Posts belonging to Category corporate governance



Shareholders Shift Their Focus

It’s been widely reported that companies have fared quite well as far as Say on Pay votes have been concerned. Indeed, Semler Brossy Consulting Group reports that, as of April, 94 percent of employers have passed such a vote (with a 70 percent approval rating).

Say on PayTo be sure, that’s good news for companies and their comp committees. But it does raise the question:  Who’s failing?

According to researchers at Towers Watson, the answer: smaller companies.

While key shareholder voting outcomes have improved very slightly for the Russell 3000 overall, the analysis found, smaller companies are failing their Say on Pay votes at almost twice the rate as last year. (Towers Watson defines failures as receiving Say on Pay support from less than 50 percent of the votes cast.)

In an article posted Monday on Towers Watson’s website, the authors note:

Through May 24, a total of 27 Russell 3000 companies received failing Say on pay votes from their shareholders. Only two are in the S&P 500. Companies outside the S&P 1500 … accounted for almost two-thirds (63 percent) of the failures. Last year, these smaller companies accounted for only 31 percent of the Russell 3000 failure.”

James Kroll, a senior consultant at Towers Watson and one of the article’s authors, said he isn’t surprised to see shareholders start to shift some of their attention to smaller companies. “We’re most of the way through proxy season and we’ve seen a refinement of efforts at the largest companies—so it’s natural that the focus would start to shift downward in terms of company size,” he said.

In light of this, Kroll said, smaller companies might want to take some cues from their larger peers, including revisiting their disclosures and fine-tuning their messaging so shareholders have a much clearer picture of what’s happening.

Put simply: Be more engaged with your shareholders, something many larger companies have  gotten much better at.

And if you’ve failed a vote? “Shareholders,” Kroll said, “are going to be looking at how you’ve responded … .”  In terms of responding, he adds, some companies are doing a better job than others.

The “Biggest Thing Happening” In Exec Comp

It’s a global trend that’s sweeping financial capitals all over the world, and it’s going to keep things quite interesting for HR leaders at public companies.

The “it” in question is say-on-pay, or the practice of letting shareholders vote on the renumeration awarded to executives of publicly traded companies in order to discourage or prevent corporate boards from granting excessive pay packages not linked to actual performance. Here in the U.S., a provision included as part of the Dodd-Frank Act of 2010 gives shareholders a non-binding vote on executive pay. Earlier this week at WorldatWork’s Total Rewards 2013 conference in Philadelphia, three executive-comp experts discussed its potential long-term effects.

“It’s going to lead to greater homogenization of pay,” said John England, managing partner of Pay Governance LLC. Say-on-pay “is causing some boards of directors to operate in a mode of ‘Let’s keep our heads down and stay under the radar screen.’ I’m not so sure that’s best for shareholders or companies in general.”

Companies in highly competitive sectors — such as technology and bioscience, for example — should be able to adapt their pay practices as they see fit in order to lure and retain the sought-after executive talent in those fields, he said.

Nevertheless, say-on-pay has also “been helpful in providing focus and strength to boards to clean up compensation practices that were not working,” said Steve Harris, managing director of Frederic W. Cook & Co. “I think boards are now at a point where they understand the implications of compensation decisions that may risk a backlash.”

Say-on-pay has also affected executive bonuses, said England. “I do believe it’s much more common now, thanks to say-on-pay, for bonuses to to be much more linked to performance,” he said. “In the past, executives received bonuses even when targets were missed, with the explanation that ‘Yeah, but the targets would’ve been hit had the market conditions not changed.’ Now, there’s no more ‘Yeah, but’ — when targets are missed, no bonus.”

The rise of say-on-pay has made communicating with shareholders a bigger imperative than ever, said England. “If you can influence your shareholders and tell them a story before they read the Institutional Shareholders Services report, that’s good. And it should not just be the HR and legal folks talking to shareholders — if you can get the board members talking with shareholders, that’s great.”

It can be very effective when a CEO meets with shareholders to “tell the company’s story,” said Harris. “Shareholder engagement needs to be done on an ongoing basis, not just when there’s a crisis,” he added. “Develop the relationship now and maintain it regularly; otherwise, you may not have these shareholders to turn to when you do have a crisis.”

Shareholders “love context,” said Blair Jones, managing partner of Semler Brossy Consulting Group. “They eat it right up. Develop a dialogue with your shareholders.”

The specter of a say-on-pay law that is actually binding — a number of European countries have taken, or are considering taking, this step — should keep boards and HR on their toes, said Harris. “I’m concerned about what is happening in Europe coming across the pond and infecting the U.S.,” he said. “Right now, I think Washington’s attention has shifted to jobs and growth, not executive pay. But we have to be careful. When CEO pay escalates sharply against average worker pay, it will inflame things.”

“I do believe we are just one or two scandals away from the prospect of a binding say-on-pay law … in this country,” said England.

Pay-Ratio Reference Draws Fire

A statement released last week by U.S. Securities and Exchange Commission’s Luis A. Aguilar received a prompt response last Thursday from the HR Policy Association’s Center on Executive Compensation.

