corporate governance and the board - what works best
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Corporate Governance and the Board -- What Works Best
Financial Executives SummitScottsdale
May 7, 2001
Richard M. Steinberg
Leader, Corporate Governance
Why We Care About Corporate Governance
Impetus for the PwC Study
Why All the Interest?
• Corporate upheavals, failures, misstated financial reports
• Increased regulatory scrutiny -- Blue Ribbon Committee-based new SEC and listing rules
• Shareholder activism -- institutional investors (CalPERS, TIAA-CREF), social investors (PIRC)
• Legal liability -- Federal Sentencing Guidelines, Caremark
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Organizational Drivers - The US
• Corporate Director’s Guidebook, American Bar Association, 1994
• Standards issued by investor groups such as CalPERS & TIAA-CREF
• Statement on Corporate Governance, Business Round Table, 1997
• Principles of Corporate Governance: Analysis and Recommendations, American Law Institute, 1994
• National Association of Corporate Directors
• SEC, NYSE, NASD and AMEX adopted new audit committee rules in December 1999
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Around the World
• Canada -- Dey (’94), CICA (‘95,’99)
• UK -- Cadbury (’92), Hampel (‘98), Turnbull (’99)
• France -- Vienot (’95,’99)
• The Netherlands -- Peters (’97)
• Belgium -- Cardon (’98)
• Germany -- KonTraG (’98)
• South Africa -- King (’94)
• Australia -- Bosch (’95)
• Hong Kong -- Hong Kong Exchange (’99)
• Japan -- Principles (’97)
• OECD -- Advisory Group (’98)
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The Study
Corporate Governance and the Board -- What Works Best
Conducted, written: PricewaterhouseCoopers
Sponsored, published: Institute of Internal Auditors Research Foundation
Our Objective
To help boards of directors improve the effectiveness of their oversight, thereby enabling them to enhance shareholder value
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Methodology
• Reviewed over 200 publications• Survey
– 72 directors, thought leaders in 9 countries
• In-person, in-depth interviews– 28 directors in 5 countries
• PricewaterhouseCoopers’ experience in serving boards
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Corporate Governance Responsibilities
Board Responsibilities
• Corporate strategy and planning
• Risk management
• Values & ethics -- tone at the top
• Measuring and monitoring performance
• Major transactions
• Management evaluation, compensation and succession
• Communications & disclosure
• Board structure & operations
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1. Strategy and Planning
• Board contribution to strategy is lacking
• Area most in need of improvement
• One director says --
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“If the board isn’t comfortable with
the strategy . . . it should tell
management to rethink it, and come
back with something better. But, the
board shouldn’t be involved in
developing the strategy. That is,
noses in, fingers out.”
U.S. director11
1. Strategy Pitfalls
Management
• Intractably committed to one course
• Impatient with directors not sharing commitment to chosen path
• Holding on to bad strategy too long
• Highly controlled strategy- discussion agenda
Directors
• Hesitant to aggressively, constructively challenge
• Insufficiently prepared
• Fearing isolation, replacement
• Insufficient time, resources
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1. Strategy and Planning
Critical Elements for Effectiveness:• Enough time, atmosphere for full, frank
strategy discussions• Aggressive but constructive debates, bringing
directors’ skills, knowledge, insight• The right information on risks,
interdependencies, resources, competitors • Application of lessons learned from past
successful, unsuccessful strategies
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1. Strategy and Planning
Critical Elements for Effectiveness:• Management uses robust process to develop
strategy, with full buy-in• Comfortable with planned extent of change:
incremental, substantial or transformational• Satisfied tactical plans will result in successful
implementation• Consensus with management on performance
measures for judging strategy
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“There’s nothing like a big screw up
to make a board get into the bowels
of the real problem.”
U.S. director
2. Risk Management
Another top issue on the board agenda:
Directors witness examples of unmanaged, unknown risk bringing other companies to their knees, and they want to avoid unpleasant surprises at their companies
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2. Risk Management
Pitfalls• No common terminology -- talking at cross
purposes• Shortcutting the process, looking first at risk
instead of strategic objectives• Responsibility at too low organizational level • Failing to eliminate programs not aligned with
objectives• Taking “snapshot” instead of ongoing program
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2. Risk Management
Critical Elements for Effectiveness:• Management has effective, robust process to
identify, assess, manage risk• Align risk management actions with company’s
strategy, business objectives• Understands significant risks, and comfortable
with how management addresses them • Culture that assigns responsibility for and
rewards appropriate risk management
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“Corporations are getting away from their
core activities and competencies into areas
which have far higher risk, without
properly understanding those risks.”
