Tag Archives: conflict of interest

CEO turnover and succession planning

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HandShake

Selecting a new CEO is one of the board’s most important responsibilities and represents a critical moment in a company’s history. A smooth transition is necessary to maintain the confidence of stakeholders. This is why a well defined succession plan is needed.

The annual study, by Booz & Company, on CEO turnover among the largest 2 500 public companies revealed that in 2012, 15% of CEOs left office. This is the second-highest rate of CEO turnover since 2000. With this rate rising, companies are becoming more proactive about the CEO succession process. The amount of planned successions reached 72% in 2012, the highest in the 13 years history of the study and forced turnovers represented 19%, their second-lowest share ever. This indicates that companies take a more thoughtful approach to transitions and to ensure they put in place new leaders who will best serve the company for years to come. These new CEOs are for the most part familiar faces. Indeed, 71% were people already working in the company when they became CEO. This represents a significant decrease from previous years with an average share of insiders of 80%.

Interestingly, in planned successions, the share of insiders has dropped from an average of 82% between 2009 and 2011 to 70% in 2012. With careful and thoughtful plans, it seems that companies feel stable enough to take a bit of a risk on an unknown leader. Moreover, these risks were reduced since 56% of the outsiders came from the same industry as their new company.

Also, 81% of the new CEOs were from the same country as the company’s headquarters and 95% were men. The proportion of women reaching a CEO position has risen from an average of 3 % over the last 3 years to 5% in 2012, but still remains a tiny share.

Regarding the apprenticeship model, (the outgoing CEO remains or becomes chairman of the board and can “apprentice” the incoming CEO), this happened in 29% of turnovers in 2012. In this case, the share of an insider named CEO reached 92%. Companies in Brazil, Russia, and India had the highest increase in turnover rates between 2007 and 2012 (15.4% to 23.9%) and the highest increase in share of planned turnovers (8.8% to 15.5%). The telecom and utilities industries had the highest turnover rates in 2012 (both at 24%), closely followed by energy (21%). The lowest turnover rate was in the consumer discretionary industry with 9%.

> Read the full study by Booz & Company

Everyday Governance: “in-camera sessions”

When a board decides to discuss private matters like management, employee negotiations, law enforcement matters, reviewing the functioning of the Board… They have an “in-camera session”, this refers to a closed meeting of the board where only board members and possibly specifically chosen others may attend. All non board members and management such as the CEO, are “recused”, this means removed from participation in a decision on a matter because of a conflict of interest or a position.

This allows the board to discuss freely about some topics which could be difficult if the people concerned were present, especially when it concerns their performance. This provides an opportunity for the board to share their views, discuss results and develop recommendations for the future of the company. Except for the absence of some individuals, the session unfolds like an open session. There is an agenda and the same decision making process.

Note that in-camera sessions should be held regularly, for instance 15 minutes at the end of each board meeting; otherwise it may put a lot of stress on the management since they will suspect that a special request for a private session is to talk about them.

9 keys issues for board of administrators in 2013

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Here you have a list of the key issues that are newly emerging or will be especially important in the coming year. Each year, the legal rules and aspirational best practices for corporate governance, as well as the demands of activist shareholders seeking to influence boards of directors, have increased. So too have the demands of the public with respect to health, safety, environmental and other socio-political issues.
Looking forward to 2013, it is clear that in addition to satisfying these expectations, the key issues that boards will need to address include:

1. Working with management to encourage entrepreneurship, appropriate risk taking, and investment to promote the long-term success of the company, despite the constant pressures for short-term performance, and to navigate the dramatic changes in domestic and world-wide economic, social and political conditions.

2. Working with management and advisors to review the company’s business and strategy, with a view toward minimizing vulnerability to attacks by activist hedge funds.

3. Resisting the escalating demands of corporate governance activists, which this year will continue the efforts to increase shareholder power and dismantle takeover protections and include proposals to separate the positions of Chairman and CEO and to lower the percentage of outstanding shares necessary for shareholders to call a shareholder meeting.

4. Organizing the business, and maintaining the collegiality, of the board and its committees so that each of the increasingly time-consuming matters that the board and board committees are expected to oversee receives the appropriate attention of the directors.

5. Developing an understanding of shareholder perspectives on the company and fostering long-term relationships with shareholders, as well as coping with the escalating requests of union and public pension funds and other activist shareholders for meetings to discuss governance and business proposals.

6. Developing an understanding of how the company and the board will function in the event of a crisis. Many crises are handled less than optimally because management and the board have not been proactive in planning to deal with crises, and because the board cedes control to outside counsel and consultants.

7. Retaining and recruiting directors who meet the requirements for experience, expertise, diversity, independence, leadership ability and character, and providing compensation for directors that fairly reflects the significantly increased time and energy that they must now spend in serving as board and board committee members.

8. Working with management to cope with the proliferation of new regulations and changes in the general perception of business that have followed the financial crisis.

9. Dealing with populist demands, such as criticism of executive compensation and risk management, in a manner that will pre-empt increased regulation and avoid escalation of activist’s demands while at the same time furthering the best interests of the company.

