The GMI Blog

African-American CEOs

By Paul Hodgson - CCO and Senior Research Associate

Businessinsurance.org has recently released a list of the 10 Most Successful African American CEOs of all Time. The list includes names such as Kenneth Chenault, CEO of American Express, Aliko Dangote, CEO of Nigerian conglomerate Dangote Group, Oprah (no explanation needed), and Sean “Puff Daddy” “Puffy” “P. Diddy” “Diddy” Combs, CEO of Bad Boy Entertainment among other companies.

The list does NOT include Stanley O’Neal, former CEO of Merrill Lynch, or Richard Parsons, former CEO of Time Warner, or Franklin Raines, former CEO of Fannie Mae… for fairly obvious reasons.

A Credit to Mentors Down Under? A Record-setting Year for Australian Female Directors

By Michelle Lamb, Research Associate

Last month a record was set in Australia with respect to the percentage of women on company boards. According to this article in the Sydney Morning Herald, as of 2011 year-end the number of women on ASX200 boards reached 65, including 12 new appointments (or 40 percent of new hires). Compared to ION’s finding that only 16 percent of new board hires in the US were women last year, this momentum in Australia is remarkable.

Some credit is being given to the revised Corporate Governance Principles and Recommendations (effective January 1, 2011 for ASX-listed companies) that encouraged disclosure of gender representation at the staff, senior management, and board levels, as well as “measurable objectives” regarding gender diversity. (These “recommendations” adopt the “comply-or-explain” approach, and are not mandatory, yet some claim they are making an impact.) However, there is another initiative may have more to do with the improved gender representation – a two-year-old mentoring program at the Australian Institute of Company Directors that matches long-serving directors with up-and-coming females.

The recent increase is a continuation of a trend we noted in our March 2011 Women On Boards report; women comprised 10.9 percent of all directors at the public companies we cover in Australia, up from 8.3 percent in 2010.  As some countries adopt quotas or threaten to, others are initiating guidelines and mentoring programs such as those in Australia. It remains to be seen the results of the various approaches, both in the raw figures and the resulting quality of the corporate governance in different countries.

No News is Bad News: WOB No Significant Change in Six Years

By Michelle Lamb, Research Associate

Yesterday two powerhouses in the promotion of female equality in the workplace, ION and Catalyst, released their annual studies on women directors and executive officers in the US. ION’s “Gender Imbalance in the Boardroom: Opportunities to Change Course” includes data on Fortune 500 companies in 14 geographic areas as well as hundreds of small and mid-cap businesses, supplementing the research of Catalyst (which focuses on the F500 in their reports – see findings here and here) with additional S&P 1500 and Russell 3000 benchmarks from us here at GMI.

Their findings certainly confirm the perennial saw, that women’s share of leadership positions is stalled in corporate America and that female representation is still misaligned with the percentages of females in leadership roles outside of the corporate boardrooms and C-suites.  Specifically, they give evidence of no significant gains in the last year and claim that women are no further up the corporate ladder than they were six years ago.

Key takeaways from the Catalyst reports:

• In 2011, women held 16.1 percent of board seats at Fortune 500 companies. In both 2010 and 2011, less than one-fifth of companies had 25 percent or more women directors, while about one-tenth had no women serving on their boards. In both 2010 and 2011, women of color held 3.0 percent of all board seats.

• In 2011, women held 14.1 percent of Executive Officer positions at Fortune 500 companies and 7.5 percent of Executive Officer top earner positions. In both 2010 and 2011, nearly one-fifth of companies had 25 percent or more women Executive Officers, yet more than one-quarter had no women.

Perhaps most importantly, the ION report highlights the extent of missed opportunities to address the situation; that despite new, independent board members accounting for about 10 percent of boards, with 542 individuals having joined a board last year, only 87 of them (or 16 percent) are women. This year’s report focuses its “Calls to Action” section on the roles involved in this director selection process – board chairs and nominating committee chairs, all sitting directors, and executive recruiters – concluding:

“All over the world, from Norway to the United Kingdom to Malaysia to Australia, the pace of change in the gender composition of boards has markedly increased in response to a range of efforts by governments, stock exchanges and the business community. U.S. companies that compete in a global marketplace cannot afford to be left behind. They and their boards need to challenge and change the assumptions and practices that continue to produce the landscape described in this report. Their stakeholders deserve no less.”

Remake the board, don't just repopulate, says Mr. Monks

By Paul Hodgson - CCO and senior research associate

Bob Monks  on our 3-D Blog yesterday proposes not that we simply repopulate boards with a more diverse set of directors, but that we remake boards altogether. The following quotations will give you a flavor of the full blog.

We cannot hope to make progress until - once and for all - we face up to the reality that a self selecting board cannot ever meet the very real governance needs for independence at critical points in the structure.

A solution might be to recognize that there is no single board solution - there are some board functions that absolutely depend on collegiality and confidentiality; there are other board functions that absolutely depend on “independence”. Why not base the design for board structure on the incompatibility of collegiality and independence. A self perpetuating board might be the optimal instrument for strategy, succession and compliance, while independence seems essential in those areas where conflict of interest between agent and principal are apparent.

