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| Vision & Revisions |
The New Regencies
Daniel Gross
10/01/2004
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Boards’ attitudes toward executive compensation have changed.
Excessive compensation of ceos has been one of the errors that boards have
committed. I indict myself among others. Now, I am not saying that we are going
to see salaries cascading downward. But I think the acceleration upward is going
to be minimized, and from here on out we will see an improvement in performance
matching compensation. Boards were embarrassed by the revelations and the perks.
It does not mean CEOs are not going to be outrageously overpaid by most
standards, but they are not going to control the process.
Shareholder activists play an important role.
I give credit to the activism of people such as Robert Monks and
Institutional Shareholder Services (ISS) in Washington. They in turn have
awakened the big institutions to their responsibilities. I have always faulted
pension funds and mutual funds for not taking their responsibilities seriously.
They own American industry, and they never really put enough pressure on
companies. It was not until the 1990s that these people banded together and
demanded meetings, and made their case that management was taking too much money
for inadequate performance. Some of these Washington groups today rate boards
now on the questions of how many times they meet, and on compensation and
independence. It puts a spotlight on the board performance. But some of the
people involved in these groups have not been inside a boardroom and do not
understand the questions. The main theme I express today at seminars is that
there needs to be a cleaning of boards by the board members themselves.
Think about it: Every board member is paid the same retainer and fees, but
when it comes to performance, there are plainly members who are underperforming.
It is our job to get rid of the people who do not perform on boards, the trophy
directors who do not show up or do not do their homework. You should congeal
around the leading board member, then he or she should talk to the board member
who is inadequate and say, “Either you have to clean up your act, do better work
or quit.”
Board members should devote more time and effort to their responsibilities.
Iss has very mechanistic rules. One is that no person should serve on more
than six boards. That impacts me because I am now on seven. But I do not also
run a business or a law firm. The only restriction on me is my time, and my
family saying, “Don’t work so hard.” My absentee record is as good as anybody’s
in the country. On the other hand, if a person has a full-time job, he would not
want to be on more than two or three boards.
Corporate boards need to change over a period of time.
Frequently, major companies originate in small towns and grow up to be big
companies, but the boards remain small town. Adelphia and HealthSouth are good
examples of very successful companies dominated by an individual or family,
wherein the board was composed of small-town directors. I am not saying they
were bad people; they were just unsophisticated. They had no idea about SEC
regulations. Also, frequently, the accounting firm is the small-town office of a
large firm, and the future of the company becomes extremely important to the
local partner. So it is easier for the accountants to get co-opted.
Boards may take too much power away from management; for example, at
Coca-Cola the board really seems to be running the company.
I was on a board 20 years ago where the management was so scared of the
board, it was paralyzed. There are too many loudmouths on that Coca-Cola board
today. The Coke situation is an example of too many high-powered, self-important
directors, who, while successful in their own fields, are not functioning as a
board. It is a group of 15 people talking about themselves. My own experience is
that you must have cooperation. That is why you do not want too many ex-CEOs on
a board, because every one of them wants to run the business the way he ran his
own. What is more, once a CEO retires, he should not remain on the board of the
company; he should get out. As a new CEO, you do not want interference from your
predecessor. And you sure as hell should not bring back an old director and put
him in charge of the search.
It is difficult for a director to know if fraud is being committed.
It is difficult for a director to know about fraud if the firm’s accountant
is signing off on the numbers. But today you just have to be more skeptical.
Maybe once in a while you should go out and get a forensic accountant to make
sure that the numbers are reasonably real. One of the rules I insist on, is that
if a problem does arise, any investigation must be handled by an independent
party. You want someone who has never had anything to do with the company,
someone who is beholden to the independent audit committee, to conduct
investigations. But if somebody who is quite smart is determined to screw the
company, I don’t think anybody is going to uncover it for quite a while.
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