The GMI Blog

Remember What should I do now I'm not President anymore?

By Paul Hodgson - CCO and Senior Research Asscociate

I expanded this GMI blog post, adding in new commentary and some extra research on your friend and mine Dan Quayle who is on the board of Heckmann Corporation, well-known for its investments in Chinese soft drink companies and waste water treatment systems... don't ask. So I expanded it and posted it on my new Forbes.com blog Governance Matters. Check it out.

What should I do now I’m not President anymore?

By Paul Hodgson - CCO and Senior Research Associate

Well, we all know about Al Gore (and by now you know I’m talking Vice Presidents as well as Presidents), but what about all the others? Dick Cheney, Bill Clinton, George Bush. Well, GMI has data on all that good stuff so it’s a nice simple query for us. And this is what we came up with for membership on corporate and non-corporate boards. Of course, it’s not an exclusive list, because we don’t collect data on every non-corporate non-profit, but it’s a better list than you would get anywhere else.

Company Name	President/VP's name	Position	Status
Apple Inc.	Albert A. Gore Jr.	Director	Active
American Philosophical Society	Albert A. Gore Jr.	Board Member	Active
UnitedHealth Group Incorporated	Walter Frederick Mondale	Director	Retired
Northwest Airlines Corporation	Walter Frederick Mondale	Director	Retired
Mayo Foundation	Walter Frederick Mondale	Board Member	Emeritus
RAND Corporation (The)	Walter Frederick Mondale	Board Member	Honorary
American Enterprise Institute for Public Policy Research	Richard Bruce Cheney	Board Member	Active
Smithsonian Institution (The)	Richard Bruce Cheney	Board Member	Former
Trilateral Commission (North American Group)	Richard Bruce Cheney	Board Member	Former
Business Council (The)	Richard Bruce Cheney	Member	Former
Greater Houston Partnership	George H. W. Bush	Board Member	Honorary
U.S. Fund for UNICEF	George H. W. Bush	Chairman	Honorary
Citigroup Inc.	The Honorable Gerald R. Ford	Director	Retired
Heckmann Corporation	J. Danforth Quayle	Director	Active
U.S. Fund for UNICEF	William Jefferson Clinton	Chairman	Honorary
Trilateral Commission (North American Group)	William Jefferson Clinton	Board Member	Former
U.S. Fund for UNICEF	James Earl Carter Jr.	Chairman	Honorary

Not too many corporate boards, there, but, wait a minute, whoa, Walter Mondale got around, didn’t he? He was on the board of Northwest when it filed for bankruptcy. Doesn’t look good on your resume. Nor does being on the board of UnitedHealth when they were backdating stock options like crazy. And Gerald Ford was on the board of Citigroup? Did a little better than Mr. Mondale, however, he retired in 2006. Smart move. Of course, since most of them have retired we don’t have compensation data on them, except for Mr. Gore, who earned $1,278,431 during 2010; not an inconvenient amount.

An overpowering CEO, sure… but an overpowering director?

By Michelle Lamb - Research Associate

Here’s something we don’t hear about every day – a director overpowering the CEO to a company’s detriment?  In a Fortune article, William Cohan shed light on a serious power struggle at Merrill Lynch in the months leading up to its firesale to Bank of America. It lays the blame on an unlikely suspect: a director. Alberto Cribiore was a Wall Street insider who, therefore, “wielded outsize power” on the Merrill board and stifled then-CEO Stanley O’Neal’s attempts to sell Merrill in 2007. According to Cohan, Cribiore “argued vociferously that O'Neal was too negative and that Merrill could address its CDO problem without having to sell the firm at a moment of weakness.”

We all know what happened next: “In the aborted 2007 negotiation, O'Neal seemed close to a deal with Bank of America to sell for about $100 billion. When Merrill was finally unloaded a year later to the same buyer, it went for half that amount. In all, the failure to sell in 2007 would cost Merrill shareholders some $50 billion….Finally, after the announcement of the sale to Bank of America for stock worth $29 per Merrill share, O'Neal sent Cribiore one last e-mail: 'My former friend, you should have helped me sell this business when we had the chance.'"

Although this could all be 20-20 hindsight colored by a regretful, redemption-seeking CEO, it highlights corporate governance risk  from a fresh perspective – the risk of not a rubber-stamping, passive board, but rather one that is too contrarian and dominated by a sole industry expert (who was tapped for his board position by the CEO himself, in this case).  So the dominating position may have changed but the message remains the same: who is on the board, and how they conduct themselves is what is most important. In the case of Cribiore, the risk seems to be his disproportionate industry knowledge, with no others on the board to challenge his opposition.

