Executive Leadership and Corporate Governance (Part Five)

As the company’s owner and CEO, you have made the choice to employ “best practices” with respect to corporate governance and have separated yourself from the position of Board Chair. Further, the Directors have been elected, committees formed and the Board is ready to commence the governance process on behalf of the company’s shareholders.

Obviously the following needs to be determined prior to putting the Board together, but since we have been dealing with the philosophy and theory of governance in the last few blogs, I have allowed the issue of Board compensation to fall a bit out of order, but it is a most important component of the governance equation – and one few companies seem to get right.

First, Board compensation is an investment in the creation of shareholder value. Therefore it must be meaningful, and like beauty, meaningful is in the eyes of the beholder. So, to clarify, by meaningful I am saying compensation that is fair for the risk (which is enormous) assumed, for the work required and for the value a Director creates for the shareholders via his or her expertise is required.

Let me give you an example of compensation that is not meaningful. A company with annual revenue of more than $100 million offered me a Board seat (subject to shareholder approval) for $2,000/quarter, based on the fact that there would only be four Board meetings per year and that each meeting would not last more than two hours and would require “minimal” preparation time. That offer was not adequate compensation. Why? It gave no consideration for the risk involved. It gave no consideration for the number of years of my Board service, or for my level of expertise based on my various committee assignments and the complexity of issues I dealt with. And, it didn’t adequately compensate for the time required, as there is no such thing as “minimal” preparation time, and I’ve never been in a regularly scheduled quarterly Board meeting in a company that size that lasted only two hours. There are simply too many issues to deal with for two hour Board meetings to be the norm. So in the case of this company, an offer of $10,000 per quarter would have been much more reasonable.

Second, Director compensation should be all cash and no stock. Stock options could possibly be appropriate, but should only be exercisable once the Director’s term has ended. Why no stock?

Most public companies have blackout periods to eliminate insider trading. That sounds good in principle. The reality is that Directors always, and I mean always, have more information available to them than any outside investor ever does. And that’s true for companies whose disclosures with the SEC are forthright and in full compliance with Regulation FD. A Director always has an investment edge over an outside investor in terms of knowledge. A no buying or selling policy eliminates that unfair advantage.

Another myth that needs to be dispelled is that if Directors hold stock of the company on whose Board they serve, their interests are aligned with the shareholders. Possibly not. There are hedge funds. There are short sellers in the market. There are day traders. There are management and possibly family holdings. I submit that it’s impossible for a Director to have the necessary knowledge to align himself/herself with all of the above and other groups whose interests may be in conflict with one another. And it’s certainly not a Director’s responsibility to adjudicate those conflicted positions. A Director’s responsibility is to govern the activities of the company through the CEO on behalf of all shareholders, to assure that all shareholders and prospective shareholders have the same timely information available to them, and that that information meets or exceeds all SEC disclosure requirements.

Having written the above, we are capitalists, and I have no problem with any Director acquiring a capital gain on stock he or she holds. Just do it with a company with whom you have no governance responsibilities in order to eliminate any perception or reality of conflict of interest.

My next Blog will discuss the proper amount of compensation for the Independent Board Chair.

 

Introductory Blog

Welcome to Business Development Associates Inc. (BDA) and our introductory Blog. We are excited to be able to offer what we hope you will find to be a valuable service, and a Blog you will want to follow on a regular basis.

Each Blog will discuss a topic that we trust will be regarded as relevant and that will be no more than three to five paragraphs in length. So a pretty quick read. And each Blog we write will either be a topic we have deep experience with and will be informational in nature or will be a topic that is designed to stimulate your thinking and hopefully generate feedback.

We will likely start with topics listed on the Company Health Check Page of our web site. Why, and why is that page on the site? Because if a company isn’t willing to deal effectively with the macro issues like those noted, it’s going to be very difficult to get the micro issues at the right level on a sustainable basis. And the page is there because companies need to be constantly assessing their level of excellence with respect to each of those issues. So we provided a reminder for them to do so.

So what we will be talking about relative to those Health Check Topics are the good and the bad we have seen through the years, as both consultants and as operating management. Why the good and the bad? Simply because it’s possible to learn from both.

Stay tuned!!