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ALL BUSINESS: Too many boards are still cavalier
October 8, 2009 by The Associated Press / RACHEL BECK (AP Business Writer)
NEW YORK (AP) — Corporate directors don't like it when shareholders accuse
them of being management cronies, but how else can they be seen when they
drop the ball on basic responsibilities like leadership development and
executive pay?
Too many boards are being reactive when it comes to important matters of
corporate governance. Just consider what happened at Bank of America Corp.
CEO Ken Lewis had been under duress for months, yet the bank's directors
didn't have a plan in place for who would succeed him. Now they've been
caught flat-footed since Lewis unexpectedly announced plans to retire by
year's end.
It's as if not much has changed since the corporate scandals earlier this
decade involving Enron, WorldCom and more. The implosion of those companies
spurred calls for a drastic overhaul of boardrooms, and new corporate
reforms were required under the Sarbanes-Oxley Act in 2002.
But clearly not enough was done to get boards more focused on their role of
looking out for shareholder interests and being held accountable for their
actions.
Just look at what boards are doing when it comes to developing new leaders,
something that directors themselves say is critical to effective governance.
An amazingly high 44 percent of directors say their boards have no
succession plans in place for when the CEO leaves, according to a new survey
of 632 board members at public companies by the National Association of
Corporate Directors.
That means directors would be left scrambling to fill the CEO slot if
someone suddenly departs or is struck by tragedy. A vacancy in the executive
suite can be highly disruptive to employees, investors and customers.
"What kind of public message does that send out? How about chaos,
disorganization and lack of preparedness?" said Marshall Goldsmith, who
advises executives on leadership and authored the new book "Succession: Are
You Ready?"
In the case of BofA, the lack of succession planning could hardly come at a
worse time for the bank, one of the nation's largest and a recipient of $45
billion in government bailout funds. The Charlotte, N.C.-based bank faces an
upcoming trial with the Securities and Exchange Commission and is under
intense scrutiny from the attorneys general in New York and North Carolina,
all relating to BofA's purchase of Merrill Lynch & Co.
Long before Lewis announced Sept. 30 that he was leaving, the board should
have recognized the importance of crafting a succession plan. Shareholders
last spring had stripped Lewis of his chairman title as losses mounted.
Lewis has also been under attack for the bank's Merrill acquisition, which
was forged at the height of the financial crisis in September 2008 and
closed on Jan. 1.
"Banks in recent years became too beholden to a single CEO, and those CEOs
convinced their boards they didn't have to focus on succession planning,"
said Jeffrey Sonnenfeld, a professor at the Yale School of Management and
expert on CEO leadership and corporate governance issues.
Sonnenfeld points out that succession planning takes time, sometimes years
to build a bench of possible CEO candidates. When companies don't plan, it
can cripple them.
Governance experts point to what happened at food company TLC Beatrice
International Holdings Corp. as evidence. Its chairman and controlling
shareholder Reginald Lewis died at age 50 in 1993, two months after being
diagnosed with a brain tumor. TLC Beatrice was first handed over to a
three-person committee, and then to Mr. Lewis' half-brother, an attorney.
Within a year, Lewis' widow, Loida Nicolas Lewis, took over, and soon began
selling off parts of the company.
Boards have also been weak in overhauling their executive pay programs,
despite the public outcry over what many Americans deem to be excessive
executive compensation. Banks, in particular, have come under fire for
paying top executives big bonuses, which many see as encouraging excessive
risk-taking and a focus on short-term results.
Even though nearly 80 percent of those surveyed by the National Association
of Corporate Directors said CEO compensation is too high relative to
corporate performance, they aren't taking the tough steps needed to make
changes.
Among those who said pay was too high, more than half said the reason is
because of a lack of genuine performance objectives used in setting pay.
Many also said that directors who set pay aren't strong negotiators and
allow CEOs to dominate the pay-setting process.
Something has to change to get boards to perform their duty. Even if
previous boardroom reforms didn't take hold, this isn't the time to give up.
The most important focus has to be on accountability. In the area of
compensation, more shareholders are submitting proposals to give investors
advisory votes on compensation, otherwise known as "say on pay." The Obama
administration has proposed requiring this at all public companies.
The SEC, which plans to make changes to corporate pay disclosures in the
coming months, should consider forcing directors to take more responsibility
for their pay-setting decisions.
One way to do that would be to require directors who set pay to legally sign
off, or "certify," the pay information companies detail to shareholders in
their annual proxy statements. That would be part of a section in the proxy
where board compensation committees are supposed to lay out their thinking
and reasoning for the pay it grants to top executives.
Investors also need to keep voting in director elections, even if their "no"
votes against board members can be ignored by companies because the votes
are nonbinding.
All this could send a powerful message to the nation's boards. It's about
time they listen.
___
Rachel Beck is the national business columnist for The Associated Press.
Write to her at rbeck(at)ap.org
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