Now, to be fair, we are talking about the largest market-wide crisis since the Great Depression that only the characters in The Big Short seem to have adequately grasped in advance, but still. Even though O’Neal couldn’t measure the full extent of risk of their CDOs, he still had some sense – a better sense than his board – that write-downs weren’t enough to address it. It is clear in this telling that Cribiore’s opposition (and his persuasion of other board members, like pal “Don Armando”) led to the company’s downfall. With more board bench strength in terms of industry experience and diversity of opinion to weigh their options as a group, one could argue the fate of this financial firm, and its shareholders, would have been quite different. At GMI we had rated Merrill Lynch a D since 2005.

To be elected or not to be elected

 By Hoang Nguyen - Ratings Manager

News Corporation held its annual general meeting on October 21, 2011 and a significant portion of outside shareholders have lost confidence in the controlling family. Approximately 35% of the votes cast last Friday were withheld from Deputy COO James R. Murdoch, 34% were withheld from former Deputy COO Lachlan K. Murdoch, and 14% were withheld ffrom Chairman and CEO Keith Rupert Murdoch. While this does not represent a majority of all votes, if we were to exclude the approximately 40% of the votes owned by the Murdoch family and the 7% owned by Saudi Prince Alwaleed Bin Talal Bin Abdulaziz, who has publicly pledged his support for the Murdochs – the two sons would not have been re-elected. Excluding the pro-Murdoch votes, an average of about 75% of the remaining votes were withheld from James and Lachlan.

A significant number of votes were also withheld from three other directors. Overall, approximately 33% were withheld from Natalie Bancroft, 23% from David F. DeVoe, and 32% from Andrew S.B. Knight.  Lastly, 35% of the votes cast were against the Say on Pay proposal.

Chelsea Clinton Joins IAC Board

By Kimberly Gladman, CFA, Ph.D., Director of Research and Risk Analytics

The Wall St. Journal reported today that Chelsea Clinton has been appointed to the board of internet company IAC/InterActive, whose Chairman, Barry Diller, has been a supporter of campaigns by both her parents.  While this seems like a particularly blatant case of choosing a director for her connections rather than qualifications (bright 31-year-old graduate students not usually being high on a nominating committee's list), it is not that surprising coming from IAC. We have long rated IAC poorly, due to governance concerns including dual share classes with disparate voting rights, a board containing many overcommitted and non-independent directors, and executive compensation that is not well-aligned with company performance. The newest director appointment gives investors even more reason to question the quality of the board's oversight.

Yahoo!’s Independent Chairman fires CEO

By Paul Hodgson - CCO and Senior Research Associate

The announcement yesterday that Yahoo!’s CEO Carol Bartz, who has only been with the company since 2009, was fired has a couple of different governance aspects, aspects that are at the forefront of GMI’s commentary and analysis, that are worth discussing. First, the Yahoo! board has an independent chairman, a real independent chairman, not a former CEO who has shifted sideways, and it’s pretty unusual to have such a director able to act with real authority. It was the board chairman, Roy Bostock (part of the team that recruited Ms. Bartz), who informed Ms. Bartz that her services were no longer required. As has been widely reported, Mr. Bostock fired her over the telephone, a method which seems to have irked Ms. Bartz almost as much as being fired in the first place. And, I have to admit that, for a senior executive, it is a little unusual, to say the least.

This is an unusual board in other ways too, with a group of long-tenured directors (Arthur Kern, Gary Wilson, and Jerry Yang) and some very new directors (Brad Smith, David Kenny, Patti Hart, and Sue James), and some medium-term directors (Vyomesh Joshi and the chairman). There are also more women on this board – at least there were until Ms Bartz was fired – than is typical. As a result, GMI has a pretty high opinion of it, which would appear to have been borne out by some pretty decisive actions, not least the relatively hard-nosed recruitment and severance packages it negotiated at the time of Ms. Bartz’s hiring. Much of her golden hello stock options had stock price targets that are going to be very difficult if not impossible to achieve, even with a successful sale of the company, and her cash severance is extremely modest… by U.S. standards. So the total $10.5 million in potential severance quoted in this year’s proxy statement is likely to be an overestimate, though the $5.2 million in cash severance is guaranteed.

