Category Archives: corporate governance

Benchmarking and Executive Comp

Executive-pay packages often don’t include a comparison of company performance and its competitors are regularly approved by boards of directors, and many have wondered why.

New research by University of Michigan professor Martin Schmalz and co-authors Miguel Anton and Mireia Gine of the IESE Business School and Florian Ederer of the Yale School of Management helps explain why—and why benchmarking happens more in some industries than in others.

They found that when companies in an industry are owned by the same shareholders, the executives tend to be rewarded relatively more for industry performance and less for their own company’s performance.

“Many people have been puzzled why shareholders approve pay packages that lead to high pay without much benchmarking,” said Schmalz, the NBD Bancorp Assistant Professor of Business Administration and an assistant professor of finance. “But it’s actually not that puzzling once you analyze these shareholders’ economic incentives.”

Schmalz, Anton, Ederer and Gine examined 20 years’ worth of data from ExecuComp, which measures the compensation of top executives of the largest 2,000 U.S. companies.

The more a company’s institutional shareholders own big stakes in rival companies, the less pay managers receive for company performance and the more pay they receive in response to rivals’ performance.

The logic is easy to understand, the author contends:

If you benchmark performance against rival companies, that gives managers an incentive to compete aggressively. If you own a number of companies in the same industry, you don’t want that to happen,” Schmalz said. “If anything, you want them to cooperate more, because you want to improve the value of your entire portfolio, not just one company. Our findings suggest managerial contracts give managers economic reasons to act in their shareholders’ interests—it’s as simple as that.

Successful C-Suite Psychopaths

Higher-than-expected levels of psychopathic traits exist among people found in the upper echelons of the corporate business sector, and companies should undertake psychological screening to help identify ‘successful psychopaths.’

That’s according to new research presented at the Australian Psychological Society’s Congress, which was recently held in Melbourne.

Forensic psychologist Nathan Brooks says emerging studies show that, while one in 100 people in the general community and one in five people in the prison system are considered psychopathic, these traits are common in the upper echelons of the corporate world, with a prevalence of between 3 percent and 21 percent.

Brooks says the term “successful psychopath,” which describes high-flyers with psychopathic traits such as insincerity, a lack of empathy or remorse, egocentric, charming and superficial, has emerged in the wake of the 2008 global financial crisis, prompting a range of new studies.

To arrive at their conclusions, Brooks and colleagues first examined psychopathic traits in the business sector. One study of 261 corporate professionals in the supply chain management industry showed extremely high prevalence rates of psychopathy, with 21 percent of participants found to have clinically significant levels of psychopathic traits — a figure comparable to prison populations.

The current issue of HRE also features a story by Julie Cook Ramirez about how HR can weed out psychopaths in the workplace:

What sets a psychopathic leader apart is the way in which he or she manages or interact with people, says William Spangler, associate professor of management and organizational behavior at the School of Management, State University of New York at Binghamton.

“Psychopathic leaders are toxic individuals who manage subordinates [with] a combination of fear, threats, punishment and public humiliation,” says Spangler. “They present a positive persona to their superiors and are often promoted for what is perceived to be their effectiveness, but they can [cause] great harm to the organization by destroying relationships, damaging work units and putting the entire company at risk for legal action.”

Ramirez also quotes A.J. Marsden, assistant professor of human services and psychology at Beacon College in Leesburg, Fla. who says that, by hiring a person who demonstrates these types of tendencies, “you are putting your other employees at risk for bullying and other abuse.”

“The organization may end up losing many good employees [and] facing harassment suits against the psychopath,” says Marsden. “At higher levels of employment, psychopaths may engage in unethical and illegal behaviors, such as embezzlement, just to look successful.”

 

Do CEO Stock Options Mean Trouble?

It’s the season for fretting about chief executive compensation. Annual proxy statements for most public companies are in. The numbers have been crunched. Now it’s time for the hand-wringing.

200401764-001But there are some surprises this year. The New York Times, using data compiled by Equilar, reports that average compensation for the 200 best-paid CEOs last year was $19.3 million, down 15 percent from 2014.

