August 11, 2014 | www.AgendaWeek.com
SHAREHOLDERS
2 GM, Microsoft Among
Companies Splitting
CEO-Chair Role
Popularity of splits grows
despite lack of support
for shareholder proposals
NEWS & ANALYSIS
4 Fox–Time Warner Deal
Collapse Blamed on
Dual-Class Structure
Fox will use $6 billion for
a stock buyback instead
OPINION & ANALYSIS
5 Three Actions for Audit
Committees to Avoid
The SEC’s Wrath
A former SEC senior legal
advisor on avoiding
enforcement action
ONBOARDING
6 Boards Coax Rookie
Directors to Speak
Up Sooner
Some boards expect
meaningful director
participation in debut
meetings
7 IBM Tests AI for
Business Meetings
A demonstration
showed its use in picking
acquisition targets
EXECUTIVE COMPENSATION
9 SEC Pay-Ratio Rule
Still Months Away
The regulator has a history
of missing deadlines
PayGap Widens Between CEOand NEO
CBS, Starbucks and Walt Disney are consistent outliers
by Ton y C ha pelle
C
o m p sp read s betw een C EO s an d
the average n am ed executive ofcer at m ajor U.S. com pan ies have been
grow ing for each of the past ve years.
In fact, there are fears that the disparity has reached hazardous propo rtion s
by som e m easures.
So m e go v ern an ce m o n ito rs deem
it a bad idea for chief executives to be
paid far m ore than their direct reports.
Big pay gaps, they say, could m ean that
a C EO has far too m uch control or that
other o fcers are to o in experien ced to
be co n sidered fo r C EO succession .
O n e reaso n fo r th e w iden in g gap
is th at C EO s h ave go tten an n ual pay
in creases o f 1 1 % durin g th e past ve
years w h ile th e average an n ual bo o st
fo r NEO s h as b een o n ly 8 % . Sin ce
som e institutional in vestors an d proxy
adv iso ry rm s such as ISS pay atten tio n to th e spread, sh o uld th is tren d
m atter to directors?
Jud gin g by th e resp o n ses o f th e
bo ard in sid ers w h o m Agenda asked
abo ut the issue, the jury is split.
“If investors did not care, the proxy
adviso rs w o uld n o t care o r o pin e [o n
pay ratios]. Boards attun ed to political
Gap continued on page 8
CEOSuccession’sUtilityPlayer: TheHRChief
More boards see succession planning as an ongoing process
by Am a nda G erut
W
hen In gerso ll Ran d ’s th en C EO chairm an, Herbert Hen kel, hired
Marcia Av ed o n as the head o f hum an
reso urces n early eigh t years ago , o n e
o f th e reaso n s w as h er experien ce in
plan n in g fo r C EO successio n s. His in stin ct paid o ff. With in six years, Av edon had played a key ro le in the tran sitio n fro m Hen kel to h is successo r,
as w ell as iden tify in g a C EO to lead
spin - o ff com pan y Allegio n .
Av edo n ’s ro le in successio n p lan ning highlights a growing trend am ong
large co m pan ies. As bo ards sh ift succession planning from an event- driven
process that starts when the CEO begins
eyeing retirem ent (or is asked to leave)
to an ongoing process of organizationwide talent developm ent, som e boards
are beginn ing to rely m ore heavily on
an un sung clutch player: the chief hum an resources ofcer (C HRO ).
A skilled an d so ph isticated C HRO
can h av e an o utsize im p act o n th e
effectiv en ess o f th e C EO successio n
CEO Succession’s continued on page 10
S
O
S
GM, Microsoft AmongCompanies SplittingCEO-Chair Role
Popularity of splits grows despite lack of support for shareholder proposals
by Ia n Thom a s
T
h e m o st p o p u lar go v ern an cerelated shareholder proposal this
pro xy seaso n w as fo cused o n in dep en d en t bo ard lead ersh ip , fo r th e
third co nsecutive year.
Splittin g the C EO an d ch airm an
ro les is n o t just a co n v ersatio n in creasin gly bro ught up by shareholders, but on e that has been go in g on
in the bo ardroom as w ell.
M o re th an o n e q uarter o f S& P
500 boards are n ow led by in depen den t ch airs, up from approxim ately
2 0 % in 2 0 1 2 , acco rd in g to d ata
co m piled by ISS’s Q uickSco re. C o m pan ies th at split th e ro les th is y ear
include GM, Micro so ft, Q ualco m m
an d Th e Kro ger C o m p an y .
O n ly 55% of C EO s w ere also the
ch airm an as o f N o v em b er 2 0 1 3 ,
co m pared to 61 % in 2008 an d 77 %
in 2003, accordin g to data com piled
by Sp en cer Stuart.
But even though this kind of propo sal appeared o n th e ballo ts o f 63
com panies this year (com pared to 62
last year) — in cludin g Go o gle, WalMart Sto res, Wells Fargo , C h ev ro n ,
C o ca- C o la, Bo ein g an d Sta rb u ck s
— gen erally sh areh o ld ers h av en ’t
sho w n the high level o f support for
th is sh ift th at th e freq uen cy o f appearan ce seem s to suggest.
Av erage sh areh o lder suppo rt fo r
in d ep en d en t ch air p ro p o sals th is
proxy seaso n is approxim ately 31 % ,
w h ich is n early iden tical to 201 3,
an d d o w n fro m 35 % in 201 2, acco rdin g to data com piled by ISS.
“ If y o u lo o k at th e h isto rical
m o v em en t o n th is to p ic, it seem s
like each of the last ve o r six years
yo u’re seein g a gro w in g n um ber o f
co m pan ies ado ptin g th e split ro le,”
say s Pau l D eNic o la , m an agin g directo r at Pw C ’ s C en ter fo r Bo ard
Go vern ance. “ There are in stan ces of
in creasin g stakeh o lder p ressure to
m ake ch an ges, an d m o re an d m o re
calls on the groun ds that it provides
a greater sen se o f acco un tability at
the board level.”
Four proposals have also received
m ajo rity supp o rt in 201 4 th us far:
Hea lth c a re Serv i c es G ro u p , w ith
61 .2% ; Vo rn ad o Realty Trust, w ith
58.6% ; Stap les, w ith 50.7% ; an d Allergen , w ith 5 0.5 % . Th ere w ere six
such victo ries in 201 3.
O th er go v ern an ce- related p ro po sal to pics, such as th o se fo cused
on staggered boards or m ajority voting, follow ed a sim ilar pattern: years
of havin g a high n um ber of pro posals w ith lo w support, then a tippin g
po in t fo llo w in g academ ic research
and anecdotal support, w hich results
in its bein g co n sidered a best practice. But in depen den t bo ard leadersh ip p ro p o sals m ay n o t fo llo w th e
sam e tren d.
“ A few y ears ago , a pro po sal o n
m ajority vo tin g w as still con sidered
a to ss- up in regard s to it p assin g;
n o w if it’s o n a ballo t, it’s go in g to
pass,” says Laura Rich m an , co un sel
at May er Bro w n .
“However, there’s a big difference
CEO Transitions
S&P 500 companies that underwent a CEO transition in Q2 2014
Company
New CEO
Former CEO
Reason For Change
CEO/ Chair
Role Split?
Former CEO
Now Chair?
Ameren Corp.