New Director at News Corp. is Independent, But Busy

By Greg Ruel - Research Associate

James Breyer, a Partner at venture capital firm Accel Partners, is expected to be elected to the board of News Corp. at its annual meeting in October. In addition to his day job at Accel, Mr. Breyer is a director at Dell Inc., presiding director at Wal-Mart Stores, Inc. and serves as director at several private companies, including Facebook, as well as various non-profits. He has been an investor in more than three dozen media and technology companies which completed successful IPO’s or mergers. So, will Mr. Breyers appointment improve board independence at News Corp.? Perhaps a little, but we aren't expecting too much of an impact.

Mr. Breyer is projected to join the board as two long-term directors depart. Thomas Perkins, who will be turning 80 soon, leaves as an independent director though he served on the board for 15 years and was a member of each of the board's major committees until his retirement. Kenneth Cowley is departing with a directorship tenure more than twice that of Mr. Perkins, 32 years, and previously served as an executive at News Corp. With no direct ties to the company, Mr. Breyer is certainly more independent than the men he is replacing, but the overall make-up of the board stays about the same.

With two directors departing and one arriving, the percentage of board members who are inside increases to 40%. Include other directors related to Rupert Murdoch, former employees, or board appointments and that’s more than half the board in all. While adding an independent director to the mix is a positive step, it’s reasonable to question the impact this new director will have, especially considering his time commitments.

For instance, Mr. Breyer attended just 64% of expected meetings at Dell Inc., where he serves on the compensation committee and finance committees. The second year Dell director received more than 41% of votes against his re-election in 2011 while no other director received even 7%. If time conflicts are preventing him from attending the requisite amount of meetings as a director at Dell, is there any reason to believe he has the time to take on a new directorship? Especially on a board in dire need of independent directors who can provide an active voice counter to the typically deferential board at News Corp.? Ultimately, the board at News Corp. is expected to remain about the same. It’s a Murdoch run company with a pro-Murdoch board and there isn’t expected to be a significant change to that set-up any time soon.

Red Flagging Entertainment Directors

By Paul Hodgson - CCO and Senior Research Associate

I can’t claim the whole of this idea myself, though it did start to fly with my suspicion that the Lehman board had an opera singer on it too, same as News Corp. But it was Susan Antilla from Bloomberg who suggested there might be an opera red flag. That worked for me, with maybe a double red flag if they’re Wagnerian opera singers.

But as it turned out, Lehman Brothers’ entertainment quota was made up of an actress and a Broadway producer. As Ric Marshall’s securities litigation 2009 update says:

Two of their longstanding directors came from the entertainment business: actress Dina Merrill, who retired from the Lehman board in 2006 at age 83 after 18 years of service, and Broadway producer Roger Berlind, 76, and currently the longest-tenured member of the Lehman board with 23 years of service. At the time of her retirement Ms. Merrill was a member of Lehman’s Nominating & Corporate Governance and Compensation & Benefits Committees; Mr. Berlind is a member of Lehman’s Audit and Finance & Risk Management Committees.

To say the very least, these directors had few attributes that would qualify them to sit on the board of, never mind key committees of, a modern securities house.

So then we come to News Corp, which elected “classically-trained opera singer” Natalie Bancroft to the board on its acquisition of Dow Jones, to satisfy a requirement that a member of the Bancroft family be elected to the board. News Corp’s justification?

Ms. Bancroft’s youth, female perspective and international education and experience add valuable diversity and perspective to the deliberations of the Board.

The fact that she hadn’t sat on the board of Dow Jones and the fact that Christopher Bancroft and his cousins Leslie Hill and Elizabeth Steele were board members at the time of the acquisition and might actually be more qualified (I’m making a wild guess here) appears to have escaped Mr. Murdoch’s notice.

So where did it all start,  this mania for having actors and the like on the board? Did it start with Sidney Poitier, a director on Disney’s board from 1994 to 2003? Now, he wasn’t on the board when it decided to award former CEO Michael Eisner enough options for him to profit about three-quarters of a billion dollars, so we can’t blame him for that. But, and this is a pretty big ‘but’ given this employee’s background, he was on the board when Disney hired actors’ agent extraordinaire Michael Ovitz. And he was still on the board when it fired Ovitz, costing Disney shareholders about $140 million.

That said, you can forgive a man almost anything for a performance like Virgil Tibbs in In the heat of the night.

Can anyone think of any others?

I’m looking. I’m looking.