Australian director
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3. Tone at the Top
Critical Elements for Effectiveness:• Management practices desired values-based culture• Robust code of conduct in place and adhered to, with
effective communication channels• Contact employees, customers, suppliers to
independently assess de facto culture • Focus on ethical issues in mergers and other major
transactions -- including partner companies• Directors’ ethics demonstrate desired values to
management, employees, the world
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“I’ve met some CEOs who had no
respect for ethical principles. They
got ahead over the strewn bodies of
associates.”
U.S. director
4. Measuring and Monitoring Performance
A major issue boards grapple with today:
• Few companies measure and track the right elements. Many companies don’t understand what drives their shareholder value.
• Directors are reluctant to raise concerns about potential impending trouble, because conclusive evidence is often lacking.
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Shareholder Value
Strategies &Tactics
RiskManagement
PerformanceMeasures
IncentiveCompensation
Performance Measurement Linkages
Value Drivers
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4. Measuring and Monitoring Performance
Critical Elements for Effectiveness:• Measures link to strategy, tactics, value drivers• Measures balance:
– financial with non-financial– forward looking with retrospective– benchmarking against competitors, peers and best practice– key scorecard categories: operations, customers,
employees, etc.
• Targets set are tough, but not disincentives
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4. Measuring and Monitoring Performance
Critical Elements for Effectiveness:• Comfortable information systems provide reliable,
timely information• Measures link to rewards throughout the company,
so all are pulling toward common goals• Rigorous follow up, identifying reasons for missed
targets -- both under performing and greatly over performing
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“Although boards hate bad news
. . . executives need to get bad news on
the table, and get it on the table early.”
Australian director
5. Transformational Transactions
Critical Elements for Effectiveness:• Complete comfort with business reasons for
proposed transaction, including how it links to current strategy
• Critical evaluation of management’s information, transaction assumptions, ability to integrate target successfully
• Application of lessons learned from past successful and unsuccessful transactions
• Courage to walk away from a bad deal
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5. Transformational Transactions
Critical Elements for Effectiveness:• Obtaining counsel of objective advisors• Recognize change in allegiance and differing
objectives of management in to-be-divested units
• Ensure company has right partners, reliable due diligence and properly structured deal before entering joint venture or alliance
• Critical review of proposed capital expenditures, ensuring link to strategy
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6. Management Evaluation, Compensation and Succession
• Tends to be a sticky issue for directors, given natural discomfort with judging peers
Boards increasingly proactive in replacing executives who are not working out -- but problems might have been avoided
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“High executive turnover does not
bode well. It indicates a CEO that is
fickle, intolerant or difficult to work
for.”
U.S. director
Critical Elements for Effectiveness:• Agree upon performance criteria, targets, link to desired
behavior• Continually monitor performance, providing clear,
constructive feedback to the CEO• Ensure compensation helps retain the best talent, while
paying for desired performance• Courage to replace CEO if necessary • Evaluate, develop relationships with key executives• Comfortable with succession plans
6. Management Evaluation, Compensation and Succession
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7. External Communications
•
• Financial reporting reliability in spotlight, with close regulator attention to incidents of improper financial reporting
Market focus increasingly quarterly, short-term. Also witnessing markets moving on non-financial information
• SEC focus on fair disclosure -- Reg FD
•
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7. External Communications
Critical Elements for Effectiveness:• Ensure skilled directors evaluate financial reports • Understand operating information disclosed by
company, and how reliability is assured• Satisfaction management has effective
communications policies and processes• Comfortable market-sensitive information properly
handled to protect current, future shareholders
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7. External Communications
•
• For leading audit committee practices, see the companion report:
Improving Audit Committee Performance - What Works Best, 2nd edition
•
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8. Board Dynamics
• Most corporate governance recommendations focus on matters of board form, as surrogates for improved board performance:
– independence– board size– committee structure– number of meetings
• While useful, these don’t ensure effectiveness
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“I would rather see a smaller board
wrestle with all the problems than a
larger board delegate everything out.”
American director
“Once you get beyond 10 or 12 at a
board table, you don’t discuss -- you
wait for your turn to speak.”
British director
8. Board DynamicsBad
• Board is a necessary evil
• Good meeting: short meeting
• Rigid agenda, regimented meetings
• Impatience with directors
• Directors beholden to CEO
• All information from manage-ment, little analysis, no options
Good
• CEO believes he/she can learn from board
• Real discussion in meetings
• Relationships outside boardroom
• Atmosphere of openness, trust
• Process, not event -- continuous responsibility
• Assertive, constructive engagement
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“Directors need to see their role as a
process, not an event. Their role goes
beyond attending meetings.”
American thought leader
8. Board Dynamics
•
• Thought leaders agree
Directors need to spend more time fulfilling their duties, and need to be paid more
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Contact Information
Richard M. Steinberg
PricewaterhouseCoopers, Leader, Corporate Governance
e-mail: [email protected]
phone: (973) 236-7280
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