Warner Baxter
Thomas Voss
Former CEO retired
No
No
Consol Energy
Nicholas Deluliis
Brett Harvey
Former CEO retired
Yes
Yes
Ensco
Carl Trowell
Dan Rabun
Former CEO retired
Yes
Yes*
Health Care REIT
Thomas DeRosa
George Chapman
Former CEO retired
Yes
No
Paccar
Ronald Armstrong
Mark Pigott
Former CEO stepped down
Yes
Yes*
Reynolds American
Susan Cameron
Daniel Delen
Former CEO retired
Yes
No
Ross Stores
Barbara Rentler
Michael Balmuth
Former CEO stepped down
Yes
Yes
Rowan Companies
Thomas Burke
Matt Ralls
Former CEO retired
Yes
Yes
Valero Energy
Joe Gorder
Bill Klesse
Former CEO stepped down
Yes
Yes*
Source: Spencer Stuart
* Former CEO was already the chair
2
August 11, 2014
Who Is Your Chairman?
Percentage of S&P 500 Companies
n Non-Executive
n Former Executive
n CEO
100%
80%
60%
77
74
71
67
65
61
63
61
58
56
55
21
20
21
20
20
16
19
21
23
25
40%
20%
0%
23
17
20
23
22
23
9
9
10
13
16
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Sources: Spencer Stuart, Korn Ferry Institute
betw een that kind of proposal an d a
proposal on board leadership, w hich
is m uch m ore about how the com pany is being run on a day-to-day basis.”
Complex changes
Richm an says th at w ith so m e o f
th e o th er v o tin g- related pro po sals,
they o ften are able to garn er a lot of
suppo rt because it so un ds fair, an d
com pan ies typically do n ’t resist im plem en tin g such chan ges because it
do esn ’t have a trem en dous practical
im pact. But the topic of splittin g the
C EO an d chairm an roles is far m o re
co m plex, she says.
“ Ev en if y o u lo o k at ISS po licy,
they’re w illin g to have th e ro les be
com bined as long as there is a strong
lead director,” she says.
“ Th ere w ill be in stan ces w h ere
chan ging the structure co uld help a
specic com pan y in a specic situatio n , but I do n ’t th in k peo ple w an t
to change the way the board is being
run just to check a box on a perceived
best practice.”
G len Sch ley er, a partn er at Su lliv an & C ro m w ell, says that w h ile
m ost investors take a m o re n uan ced
v iew o n th e to pic an d realize th at
lead ersh ip sh o uld be d ifferen t fo r
differen t co m pan ies, th e freq uen cy
w ith w h ich it’s been discussed h as
been o n e o f the reaso n s w h y it’s o n
the m in ds o f m an y directors.
“ To so m e exten t, th ese sh areholder proposals have driven the developm en t of the lead in depen den t
director concept,” says Schleyer. “ It’s
been a to pic o f n o te in sh areho lder
outreach an d pro xy disclosure, so it
pro vides an im petus fo r an n ual discussion for the board.”
Sch ley er also credited th e 2009
SEC p ro xy ru le ch an ges th at required boards to describe w hat their
bo ard lead ersh ip structure is, an d
n o ted th at m o re co m p an ies h av e
taken th e tim e to explain w h y th e
curren t structure is the right o ne.
“ By re f in in g th at d isc lo su re ,
bo ards have had to recon sider their
decision s each year,” he says. “ Talkin g about it year after year m ay have
spurred continued thought, and m ay
to so m e exten t driv e co m pan ies to
split th e ro les w h en th ere’s an o p portun ity.”
But while the discussion on split-
tin g th ese ro les is h appen in g m o re
o ften , the actual actio n o f th e split
is still h appen in g in th e sam e situatio n s, say s Ju lie D a u m , leader o f
th e No rth Am erican bo ard practice
at Spencer Stuart.
Daum say s a typical in stan ce o f
a C EO - ch airm an sp lit takes p lace
w hen the new C EO is bein g prom oted from w ithin an d w o uld be a rsttim e C EO . “It’s hard en ough to learn
on e job, let alon e tw o,” she says.
While Daum says in vesto r sen tim ent has helped the idea persist, she
believes the increase in the split has
m ore to do w ith a changin g view on
the leadership en vironm en t, both in
the boardroo m an d in the C - suite.
“ Ten y ears ago , it w o u ld h av e
been extrem ely surp risin g to see a
C EO bein g hired w itho ut the chairm an title as w ell, but to day th at’s
n ot the case,” she says. “ Boards n ow
h av e m uch stro n ger in d ep en d en t
lead ersh ip , an d d irecto rs are also
m o re co m fo rtable w ith o th er directors’ takin g a true leadership ro le.”
Sch ley er say s th at b o ard s can
d ecid e if th ey h av e an in d iv id ual
directo r w h o is in a po sitio n to devote the tim e an d attention to bein g
a ch airm an , o r perh aps so m eo n e to
serve as an active lead in depen den t
d irecto r w h o p ro v id es m o re o f a
ch eck o n th e C EO .
“ Ultim ately, I thin k w e’ve gotten
to a go o d settlin g place w ith shareh o lder pro po sals o n th is to pic,” h e
says.
“ It seem s unlikely there w ill ever
be a o n e- size- ts- all an sw er, but the
p ractice h as d ev elo p ed o v er tim e
into som ethin g w here a rational discussio n can take place an d co m pan ies an d bo ards are able to explain
their tho ught process.” g
Ian Th o m as (21 2- 542- 1 243 o r ithom [email protected] ) covers shareholder issues and audit co m m ittees.
www.AgendaWeek.com
3
S&
SS
Owen Walker
Managing Editor
Kristin Gribben
Associate Editor
Melissa J. Anderson
Reporter
Tony Chapelle
Senior Reporter
Amanda Gerut
Senior Reporter
Ian Thomas
Reporter
Marc Hogan
News Analyst
Jonathan E. Braunstein
Editorial Director —Webcasts
Greg Shulas
Opinion Editor
Andrew Willmott
Group Managing Editor
Daniel I. Fink
Managing Director
Jenny Spaulding
Art Director
Keri Rossetti
Web & Print Designer
Egon Smullyan
Director of Circulation
Craig London
Sales Director
Christopher Burke
Senior Relationship Manager
Matt Fottrell
Commercial Director of
FT Financial Publishing
Agenda is an independent general
circulation weekly newsletter published
by Money-Media Inc. Subscriptions are
available to corporations. This provides
delivery to each board member and
to those who work closely with them.
Please contact Craig London at
212-542-1262 for subscription
information.
Please send correspondence
to Agenda at Money-Media Inc.
330 Hudson Street, 7th Áoor
New York, NY10013
Phone: 212-542-1245
Fax: 646-417-7549
E-mail: [email protected]
Website: www.AgendaWeek.com
COPYRIGHT NOTICE: No part of
this publication may be copied,
photocopied or duplicated in any form
or by any means without the prior
written consent of Money-Media Inc.
Copying of this publication is a
violation of the federal copyright law.
Violators are subject to criminal
penalties, as well as substantial
monetary damages. The phrase
“Agenda” is patent-pending with the
U.S. Patent OfÀce. Copyright 2014
Money-Media Inc. All rights reserved.
To purchase a reprint of an Agenda
article please contact the sales
department at 212-542-1262.
4 August 11, 2014
Fox–TimeWarner Deal Collapse
Blamed on Dual-ClassStructure
As th e d ust settles o n 2 1 st C en tu ry
Fo x ’s statem en t th at it h as aban d o n ed
its bid fo r Tim e Warn er an d w ill in stead
launch a $6 billion stock buyback, the Rup ert M urd o ch –led co m pan y’s dual- class
share structure lo om s as a poten tially sign ican t factor in the failed deal.
Fo x said in an Aug. 5 statem en t that
Tim e Warn er’s bo ard “ refused to en gage
with us to explore an offer which was highly com pelling.” Fox also said the 1 0% drop
in its share prices since the initial offer “undervalues our stock and m akes the transaction unattractive to Fox shareholders.”