Specifically, it was the pay-ratio component of the commissioner’s comments that caught the HRPA’s eye.

Aguilar noted in his statement, titled “Shareholders Need Robust Disclosure to Exercise Their Voting Rights as Investors and Owners,” that …

Pay Ratios“The relative pay of different classes of employees, such as the ratio between CEO compensation and median pay, can also create risks to an enterprise, including the risk of employee, customer, and shareholder discontent. Decisions regarding executive compensation may also affect succession planning and related risks. Companies should consider whether additional disclosure is necessary to enable stockholders to assess such risks and the manner in which any such risks may be affected by a company’s compensation policies and practices.”

(Check out this Reuters’ story for more.)

A provision in the Dodd-Frank Act, the notion of pay ratios has drawn fire from HRPA’s Center in the past.

In response to Aguilar’s most recent statement, CEC President Timothy J. Bartl said

While we were encouraged that the statement recognized the value of supplemental executive compensation disclosures to investors in explaining the pay for performance relationship, we were disappointed that Commissioner Aguilar encouraged companies to voluntarily disclose a pay ratio in their 2013 proxies, given that investors have not expressed broad interest in this information and the Commission has not yet  issued final rules.

In evaluating whether to make such disclosures, Commissioner Aguilar asks companies to be ‘guided by a clear vision of the investors who are relying on the disclosure to make important voting and investment decisions.’ Yet, the Center has found that, unlike pay for performance, investors are generally not asking for pay-ratio information, and where shareholder proposals have been offered on the pay ratio, support from shareholders has been very low.

“It’s pretty unusual for the commission to put out a statement advocating company actions,” Bartl told me this morning. “It’s more typical for these be expressed through speeches or other channels.”

Through his statement, Bartl says, Aguilar is urging companies to take voluntary steps, in light of the fact that the SEC is not close to taking action on rules, given the current status of the commission with two commissioners from each party following the departure of SEC Chairman Mary Schapiro in December.

But if Bartl is correct, he probably shouldn’t hold his breadth on this particular front.

Do As We Say, Not as We Do …

There’s just one question that comes to my mind while reading over the alleged misdeeds of former Best Buy Chairman and Founder Richard M. Schulze: Just what was this guy thinking?!?

By this point the general outline of the story is fairly well-known: Schulze has just resigned after acknowledging he knew about an “improper relationship” between Best Buy’s (married) CEO and a younger female employee, yet failed to report it to the board of directors. CEO Brian Dunn, who resigned last month, “violated company policy by engaging in an extremely close personal relationship with a female employee that negatively impacted the work environment,” according to a report by the board’s audit committee, which began looking into the matter in March after a Best Buy HR exec heard about it, according to the New York Times.

The 51-year old Dunn and the 29-year-old employee appeared to have had a rather intense relationship, even if–as they maintain–it was not sexual. According to the audit report, the CEO contacted the female employee by cellphone “at least 224 times during one four-day and one five-day trip abroad, including at least 33 phone calls, 149 text messages and 42 pictures or video messages.” Things got especially awkward in the workplace when the employee began boasting to other employees about her relationship with Dunn and the favors he provided her with, including tickets to concerts and sports events.

For me, the kicker is when an executive provided Schulze with a signed, written statement from another employee detailing the relationship between Dunn and the young woman. Chairman Schulze proceeded to confront Dunn with the written allegation and ask if it was true. Dunn denied it was true, and Schulze dropped the matter, failing to follow company policy by notifying the appropriate company officials. Let me state that again: Schulze confronted Dunn with a SIGNED, WRITTEN STATEMENT from a whistleblowing employee, and then did nothing. So, Best Buy, how’s that whistleblower program working out? How’re the corporate ethics folks feeling these days? And how’s that whistleblowing employee doing–does he or she still have a job at Best Buy?

After flagrantly violating company policy, Dunn is walking away with an estimated $6.6 million severance package. Schulze will receive the “honorary title of chairman emeritus” when his resignation is official in June.

Resigning in a ‘Very’ Public Way

By now, I probably don’t need to tell you who Greg Smith is.

Yesterday, Smith resigned as a Goldman Sachs executive director and head of the firm’s United States equity derivatives business in Europe, the Middle East and Africa in the most public of ways: through an op-ed piece in the New York Times!

Since then, the piece has created quite a stir, including leading off last night’s NBC Nightly News broadcast (and perhaps others).  As of early this morning, roughly 365 people posted comments to the op-ed piece on the NYT’s website and the news has been all over the business news channels, Twitter and the like.

This isn’t the first time a departing employee or executive has found an unusual way to tender his or her resignation. For example, I vaguely remember hearing about an incident where someone brought a cake to work colorfully decorated with their resignation letter on it.  But I wouldn’t be surprised if this wasn’t the first time someone used the op-ed section of a major national newspaper to bid his or her employer farewell. (Be sure to let me know if this isn’t the case.)