Grading directors by stock price

By Paul Hodgson – Chief Communications Officer

In today’s Wall Street Journal, Joann Lublin, using research undertaken by GMI, has written and researched an article which highlights 12 directors who have served on the boards of at least two companies that have both outperformed their peers and the S&P 500 for at least the last five years. We identified these top tier personnel by looking for directors with at least five years’ tenure and positions on the boards of at least two of these outperformers. One director, Naomi O. Seligman, sat on the boards of three such companies. Joann also spoke to many of the directors and identified a number of strategic actions that they took in order to boost shareholder return at the companies. None of the directors are “big names”, which may explain why many are identified as successful. Unfortunately, it is often bad news, bad decisions, or membership on bad boards that gain a director recognition, or rather notoriety, so it is a pleasure to be able to name names with a success ticket attached.

Managing Corruption Risk

My latest column on Bnet is about corruption risk.  

An international corruption trial in China imposed the death penalty (with a reprieve) on a China Mobile executive found to have taken bribes from Siemens. His colleague received a 15-year prison term. Siemens had already paid a record $1.6 billion in 2008 to settle U.S. and German corruption charges and the SEC and Department of Justice and the German authorities provided investigative support for the Chinese prosecution.

The column includes an edited version of an interview with KPMG Principal Michael B. Schwartz, who leads Anti-Bribery and Corruption Services for the U.S. audit, tax and advisory firm, about their new report on corruption risk as assessed and managed by US and UK officials.  Here is the full interview, with a sidebar at the end about OECD guidance.

• Your report shows that some 73 percent of U.K. senior compliance executives and 70 percent of their U.S. counterparts say corruption is endemic in certain areas of the world, but only 32 percent of the U.K. respondents and 25 percent in the United States acknowledge not doing business in those nations as a way of avoiding bribery and corruption risks.  How can companies make the costs of reducing risk from corruption a competitive advantage?

 

There are many perspectives on making risk reduction a competitive advantage.

 

The most dramatic example involves many organizations now asking their business partners, such as vendors, agents or even those involved in their distribution channels, to certify in contracts that they do not engage in activities that would be considered bribery or an act of corruption. Companies that can’t certify that they will not and do not engage in bribery or corruption would be at a disadvantage.

 

There also is the issue of revenue leakage, as funds that could be used for core operations are being diverted to illegal activity. Of course, the result of such activity may be an incident that would require a major investigation by the company, regulators, causing the potential for fines, reputational damage and diverted executive attention.

 

 

• What are the most important steps a company can take to reduce corruption and bribery risk? 

 

The KPMG survey found three primary challenges among corporate executives in managing risk around bribery and corruption: auditing third parties for compliance, performing due diligence on third parties, and the large number of laws and regulatory requirements that can vary from country to country, further complicating managing activities across borders. But leading companies are working hard to understand the broad landscape, and tailoring a number of elements of an effective risk mitigation program to meet the needs of the individual countries in which they may have operations.

 

Companies must have an appropriate tone at the top, led by senior management that says doing the right thing is the only way to operate, and that it is OK to lose business if getting the business would mean breaking the law. 

 

The OECD’s Good Practice Guidance on Internal Controls, Ethics and Compliance describes what companies should consider to ensure effective internal controls, ethics and compliance programs or measures for the purpose of preventing and detecting foreign bribery.  The OECD’s Good Practice Guidance is consistent with the U.K. Ministry of Justice’s recent guidance on “adequate procedures” related to the U.K. Bribery Act 2010 and the position the U.S. Department of Justice has taken related to the elements of effective anti-bribery and corruption compliance programs in multiple deferred and non-prosecution agreements with companies that admitted to violating the FCPA.

 

• How can a board of directors, with limited time and even more limited knowledge of what is going on in other countries, make sure that corruption risk is being effectively managed?

 

Boards need to take a very active and involved approach, when it comes to foreign operations, especially if the organization has business units or relationships in countries that have reputations for bribery and corruption. Transparency International indices can help identify some of the more troublesome areas but Board members should ask direct questions of management, and should expect direct answers, on the topic of where the company faces risk and how it is being mitigated. If the responses are somewhat shaded or ambiguous, the board should act appropriately. In a recent and very tangible example, a company’s board concluded management had not done the appropriate anti-bribery and corruption diligence on a proposed acquisition and tabled the deal until appropriate diligence could be performed and the Board briefed. Boards should expect management to limit risk in terms of cost and reputation. Compliance officials should have a direct line to Audit Committee members to obtain the benefits of complying with the U.S. Organizational Sentencing Guidelines.

 

• What are some of the accounting or audit red flags that should raise concerns at the board level about corruption and bribery?