Executive scandals prompt move to independent directors - East Valley Tribune: Business

Executive scandals prompt move to independent directors

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Posted: Sunday, February 29, 2004 7:50 am | Updated: 5:29 pm, Thu Oct 6, 2011.

NEW YORK - A year ago, SBC Communications successfully blocked shareholder resolutions seeking to link executive pay to performance, arguing that the measures would scare away talent and hurt the telecommunications giant’s competitiveness.

Twelve months later, SBC has changed its mind and is implementing a new executive compensation system. One reason for the change: Independent board director James Henderson.

Henderson, the new head of the board’s executive compensation committee, decided shareholders had a point. So he hired an outside consultant, talked with some of SBC’s largest shareholders and, with his committee, proposed the new system.

‘‘A shareholder resolution meant there was some dissatisfaction in the shareholder ranks, and if you’re trying to be responsible to shareholders it was logical ... to devise a compensation system that was more in their interests,’’ Henderson, the retired chief executive of Cummins, recalled.

‘‘Management was aware of our efforts, but this was clearly the compensation committee’s initiative. We initiated the process."

As the 2004 annual meetings season gets under way, independent directors are taking a higher-profile role than ever before in balancing shareholder and management interests. The change reflects new regulations approved in the aftermath of the Enron, World-Com and Tyco scandals that have forced companies to increase the power and representation of independent directors.

Perhaps even more significant, some observers say, is a changing corporate culture that makes it more acceptable for independent directors to speak out.

Much of the new attitude grows out of the Sarbanes-Oxley Act, the legislative overhaul of corporate governance standards passed by Congress in 2002, as well as tougher new listing requirements by the nation’s stock exchanges. The new measures aim to protect shareholders by tightening the definition of director independence — so that a director has no material ties to the company — and putting independent directors in control of audit, compensation and nomination issues.

‘‘There’s a very big difference in the situation now and the way it was three years ago before all the scandals,’’ said Peter Clapman, a senior vice president and chief investment counsel at TIAA-Cref, which sponsored one of the SBC resolutions.

Clapman, who says SBC had originally fought to keep TIAA-Cref’s resolution off its shareholders’ ballot, is pleased with SBC’s new pay system and is not offering his resolution again. Henderson’s efforts, he said, ‘‘ended in a very amicable way any differences between SBC and TIAA-Cref’’ and suggest SBC is ‘‘undergoing a sea change in attitudes toward legitimate shareholder concerns.’’

Critics had attacked SBC’s executive pay policy as excessive. The company’s general counsel, Jim Ellis, said he doesn’t know whether the company would have changed the policy without Henderson’s efforts, but he credits the committee for making the issue a priority.

Skeptics warn that such positive results are still far from typical and say the term ‘‘independent’’ provides no guarantee of an impartial advocate for shareholders.

‘‘Our markers for ‘independence’ are so inept . . . and have tons of loopholes," said Nell Minow of The Corporate Library, which monitors governance issues. ‘‘If someone was someone’s college roommate, there really is no way to tell that right now from the disclosures that are required. That’s why we say we can tell more about a board’s independence by looking at a chief executive’s compensation than at the board members’ resumes.’’

Minow and many other corporate governance experts contend that a director can only be truly independent if he or she is nominated by shareholders rather than management. The Securities and Exchange Commission has proposed making it easier for shareholders to nominate directors to the board, but the business community is solidly opposed, saying such a process would be costly and unnecessary, and promises a legal challenge if regulations allowing shareholder nominees are implemented.

General Electric Co., for example, now expects its independent directors to visit two division sites every year — a move that independent board member Robert Swieringa says ‘‘gives you a real feeling for how things are going’’ — but that kind of effort is an exception, rather than the rule.

Currently, there are no formal education requirements for board directors, and it largely up to management to decide how much information about the company it wants to share.

In a recent letter to the SEC in support of the shareholder nomination proposal, Stanley Gold, the former Walt Disney Co. director waging a campaign to unseat part of the current board, said he has "too often encountered board members who know very little about the company on whose board they sit (and who) are unwilling or unable to invest the time and effort necessary to learn.’’

‘‘If you don’t understand the issues and you’re independent, you’re still no good,’’ said Espen Eckbo, founding director for the Center for Corporate Governance at the Tuck School of Business at Dartmouth College. ‘‘If you understand the issues, you need to be independent to bring them up in the board.’’

Eckbo’s center offers corporate governance education courses for board directors, but he says demand is light. He likens getting people to sign up to ‘‘teaching people to wear seat belts.’’

That said, there are signs that boards and directors are taking their responsibilities more seriously.

Three-quarters of 875 board directors surveyed by Corporate Board Member magazine recently said time devoted to their board duties increased from an average of 14.1 hours per month in 2002 to 19 hours a month last year.

And nearly 86 percent believe good governance improves a company’s image, while just under 47 percent say it benefits the company’s stock price.

At the same time, companies have become more selective about independent directors, a reflection of the need to find qualified people to serve on audit, compensation and governance committees.

‘‘We are seeing a tremendous demand for directors with certain operating skills, such as financial skills," said Julie Daum, a spokeswoman for Spencer Stuart, an executive search firm. ‘‘People are also scaling back on the number of boards they serve on because of the time commitment required. And a lot of company CEOs are being told by their own boards they can’t serve, or should only serve on one board.’’

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