This article is extract from:  Key Issues for Directors in 2013

Say On Pay = New tool of Social Responsibility?

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“If it makes good sense to tie compensation of top executives to the financial performance of their firms, it is also wise to gauge that compensation in relation to other corporate performance factors,” says Peter Madsen.

But, what is «Say on pay»? Is it an answer to the compensation issue? Or just another practice to pay more the CEO?

 

As an example, in 1991, President Clinton wanted to permit companies to write off executive compensation amounts of more than $1 million only if executives hit specified performance goals.

In a 2011 paper titled Killing Conscience: The Unintended Behavioral Consequences of ‘Pay for Performance,’ Stout offers three reasons to explain why the Clinton administration’s revisions to the Internal Revenue Code (I.R.C. Section 162(m)) didn’t work.

First, incentive schemes frame social context in a fashion that encourages people to conclude purely selfish behaviour is both appropriate and expected. As a result, pay-for-performance rules “crowd out” concern for others’ welfare and for ethical rules, making the assumption of selfish opportunism a self-fulfilling prophecy.

Second, the possibility of reaping large personal rewards from incentive schemes tempts people to cut ethical and legal corners, and for a variety of reasons, once an individual succumbs to temptation, future lapses become more likely.  The result can be a downward spiral into opportunistic and unlawful behaviour.

Third, industries and firms that emphasize incentive pay tend to attract individuals who, even if they are not « psychopathic », nevertheless are more inclined to selfish behaviour than the average.

It isn’t easy, however, to find companies that specifically state that the compensation of their executives is tied to more than financial performance. PepsiCo, for example, has established Performance with Purpose, a global initiative that makes an effort to deliver sustainable growth by investing in a healthier future for people and our planet. However, the company is cautious about linking executive compensation to the results of this program.

Aron Cramer, President and CEO of BSR, a CSR consulting firm that works with a global network of nearly 300 member companies, believes that financial performance is inevitably linked to social and environmental performance.

Cramer’s emphasis on rewards rather than incentives is consistent with Professor Stout’s point of view. “We should set financial compensation ex post, on the basis of the employers’ subjective satisfaction with the employees’ performance,” writes Stout.

 

Ironically, the new imperative for corporations to be socially responsible could be jeopardized by attempts to tie executive compensation more closely to corporate responsibility through pay for performance incentives. »

 

This article is an extract from: Can Say On Pay Increase Social Responsibility?

Read more: Executive compensation: Shareholders have their say

Is executive compensation fair or flawed?

Say-on-pay voting process ‘highly successful tool’, according to survey of institutional investors

Why not set up board’s police?

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Imagine a new law enforcement bureau is formed to investigate and bring to justice the perpetrators of crimes on Nonprofits’ Boards?

 This elite force, known as The Board Police, works mostly undercover, passing themselves off as ordinary citizens serving on unsuspecting boards looking to identify boards or individual board members guilty of governance crimes or misdemeanours.

Here are the top crimes we want you to be on the lookout for!

Loitering - You know what it means to loiter, it’s to stand idly about or linger aimlessly. It is reported that a high percentage of nonprofits’ board members are accused of this crime!

Impersonating a board officer - In many meetings, you may have difficulty spotting the board officers.

Dereliction of Duty - This one may require some detective work as the most flagrant violators rarely show up at meetings.

Þ    Be careful: However, exercise care here, as taking too much interest may certainly out you as an undercover operative!

Harassment – includes any kind of behaviour that is intended to annoy, disturb, alarm, torment, upset, or terrorize another.

Disorderly conduct - Reports exist of instances where a few board members get so worked up that they become verbally abusive and begin shouting at others in the room.

Misappropriation of focus – We know you’re familiar with misappropriation of funds — which itself is a serious crime. However, misappropriation of focus is also serious, but often undetected.

Conspiracy - You may not witness this at first as it takes time to earn the trust of the conspirators and be taken into their confidence. Conspiracy occurs when two or more people get together to plot and plan a course of action.

Þ    You’ll know you’re in when you get invited to the “special meeting” of the select board members.

Obstruction of governance – any act or action that distracts the board from having substantive discussions or decisions about important issues or policies to move the organization forward in a strategic manner.

Þ    They are all ploys to prevent real governance from occurring.

 

We need you to be diligent in your work!

This article is an extract from: Crimes and Misdemeanours of Nonprofits Boards

 

 

Toward Effective Governance of Financial Institutions

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“Drawing lessons from the financial crisis, the G30 calls on boards of directors of financial institutions to do far more to strengthen governance. The report stresses that values influence the behavior of those with governance responsibilities and the key to reform is to promote changes in the ways in which these individuals think about their responsibilities.”

Toward effective governance of financial institutions

What if Board Member is Treasurer and Chair of Audit Committee?

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By Beth Deazeley from the nonprofitrisk.imaginecanada.ca

We have found an excellent article on the governance in a Charity Board of directors writting by Beth Deazeley in 2009.

To resume :

This article deals on the following topic : A small board of directors in charity (under $1M)  has appointed one of its directors to be treasurer.  That same person is also the chair of the audit committee.  Is that permitted?

To read more:
nonprofitrisk.imaginecanada.ca