This follows an analysis by Equilar and the Associated Press of a larger group of CEOs that found pay was up, but at a slower rate compared to past years. The AP story noted that public companies are increasingly relying on performance-based compensation such as stock grants or options.

The theory, of course, is that CEO pay should be aligned with the interest of company shareholders. But there’s an active debate over whether stock options — a very common part of CEO compensation packages — are the best way to do that.

That’s where we find this proxy season’s most interesting news about CEO pay. In the latest issue of the Harvard Business Review, Dylan B. Minor offers evidence that stock options not only encourage CEOs to pursue bold innovation, but also to take dangerous risks.

Minor, a visiting assistant professor in Harvard’s business school,  summarizes in his article the results of a recent research paper. Minor compared two kinds of CEOs, divided by what kind of equity-based compensation they received. His conclusion: those who got stock options were more likely to get their companies in trouble than those who got straight shares.

Others have made the case that stock options create a perverse incentive. Shares reward a CEO for success, just like options. But unlike options, shares also penalize the CEO for failure. Some argue that shares therefore provide a better incentive for CEOs to pursue long-term benefits.

Minor offers some hard data to back up this argument. He compared the two groups of CEOs against two measures of risk-taking.

The first analysis looked at whether companies were linked to an environmental disaster or brokeThinkstockPhotos-466936217 environmental laws. He found that those with CEOs getting options were 65 percent more likely to get in trouble than companies with CEOs receiving shares.

Minor then looked at whether companies ran into financial irregularities. He found that those with CEOs receiving options were 50 percent more likely to be investigated by the SEC for an earnings restatement than were companies with CEOs receiving shares.

“In sum, higher powered incentives can increase both good and bad risk-taking,” Minor writes. It’s a good lesson for companies of all sizes: In providing incentives to top executives, think carefully about the behavior you’re encouraging.

Compliance Efforts Not So Great Globally, Either

507249886 -- compliance word cloudIt wasn’t that long ago that I wrote a news analysis about the problems with ethics and compliance programs here in the United States.

Experts in that piece lamented the lack of clout being given to many corporate ethics and compliance officers, and the tendency at far too many organizations to require ethics officers to wear too many hats — doubling up on such governance responsibilities as risk management and human resources, thereby not being able to focus properly on any one of them, especially ethics and compliance.

Well, it appears those two disciplines are in need of collar corrections on the global stage as well. According to the recently released NAVEX Global’s 2015 Europe, Middle East, Africa and Asia Pacific State of Compliance Programmes Benchmark Report, despite tighter government enforcement, boards are not getting regular compliance reports and 40 percent don’t have regular reporting cadence with their boards or are not sure. And the majority say their budgets for ethics and compliance will remain the same or will be less in the coming year.

To come up with its findings, NAVEX Global partnered with an independent research agency to investigate how companies headquartered  across Europe, Middle East and Africa (EMEA) and Asia Pacific (APAC) develop and execute their ethics and compliance programs.

Researchers polled 247 key decision-makers and individuals responsible for ethics  and compliance programs. The purpose of the survey was to benchmark “the top priorities and challenges faced by ethics and compliance professionals headquartered in EMEA and APAC,” according to the report.

From the report (edited slightly for English readers):

“It is not surprising that measuring program effectiveness was cited as the biggest program challenge, since this is a complex undertaking. Organizations struggle to define the right combination of key indicators of culture and compliance to demonstrate the program is working.

“The key challenges of time availability and managing regulations speak to the need for programs to be properly resourced. A robust risk-assessment process can help to identify and better manage resource allocation and to prioritize jurisdictional issues. Successful programs regularly review resources against the organization’s risk profile to ensure appropriate management and mitigation actions .

“Survey write-in responses to challenges included concerns about implementing standardized programs across locations and being seen as a “troublemaker” for bringing up issues. The wide variety of responses serve as a reminder that every organization has its own culture and challenges to be factored into the development and implementation of an effective ethics and compliance program .

