRChairmanTheSegalCompany
MARGARET FORANExecutive Vice President, General Counsel
and Corporate SecretarySaraLeeCorporation
BARBARA HACKMAN FRANKLINPresident & CEO and former US Secretary
of CommerceBarbaraFranklinEnterprises
HARRY FREEMANChairmanTheMarkTwainInstitute
25
CED Trustees
MITCHELL S. FROMSTEINChairman EmeritusManpowerInc .
CONO R. FUSCOManaging Partner (Retired)GrantThornton
PAMELA B. GANNPresidentClaremontMcKennaCollege
E. GORDON GEEPresidentTheOhioStateUniversity
THOMAS P. GERRITYJoseph J. Aresty Professor of ManagementTheWhartonSchooloftheUniversityof
Pennsylvania
STUART M. GERSONPartnerEpsteinBecker&Green,PC
ALAN B. GILMANformer ChairmanTheSteaknShakeCompany
CAROL R. GOLDBERGTrusteeTheGoldbergFamilyFoundation
ALFRED G. GOLDSTEINPresident and CEO - AGAssociatesAlfredG&HopeP .GoldsteinFund
JOSEPH T. GORMANChairman and CEOMoxahelaEnterprisesLLC
EARL G. GRAVES, SR.Chairman and PublisherEarlG .GravesPublishingCo .,Inc .
GERALD GREENWALDChairmanGreenbriarEquityGroup
BARBARA B. GROGANChairman EmeritusWesternIndustrialContractors
RONALD GRZYWINSKIChairmanShoreBankCorporation
ADAM J. GUTSTEINChief Executive Officer and PresidentDiamondManagement&Technology
Consultants,Inc .
JUDITH H. HAMILTONPresident and Chief Executive Officer
(Retired)ClassroomConnect
HOLLIS W. HARTDirector of International OperationsCiti
WILLIAM HASELTINEPresidentHaseltineAssociates
BEN W. HEINEMAN, JR.Senior FellowHarvardUniversity’sSchools
ofLaw&GovernmentFormerGESeniorVicePresidentforLawandPublicAffairs
HEATHER R. HIGGINSPresidentRandolphFoundation
JOHN HILLENChief Executive Officer GlobalDefenseTechnology&
Systems,Inc .
G. PENN HOLSENBECKVice President and Corporate SecretaryPhilipMorrisInternational
PAUL M. HORNSenior Vice President (Retired)IBMCorporation
PHILIP K. HOWARDPartnerCovington&BurlingLLP
SHIRLEY ANN JACKSONPresidentRensselaerPolytechnicInstitute
CHARLENE DREW JARVISPresidentSoutheasternUniversity
JEFFREY A. JOERRESChairman and CEOManpowerInc .
JAMES A. JOHNSONVice ChairmanPerseus,LLC
L. OAKLEY JOHNSONSenior Vice President, Corporate AffairsAmericanInternationalGroup,Inc .
ROBERT L. JOSSDean, Graduate School of BusinessStanfordUniversity
PRES KABACOFFCo-Chairman of the Board of Directors &
Chief Executive OfficerHRIProperties
ROBERT KAHNSenior Adviser, Financial Systems, Financial
& Private Sector Vice PresidencyTheWorldBankGroup
EDWARD A. KANGASChairman and Chief Executive Officer
(Retired)DeloitteToucheTohmatsu
MIKE KELLEYVice President, Government RelationsYRCWorldwideInc .
WILLIAM E. “BRIT” KIRWANChancellorUniversitySystemofMaryland
KAKUTARO KITASHIROChairmanIBMJapan
YOTARO KOBAYASHIformer Chief Corporate AdvisorFujiXeroxCo .,Ltd .
THOMAS F. LAMBSenior Vice President, Government AffairsPNCFinancialServicesGroup,Inc .
KURT M. LANDGRAFPresident & CEOEducationalTestingService
DAVID H. LANGSTAFFFormer President & CEO, Veridian Corp.;
Chairman, Wildheart GroupVeridianCorporation
W. MARK LANIERPartnerTheLanierLawFirmP .C .
ROBERT G. LIBERATORESenior Transatlantic FellowGermanMarshallFundoftheU .S .
JOHN LIFTINGeneral CounselD .E .Shaw&Co .,L .P .