Could I suggest a very simple two part test that anyone responsible for selecting board nominees will find useful:
1. Is this individual willing to ask questions when she is uncomfortable?
2. Is this person willing to be thought a fool as a result of asking questions?
Nobody knows enough to be a director.

If every director were as smart as Bob and as intellectually modest about it, we wouldn’t be in this situation.

Nell Says It Like It Is

Nell Minow’s new blog on our 3-D Blog says it like it is. The blog, titled And Another One Bites the Dust takes side swipes at MF Global, Nabors, and Chesapeake Energy. She rightly blames the boards of all three and concludes that if companies keep on nominating the usual suspects, the same scandals will continue. So it’s time for a different set of candidates from our Diverse Director DataSource.

IBM Becomes Largest Female Run Company on Virginia Rometty CEO Appointment

By Greg Ruel- Research Associate

The first female CEO in the 100-year history of IBM will take office in January 2012. Ms. Virginia “Ginni” Rometty, 54 years old, is a great CEO appointment by virtually all accounts. She joined IBM in 1981 and served in various roles of increasing responsibility up to most recent appointments as Senior Vice President and Group Executive for Sales, Marketing and Strategy. Ms. Rometty and Meg Whitman, who was recently appointed CEO of Hewlett-Packard Co., will join 16 other female CEOs currently leading S&P 500 companies. Virginia Rometty will make IBM the largest company run by a female CEO, supplanting Indra K. Nooyi of PepsiCo, Inc.

There have never been more female CEOs serving as head of major corporations then there will be in 2012. In 2007, 2.75% of CEOs were female, a percentage which has risen to 3.2% in 2011 and looks to be rising. Female CEOs are something of darlings in terms of corporate governance because they tend to line up well in terms of pay for performance. Women generally earn less in perks than male CEOs and come away with fewer discretionary bonuses. In our 2009 Female CEO Pay Survey, we noted that male discretionary bonuses registered at an average of 3.5 times the amount of female bonuses and perquisites payments were nearly twice the amount on average for men. Figures so far from 2011 also help to illustrate this point.

While samples sizes are an issue of course, only one female CEO has earned a discretionary bonus in the S&P 500 this year. One out of 16 means only 6% of female CEOs got a discretionary bonus and it was for less than a million dollars. Compare this to male CEOs, where 19% received a discretionary bonus over a sample of 459 executives. These discretionary bonuses include a $12.5 million bonus for K. Rupert Murdoch of News Corporation and $27.5 million for Leslie Moonves of CBS Corporation. Annual cash bonuses however, which are predicated on the satisfaction of pre-determined performance metrics, are much higher at the median for female CEO’s than males. So far in 2011, female CEOs are getting cash bonuses of $2.3 million at the median as opposed to $1.8 million for males. This is right on par with our historical gender pay comparisons, namely, that female CEOs tend to only take a bonus when they have earned it.

Male CEOs are still taking home more in terms of perks and total pay in 2011. The average female perk total in the S&P 500 is $266,682 as opposed to $349,822 for males. In terms of realized pay, which incorporates annual pay elements and stock profits, female CEOs are averaging $10.5 million to $12.3 million for men. While all is not yet equal in CEO pay, female CEOs appear to be coming on strong. Indeed, 2012 should prove a banner year for female CEOs as they continue to take on top spots at some of America's largest corporations.

ION on 3D: A Good Board is a Balanced Board

By Michelle Lamb, Research Associate

ION President Charlotte Laurent-Ottomane blogged this week about gender diversity in the boardroom – how a corporation needs businessmen just as much as businesswomen to have an effective, well-rounded business model.

Laurent-Ottomane praises initiatives like the 3D database as tools to help companies widen their applicant pool to include more candidates experienced in a range of pertinent fields – marketing, human resources, corporate governance, among others – even though they may not have the CEO title that has historically been assumed to be a prerequisite for a board position.

Subscribe to the 3D blog to keep apprised of other thought leaders’ insights on this important topic.

Compensation Policy: CEO Severance Pay and the Cost of Failure

By Nathaniel Parish Flannery, Research Analyst

What is the price of failure? With 14 million Americans unemployed, more people are paying attention to CEO pay packages. The unemployment rate has been over 9% since April 2009, but CEOs continue to collect multi-million dollar payouts, even as their companies deliver lack-luster returns to shareholders.

Even though many investors are frustrated with executive pay packages, firing CEOs can be an expensive option.

For example, when executives at Hewlett-Packard, Bank of New York Mellon, Burger King and Yahoo were asked to step down this year, they walked away with severance packages that cost shareholders a combined $60 million. For instance, when Léo Apotheker stepped down as CEO at Hewlett-Packard, he walked away with $13.2 million in cash and stock severance.

According to data from GMI, the corporate governance research firm, more than a quarter of the companies in the S&P 500 reported declining income or net losses last year. It would cost a fortune, however, to fire these companies’ CEOs. GMI data shows that executives at these struggling companies are in line to receive severance payments worth $2.6 billion. More broadly, in the S&P 500, CEOs are entitled to receive an average of $22 million in the event they are fired. In total, it would cost shareholders $10.8 billion to fire the CEOs of all of the companies in the S&P 500.