Key takeaways from the report:

  • Take a Risk-Based Approach: Program components and implementation strategies can be complex and will vary significantly by company and by region. The development of these programs should be driven by the organization’s risk profile, which can be identified by conducting a comprehensive ethics, compliance and reputational risk assessment.
  • Put Meaningful Program Measurements in Place: Consider a variety of metrics to determine the effectiveness of the program as there is no one metric or indication that will provide complete insights. A combination of useful metrics could include whistleblower-hotline benchmarks, feedback on training sessions, leadership feedback, employee surveys and focus group data, exit interview feedback, and legal actions.
  • Train Middle Managers and Supervisors: First- and second-level managers are culture carriers — the strongest link senior management has to employees. These managers need to be trained on communicating organizational expectations to employees — and trained on how to respond when issues arise. Investing in these managers will pay dividends in terms of creating a strong culture of integrity and compliance.
  •  Engage Leadership and Your Board of Directors: Both best-practice frameworks and regulatory bodies around the world have defined a clear oversight role for the board of directors. Neglecting this duty could mean putting the organization, and board members themselves, at risk. A regular reporting cadence — with high-quality data put into context — will help keep the board and leadership engaged.
  • Do More With Less: Make good use of systems and processes that will improve the efficiency and accuracy of their programs. There is still opportunity for further automation in many areas of respondents’ E&C programs.

All Eyes on Volkswagen’s Amnesty for Answers

465782341 -- volkswagen2It’ll be interesting to see what comes of Volkswagen’s move to offer amnesty to all its bargaining-unit employees in hopes of uncovering just who was/is behind its emissions-cheating scandal.

According to a letter that went out Thursday from Herbert Diess, chief executive of the division that produces Volkswagen brand cars, employees have until Nov. 30 to come forward with information about who was responsible for installing software in 11 million diesel vehicles that disguised nitrogen-oxide output.

The letter, reviewed and reported on by the New York Times, says “people who provided information would not be fired or face damage claims [but] the company could not shield employees from criminal charges.”

In other words, the amnesty isn’t really designed for the really bad guys, “but rather, for the midlevel people who may have, without even knowing it, some relevant information,” Mike Koehler, a law professor at Southern Illinois University, told the Times.

It’s also, according to another legal source for that story — Alexandra Wrange, president of Trace International in Annapolis, Md. — “a tacit admission … that the usual reporting channels have been ineffective.”

You might call it a kind of pulling-out-all-the-stops kind of move, above and beyond the more commonplace no-retaliation policies contained in most whistleblowing programs, says Allan Weitzman, a Boca Raton, Fla.-based partner with Proskauer, whose list of specialties includes whistleblowing.

(At Volkswagen, it was an internal whistleblower who uncovered the false carbon-dioxide claims that the company made public last week. “German news media reports have said that internal investigators looking into the emissions-cheating software, which came to light in September, have been hampered by a reluctance among employees to come forward,” the Times story states.)

Weitzman joins in the general chorus of employment attorneys who consider Diess’ move new and different, to say the least.

“I know I’ve never heard of [this kind of corporate amnesty],” he says. “But these are unusual circumstances, and [as pointed out in the Times article as well], Volkswagen wants to show to governmental agencies that it has done everything it can to solve this problem; well, amnesty is pretty broad … I’d say ‘Yes, they have gone about as far as possible’ ” in this endeavor.

Is it the right move? Weitzman thinks so.

“I think it’ll work, too, if it has the support of the union, meaning [very simply] that the people who look to unions as their source of job security will participate in the amnesty program if their union supports it,” he says.

“And the union should support this,” he adds, “because the future of the union is tied to the future of Volkswagen, and if Volkswagen cannot solve this problem, it’s going to result in the unemployment of many, many union members.”

Women and the Competitiveness Factor

women competeMany women don’t like to compete with men. That’s the upshot of a number of recent studies summarized today in the Washington Post‘s Wonkblog, which notes that Germany has become the latest country to require large public companies to fill at least 30 percent of their board positions with women (starting next year).