Tim e Warner C EO Jeff Bew kes had vocally fought the cash-and- stock bid, which
would’ve been worth $71 billion as of Aug.
5. Alon g w ith callin g th e offer un dervalued, he also raised w orries about the large
com ponent of non-voting Class A shares in
the bid, accordin g to the Financial Times.
Q uestio n in g th e w o rth o f n o n - v o tin g
sh ares w as “ Bew kes’s real curveball,” according to an op- ed in The Guardian.
Bew kes didn ’t refer to the Fo x deal directly in Tim e Warn er’s earn in gs call o n
Aug. 6, acco rdin g to The New York Times.
At Fox’s earn in gs call the sam e day, C O O
C h a se C a rey said , “ Let m e be clear —
w e are do n e,” as q uo ted by Broadcasting
& Cable. He said Fo x’s sto ck declin e an d
Tim e Warn er’s recalcitran ce w o uld “ lead
to a tran sactio n w h ere to o m uch o f th e
value went to Tim e Warner shareholders.”
Fo x’s buy back o f n o n - v o tin g sh ares
w ill take place o ver the n ext 1 2 m on ths.
Murdo ch said in th e statem en t th at th e
repurchase highlights the com pan y’s “ongoin g com m itm en t to disciplin ed capital
allo catio n an d return in g v alue to sh areholders in a m ean ingful w ay.”
D isn ey an d Tim e Warn er stan d o ut
as w idely held in a m edia in dustry w here
C ab lev isio n , C BS, C o m cast, D isco v ery
C o m m u n i c a ti o n s, E. W. Sc ri p p s, Th e
Ne w Yo rk Ti m e s C o m p a n y , V i a c o m
an d o th ers are clo sely h eld. Do w Jo n es,
n o w o w n ed by Murdo ch ’s New s C o rp . ,
also had a dual- class structure. Referrin g
to th e pro po sed deal, The New Yorker recently called Murdoch “ the last m ogul.”
Walgreen’sInversion No-GoLeaves
TaxManeuver at Crossroads
Walgreen ’s an n o un cem en t last w eek
th at it w o uld take o v er Allia n c e Bo o ts
but stay ofcially based near Chicago held
m ixed im plications for so- called tax inversion s, w here co m pan ies acquire overseas
targets an d then rein co rpo rate abro ad in
search o f lo w er tax rates.
Walgreen , w hich o w n s alm ost half o f
Bo o ts, said Aug. 6 it w o uld pay ro ugh ly
$1 5.3 billion for the rest of the Swiss com pany. In a statem ent, Walgreen C EO Greg
Wasso n said that after a thorough review,
m an agem en t an d the board w eren ’t able
to fin d a d eal structure th at gav e th em
en o u gh co n fid en ce th at an in v ersio n
w o uld satisfy the IRS.
Accordin g to the statem en t, Walgreen
“ also w as m in dful o f the o n go in g public
reaction to a potential inversion and Walgreen’s unique role as an iconic Am erican
consumer retail com pany with a m ajor portio n of its reven ues derived from govern m ent-funded reim bursem ent program s.”
Th e decisio n n o t to pursue an in versio n co uld sign al a bro ad er sh ift aw ay
fro m th e m an euv er, w h ich h as d raw n
scrutin y fro m bo th m ajo r U. S. po litical
parties. The Financial Times’ U.K. equities
reporter, Bry ce Eld er, noted in a live chat,
“ If yo u’re lo o kin g fo r sign s th at th e tide
m ight be turning, that could well be one.”
At th e sam e tim e, th e sto ck m arket
w as sen din g a differen t m essage. Sh ares
o f Walgreen en ded the day of the disclo sure do w n 1 4% .
Wasso n to ld th e Chicago Tribune th at
the co m pan y w o uld’ve had to rew o rk its
origin al deal w ith Boots, addin g expen se.
Walgreen , billin g itself as “ th e ph arm acy Am erica trusts,” h as a h igh er public prole than the several o th er big U.S.
co m p an ies recen tly un d ertakin g in v ersion s.
— Ma rc Hoga n
O
O
&
SS
ThreeActions for Audit Committees to Avoid theSEC’s Wrath
A former SEC senior legal advisor provides tips on avoiding enforcement action
by Ta m m y Bieber
Tam m y Bieber is a litigation partn er at the Th o m p so n
Hin e law rm . Previously, she w as a sen ior legal adviso r
to the chief acco untant o f the SEC .
A
udit com m ittees could be the n ext gatekeeper in the
SEC ’s cro ss hairs, accordin g to recen t co m m en ts by
the agen cy’s departin g chief accoun tan t, Paul Besw ick,
and current chair Mary Jo Wh ite. This follows O peration
Broken G ate, w hich largely fo cused on auditors. The issues highlighted by Besw ick stem from the co m m ittee’s
o bligatio n to appo in t, co m pen sate an d o versee th e in depen den t audito r. In deed, in March th e SEC bro ugh t
actio n s again st audit co m m ittee ch airs based o n o th er
oversight respon sibilities. Audit co m m ittees should take
the following three actions to gain com fort that the SEC ’s
in creased scrutin y w ill bear no fruit.
Action 1: Identify the Elements Essential
to Audit Quality
Speaking at the Practicin g Law In stitute’s SEC Speaks
co n feren ce, Besw ick expressed co n cern th at audit co m m ittees’ decisions to hire and retain auditors m ay be driven by co st rather than audit quality. He w arn ed, “ If the
audit com m ittee is solely fee hun tin g an d if there w as a
subsequent audit failure ... this m ay raise questions about
the diligen ce o f the m em bers o f the audit co m m ittee in
fulllin g their respon sibilities.”
As a result, the audit co m m ittee sho uld be prepared
to dem on strate that they un dertook a critical evaluation
of the auditor’s perform an ce — particularly to avo id any
false perceptio n that it m erely rubber- stam ped m an agem en t’s reco m m en d atio n o r allo w ed fee sh o p p in g to
drive the reten tion decisio n. C urren tly, there are few established m etrics again st w hich to m easure an audito r’s
perfo rm an ce. Nev erth eless, a pruden t audit co m m ittee
m ust iden tify elem en ts cen tral to audit quality to apply
w hen evaluatin g the auditor.
In th at regard , th e Pu b lic C o m p a n y Ac c o u n tin g
O v ersigh t Bo ard has in itiated effo rts to stren gthen audito r review s that directors perform . In August 201 2, the
PC AO B explained the process it undertakes to inspect audit rm s, an d provided com m ittees w ith suggested question s to pose to their audito rs regardin g the accoun tin g
rm ’s in spection report.
Action 2: Foster Direct and Open Communication
With the Auditor
The audit com m ittee’s com m unications with the audito r are cen tral to fulllin g its o versigh t o bligatio n s. Although SEC an d PC AO B rules dictate the required com m un ication s, tho se are m erely the baselin e in the staff’s
view. Beyon d that, audit com m ittees m ust prom ote open
dialo gue, gen erally th ro ugh th e to n e set by th e ch air
th ro ugh regular an d direct co m m un icatio n s. The audit
co m m ittee should provide the audito r w ith a direct lin e
to com m ittee m em bers for con cerns that surface durin g
the audit, n ot sim ply engage the auditor for the required
co m m un icatio n s. M an agem en t can n o t be th e so le o r
even prim ary co n duit o f co m m un icatio n betw een th e
audito r an d th e audit co m m ittee. No r sho uld th e co m m ittee m erely be m an agem en t’s adv o cate, particularly
in ligh t o f its o bligatio n to reso lve disputes th at o ccur
betw een the audito r an d m an agem en t. At bottom , audit
com m ittee m em bers are w ise to rem em ber that the auditor reports to them , n ot to m an agem en t.
