Governance, Main Street, and the C-Suite
The economic crisis of '08 has led to a sea change in how Americans think about business and the boardroom. For the board director, it has led to new and proposed regulations, changes in corporate governance processes, and a fundamental shift in attitude about the obligations that business has to the citizenry. The crisis has even caused some social commentators to question our nation's willingness to accept the traditional business cycle in which a long period of uninterrupted growth is followed by an unforeseen retraction. These are short-term views to be sure, but directors need to be alert to their consequences as they bear directly on the most important role the board plays: the selection of appropriate strategies that keep risk and reward in an acceptable balance. While a global systemic breakdown has been declared the culprit by most leading economists, including Federal Reserve Chairman Ben Bernanke, popular opinion and the media have focused on the failure of risk-management processes at our leading banking institutions, and the cascade effect that had on all companies. Thus, the scrutiny and criticism towards management and board directors has been more pointed than in previous declines. While directors are moving swiftly to restore confidence in their institutions' corporate governance, there is an equally urgent need to set the record straight with regard to how most boards performed versus the few in the spotlight, as well as the significant contributions now being made towards recovery. To embark on such a mission, directors need to know what people are thinking and saying, and why. To obtain these important insights, Directorship and Deloitte collaborated to study the matter in detail, and in conjunction with Korn/Ferry International, set out to determine how the broader community—defined as "Main Street"—views the boardroom. In the course of our research, the opinions of teachers, laborers, policy makers, doctors, students, academics, and community leaders were sought. To gauge and compare those data with inside-the-boardroom views, we also asked the opinion of the C-suite, which includes board directors, chairmen, CEOs, and members of management. Seeking AnswersThe specific objective of "What Society Thinks?" was to distinguish the views of select groups on a variety of board-specific topics now the subject of intense debate, study, media attention, and regulation: for example, public opinion on issues ranging from accountability and transparency to environmental and social responsibility. Also examined was how well society understands the board's role in dealing with issues such as corporate governance, compensation, labor, ethics, risk management, and the environment. How does society perceive the board's role vs. the CEO? And how do the board and management see themselves in these contexts? These are the questions that the research set out to explore. The Directorship/Deloitte survey was organized into five broad categories: board duties and compensation, board responsibilities, opinion of board directors and CEOs, the economic crisis, and director and CEO compensation. In all, 39 questions were asked, including: How would you assess the credibility of board directors and CEOs today and how effective have they been during the economic crisis? Did CEOs and directors adhere to good corporate governance standards? How many hours do directors work and how much should they work? Is what directors and CEOs get paid fair? Should CEO compensation be capped and tied to company performance? How familiar are different constituencies with the responsibilities of a public-company board director? Should the role of the chairman and CEO be separated? What motivates CEO performance? Was criticism in the media of board directors during the economic crisis fair? Was criticism in the media of CEOs fair? Who was most responsible for the economic crisis? The ResultsSo what does society think about boards and business leaders? The most crucial element of the survey—and the motivation behind Directorship conducting it—was to discover how the credibility of directors and executives has held up through the recession as well as during the recovery period, and how this compared with directors' self evaluations. Readers will not be at all surprised to learn that when society has a problem with business, it points to the CEO and by extension, to the board. And while the negatives are palpable, they also augur a change in the zeitgeist for the boardroom and how it must deliberate and communicate. When asked to rate the credibility of directors today, less than half, or 43 percent of our survey responded with "poor," while 39 percent gave an "adequate" rating. These data are somewhat predictable, given the circumstances and the economic angst. Among the naysayers, academics were the harshest, with a full 100 percent of respondents labeling directors either poor or adequate. If there is a concern that goes beyond the numbers, it is a fear that teachers can and do have a dramatic impact on the opinions of our youngest and most impressionable. The conclusion is that broad efforts must be made to address and explain the role of director in our classrooms. How They PerformedWhen asked to measure themselves, fewer than half the director population gave themselves a "good" rating at 42 percent. CEOs fared similarly, with almost identical results as their board counterparts—81 percent scored themselves as "poor" or "adequate." Only this time, journalists were more critical, with 100 percent giving them "poor" or "adequate" ratings (compared to 95 percent for directors). The non C-suite management respondents pointed to a potential fault line, with only 17 percent giving CEOs a "good" rating. Much of directors' and executives' credibility problem stems, predictably enough, from the Wall Street crash. But while their duties and responsibilities differ widely, directors and CEOs were lumped together in terms of credibility. Both directors and C-suite officers received "poor" or "adequate" ratings of 86 percent and 80 percent, respectively, in