26
CED Trustees
IRA A. LIPMANFounder and ChairmanGuardsmark,LLC
JOHN C. LOOMISVice President, Human ResourcesGeneralElectricCompany
LI LUPresidentHimalayaManagementLLC
EUGENE A. LUDWIGFounder & CEOPromontoryFinancialGroup
COLETTE MAHONEYPresident EmeritusMarymountManhattanCollege
ELLEN R. MARRAMPresidentBarnegatGroupLLC
CECILIA I. MARTINEZExecutive DirectorReformInstituteInc .
MARGERY W. MAYERPresident, Scholastic EducationScholasticInc .
T. ALLAN MCARTORChairmanAirbusofNorthAmerica,Inc .
ALONZO L. MCDONALDChairman and Chief Executive OfficerAvenirGroup,Inc .
WILLIAM J. MCDONOUGHVice ChairmanBankofAmericaMerrillLynch
DAVID E. MCKINNEYVice ChairThomasJ .WatsonFoundation
CAROL A. MELTONExecutive Vice President, Global Public
PolicyTimeWarnerInc .
LENNY MENDONCAChairman, McKinsey Global InstituteMcKinsey&Company,Inc .
ALAN G. MERTENPresidentGeorgeMasonUniversity
HARVEY R. MILLERPartnerWeil,Gotshal&MangesLLP
ALFRED T. MOCKETTChairman & CEOCorinthianCapitalLLC
AVID MODJTABAIExecutive Vice President, Technology
and OperationsWellsFargo&Co .
G. MUSTAFA MOHATAREMChief EconomistGeneralMotorsCorporation
JAMES P. MOODYSenior Financial AdvisorBankofAmericaMerrillLynch
NICHOLAS G. MOOREDirectorBechtelGroup,Inc .
DONNA S. MOREAPresident, U.S. Operations & IndiaCGI
MICHAEL G. MORRISChairman, President and Chief
Executive OfficerAmericanElectricPowerCompany
JAMES C. MULLENPresident and CEOBiogenIdecInc .
DAVID R. NACHBARChief Human Resources OfficerGrahamPackagingCompany
DIANA S. NATALICIOPresidentTheUniversityofTexasatElPaso
DEAN R. O’HAREChairman and CEO (Retired)TheChubbCorporation
NELS OLSONManaging Director, Eastern Region;
Sr. Client Partner, CEO & Board Services Practice
Kom/FerryInternational,Inc .
RONALD L. OLSONSenior PartnerMunger,Tolles&OlsonLLP
LAURENCE G. O’NEILPresident and Chief Executive OfficerSocietyforHumanResource
Management
CAROL J. PARRYPresidentCorporateSocialResponsibility
Associates
VICTOR A. PELSONSenior AdvisorUBSSecuritiesLLC
DEBRA PERRYManaging MemberPerryConsultingLLC
GREGG PETERSMEYERChairman and CEOPersonalPathway,LLC
PETER G. PETERSONFounder and ChairmanPeterG .PetersonFoundation
TODD E. PETZELManaging Director and Chief Investment
OfficerOffitCapitalAdvisorsLLC
MARK PREISINGERVice President, World Wide Public Affairs
& CommunicationsTheCoca-ColaCompany
DOUG PRICEPresident and CEORockyMountainPBS
LOIS E. QUAMPresident and Chief Executive OfficerTysvar
GEORGE A. RANNEYPresident and CEOChicagoMetropolis2020
NED REGANProfessorTheCityUniversityofNewYork
JAMES E. ROHRChairman and CEOPNCFinancialServicesGroup,Inc .
ROY ROMERSenior AdvisorTheCollegeBoard
27
DANIEL ROSEChairmanRoseAssociates,Inc .
ANDREW S. ROSENChairman and Chief Executive OfficerKaplan,Inc .
LANDON H. ROWLANDChairmanEverGladesFinancial
NEIL L. RUDENSTINEChair, ArtStor Advisory BoardAndrewW .MellonFoundation
GEORGE E. RUPPPresidentInternationalRescueCommittee
KENNETH P. RUSCIOPresidentWashington&LeeUniversity
EDWARD B. RUSTChairman and CEO StateFarmInsuranceCompanies
BERTRAM L. SCOTTExecutive Vice President and Chief
Institutional Development and Sales Officer
TIAA-CREF
WILLIAM S. SESSIONSPartnerHolland&KnightLLP
JOHN E. SEXTONPresidentNewYorkUniversity
CHRIS SHAYSFormer Member of Congress
GEORGE P. SHULTZThomas W. and Susan B. Ford
Distinguished FellowHooverInstitution
JOHN C. SICILIANOSenior Managing Director and CEO,
Investment BoutiquesNewYorkLifeInvestmentManagement
FREDERICK W. SMITHChairman, President and CEOFedExCorporation
PETER P. SMITHSenior Vice President, Academic
Strategies and DevelopmentKaplan,Inc .