Action 3: Monitor Auditor Independence
and Evaluate Preapproval Policies
The recen t tren d by the acco untin g rm s of expan din g their con sultin g capabilities has n o t gon e unn o ticed
by the regulators, raising concerns that increased consulting could result in decreased audit quality — an indepen dence issue that arose in the early 2000s. Because the SEC
view s in depen den ce as a shared respo n sibility betw een
the com pany and its auditor, now is a good tim e for audit
com m ittees to refam iliarize them selves with their role in
m onitoring in depen dence an d evaluate their policies for
preapproval o f audit an d n o n- audit services.
Preappro val po licies n eed to pro vide th e co m m ittee
w ith en ough detail of proposed en gagem ents an d fees to
un derstand the n ature an d scope, an alyze any poten tial
in depen den ce risks, an d guard again st scope creep.
Ultim ately, th e audit co m m ittee’s gatekeepin g ro le
vis- à- vis the o utside auditor en ables the auditor to assess
the com pan y’s n an cial reporting practices an d provides
a fo rum in w hich the auditor can can didly discuss co ncern s. O bjectiv ity is at th e h eart o f th at fun ctio n , an d
should allow audit com m ittees to escape the SEC ’s deeper
scrutin y of gatekeepers, in cluding directors. g
www.AgendaWeek.com
5
O
O
G
Boards CoaxRookieDirectors to Speak Up Sooner
Some boards expect meaningful director participation in debut meetings
by Am a nda G erut
A
gro w in g n um ber o f bo ards are
askin g n ew d irecto rs to w eigh
in on discussio n s earlier, w ith so m e
seeking m ean in gful participation in
debut m eetings. The trend represents
a m o v e aw ay fro m th e traditio n o f
directo rs’ havin g to learn th e ro pes
on a bo ard befo re they speak up.
O bservers say it m akes sen se fo r
n ew d irecto rs to co m e in read y to
ad d v alue w h erev er th ey can , but
that it also takes tim e fo r a n ew directo r to gain in stitutio n al kn o w ledge about the com pany an d understan d a bo ard’s culture an d rhyth m .
Ho w ev er, as th e p ace o f bu sin ess
co n tin ues to accelerate an d m o re
boards are targeted by activist in vesto rs, bo ards are recruitin g n ew d irecto rs w ith experien ce in th e busin ess issues o f th e day. As a result,
so m e bo ard s are askin g th o se n ew
d irecto rs to co m e in o n d ay o n e
read y to p articip ate in fu ll- bo ard
discussio n .
Keith Mey er, vice chairm an an d
glo bal h ead o f th e C EO an d bo ard
practice at C TPartn ers, says the n orm al path into a board following a directo r’s recruitm en t used to in vo lve
serv in g o n th e audit co m m ittee as
a first assign m en t to learn th e full
exten t o f th e busin ess. Durin g th e
secon d year, the n ew directo r w ould
p erh ap s jo in a seco n d co m m ittee
and wouldn’t ask a question or really
w eigh in durin g a board m eetin g for
the rst 1 2 to 1 8 m on ths.
No w, Meyer says h e’s seen a few
of his board clients put new directors
to w ork o n the risk o r strategy com m ittees right o ut of the gate because
th at’s w h ere th e bo ard n eeds th eir
exp ertise th e m o st. Th ey are also
expected to con tribute in full- board
discussion s im m ediately.
Mey er say s th e sh ift is alm o st a
com plete 1 80- degree turn from what
he’s seen in the past.
“ It used to be that [bo ards] knew
ProgressiveOnboarding
Keith Meyer, vice chairman of CTPartners, says the onboarding process has
been stretched out at some companies so that new directors are more prepared
at their Àrst meeting.
Clients have asked Meyer to build a pipeline of directors to join the board one
or two years before current directors are set to retire so that they have time during the six months before they join the board to get familiar with the industry and
the company, meet with senior executives and any board members they didn’t
meet during the interview process, review business plans and visit key sites.
“That onboarding process is happening in some cases six months before the
new director sets foot into the boardroom so they can start contributing faster,”
says Meyer.
The other beneÀt to looking ahead at retirements and recruiting early is that
boards get to lock down directors with the skills they’re looking for without the
risk that they may join another board or enter into a situation that would cause
a conÁict with their board.
6
August 11, 2014
n ew directo rs w o uld ev en tually be
v aluable, but first th ey h ad to go
th ro ugh th e tran sitio n p ro cess o f
beco m in g a cred ible d irecto r,” h e
says. “ No w, the o ppo site is happen in g, w h ich is th e n ew directo r h as
p ersp ectiv e, in sigh t an d cu rren t
exp erien ce th e bo ard n eeds in th e
ro o m an d th ey w an t that co n tribution right n ow.”
Kerrii An d erso n , a fo rm er C EO
at Wen dy ’s In tern atio n al an d a directo r o n th e bo ard o f Lab o rato ry
C o rp o ratio n o f Am erica Ho ld in gs,
as w ell as ch airm an o f th e bo ard at
C h i q u i ta Bra n d s In te rn a ti o n a l ,
say s o n e o f h er bo ards bro ugh t o n
a few n ew directo rs durin g the past
sev eral years w h o w ere able to participate m ean in gfully at n early their
first b o ard m eetin g b ecau se th ey
w ere exp erts o n a to p ic th e bo ard
w as discussin g. Ho w ever, th at’s n o t
ty pical in h er experien ce, sh e caution s.
“ It’s alw ay s been m y m in d - set
th at if a directo r is go in g to be effective, they’ve go t to have a proper
and com prehensive orien tation , an d
I thin k that starts w ith the com pan y
in gen eral an d th e executiv es an d
th en also an o p p o rtun ity to m eet
w ith every board m em ber if it’s possible,” An derson says.
Sh e believ es th at n ew directo rs
usually n eed to serv e o n a b o ard
th ro ugh all fo ur q uarters to experien ce all th e go v ern an ce asp ects o f
an o rgan izatio n fully. So m eth in g
differen t typically h appen s in each
o f th e fo ur q uarters th at h as to be
w eighed again st prio r perio ds, then
pro xy seaso n co m es aro un d as w ell
as the an n ual shareholder m eetin g.
“ I couldn’t disagree more with the notion that
a new director should stay quiet during the Àrst
meeting or two.... Your mind-set from day one ...
is to help your company be successful.”
Reatha Clark King
Chairman, National Association of Corporate Directors
Plus, she adds, it w ould be un fair
to pressure a n ew directo r to m ake a
m ean in gful con tributio n during the
rst m eetin g because they m ay n o t
be fully acclim ated to the board yet.
At the sam e tim e, An derson says
that as a board chairm an, she encourages directors — new directors included — to have co n versatio n s o utside
the board m eetin g w ith th e C EO o r
m em bers of the leadership team .
Reath a C lark Kin g, chairm an of
the Natio n al Asso ciatio n o f C o rp o rate D irecto rs bo ard an d a fo rm er
director at Exxo n Mo bil, H.B. Fuller
C o . an d Wells Fargo , say s n ew d irecto rs can also co n tribute in less
fo rm al settin gs th an th e full bo ard
m eetin g, such as through board din n ers an d m eetin gs w ith co lleagues
an d m an agem en t staff.
