NACD Directorship: Leading Minds of Governance Q&A
Expert Panelists Provide Informed Answers to Directors’ Most Pressing Questions
From the advancement of women and dual-loyalty directors to social media in the boardroom, here’s what directors gleaned from the pros
by NACD Editors | March 29, 2014
On December 3, a panel of experts was assembled in New York in advance of NACD’s annual Directorship 100 gala, which each year pays tribute to the most influential people in corporate governance. The “Leading Minds of Governance” who comprised this inaugural panel were Myron T. Steele, former Delaware Supreme Court justice and partner at Potter Anderson & Corroon; Steven M. Davidoff, The New York Times DealBookcolumnist and professor at the Michael E. Moritz College of Law at Ohio State University; -Bonnie Gwin, vice chair and managing partner, Heidrick & Struggles; Nora McCord, managing director, Steven Hall & Partners; James P. Liddy, U.S. vice chair, Audit Committee Institute, and regional head of audit, Americas, KPMG LLP; and Gregg L. Weiner, vice chair of global litigation and co-head of real estate litigation, Fried Frank. Offering viewpoints from their areas of expertise, the panel fielded questions from the audience of 150 directors, providing answers to some of the key questions facing boards today. What follows are edited highlights from that spirited two-hour question-and-answer session.
Excerpt from Q&A:
Directors should be courageous. How do they stand up to the proxy advisors, namely Institutional Shareholder Services and Glass, Lewis & Co.?
Nora McCord: Say on pay has coupled public shaming with sound compensation or corporate governance decisions, and I think that has given our clients more of a backbone to stand up to the proxy advisors and say, “This is not right.” One of the things we do is empower boards with the information that makes the most sense for their particular situation, and then provide them with the ammunition they need to go out to the proxy advisor and educate them on their compensation plans. I’ve had some success with that. Not universal success, but some success. Cases can also be taken directly to shareholders and explained [that] this is the widely accepted good governance practice, this is how we looked at it, and these are the business reasons why we made a different decision and why we think it is in your best long-term interest.
I’ve never been on a board where I have felt that I’ve been adequately compensated. How do we resolve that dichotomy?
McCord: What do you pay directors for? Historically, directors have been paid for their time and expertise and not for the performance of the company. But should we be compensating directors for performance? And what about independent investors paying directors separately, whether for performance or simply for being nominated to a board? It’s risky to compensate different directors differently. Directors are providing a level of oversight, and I think there is an important component to motivation. You need to maintain a difference of perspective for that tension to remain and for companies to be governed effectively.
Gwin: It’s unusual for any board seat candidate to raise compensation as an issue. Most board members would agree that they are not paid enough for the risks to their reputation, but most directors I work with don’t see [their compensation] as a significant issue.
McCord: What I hear in boardrooms when the conversation turns to director compensation is that directors are not relying on that compensation. But it comes up in diversity, with academics or nonprofit [leaders], who are paid substantially less in their careers than a C-suite officer and how their director compensation might impact them. They’re more focused on it.
Davidoff: This was a hot button [in 2013] when JANA Partners sought a position and board seats at Agrium and Elliott Partners went after Hess. Each of the fund managers paid director [candidates] about $150,000 to run. Then what the hedge funds did was agree to give them a cut of their profits if they were elected. It raises a host of issues…and some boards are adopting [dissident director compensation] bylaws.
How do you define whether directors are doing a good job at governance?
Gwin: The ultimate outcome is to create shareholder value for the entire institution. Governance as a model needs to be oriented toward the best way to create positive value for the institution. I think that’s a pretty straightforward responsibility and straightforward outcome.
Davidoff: One of the things that I find grating is the assumption that corporate governance creates shareholder value. Is splitting the role of the chairman and CEO going to create shareholder value? Is say on pay going to create shareholder value? We’re not sure. Where is the empirical evidence for corporate governance creating value? A lot of times if you look at some of these proposals, they are more political or a result of some compromise of power and not what the studies show. Obviously, we can always do more studies.
McCord: It’s important to think about the good governance processes and instances where you diverge from good corporate governance practices. As long as you have looked at all sides of the question, you can divorce the two—practices from processes—and as long as the process is really sound, the decisions about practices are less troubling.