how they dealt with the financial crisis. Again, academics and journalists were harsher than other respondents, and, again, directors were somewhat at odds with the C-suite (42 percent of directors gave themselves "good" ratings while 32 percent of directors gave such a rating to the CEOs). Adherence to proper governance conduct drew responses along similar lines, with directors and CEOs earning "poor" and "adequate" ratings from 74 percent and 78 percent of respondents, respectively. What Employees ThinkIt's worth noting that the research showed directors need to address a critical issue concerning employee well-being. Overall, 45 percent of respondents disagreed with the statement, "Directors are concerned about employee well-being." While journalists, academics, and analysts also disagreed with the statement, what was surprising is that an astounding 34 percent of the C-suite chimed in on the same side. Directors spend a great deal of time on employee issues, in addition to the obvious one, compensation and incentives. Nonetheless, there still exists a perception problem on the part of employees that boards must remain sensitive to and consider. Directors' work and pay are both subject to a great deal of misperception. It is one more area for the board to consider how to better communicate their contribution and efforts. Adding to this, the media often plays up the director as overpaid and under-worked; with many critics pointing to significantly reduced working hours as evidence. Part of this criticism is simply not grounded in fact or definition—a board seat never was intended nor has ever been presented as a traditional full-time responsibility—but the perception of a limited time commitment tends to frame how many sectors of society view the board director. Some 42 percent of survey respondents believe that directors work fewer than ten hours each month; again, pointing to a surprising misconception even inside the company, the sector most inclined towards this view were the survey's C-suite respondents, of which 55 percent concurred. Some 52 percent of upper-level managers also estimated directors' workload at below 10 hours a month, with directors themselves—or 42 percent of them—actually estimating their monthly requirements as closer to 20 hours. As to how many hours our WST respondents thought directors should work per month, 57 percent thought board members should put in between 10 and 20 hours a month, with 19 percent saying the total should be more than 30 hours. Though C-suite members and other managers fell in line with the 10-20 hours estimates, academics, journalists, and Main Street were more exacting, responding that directors should work between 20 and 30 hours a month. In reality, according to the newly released 2009 NACD Public Company Governance Survey, the average number of hours dedicated to board work is 222 hours a year, or nearly 20 hours a month: essentially in line with the most critical of society's expectations. This becomes then a matter of perception, not fact. What accounts for this time? The NACD survey indicates directors spend the majority of their time reviewing reports and other materials, attending in-person and telephone meetings. In terms of in-person meetings alone, the majority reported an average rate of 6.1 in-person meetings a year, each meeting averaging 6.6 hours. It is clear that the majority of the Main Street respondents equate a director's time commitment to their in-person meeting duty only, the boardroom equivalent of measuring classroom time while ignoring homework. That they may spend additional hours in study, research, and other communications is not being recognized. What Directors DoWhile the duties of a CEO are more-or-less evident (run the company), the consultative nature of the director's work does not lend itself to easy classification (lend advice and personal expertise to an executive team while negotiating with and representing shareholders and concerned third parties, etc.). The survey found, however, that most respondents claimed to be familiar with the work of a corporate board member, with 76 percent agreeing or strongly agreeing with that claim. Even Main Street claimed to be reasonably well acquainted, with 60 percent agreeing that they were familiar. And 88 percent of the total surveyed agreed that board directors had an impact on their company's performance. Oddly enough, once again, the category of respondents most in disagreement with the director's impact on performance (with 19 percent) was the non-CEO members of the C-suite, which suggests that directors and senior executives don't always see eye to eye. When asked where they thought directors should lend their voice, the management initiatives that our respondents felt should be approved by directors were CEO succession (85 percent), M&A (80 percent), executive compensation (75 percent), and capital structure (73 percent). The areas where directors should stay clear? Mostly day-to-day matters such as diversity hiring (21 percent), employee benefits (26 percent), and legal matters (37 percent). These three categories were also areas that directors themselves felt did not require their approval, demonstrating that while the general job requirements of a director may be intensifying in the areas of risk oversight and compensation, they are not necessarily looking for a broader job description. Splitting RolesThe debate of the hour—or one of them—concerning the ideal leadership structure consistently returns to the question of whether the same person should hold the title of chief executive and chairman. As the Directorship/Deloitte survey results demonstrate, differences in opinion on the question were striking. All combined, 86 percent of respondents agreed that the role should be split. Ironically, directors were less likely than the C-suite to welcome the split (63 percent of directors versus 79 percent of C-suite respondents). Analysts, journalists, and academic respondents all overwhelmingly support splitting the role. Some possible interpretations of this striking difference in opinion is that some constituents