Yet, Kin g says, bran d- n ew directo rs usually brin g experien ce to the
bo ardro o m th at m akes th em cap able o f participatin g fro m th eir rst
m eetin g. What they lack, says King,
is co n text. An d go o d b o ard s w ill
prep n ew directo rs in advan ce w ith
a stron g on boardin g pro cess.
“ I co uld n ’t d isagree m o re w ith
th e n o ti o n th at a n e w d i re c to r
sh o uld stay q uiet d urin g th e first
m eetin g o r th e rst tw o m eetin gs,”
Kin g says. “ Your m in d- set fro m day
one and forever is to help your com pan y be successful.”
However, for som e boards that requires a shift in the com m unication
culture o f a bo ard, explain s Mey er.
Fo r exam ple, h e say s n ew directo rs
o ften pick up o n th e fact th at th e
m ore sen io r directors speak rst, follo w ed by the m ore jun io r directors.
As th e last to speak, n ew directo rs
w o n ’t w an t to parro t th e o th er directors, so they stay quiet, and then
th e bo ard m o ves to th e n ext to pic.
Som e boards have begun to shift this
culture so th at n ew directo rs speak
rst, he says.
In deed , Sc o tt Ha m ilto n , p resid en t o f th e Ex ecu ti v e Nex t Pra c ti c e s In sti tu te , say s o f ten b o ard
culture isn ’t th e pro blem ; th e pro blem is th at n ew d irecto rs m u zzle
th em selves prem aturely an d fo r to o
lo n g.
“ Mo st bo ards w elcom e the fresh
perspectiv e,” h e say s. “ I h av e seen
tim e and tim e again situations where
th e n ew directo r w aits tw o , th ree,
fo ur, as m an y as half a do zen board
m eetin gs before they start con tributin g.”
Anderson n otes that board chairs
an d lead d irecto rs are resp o n sible
for ensurin g that all board m em bers
co n tribute an d th at th e culture in
th e bo ardro o m is such th at it’s O K
to disagree an d to h ear fro m every on e, regardless o f w hen they jo in ed
the board.
“ That’s ho w yo u get the best decisio n s,” say s An derso n . “ Ev ery o n e
co n tributes.” g
A m a n d a G eru t (21 2- 5 42- 1 24 6 o r
[email protected] ) covers succession planning, board com position
an d directo r pay.
OnboardingIntel
IBM Tests AI for
Business Meetings
Board members would have much
more in common with a Star Trek captain with the release of technology currently under development by IBM.
According to MIT’s Technology Review, researchers at the company are
in an early prototype phase with a room
where business leaders would be able
to discuss strategy with Watson, an artiÀcially intelligent computer that has
defeated past champions on Jeopardy.
Watson’s meeting room has a huge
display across one wall and ceilingmounted microphones that can transcribe a meeting and enable the system
to hear commands. Those commands
could be as basic as a Google search.
In a live demo, though, researchers
role-playing as corporate executives reportedly used Watson to come up with
a short list of acquisition targets.
In the demo, researchers told Watson to read an internal strategy memo.
They then asked the computer to create a long list of potential acquisition
targets based on that memo. “Watson,
show me the companies between $15
million and $60 million in revenue relevant to that strategy,” a researcher is
quoted as having said.
The researchers then had Watson
put together a shorter list of acquisition
candidates, lined up in a table. They
assigned a column to each relevant
factor. “ Watson, make a suggestion,”
a researcher reportedly said. “I recommend eliminating Kawasaki Robotics,” said Watson. “It is inferior to Cognilytics in every way,” the system said
when pressed for a reason. The venture
comes after a Hong Kong–based Àrm’s
appointment earlier this year of what it
called the Àrst artiÀcial intelligence to
hold a corporate board seat.
—Marc Hogan
www.AgendaWeek.com
7
CU
CO
S
O
Gap continued from page 1
atten tio n fro m th e capital m arkets,
regulato rs an d p ro xy adv iso rs w ill
allo cate at least brief atten tio n to
th e m atter,” Jeffrey C o les w rites in
an e- m ail. C o les is a n an ce professo r at th e Un iv ersity o f Utah busin ess sch o o l an d a sen io r academ ic
co n sultan t at th e In cen tiv e Lab , a
co m pen satio n an aly tics rm based
in Scottsdale, Ariz.
O n e d irecto r an d fo rm er in stitutio n al in v esto r, h o w ev er, takes a
m o re m arket- based stan ce. “ If th e
m arket is p ricin g C EO skills w ell
abo v e o th er NEO s’ th en o n e risks
C EO turn o v er by sup erim p o sin g a
cap o r relativ e m etric,” w rites Kim
G o o d w in in an e- m ail. “ Th at’s n o t
likely to be a w ell- received respon se,
but is co n sisten t w ith m y d ay s o f
run n in g an asset m an agem en t dep artm en t w h ere stellar p erfo rm ers
co uld sim ply w alk acro ss th e street
for higher com p if not paid com peti-
tively.” Go odw in is a board m em ber
at Puerto Rican –based bank Po p ular
and a form er com p chairm an at Akam ai Tech n o lo gies. She retired after a
career in w hich she had headed eq uity in vesting for asset m anagem en t
d iv isio n s at C red it Su i sse G ro u p ,
State Street Research an d Man agem en t an d Am eri ca n C en tu ry In v estm en t Man agem en t.
C o m p en satio n - co n sultin g firm
Fa rien t Ad v iso rs recen tly ran th e
n um bers o n C EO - NEO p ay b ased
on proxies from 2009 through 201 4.
Farien t fo un d th at C EO pay m ultiples at h alf o f S& P 5 00 co m p an ies
are n o w in an area that go vern an ce
ratings rm GMI Ratin gs would consider too high; their CEO s are paid at
least three tim es the average pay o f
the other four NEO s.
Ratin gs rm M o o d y ’s In v esto rs
Serv ice, m eanw hile, considers a vetim es m ultiple as cause for co ncern .
Yet Farien t d eterm in ed th at abo ut
7 % o f S& P 5 00 rm s exceeded th at
Mind the Pay Gap
Since 2009, the following companies have paid their CEOs at least Àve times
more than NEOs for at least three years
Multiple the CEO earned over the NEO
Company
2009
2010
2011
2012
2013
Autodesk
3.33
3.51
6.05
5.22
5.43
CBS
5.35
5.2
5.94
5.58
5.2
Discovery
Communications
1.48
7.15
9.13
16.38
5.13
Edison
International
4.01
4.45
5.16
5.62
5.69
LyondellBasell
Industries
4.81
14.23
7.39
5.31
3.29
Nabors Industries
8.86
4.02
2.77
39.15
41.88
Owens-Illinois
5.92
5.96
5.99
6.47
5.2
PerkinElmer
4.73
4.93
6.79
5.29
5.03
Roper Industries
1.74
1.63
5.41
5.99
6.21
Starbucks
7.88
6.51
5.21
7.42
5.6
Walt Disney
6.53
4.01
5.2
5.91
5.36
Source: Farient Advisors
8
August 11, 2014
high- water m ark last year. A handful
of those — CBS, Starbucks, Walt Disn ey , D isco v ery C o m m u n icatio n s
and O w en s-Illin ois — have surpassed
ve tim es every year since 2009.
An o th er sev en co m p an ies h ad
ve- tim e m ultiples for at least three
of the past ve years: Nabo rs In d ustries, Ro p er In d u stries, Au to d esk ,
Ed iso n In tern atio n al, Ly o n d ellBasell In d ustries an d Perkin Elm er.
M ed ian p ay ratio s h av e all in creased o v er th e p ast f iv e y ears.