Germany’s new law strikes some as a form of affirmative action that will only taint its beneficiaries as having gotten their positions due to their gender, not their skills and/or accomplishments, writes Wonkblog’s Jeff Guo. However, he writes, a number of studies suggest that even highly qualified women are reluctant to compete — especially with men — and that quotas such as Germany’s may be necessary to ensure that high-performing women feel comfortable putting themselves forward.

Guo quotes Muriel Niederle, an economics professor at the University of Cologne who’s helped conduct a number of studies that found women are eager to compete with other women but much less eager to compete with men. In one such study, conducted in 2013, Niederle and her research colleagues gathered groups of six participants — divided equally between men and women — and gave them equations to solve. The participants had a choice of whether to be paid 50 cents for each problem they solved correctly or enter a competition to get paid many times that.

In a previous study in 2007, the researchers found the women were much less likely than the men to participate in the competition — even the ones who demonstrated an alacrity for solving the equations. This time around, however, the researchers added a twist: The competition would have two winners, and in some cases at least one of the winners was guaranteed to be a woman. Faced with a contest that guaranteed a winning spot to a woman, over 80 percent of women elected to participate in the competition.

These and other studies suggest that quotas mandating that a certain number of spots be set aside for women will help organizations be more competitive, University of Cologne economist Matthias Sutter told Guo.

“We find that quota rules encourage the best women to really go for it,” he said.

Osama bin Laden: HR Leader?

When you’re running an operation whose business is creating mass casualties of innocent bystanders at various locations throughout the world, you need a strategic plan. You need a sophisticated recruiting program. You need a training program. You need a development program. These subjects weighed heavily on the mind of Osama bin Laden, recently declassified documents from the Central Intelligence Agency show.

The documents, which were seized by U.S. commandos after they stormed the terrorist leader’s hideout in Abbottabad, Pakistan during the May 2, 2011 operation that culminated in bin Laden’s death, include a series of planning memos that Agence France-Presse disconcertingly suggests “paint a picture of the jihadist leader operating almost as the director of human resources at a struggling multinational.”

This particular multinational (let’s call it Al-Qaeda Corp.) had a rather unique business model, but all the same its leaders struggled with finding and deploying the right mix of talent to accomplish its core objective (killing lots of civilians).

“Please enter the requested information accurately and truthfully. Write clearly and legibly. Name, age, marital status. Do you wish to execute a suicide mission?” So reads Al Qaeda’s application form, which included this gem as well: “Who should we contact in case you become a martyr?”

bin Laden clearly was concerned about operational efficiencies, as revealed by a document he wrote calling for a professional training program: “One of the specialties we need that we should not overlook is the science of administration.” The organization needed motivated young volunteers with qualifications in science, engineering and office management as well as deep religious convictions, according to the document.

AQ Corp. was bedeviled with talent-deployment issues, as another document reveals: “The other brothers are new and we rushed to send them very quickly, before their security was exposed or their residency documents expired.”

Retention and turnover may also have been an issue: the same document cites a volunteer who was able to stay a couple months because he had to return home: “We have him an academic explosives course and he travelled back before his residency expired and we have not heard from him since he left. … We hope that we hear from him very soon.”

bin Laden was concerned that young recruits who were capable of infiltrating the West lacked adequate patience and training to accomplish their missions. “We need a development and planning department,” he wrote. He wanted to create a center of excellence, of sorts, compiling jihadist best practices and research to create a more effective breed of jihadist.

Outreach activities were also part of the mix: bin Laden was apparently planning a PR campaign to mark the 10th anniversary of the Sept. 11 attacks. But thanks to Seal Team 6, he wasn’t able to make it  to the celebration.

 

 

Confidentiality Agreement Crackdown, Revisited

If there was any question whether the Securities and Exchange Commission was serious in its efforts to clamp down on confidentiality statements, Office of the Whistleblower Chief Sean McKessy put it to rest during a recent American Bar Association webinar titled “New Developments in Whistleblower Claims and the SEC,” which took place on Wednesday.ThinkstockPhotos-155172325

Some of you may recall the story we published earlier this month titled “Cracking Down on Confidentiality Agreements,” in which I reported on the SEC’s first “enforcement action” against a company it said had used restrictive language in its confidentiality agreements.