seem to want a less powerful CEO or a more empowered board representative, or some CEOs recognize that governance is a full-time occupation that may reduce the time required to run business. Bankers, regulators, politicians, and mortgage borrowers were deemed most responsible for the economic crisis. And when asked which of the same groups would be most responsible for the economic recovery, respondents more positively pointed to executive teams and CEOs. Directors and CEOs see themselves as part of the solution, whereas some 52 percent of journalists ranked regulators as the most responsible for better times ahead. Survey respondents, when asked the question of whether the media had been fair in its criticism of directors and CEOs, largely concurred that they had; 77 percent of respondents felt director criticism was fair, while 82 percent felt CEO criticism was fair. Journalists led the pack in this regard, with 95 percent agreeing or strongly agreeing that the media had been even-handed in its treatment of the matter. Business leaders themselves have been mostly resigned to the media backlash. When it came to the criticism leveled against CEOs, 62 percent of directors and 70 percent of C-suite officers agreed that such criticism was fair. However, when it came to criticism against directors, nearly half, or 48 percent, agreed with the fairness of the criticism (as compared to 63 percent of C-suite officers). And, again getting to the heart of what has swayed public opinion away from directors and executives, the "Main Street" view was firmly in accordance with media criticism, with 86 percent agreeing with such criticism of directors and 78 percent agreeing with similar critiques of CEOs. The MoneyThough there are certainly a multitude of unique issues facing Corporate America today, we often return to our favorite theme, the money. Most of the "What Society Thinks" survey respondents agreed that compensation was an important issue; when asked why CEOs are motivated to perform, compensation led the pack with 73 percent of respondents listing it as a main motivator ("accomplishment" was second, with 60 percent). But how does society view present compensation policy? Well, as the headlines reflect, an overwhelming majority (77 percent, including 70 percent of directors) believes CEOs are overpaid, with 22 percent reporting that CEO pay is adequate as it stands. As for directors, who haven't received as much attention for their compensation compared to what was handed out to high-profile executives, 49 percent of respondents said they were adequately paid, 41 percent said they were overpaid, and the remaining 10 percent said that board members should be paid more. Another issue: the correlation between company performance and compensation levels and the question of whether it should or should not be capped, received a unilateral vote. Though 52 percent of respondents said CEO salary should be capped, and a somewhat surprising 48 percent said it should be uncapped, 94 percent agreed that, in any case, compensation should be linked to company performance. As for just how much CEOs should make (in the event that compensation is indeed capped), the results were more diverse. However, most people (67 percent) believed that CEO compensation at a large-sized company should fall at or below $10 million. C-suite officer respondents were naturally the most generous on this issue, with 26 percent proposing a cap of $20 million, and 16 percent suggesting $100 million. For those in the trenches, 82 percent of "What Society Thinks?" respondents agreed that employees were underpaid compared to the CEO, with ratios of 10:1 (25 percent), 20:1 (31 percent), and 50:1 (21 percent) being the most popular of those proposed (multipliers of 100, 250, and 500 were less popular). Looking ForwardThere are numerous possible conclusions to be drawn from the research. Many sectors bear responsibility for the crisis that are not always part of the popular discussion, including, for instance, homeowners who over-extended themselves. A further overarching question is that of the responsibility of institutional investors to perform more thorough due diligence on risk, and limit their reliance on the credit-rating agencies while restricting their appetite for short-term highest yield at any cost. That's an area of oversight now of fervent interest to the Securities and Exchange Commission, which has in recent months expanded the resources and staff of the Office of Investor Education and Advocacy. Other possible reactions are that it will no longer be practical for the boardroom to remain a closed inner sanctum while the world of Internet, media, blogs, and word of mouth presses for more information with accuracy playing second fiddle to timeliness. "What Society Thinks" reveals that directors need clear guidance on public attitudes and equally clear strategies for responding to them. The findings also suggest that getting engaged with the shareholders in corporate governance matters—while seeking appropriate legal counsel as well as ensuring that management and the board speak with one voice—will be a significant contributor to improved perceptions. Should directors be worried? If you accept that business is cyclical, perhaps some of this negativity will dissipate as the recovery takes hold and the memory of the loss becomes stale. The research points to some obvious remedies: establishing best practices for board processes, making sure the board's composition is perfectly attuned to the company's strategic needs, and a firm willingness to work as hard as the new director role will require, are imperatives. Important new responsibilities will include effectively communicating to lower ranks of management and employees, in addition to investors, and finding ways to make their work known to the Main Street public. Compensation will continue to be a focus, so knowing how to structure a program that stands up to various fairness tests, and to be able to tell that story well may yet be "job one" for a while longer. Perception is reality.
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