SARAH G. SMITHChief Accounting OfficerGoldmanSachsGroupInc .
ALAN G. SPOONManaging General PartnerPolarisVenturePartners
JON STELLMACHERExecutive Vice PresidentThriventFinancialforLutherans
PAULA STERNChairwomanTheSternGroup,Inc .
ROGER W. STONEChairman and CEOKapStonePaperandPackagingCorp .
MATTHEW J. STOVERChairmanLKMVentures,LLC
HENRY S. TANGManaging PartnerCommitteeof100
DAVIA B. TEMINPresident and Chief Executive OfficerTeminandCompanyIncorporated
SARAH B. TESLIKSr. Vice President, Policy and GovernanceApacheCorporation
LARRY D. THOMPSONSenior Vice President, Government Affairs,
General Counsel and SecretaryPepsiCo,Inc .
JAMES A. THOMSONPresident and Chief Executive OfficerRAND
PATRICK TOOLEVice President & Chief Information OfficerIBMCorporation
STEPHEN JOEL TRACHTENBERGPresident Emeritus & University Professor of
Public ServiceGeorgeWashingtonUniversity
TALLMAN TRASKExecutive Vice PresidentDukeUniversity
VAUGHN O. VENNERBERGSenior Executive Vice President and
Chief of StaffXTOEnergyInc .
JORGEN VIG KNUDSTORPChief Executive OfficerLEGOGroup
JAMES L. VINCENTChairman (Retired)BiogenIdecInc .
FRANK VOGLPresidentVoglCommunications
DONALD C. WAITEDirectorMcKinsey&Company,Inc .
JERRY D. WEASTSuperintendent of SchoolsMontgomeryCountyPublicSchools
JOHN C. WILCOXChairmanSodaliLtd .
HAROLD M. WILLIAMSPresident EmeritusGettyTrust
LINDA SMITH WILSONPresident EmeritaRadcliffeCollege
MARGARET S. WILSONChairman and CEOScarbroughs
H. LAKE WISEExecutive Vice President and
Chief Legal OfficerDaiwaSecuritiesAmericaInc .
JACOB J. WORENKLEINChairman and Chief Executive Officer,
(Retired)USPowerGeneratingCo .
KURT E. YEAGERPresident EmeritusElectricPowerResearchInstitute
STEVEN ZATKINSenior Vice President, Government RelationsKaiserFoundationHealthPlan,Inc .
CED Trustees
28
CED Honorary Trustees
RAY C. ADAMRetired ChairmanNLIndustries
ROY L. ASHChairman (Retired)LittonIndustries
ROBERT H. BALDWINRetired ChairmanMorganStanley
GEORGE F. BENNETTChairman EmeritusStateStreetInvestmentTrust
JACK F. BENNETTRetired Senior Vice PresidentExxonMobilCorporation
HOWARD BLAUVELTRetired President & CEOConocoPhillips
ALAN S. BOYDRetired Vice ChairmanAirbusofNorthAmerica,Inc .
ANDREW F. BRIMMERPresidentBrimmer&Company,Inc .
FLETCHER L. BYROMPresident & Chief Executive OfficerMICASUCorporation
PHILIP CALDWELLRetired ChairmanFordMotorCompany
HUGH M. CHAPMANRetired ChairmanNationsBankofGeorgia
E. H. CLARKChairman and Chief Executive OfficerTheFriendshipGroup
A. W. CLAUSENRetired Chairman and Chief Executive
OfficerBankofAmericaCorporation
DOUGLAS D. DANFORTHExecutive Associates
JOHN H. DANIELSRetired Chairman and CEOArcherDanielsMidlandCompany
RALPH P. DAVIDSONRetired ChairmanTimeInc .
ALFRED C. DECRANE, JR.Retired ChairmanTexacoCorporation
ROBERT R. DOCKSONChairman EmeritusCalFed,Inc .
LYLE J. EVERINGHAMRetired ChairmanTheKrogerCo .