More precisely, the SEC charged the Houston-based engineering firm KBR Inc. of violating whistleblower protection Rule 21F-17 by requiring witnesses in certain internal-investigation interviews to sign confidentiality statements saying violators could face discipline, including termination, if they discussed the matters with outside parties without KBR’s approval.

Most of the experts I spoke to for that story predicted that the SEC wasn’t likely to stop with KBR in pursuing such violations—and  McKessy’s remarks on Wednesday seemed to back up those claims.

On Thursday, Seyfarth Shaw attorney Ada W. Dolph, who was one of the sources for my original story, provided some commentary on McKessy’s remarks, writing in a memo that McKessy pointed out in the ABA webinar that the SEC rule is “very broad,” and “intentionally so.”

Dolph, based in her firm’s Chicago office, continued …

“McKessy stated that this initiative remains a ‘priority’ for him and his office. ‘To the extent that we have come across this language [restricting whistleblowers] in a Code of Conduct’ or other agreements, the SEC has taken the position that it ‘falls within our jurisdiction and we have the ability to enforce it.’ He noted that ‘KBR is a concrete case to demonstrate what I have been saying,’ referencing public remarks he has made in the past regarding SEC scrutiny of employment agreements. He stated that the agency is continuing to take affirmative steps to identify agreements that violate the Rule, including soliciting individuals to provide agreements for the SEC to review. Additionally, he reported that the SEC is reviewing executive severance agreements filed with Forms 8-K for any potential violations of the Rule.”

Dolph pointed out that McKessy also addressed the question of whether the SEC would apply the KBR order to private companies under the U.S. Supreme Court’s 2014 ruling in Lawson v. FMR LLC, 134 S.Ct. 1158 (2014)—which expanded Sarbanes-Oxley’s whistleblower protections to employees of private companies who contract with public companies. McKessy, she reported, “stated that the SEC has not officially taken a position on this issue, but in his personal opinion he ‘certainly can see a logical thread behind the logic of the Lawson decision’ to be ‘expanded into this space [private companies],’ and that ‘anyone who has read the Lawson decision can extrapolate from it the broader application.’ ”

In short, Dolph concluded, “it is clear that we can expect further SEC enforcement actions in this area.”

Granted, that’s pretty much been the expectation all along. But McKessy’s remarks should, at the very least, be considered a not-so-friendly reminder that you might not want to wait too long before reviewing your confidentiality agreements and policies in order to ensure they aren’t worded in a way that would catch the attention of SEC officials.

The Push for Gender Wage Equality

On the heels of Patricia Arquette’s call for wage equality at last Sunday’s Academy Awards ceremony, Arjuna Capital issued a press release yesterday referencing Arquette’s remarks and calling attention to eBay’s decision to oppose the wealth-management GettyImages_478267645firm’s gender-pay-transparency proposal.

Could proposals like this one be a preview of things to come? I would think many HR leaders probably hope they won’t be.

Here are some specifics from the Arjuna’s release …

“eBay’s Board has committed to publicly oppose a shareholder proposal filed by Arjuna Capital … requesting eBay publicly report the pay disparity between male and female employees and set goals to close the gap.

This is the first year the issue of gender wage equality has been put to the proxy ballot of a U.S. corporation and the Company’s opposition comes in the face of public outcry and regulatory efforts … .

The eBay Board has stated that it believes that implementation of this proposal is not in the best interests of eBay and its stockholders.”

Arjuna’s proposal calls for eBay to issue a report that would be “adequate for investors to assess eBay’s strategy and performance” and “would include the percentage pay gap between male and female employees, policies to improve performance and quantitative reduction targets.”

In case you’re not familiar with Arjuna (I certainly wasn’t), here’s a snippet from its website …

“Our mission is twofold: Through our research and activism, we seek to advance the understanding of what sustainability means for investor returns and corporate profitability.