Based up o n figures in th eir 201 4
pro xies, the m edian pay gap at S& P
500 com panies reached a three-tim es
m ultiple (actually 3.03) fo r the rst
tim e in 201 3. That w as up from 2.87
in 2009, according to Farien t.
Ro b in Ferrac o n e, C EO o f Farien t, says the rise is likely due to the
peppier eco no m y sin ce 2009, w hich
has goosed stock prices at m ost public co m pan ies. “ Th e C EO h as m o re
[sto ck- based in cen tiv e] pay at risk
[co m pared to o th er NEO s] an d w ill
b en efit m o re d isp ro p o rtio n ately
th ro ugh th e bo n us an d a little in
th e eq uity gran ts,” Ferraco n e say s.
She adds that she isn ’t com m en tin g
on whether the trend is dangerous or
where a safe benchm ark would be. “I
wouldn’t get overly alarm ed, but this
is so m ethin g to keep an eye o n . The
m ain thin g fo r bo ards to do is start
developing an in terpretation for this
ratio in their ow n co m panies.”
C aro l Bo w ie, head of research for
ISS’s Am ericas regio n , says th at h er
rm ’s an aly sts m igh t be co n cern ed
abo ut an y C - suites w h ere th e ratio
is m o re th an th ree tim es, w h ile a
m ultip le o f fo ur “ w o uld be a clear
red flag to take a clo ser lo o k. ” Yet
th ere are so m etim es go o d reaso n s
fo r excep tio n s. Fo r exam p le, sh e
says, w hen a n ew C EO is appoin ted
it would stand to reason that the person ’s total co m pen sation , in cludin g
sto ck in cen tiv es, m igh t be h igh er
than th e o ther o fcers’. “ It’s alw ays
case- by- case,” Bow ie says.
“ The CEO has more
[stock-based incentive] pay
at risk [compared to other
NEOs] and will beneÀt more
disproportionately through
the bonus and a little in
the equity grants.”
Robin Ferracone
CEO of Farient Advisors
In c o m p i l i n g a n n u a l p o l i c y
guid elin es an d reco m m en d atio n s
for how to vote on specic com pan y
ballot item s, ISS analysts assum e that
w h ere th e C EO - NEO ratio is h igh ,
“ w e m igh t expect to see a pay - fo rperfo rm an ce disco n n ect, o r succession plan n in g that isn ’t appro priate
or an im perial C EO at w ork,” Bo w ie
says.
Th e C o u n c i l o f In sti tu ti o n a l
In v esto rs, a trad e asso ciatio n fo r
p en sio n fun d s, en d o w m en ts an d
foun datio n s, do esn ’t specically add ress C EO - NEO p ay, acco rd in g to
deputy directo r Am y Bo rrus. So m e
language in its corporate governance
policies, however, generally supports
th e co n cep t. Fo r in stan ce, th e C II
advises co m p co m m ittees to en sure
th at executiv e p ay is “ reaso n able
an d ratio n al w ith respect to critical
facto rs,” o n e of w hich is co m p paid
to o ther em plo yees. An o th er po licy
reco m m en ds that pay structures for
the “CEO and others in the oversight
group” are fair in the co ntext of the
broader com pan y.
Ka te D C a m p , a fo rm er co m p
com m ittee chair at Tech n o lo gy So lutio n s an d a retired C isco Sy stem s
h um an reso urces sen io r v ice president, suggests that bo ards m in d the
gap o n C - suite p ay. In h er exp erien ce, she w rites in an e- m ail, it can
m ean the C EO is carrying too m uch
of the organization on their shoulders
o r that they are in ten t o n replacin g
sen io r staffers w ho co uld be successor threats w ith m ore junior staffers.
“Trust m e, they exist,” DC am p adds.
It could also m ean that the C EO and
direct reports are being paid for differen t m etrics. For in stan ce, on e could
be pegged to prot w hile the other is
to reven ue gro w th. That’s m isalignm en t and is un sustainable, she says;
the gap in dicates that pro t grow th
is com ing by reducing costs an d n ot
growing the top line.
Th is fall, th e SEC is expected to
h an d d o w n its lo n g- d elay ed d isclo sure req uirem en ts o n th e relatio n sh ip b etw een co m p en satio n
fo r C EO s an d th eir m ed ian w o rkers. Sin ce C o n gress d id n o t stip ulate in th e Do dd- Fran k Act th at th e
n ew rule sh o uld require co m pan ies
to h igh ligh t th e C EO - to - NEO p ay
spread, sources say it’s alm ost certain
that w on ’t be included.
Alth o ugh , th e m edian p ay gap
at m ajo r U. S. co m p an ies h as n o w
reached a three- tim es m ultiple, there
are a few n otable exception s. For in stance, No rd strom had an extrem ely
clo se ratio, a m ultiple of just 1 .27.
An d at least on e in dustry alm ost
alw ay s bucks th e tren d. Wall Street
in v estm en t ban ks ty p ically sh o w
little o r n o separatio n betw een th e
to p m an ager’s p ay an d th at o f th e
to p ch iefs. At G o ld m an Sach s, fo r
exam p le, Ll o y d Bl a n k f e i n m ad e
th e sam e as th e av erage pay o f h is
n am ed executiv e o fficers in 2009 .
As o f 201 3, th at h ad gro w n to 1 .07
tim es his co lleagues’ pay. g
To n y C h a p e l l e (2 1 2- 5 4 2- 1 2 36 o r
tchapelle@Agen daWeek.co m ) w rites
abo ut c o rp o rate strategy an d risk
m an agem ent.
ExecutiveComp Intel
SEC Pay-Ratio Rule
Still Months Away
The SECwill adopt Ànal rules in October
that put into effect the CEO pay-ratio
disclosure mandated under DoddFrank, if the regulator sticks to its current schedule.
According to Pensions & Investments, Mayer Brown counsel Laura
Richman pointed out the planned timing in a July 31 teleconference on the
proxy season. She said she based it on
information published by the OfÀce of Information and Regulatory Affairs within
the OfÀce of Management and Budget.
Richman pointed out that the SEC
has often failed to hit its deadlines in
the past. And she said that companies
probably wouldn’t be forced to disclose
their CEO pay ratios in the 2015 proxy
season even if the rule gets wrapped
up this year.
SEC spokesman John Nester told
P&I he didn’t have an updated time
frame for Ànal pay-ratio rules. “These
are the commission’s best estimates
when work is scheduled to be completed,” he’s quoted as saying.
Only recently, the SECwas expected
to Ànalize the CEOpay-ratio rule in time
for next year’s proxy season. ISS told
Agenda in June that it has no plans to
set a certain policy around the rule.
The SEC proposed its contentious
rules last December on disclosing the
ratio between an executive’s pay and
that of a typical employee. The rules
are among an array of Dodd-Frank requirements that were still unÀnished as
the law approached the four-year anniversary of its July 21, 2010, signing.
Compensation for CEOs at the top
350 U.S. companies by revenues is
296 times that of the average worker
in their industries, a study from the Economic Policy Institute recently found.
—Marc Hogan
www.AgendaWeek.com
9
SUCC SS O
G
CEO Succession’s continued from page 1
plan n in g process, reports a Sp en cer
Stuart article published this m o n th
on its w ebsite. The skills of high- caliber C HRO s ran ge from servin g as a
co n sigliere to directo rs o n th e leadersh ip p o ten tial o f key executiv es
to h elpin g retirin g C EO s deal w ith
w alkin g aw ay fro m their day- to- day
ro les as ch ief executiv es. Ho w ev er,
m an y bo ards aren ’t fully utilizin g
the co m pan y C HRO , observers say.