DON C. FRISBEEChairman EmeritusPacifiCorp
W. H. KROME GEORGERetired ChairmanALCOA
WALTER B. GERKENRetired Chairman & Chief Executive OfficerPacificInvestmentManagementCo .
LINCOLN GORDONformer PresidentJohnsHopkinsUniversity
JOHN D. GRAYChairman EmeritusHartmarxCorporation
JOHN R. HALLRetired ChairmanAshlandInc .
RICHARD W. HANSELMANformer ChairmanHealthNetInc .
ROBERT S. HATFIELDRetired ChairmanTheContinentalCorporation
PHILIP M. HAWLEYRetired Chairman of the BoardCarterHawleyHaleStores,Inc .
ROBERT C. HOLLANDSenior FellowTheWhartonSchooloftheUniversityof
Pennsylvania
LEON C. HOLT, JR.Vice Chairman and Chief Administrative
Officer (Retired) Air Products and Chemicals, Inc.
HoltFamilyFoundation
SOL HURWITZRetired PresidentCommitteeforEconomicDevelopment
GEORGE F. JAMES
DAVID T. KEARNSChairman EmeritusNewAmericanSchoolsDevelopment
Corporation
GEORGE M. KELLERRetired Chairman of the BoardChevronCorporation
FRANKLIN A. LINDSAYRetired ChairmanItekCorporation
ROBERT W. LUNDEENRetired CharimanTheDowChemicalCompany
RICHARD B. MADDENRetired Chairman and Chief Executive
OfficerPotlatchCorporation
WILLIAM F. MAYformer Chairman and CEOStatueofLiberty-EllisIslandFoundation
OSCAR G. MAYERRetired CharimanOscarMayer&Co .
JAMES W. MCKEE, JR.Retired ChairmanCPCInternational,Inc .
CHAMPNEY A. MCNAIRRetired Vice ChairmanTrustCompanyofGeorgia
J. W. MCSWINEYRetired Chairman of the BoardMeadWestvacoCorporation
29
ROBERT E. MERCERRetired ChairmanTheGoodyearTire&RubberCompany
LEE L. MORGANformer Chairman of the BoardCaterpillarInc .
ROBERT R. NATHANChairmanNathanAssociates
JAMES J. O’CONNORRetired Chairman and Chief Executive
OfficerExelonCorporation
LEIF H. OLSENChairmanLHOGroup
NORMA PACEPresidentPaperAnalyticsAssociates
CHARLES W. PARRYRetired ChairmanALCOA
WILLIAM R. PEARCEDirectorAmericanExpressMutualFunds
JOHN H. PERKINSformer PresidentContinentalIllinoisNationalBankand
TrustCompany
DEAN P. PHYPERSformer Chief Financial OfficerIBMCorporation
ROBERT M. PRICERetired Chairman and Chief Executive
OfficerControlDataCorporation
JAMES J. RENIERRetired Chairman and CEOHoneywellInternationalInc .
JAMES Q. RIORDANChairmanQuentinPartnersCo .
IAN M. ROLLANDChairmanNiSourceInc .
WILLIAM M. ROTHformer United States Trade Representative
THE HONORABLE WILLIAM RUDER
former US Assistant Secretary of Commerce
RALPH S. SAULRetired Chairman of the BoardCIGNACorporation
GEORGE A. SCHAEFERRetired Chairman of the BoardCaterpillarInc .
ROBERT G. SCHWARTZ
MARK SHEPHERD, JR.Retired ChairmanTexasInstrumentsIncorporated
ROCCO C. SICILIANOChairman, Dwight D. Eisenhower
Memorial Commission
ELMER B. STAATSformer Controller General of the United
States
FRANK STANTONRetired PresidentCBSCorporation
EDGER B. STERN, JR.Chairman of the BoardRoyalStreetCorporation
ALAXANDER L. STOTTRetired President & COOGTECorporation
WAYNE E. THOMPSONRetired ChairmanMerrittPeraltaMedicalCenter
THOMAS A. VANDERSLICERetired President and Chief Operating
OfficerGTECorporation
SIDNEY J. WEINBERG, JR.Senior DirectorGoldmanSachsGroupInc .