We bring the fruits of those efforts to our clients in the form of the most diverse, sustainable, profitable and suitable investment opportunities on offer.

We work to build and preserve our clients’ wealth while serving the common good through enlightened engagement in the capital markets.”

In its response to Arjuna, eBay wrote …

“We remain committed to our ongoing efforts to promote diversity in the workplace and strongly believe we continue to make demonstrable progress in building a diverse eBay. As such, the Board feels that the proposal would not enhance the Company’s existing commitment to an inclusive culture or meaningfully further its goal and efforts in support of workplace diversity.”

Natasha Lamb, director of equity research and shareholder engagement for Arjuna Capital, said the eBay proposal is Arjuna’s first and only attempt to seek information on pay gaps. “But our goal,” she explained, “is to invest in companies committed to the innovation and success diversity fosters, and we intend to continue to seek more transparency on these issues.” (She said she’s heard similar proposals, independent of Arjuna, were sent to the boards of ExxonMobil and Wal-Mart for the current proxy season.)

Lamb said she was surprised by the board’s opposition, since the eBay proposal is clearly in the interest of enhancing shareholder value.

Of course, not everyone agrees that would be the case.

Yesterday afternoon, I spoke with Alan Johnson, managing director of Johnson Associates, a New York-based compensation-consulting firm, who told me he wasn’t at all surprised eBay’s board would reject the proposal.

“In terms of eBay,” Johnson said, “the assumption is being made that the jobs are the same, but the reality is that that may not be the case. eBay, for instance, may have a big call center staffed by females. If that’s true, it would skew all the numbers.”

Johnson noted that the Arjuna proposal is an attempt to put “a lot of pressure on fixing something that may not be correctable” and could ultimately “do a lot of harm” by encouraging employers like eBay to offshore jobs or hire part-time workers.

Apparently not one to mince words, Johnson described the effort as “naïve” and a “big, expensive distraction.”

Like I said, not everyone agrees the proposal is a good idea.

Corporate Misconduct: Everyone Loses

financial misconductTalk about one bad apple spoiling the whole bunch.

A new Penn State University study finds the announcement of one public firm’s misconduct can have negative consequences for other public companies in the same industry, in the form of decreased investor confidence.

Srikanth Paruchuri and Vilmos Misangyi, associate professors of management and organization at PSU’s Smeal College of Business, studied accounting irregularities that resulted in financial restatements, in which the company in question had to revise and publish one or more previous financial statement. The pair focused on a sample of 725 Standard & Poor 1500 firms, covering 219 industries. They analyzed 84 financial restatement events that took place in 2004, as captured in the U.S. General Accountability Office’s Financial Restatement Database.

When one firm announces that wrongdoing has occurred within its organization, Paruchuri and Misangyi found “a generalization of culpability ensues,” to an extent that investors fear others within the industry “are also likely to have engaged in similar misconduct,” they wrote in the study, which is slated to appear in the Academy of Management Journal.

And, the more recognizable the company doing the dirty deeds, the worse the fallout, it seems.

“In other words,” the study authors wrote, “bystander firms are more negatively valued based on another firm’s misconduct if the offending firm is larger, and therefore more familiar to the investor.”

In the context of how investors perceive financial transgressions, “investors will see those perpetrator firms with which they are familiar as being representative of the industry as a whole, and this familiarity therefore makes the culpability of the perpetrator more potent for generalization,” according to the researchers.

These findings come just a few months after we reported on the release of an Ethics Resource Center study indicating corporate misconduct is on the decline. In a poll of 6,400 U.S. employees, the Arlington, Va.-based ERC found 41 percent of respondents saying they observed misconduct in 2013; a 14 percent dip from 2007.

So, that’s encouraging. But, as this new PSU study demonstrates, the implications of bad corporate behavior are far-reaching, extending well beyond your organization’s walls. Taken together, these studies seem to also offer another reminder of HR’s responsibility to conduct solid ethics training, promote a principled corporate culture, and, hopefully, keep the organization from becoming that one bad apple.