In his op-ed, Smith cites the “firm’s decline in moral fiber” as the reason for his departure, writing:

It makes me ill how callously people talk about ripping their clients off. Over the last 12 months I have seen five different managing directors refer to their own clients as “muppets,” sometimes over internal e-mail. Even after the S.E.C., Fabulous Fab, Abacus, God’s work, Carl Levin, Vampire Squids?  No humility?  I mean, come on.  Integrity?  It is eroding.  I don’t know of any illegal behavior, but will people push the envelope and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client’s goals? Absolutely. Every day, in fact.

Goldman Sachs (headquarters pictured above) responded to Smith’s assertions, saying that it didn’t reflect the way the company treated its clients.

So what’s the takeaway for HR leaders?

Merrie Spaeth, a Dallas-based communications’ expert, offers this assessment of Smith’s letter:

Normally, you’d say this is exactly the wrong, wrong, wrong way to go out the door. But this is like the woman who wrote the long letter to Ken Lay (Enron.) This is a very substantial, very senior, very well respected executive. He is actually sending a love letter to the firm, meaning—he loves GS and is willing to have a potentially very negative impact on his own position in the industry by calling them to account.

(Spaeth says she considers the op-ed piece credible because of what happened to “a good portion of the financial services/banking industry,” not because she personally knows Smith.)

I suspect the folks at GS may not see it the same way as Spaeth.

So returning to my earlier question of what this might means to HR leaders, Spaeth suggests the following:

I think the message for the senior HR executives is that you have to have functioning internal feedback and safety valves which hold executives accountable. (Think of Mark Hurd at HP and his behavior with the ‘escort.’ Think how many people had to know about that but no one stepped in and said, ‘Mark, pal, knock it off. No good will come of this.’  The GS example is potentially much more detrimental. Think of what just happened to Olympus, the Japanese company. They fired their CEO when he uncovered massive wrongdoing, and they thought they could get by.)

Can a Corporatewide ‘Will to Compete’ Be Measured?

I came across this interview on huffingtonpost.com I thought might be worth sharing. John Fox, founder and president of Venture Marketing, a B2B consulting firm, is interviewing Tom Fitzgerald, an expert on corporate transformation and author of the recently published Fire in the Corporate Belly

They’re talking about Fitzgerald’s premise that, after all the studies are done and digested, we still don’t really know why mergers and acquisitions fail. But Fitzgerald thinks he knows. He says it’s found by digging far deeper than any study or survey has, heretofore, been able to – into what he calls the “operating dynamic” of the acquired organization, or, as he also calls it, the “will to compete.”

What is it, exactly? You need to take a closer look, or maybe read his book, to get your arms around it. It looks to me like it extends far beyond an M&A discussion. He calls it “the ground and root cause of all corporate performance,” something that “can be great or small, positive or negative, [driving] success or stagnation or failure.” He says, in some instances, it can be great and, in those companies, “managers perform beyond anything they could be expected to do elsewhere.”

What’s interesting is that Fitzgerald and his crew have found their own way of measuring this “will to compete,” by asking managers and supervisors (it’s not designed for workers), ” in 50 different ways, for their perceptions of the organizational forces that are at work within the company, driving performance,” Fitzgerald talls Fox.

“Once detailed measures are available, the elephant becomes visible in all its parts,” he says. “Once it is visible, it can be changed and harnessed. Improving it by even 20 percent has been shown in large-scale studies to trigger profit improvements of over 40 percent.”

As I said, possibly worth a look. 

 

A Different Way of Looking at Corporate Misconduct

Not sure how helpful this is, but this recently published guide to lessons learned from cases of corporate misconduct is so uniquely packaged it caught my eye.

Called The Unlucky 13: Lessons Learned from Companies Caught in the Act, the small and free downloadable publication offers tiny little synopses of small and large cases — some I’d heard of — from the likes of Xerox, Ford, Siemens, Tyco, Hewlett-Packard, Johnson & Johnson, Mattel, Google, Verizon and more.

Most of the write-ups start with the monetary damage involved, followed by one or two graphs about what happened, followed by one or two bullet-pointed corporate “takeaways.”

Like the $50-to-$100-million case from November 2010 involving a former Ford employee who pleaded guilty to stealing trade secrets by downloading design documents unrelated to his job onto an external hard drive. Reminders there: Don’t ever give employees access to information unrelated to their jobs and eliminate their abilities to connect any sort of media-storage devices to the network.

Or the $20 million disability discrimination settlement by Verizon, underscoring the need for employers to have attendance policies in place that take into account the need for paid or unpaid leave as a reasonable accommodation for employees with disabilities.

My personal favorite: a smaller case involving a $22,500 discrimination settlement paid by Happy Days Children’s Wear Inc. for – of all things, considering the business – firing a female employee because she was pregnant.

If you really want the full scoop in any of these cases, you’ll have to do your own digging. The guide is hardly comprehensive. But you might find some of the reminders helpful.

Perhaps the best advice around corporate misconduct comes from HREOnlinecolumnist Susan Meisinger in her column this week: If you, as an HR leader, detect unethical practices or behavior that set a cultural tone you — hard as you try — can’t change … “Go. And go as quickly as you can.”