Kath leen C o te, a director on the
bo ards o f VeriSign , Western D igital an d GT Ad v an ced Tech n o lo gy ,
says that as succession plan ning has
em erged as a regular item o n th e
board’s agenda, there are m ore opportunities for partnerships between the
C EO , the C HRO an d the board. Yet,
Cote explains that the CHRO role still
isn ’t fully in tegrated in to th e C EO
succession planning process at m any
com panies because a lot of boards are
in the m idst of shiftin g from a C EO
successio n p ro cess th at kicks in to
high gear when the C EO retires or is
asked to leave to a constantly m oving
process of senior talent developm ent.
“ We’re just gettin g to th e po in t
w here this is a process in w hich it’s a
m ore transparent approach, with the
CEO feeling com fortable and partnerin g w ith the chief hum an reso urces
o fcer to h elp w ith th ese tasks an d
facilitate these talks and to have [succession planning] as som ething in tegrated in to th e bo ards’ discussio n s
on a regular basis,” C ote says.
Ho w ev er, fo r bo ard s an d C EO s
th at h av e in v o lv ed th e C HRO in
talen t d ev elo p m en t an d C EO successio n p lan n in g, th e results h av e
been po sitive.
D i re c to rs a n d C HRO s re p o rt
th at C HRO s are regularly w o rkin g
w ith C EO s to ev aluate co m pan ies’
executiv es an d iden tify th o se w ith
po ten tial to o n e day beco m e C EO s.
10
August 11, 2014
C HRO s are also h elpin g C EO s w ork
o ut d ev elo p m en t p lan s, co ach in g
an d m en torin g, an d con ductin g on go in g p erfo rm an ce assessm en ts to
keep succession plans for key sen io r
leadership position s up to date.
Fo r exam p le, Av ed o n say s th e
In gerso ll Ran d b o ard w ill h o ld a
three- hour organ izational leadership
rev iew in O cto ber to giv e directo rs
a m acro view o f train in g an d developm en t w ithin the co m pany. It w ill
also lo ok at ho w hum an reso urces is
develo pin g talen t again st In gerso ll
Ran d’s strategic prio rities.
Sim ilarly, Dav e Bran d o n , form er
chairm an and C EO at Do m in o ’s Pizza and form er C EO at Valassis C o m m u n ic a tio n s, say s each co m p an y
h e’s been in v o lv ed w ith h as dev elo ped an appro ach th at in v o lv es an
an n ual deep dive in to talen t develo pm en t an d a bo ard discussio n o n
the pro gress m ade by sen io r executives on leadership developm ent and
train in g. Bran do n say s th e pro cess
gives directors an opportunity to beco m e m o re fam iliar w ith th e career
objectives an d progress of the C EO ’s
direct reports over tim e.
Bran do n say s h e h as alw ay s felt
stro n gly th at th e C HRO sh o uld rep o rt d irectly to th e C EO , an d h as
n ever felt co m fo rtable w ith a situatio n w h ere th e C EO an d th e bo ard
w ere distan ced fro m th e in div idual
resp o n sible fo r talen t recruitm en t
an d selection .
“ Th e th ree pieces m o ve w ell to gether,” he says.
However, even though the C HRO
can play an in tegral ro le in o rgan izatio n - w id e talen t d ev elo p m en t,
the level of in volvem ent the head of
HR has in a C EO successio n usually
depen ds o n th e track reco rd o f th e
C HRO an d th e situatio n facin g th e
board, Bran don says.
“ A lo t o f it h as to d o w ith th e
experien ce an d trust th e h um an re-
so urces pro fessio n al h as built w ith
the board itself,” says Bran do n, w ho
is chairm an of the board at Dom ino’s
Pizza an d a director on the boards of
D TE En ergy an d Herm a n M iller.
“ An d, again , I believ e it’s v ery scen ario- specic.”
Textbook, Planned Successions
Avedon explain s that the context
in w h ich a C EO successio n takes
place sets th e stage fo r th e ro le th e
C HRO w ill play in helping the board
select an effective C EO .
Id e al ly, w h e n th e p ro c e ss i s
p lan n ed an d d o esn ’ t in v o lv e an
em ergen cy or pro blem s at the com pan y, the pro cess can span a perio d
o f y ears, w ith plen ty o f o ppo rtun ities to gather data, hold discussion s
and revisit issues tim e and again, says
Av ed o n , w h o prev io usly serv ed as
the C HRO at Merck, where she w ent
through another C EO succession and
a spin- off.
To begin th e pro cess, o n e o f th e
best conversation s C HRO s can facilitate w ith the board or a bo ard com m ittee is a discussio n abo ut the prole o f th e future C EO based o n th e
co m pany’s strategy, she adds.
O n e o f th e rst th in gs Av ed o n
d id w ith th e In gerso ll Ran d bo ard
w as to h av e su ch a co n v ersatio n .
Sh e, Hen kel an d th e directo rs talked abo ut co m peten cies an d experien ces th ey desired in th e n ext C EO
as w ell as sp ecific criteria, attributes an d skills th e ch ief executiv e
sh o u ld h av e. Th ey also d iscussed
h o w th e co m p an y ’s culture w o uld
n eed to ev o lv e.
“Hearing the board’s view and input w as helpful, but if the chief hum an reso urces o fcer is n o t in th e
ro o m , th ey can ’t be as go o d a partn er,” says Avedo n .
“ Bein g th ere , f acilitatin g th e
co n versatio n , listen in g in an d th en
craftin g a prole gave us a to ol that
guided the process years ahead of the
n al decisio n .”
In deed, fo ur y ears after Av edo n
joined the com pany, Ingersoll Rand’s
ch ief o p eratin g o f ficer, M i c h a e l
Lam a ch , rep laced Hen kel as co m pan y C EO , w ith v ery little fan fare,
w hich is typically w hat boards strive
for in C EO succession s.
Wo rkin g co h esiv ely w ith th e
bo ard an d C EO on successio n plann in g is a fun ctio n of both the expertise o f th e C HRO an d th e w ay th e
bo ard an d C EO utilize th e C HRO ,
says Avedon .
“ C learly th e experien ce an d capability o f th e in dividual w h o is in
th e C HRO seat an d th eir skills an d
fo cus [are a facto r],” she says. “ An d
th e seco n d facto r is h o w th e bo ard
an d th e C EO view th e C HRO po sitio n . Mo re an d m o re it’s bein g seen
as a strategic ad v iso r to th e bo ard
an d senio r m an agem en t.”
Messier Successions
W h en su c c e ssi o n isn ’ t go in g
sm o othly o r based o n a plan n ed retirem ent, the role of the CHRO is less
apparen t. Bo ards o ften take tigh ter
co n tro l o f th e p ro cess, an d if th e
C HRO has a close relatio n ship w ith
the o utgoin g C EO , for exam ple, the
board m ay be con cern ed abo ut their
objectivity, explains Bran do n.
Jill Kan in -Lovers, a form er CHRO
at Av o n Pro d ucts an d a veteran director and form er consultant who has
chaired ve C EO search com m ittees,
says the m ost difcult successions are
those in which there are perform ance
pro blem s w ith th e C EO . Th ere m ay
be disagreem ent on the board about
whether the com pany should stick to
its current strategy, and internal candidates w ith C EO potential m ay not
be ready for the job.
Still, ev en in hectic situatio n s, a
great C HRO can serve as a conduit to
TheDelicateDanceof theCHRO
While boards and CEOs are relying more heavily on the chief human resources
ofÀcer, not all CHROs are created equal. The CHRO has to be sophisticated
enough to manage their relationships with board members and the CEO even
when their interests conÁict, observers say.