CVS’s CEO, Larry Merlo, will be well cared for if he’s ever fired; he’s eligible for a severance package worth $170 million. Likewise, Ralph Lauren the founder and CEO of the Ralph Lauren Corporation would still be living in style if he were asked to step down; he’s eligible for a severance payout worth $148 million.

CVS, The Chubb Corporation, Lockheed Martin, Comcast, and Verizon all reported declining net incomes or losses last year, and yet their shareholders would be on the line for almost half a billion dollars in severance packages if they moved to fire these companies’ CEOs.

Severance packages for under-performing CEOs reflect a broader trend in the U.S. economy. Currently the richest 1% of households earns as much as the bottom 60% and possesses as much wealth as the bottom 90% of Americans put together. One tenth of U.S. workers are currently unemployed and almost half of these people have been unemployed for six months or more. Ben Bernanke, the Chairman of the U.S. Federal Reserve, recently said, “this unemployment situation we have is really a national crisis.”

If shareholders want to take action on executive compensation, they should make sure that executives’ interests are aligned with their own, they should look for bonus schemes that link payout to targets for metrics like Total Shareholder Returns. In the wake of the financial crisis, U.S. legislators have already acted to implement new rules regarding so-called “golden parachute” payments for departing executives. These rules however, apply to cash payments only, and not to stock-linked compensation. As the most recent data show, the new rules have done little to clamp down on excessive CEO severance packages.

On both sides of the political spectrum, Americans are speaking out about what they see as an uneven playing field emerging in the U.S. economy. Executives at publicly listed companies should be aware that if they fail to align pay policies with performance, regulators might be inclined to intervene to change the rules of the game.

After all, Lloyd Doggett, a Democratic representative of Texas and senior member of the House Ways and Means Committee, recently called outsized severance packages for executives “outrageous.”

“The whole concept that the only way to get rid of bad management is to buy them off is fundamentally wrong” he said.

Diverse Director Database - 3-D - Launched by GMI

By Paul Hodgson - CCO and Senior Research Associate

GMI announced today the launch of the Diverse Director Datasource (“3D”), which houses a group of diverse prospective candidates for board of director positions. GMI developed 3D to support investor, corporate and market demands for a broader, international pool of boardroom candidates.  

3D offers director search efforts a unique pool of fresh candidates with a different kind of experience, knowledge and talent. The term “diverse” refers to the range of attributes, experiences, perspectives and skill sets that can contribute to sustainable value creation by corporate boards of directors. Core attributes that make up a diverse board address accounting and finance skills; international markets, business or management experience; industry knowledge; customer-base experience or perspective; crisis response, leadership and strategic planning expertise; as well as the perspective of historically under-represented groups on the board, including women and minorities.

“GMI created this new resource because we know, through our years of research and practical experience, that board diversity can be instrumental to a company’s continuing success. It’s a board’s fiduciary responsibility to try to achieve the best long-term, risk-adjusted returns possible – and having a strong, sound board with a diversity of skills, perspectives and experience is an important contributor to this,” said Richard A. Bennett, GMI’s Executive Chairman. “During the financial crisis, we saw examples of boards that were composed of members who were too similar in background and that too often may breed ‘groupthink’. Those boards would have benefited from having a more dynamic and broad-ranging composition.”

California Public Employees’ Retirement System (CalPERS) and California State Teachers’ Retirement System (CalSTRS) commissioned GMI to produce the database.

Candidates can nominate themselves for free and build their own profiles, which include, among other things, their board and professional experience, board education, leadership skills, business skills, certifications and international experience.  Subscribers – recruiting firms, nominating committees at both for profit and not-for-profit organizations – will have access to tools to vet potential candidates for nomination through a rigorous process. 3D has an advanced search function that identifies candidates based on very specific criteria and enables continued refinement after the initial search.

“3D is not about filling diversity quotas – it’s about giving corporations access to new, qualified talent with diverse skill sets that can bring fresh thinking to a board,” said Shauna Morrison, GMI’s Vice President of Data and Editorial Operations. “Studies show that companies with diverse boards perform better, and 3D is a great tool to identify these individuals for consideration to improve corporate performance.”

The Shallow Pool of Female Directors?

This article "One woman, multiple boards: rise of the 'super-connected' director" addresses an ironic phenomenon: although more women are being elected to boards (through quotas and other political action), the number of "super-connected" (elsewhere called "overboarded") female directors is rising. The Corporate Library's Chief Analyst Ric Marshall cites evidence and examples of this increase. Despite the legislation intending to combat the issue of under-representation of women on boards, the numbers are improving seemingly at the expense of board quality - boards are simply utilizing the same batch of women already serving as directors elsewhere, contributing to a new problem of ineffective, over-burdened directors. This side-effect warrants serious attention; the depth of the director candidate pool needs to change in order to prevent the web of existing directors simply becoming more dense. Board diversity should not be achieved at the expense of board quality - anyone on more than four boards simply cannot serve each board as well as a director should.

Michelle Lamb - Research Associate