CLIFTON R. WHARTON, JR.former Chairman and CEOTIAA-CREF
DOLORES D. WHARTONformer Chariman and CEOTheFundforCorporateInitiatives
ROBERT C. WINTERSChairman EmeritusPrudentialFinancial
RICHARD D. WOODRetired Chief Executive OfficerEliLillyandCompany
CHARLES J. ZWICKRetired ChairmanSouthernBankingCorporation
CED Honorary Trustees
30
Chair:
JOHN L. PALMERUniversity Professor and Dean EmeritusTheMaxwellSchoolofCitizenship&PublicAffairs,Syracuse
University
Members:
ANTHONY J. CORRADOCharles A. Dana Professor of GovernmentColbyCollege
ALAIN C. ENTHOVENMarriner S. Eccles Professor of Public & Private MangementStanfordUniversity
BENJAMIN M. FRIEDMANWilliam J. Maier Professor of Political EconomyHarvardUniversity
ROBERT W. HAHNResident Scholar & Executive Director, AEI-Brookings Joint Center
for Regulatory StudiesAmericanEnterpriseInstituteforPublicPolicyResearch
CED Research Advisory Board
DOUGLAS HOLTZ-EAKINPresidentDHEConsulting,LLC
HELEN F. LADDEdgar Thompson Professor of Public Policy Studies and Professor of
EconomicsDukeUniversity
ROBERT E. LITANVice President, Research & PolicyEwingMarionKauffmanFoundation
ZANNY MINTON-BEDDOESWashington Economics EditorTheEconomist
WILLIAM D. NORDHAUSSterling Professor of EconomicsYaleUniversity
RUDOLPH G. PENNERArjay and Frances Miller Chair in Public PolicyTheUrbanInstitute
31
CHARLES E.M. KOLBPresident
LONE BRYANDirector of Trustee Relations and Secretary of
The Research and Policy
AMANDA TURNERExecutive Assistant to the PresidentDirector of Administration
Research
JOSEPH J. MINARIKSenior Vice President and Director of Research
JANET HANSENVice President and Director of Education Studies
ELLIOT SCHWARTZVice President and Director of Economic Studies
STUART KOTTLEResearch Associate
MANUEL TRUJILLOResearch Associate
DONALD C. “BUFF” MACKENZIESenior Fellow
Communications/Government Relations
MICHAEL J. PETROVice President and Director of Business andGovernment Relations and Chief of Staff
MORGAN BROMANDirector of Communications
AMY MORSECommunications and Outreach Associate
MEREDITH HANLEYDirector of Foundation Relations
LAURA OLDANIEProgram Manager
EEVA MOOREOutreach & Online Communications Associate
RACHEL GORMANOutreach Associate
Development
MARTHA E. HOULEVice President for Development and Secretary of the Board of Trustees
RICHARD M. RODERODirector of Development
LINDSAY HOFFMANDevelopment Associate
Finance and Administration
LAURA LEEChief Financial Officer and Vice President of Finance and
Administration
ANDRINE COLEMANController
HARRY SURJADIREDJADirector, Database Operations and Business Analysis
JILL MITOKOOffice Manager
CED Staff
32
Statements On National Policy Issued By The Committee For Economic Development
Selected Recent Publications:HarnessingOpennesstoImproveResearch,Teachingand
LearninginHigherEducation(2009)
TeacherCompensationandTeacherQuality(2009)
RebuildingCorporateLeadership:HowDirectorsCanLinkLong-TermPerformancewithPublicGoals(2009)
LeadershipandSharedPurposeforAmerica’sFuture(2008)
HarnessingOpennesstoTransformAmericanHealthcare(2008)
BuilttoLast:FocusingCorporationsonLong-TermPerformance(2007)
TheEmployer-basedHealth-InsuranceSystem(EBI)IsAtRisk:WhatWeMustDoAboutIt(2007)
TheEconomicPromiseofInvestinginHigh-QualityPreschool:UsingEarlyEducationtoImproveEconomicGrowthandtheFiscalSustainabilityofStatesandtheNation(2006)
OpenStandards,OpenSource,andOpenInnovation:HarnessingtheBenefitsofOpenness(2006)
PrivateEnterprise,PublicTrust:TheStateofCorporateAmericaAfterSarbanes-Oxley(2006)
TheEconomicBenefitsofHigh-QualityEarlyChildhoodPrograms:WhatMakestheDifference?(2006)