Claudia Lacy Kelly, North American leader of Spencer Stuart’s human resources practice and co-author of a recent article on CHROs, “CHRO at the Center,”
which appeared on the company’s website, says the degree to which companies
—and, increasingly, boards —are focused on having a strong CHROhas increased
dramatically in the past 10 years. Directors are more focused on CEOsuccession
and a logical approach to compensation. Boards have encouraged CEOs to make
sure the CHRO is experienced and sophisticated enough for the board to rely on
in the same way they rely on the chief Ànancial ofÀcer.
The CHROjob “is extremely delicate and very difÀcult,” says Kelly, whose expertise is in recruiting CHROs and their direct reports. “I frequently say that I think a
CHROhas to have the ability to walk across the top of a picket fence and in some
cases walk across the top of a picket fence that’s encased in barbed wire.”
The complexity stems from the fact that the CHRO has to report to the CEO
while respecting the Àduciary responsibility they have to the board and shareholders to help directors select effective leaders.
“The CHROhas to take that dual set of responsibilities enormously seriously,”
Kelly says. “Their true north always has to be what is in the long-term best interests of the company and the shareholders of that company.”
o ther leaders in the organ izatio n to
give the board a sense of what they’re
thinking, she says. And even though
th e bo ard m ay n o t keep the C HRO
in th e lo o p, th e C HRO can still be
accessible to th e bo ard as so m eo n e
directors can rely on, she says.
“ Th e b o ard h as to kn o w th at
you’ll die w ith a secret on your lips,”
says Kanin- Lovers of C HRO s. “Som etim es you have to keep info rm ation
from yo ur ow n boss, w hich is a very
tough position to be in .”
In additio n to stan din g sen tin el
o ver the bo ard’s process, the C HRO
can also serve as a sounding board to
the C EO . Kan in- Lovers says a transition can be an em o tion al tim e fo r a
C EO , whether it’s planned or not. In
m o re ch ao tic situatio n s, C EO s m ay
struggle if th e bo ard decides n o t to
choose the candidate the CEO favors.
“ It’s a very hard tim e,” sh e says.
“ Because n o t o n ly is the C EO actually leavin g, but their view of talen t
and who should com e after them has
also been dim in ished.”
Ultim ate ly, h o w e v e r, C HRO s
h av e to b e n i m b l e a n d f le x ib le
en o u gh to h elp th e C EO d ev elo p
talen t an d even tually tran sitio n o ut
o f th e ro le, an d to h elp th e bo ard
assess talen t an d pick th e best C EO ,
w h eth er th e pro cess takes place un der ideal o r less- th an - ideal circum stan ces, says Kan in - Lo vers.
“ Th e sm o o th est tran sitio n s are
v ery plan ful an d ev ery bo dy kn o w s
the plan ned date, an d the can didate
has been m oved in to differen t po sitions and everybody kn ow s that person is goin g to ascen d to the thron e
an d th e strategy w ill co n tin ue an d
it’s w o nderful,” she says. “ But som etim es, it’s a lot m essier.” g
A m a n d a G eru t (21 2- 5 42- 1 24 6 o r
[email protected] ) covers succession planning, board com position
an d directo r pay.
www.AgendaWeek.com
11
330 Hudson Street, 7th Áoor
New York, NY 10013
S
OU
U
RepurchasesPoised toFall After Apple’sRich Buyback
Cyber-Attack DisclosureComes Up for Debate
Ap p le’s recen t sto ck buyback pro gram , w h ich h as a
case for being the m o st lucrative in history, m arks w hat
co uld be a tippin g poin t for share repurchases. (Also see
our story about 21 st C en tury Fox’s buyback, on page 4.)
As of Aug. 5, the iPhon e m aker’s shares had risen 25%
sin ce it plo w ed $1 8 billion into its o w n stock during the
rst th ree m o n th s o f th e y ear. Th e sto cks also clim bed
32% after last year’s $1 6 billio n buy back. Acco rdin g to
Bloom berg an d Stan d ard & Po o r’s, those four- m onth return s rank as the highest am on g the 20 largest quarterly
repurchases goin g back to 1 998.
C om pan ies have recen tly been pourin g m ore capital
in to equity th an at an y poin t sin ce befo re the n an cial
crisis, but they don’t currently plan to keep up that pace.
With $1 59 billion in repurchases, January through March
m arked the busiest three m onths for buybacks since third
quarter 2007, according to S&P. But the $298 billion total
fo r an n o un ced buy backs th is y ear is do w n fro m $387
billio n at the sam e tim e in 201 3, Trim Tabs In v estm en t
Research C EO D av id San tsch i told Bloom berg.
Apple’s buybacks the past couple of years are the largest S& P h as o n reco rd, datin g to 1 998. In April 201 3,
when the earlier repurchase program began, Apple’s stock
had sun k to its lo w est price in 1 6 m on ths.
The biggest buyback com panies are beating the broader m arket. Accordin g to Bloo m berg, the 1 00 com pan ies
pursuin g the largest repurchases relative to m arket value
w ere up 5.5% year- to- date, versus 4.9% for the S& P 500
in dex.
C o m p an ies, like in d iv id ual in v esto rs, h av en ’t alw ay s been exp ert m arket tim ers. C o m p an ies w o uld
h av e gain ed 2 percen tage po in ts m o re th an th eir average buyback return o f 7 . 7 % if th ey h ad bo ugh t sh ares
at a co n sisten t lev el each q uarter, a recen tly upd ated
study o f 5 ,498 co m pan ies by Un iv ersity o f Ken tu ck y
researchers fo un d.
The conventional view that com panies should inform
authorities, vendors an d custom ers in the even t of inform atio n security breaches is facin g resistan ce fro m so m e
executives, The Wall Street Journal reports.
Daw n Marie Hutch ison , head of inform ation security
at Urban O uttters, is on e w ho do esn ’t n ecessarily suppo rt im m ediate disclo sure o f all cyber attacks. In stead,
Hutchison an d other executives co n ten d that n o t every
security breach causes h arm an d th at disclo sure co uld
reveal vulnerabilities that other crooks could use to their
advantage.
Disclo sin g “ an yth in g earlier th an th ree m o n th s, in
m y opin io n , w o uld be to o quick,” Hutch iso n is quoted
as sayin g.
At a recen t clo sed- do o r sessio n o f th e Natio n al Asso ciatio n o f C o rp o rate D irecto rs, “ so m e participan ts
questioned” w hether an noun cin g breaches is w orth “the
n egative publicity,” accordin g to the Journal.
Leslie Th o rn to n , gen eral co unsel at W G L Ho ld in gs,
said at the SEC ’s cyber- security ro un dtable in March that
“there’s m ateriality an d there’s m ateriality,” accordin g to
a transcript.
For in stan ce, Tho rn to n n oted, “ You w ouldn ’t n ecessarily disclo se a n ation - state acto r tryin g to do harm in
an in dustry that's very vuln erable.”
Th e SEC ’s 20 1 1 gu id an ce h o ld s th at “ registran ts
sh o uld d isclo se th e risk o f cy ber in ciden ts if th ese issues are am o n g th e m o st sign ican t facto rs th at m ake
an investm en t in the com pan y speculative or risky.” The
regulator later claried that com pan ies aren ’t required to
disclo se techn ical details of tho se risks.
Acco rdin g to a recen t repo rt by Pric ew aterh o u seC o o p ers an d th e IRRC In stitu te, “ Un fo rtun ately th is
has resulted in a series of disclo sures that rarely provide
differentiated or actionable inform ation for in vestors.” g
— Ma rc Hoga n
12 August 11, 2014
Pa rtia lly recycled paper