EducationforGlobalLeadership:TheImportanceofInternationalStudiesandforeignLanguageEducationforU .S .EconomicandNationalSecurity(2006)
ANewTaxFramework:ABlueprintforAvertingaFiscalCrisis(2005)
CracksintheEducationPipeline:ABusinessLeader’sGuidetoHigherEducationReform(2005)
TheEmergingBudgetCrisis:UrgentFiscalChoices(2005)
MakingTradeWork:StraightTalkonJobs,Trade,andAdjustments(2005)
BuildingonReform:ABusinessProposaltoStrengthenElectionFinance(2005)
DevelopmentalEducation:TheValueofHighQualityPreschoolInvestmentsasEconomicTools(2004)
ANewFrameworkforAssessingtheBenefitsofEarlyEducation(2004)
PromotingInnovationandEconomicGrowth:TheSpecialProblemofDigitalIntellectualProperty(2004)
InvestinginLearning:SchoolFundingPoliciestoFosterHighPerformance(2004)
PromotingU .S .EconomicGrowthandSecurityThroughExpandingWorldTrade:ACallforBoldAmericanLeadership(2003)
ReducingGlobalPoverty:EngagingtheGlobalEnterprise(2003)
ReducingGlobalPoverty:TheRoleofWomeninDevelopment(2003)
HowEconomiesGrow:TheCEDPerspectiveonRaisingtheLong-TermStandardofLiving(2003)
LearningfortheFuture:ChangingtheCultureofMathandScienceEducationtoEnsureaCompetitiveWorkforce(2003)
ExplodingDeficits,DecliningGrowth:TheFederalBudgetandtheAgingofAmerica(2003)
JusticeforHire:ImprovingJudicialSelection(2002)
ASharedFuture:ReducingGlobalPoverty(2002)
ANewVisionforHealthCare:ALeadershipRoleforBusiness(2002)
PreschoolforAll:InvestingInaProductiveandJustSociety(2002)
FromProtesttoProgress:AddressingLaborandEnvironmentalConditionsThroughFreerTrade(2001)
TheDigitalEconomy:PromotingCompetition,Innovation,andOpportunity(2001)
ReformingImmigration:HelpingMeetAmerica’sNeedforaSkilledWorkforce(2001)
MeasuringWhatMatters:UsingAssessmentandAccountabilitytoImproveStudentLearning(2001)
ImprovingGlobalFinancialStability(2000)
TheCaseforPermanentNormalTradeRelationswithChina(2000)
WelfareReformandBeyond:MakingWorkWork(2000)
BreakingtheLitigationHabit:EconomicIncentivesforLegalReform(2000)
NewOpportunitiesforOlderWorkers(1999)
InvestinginthePeople’sBusiness:ABusinessProposalforCampaignFinanceReform(1999)
TheEmployer’sRoleinLinkingSchoolandWork(1998)
EmployerRolesinLinkingSchoolandWork:LessonsfromFourUrbanCommunities(1998)
America’sBasicResearch:ProsperityThroughDiscovery(1998)
CE Circulo de Empresarios Madrid, Spain
CEAL Consejo Empresario de America Latina Buenos Aires, Argentina
CEDA Committee for Economic Development of Australia Sydney, Australia
CIRD China Institute for Reform and Development Hainan, People’s Republic of China
EVA Centre for Finnish Business and Policy Studies Helsinki, Finland
FAE Forum de Administradores de Empresas Lisbon, Portugal
IDEP Institut de l’Entreprise Paris, France
Keizai Doyukai Tokyo, Japan
NBI National Business Initiative Johannesburg, South Africa
SMO Stichting Maatschappij en Onderneming The Netherlands
CED Counterpart Organizations
CloserelationsexistbetweentheCommitteeforEconomicDevelopmentandindependent,nonpoliticalresearchorganizationsinothercountries .SuchcounterpartgroupsarecomposedofbusinessexecutivesandscholarsandhaveobjectivessimilartothoseofCED,whichtheypursuebysimilarlyobjectivemethods .CEDcooperateswiththeseorganizationsonresearchandstudyprojectsofcommoninteresttothevariouscountriesconcerned .Thisprogramhasresultedinanumberofjointpolicystatementsinvolvingsuchinternationalmattersasenergy,assistancetodevelopingcountries,andthereductionofnontariffbarrierstotrade .
Committee forEconomic Development
2000 L Street N.W.Suite 700
Washington, D.C. 20036202-296-5860 Main Number
202-223-0776 Fax1-800-676-7353
www.ced.org
top related