Media Panel: CRO Ripped from the Headlines
Panel Members:
Alan Murray, Assistant Managing Editor, The Wall Street Journal
Marty Schenker, Top Editor, Bloomberg News, Americas
Bill Baue, Writer, Socialfunds.com
Moderator: Michael Connor, Editor, CRO Magazine
MOD: The title of the session is Ripped from Headlines, and I didn’t have a headline until just this morning, when I opened up The Wall Street Journal and your column [Alan], the headline of which is “Time to Tear Up CEO Employment Contracts.” You talk about Clear Channel Communications, a big media company that is thinking of going private, and if it goes private, the three senior executives, who are all related, all brothers, who make up the management would not only make money from the sale of the company, but they have employment contracts which would guaranty them seven years severance apiece, 17 million dollars apiece in severance. One of the interesting things that you say in the column, you cite this egregious example of executive compensation, then you go on to say Clear Channel notwithstanding, the world of corporate power is changing. Like Rip Van Winkle, directors at most companies have awakened from their decades-long slumber and are starting to do their jobs. They’ve been prodded into consciousness by activist shareholders, whipped awake by government regulators, and frightened by the threat of lawsuits. Then you go on to cite a number of CEOs who are no longer CEOs. My question is: What does this say about corporate responsibility? Is the system starting to work?
Alan Murray: In some ways, yes. I think there’s been a phenomenal amount of change in five years, and the biggest evidence of that is the CEO firings. You start with what happened to Michael Eisner, and go right down the list: Frank Raines, Carly Fiorina, poor Harry Stonecipher at Boeing, who was just trying to get a little love, he said. Purcell at Morgan Stanley. You look at the pharmaceutical industry, the entire pharmaceutical industry, they’ve all been pushed out. You don’t have to go that far back in history. Go back to the 1980s when CEO firings were virtually unheard of. From time to time, you might have a CEO who would agree with his board it was time to go, but to actually dump the CEO hardly ever happened. One of the first examples was at GM in the 1990’s. Then you had a few others: American Express, a few others that happened then. But now, in the last two years, you’ve had this incredible string of CEO firings. Now I’m not saying that’s necessarily a great thing, but it is a sign that something is going on, that the power equation has changed, that the sort of near unilateral power that CEO’s had through the last quarter century, the end of the last century, has dissolved in this century and something new is taking its place. So I think there are big, big changes going on. But there are obviously still problems. This employment contract I wrote about this morning was negotiated in 2005. This is not a holdover from the pre-Enron era.
MOD: This is not post-Sarbanes.
Alan Murray: Correct. This is very much a – and of course, the interesting thing about CEO pay is that a lot of the other reforms have made the CEO pay problem worse. One of the things that’s happened with this spate of CEO firings is boards have been caught unaware. They haven’t done their jobs internally. They don’t have a candidate for the CEO job internally, so they have to go outside. When they go outside, they have to pay a lot of money. And anybody, if Hewlett Packard dumps its CEO and then comes to you and says would you like to be CEO, you’re going to want an employment contract. That’s sort of a natural next step. And so we’ve gone from having about a third, five years ago, a third of the CEOs in the S&P 500 had employment contracts with these kinds of backend safety net deals. Now it’s two-thirds. That’s happened in the last five years. So while some things are getting better, some things are getting worse.
Marty Schenker: And another example of how serious companies are taking this is that there are a number of companies whose backdated options probes are still underway. And they can’t meet, so they’ve delayed their filing reports and have threatened to be de-listed by the NASDAQ if they don’t file timely reports. But they are steadfastly going through every single year and every single financial report to make sure that they’re accurate. And even to the extent of being de-listed as a possibility.
MOD: Is the options thing a legacy of the year 2000 or does that continue into more recent years?
Marty Schenker: It’s a legacy. Certainly Sarbanes-Oxley has apparently eliminated the problem of backdating options. So it is a semblance of the high and wild days of the internet bubble. But there are other different kinds of ways companies can compensate executives without doing backdating. There’s the whole springboard options, where you can time options to the announcement, right before the announcement of good news, which is another practice which may or may not be illegal but is certainly prevalent among companies that want to compensate executives who are already well-compensated. As former employees you guys would appreciate this, but at Dow Jones, we’re going to pioneer forward-dated options.
MOD: It was Marty who once told me that getting Dow Jones options was like getting tips. Now, before I go to Bill, Alan and Marty, governance and boards seem to be critical to this whole process. Is that what this is about?
Alan Murray: I think so. Look, when you hire somebody to run a big company, you want them to be money-grubbing capitalists. That’s what you’re looking for. So somebody like Bill McGuire at United Health, or the Mays family at Clear Channel, they’re motivated by making as much money as they possibly can, and that’s good. The problem is, you’ve got to have a Board of Directors that says fine, but we’ve got to make sure the shareholders are getting that money and you’re not stuffing your pockets too much with yours. So it very much comes down to the board.
Marty Schenker: I would add a third element to that, and that’s the mutual funds who represent the shareholders. Warren Buffet always ways that shareholders are partners in the business. But most Americans hold stock in companies through mutual funds, and mutual funds have to be and should be much more activist about what happens at the companies they own, how they vote their shares at shareholders meetings, how they examine the Board activities and demanding performance from companies. Now that’s been a real change in the last five years. Calipers and other big pension funds and mutual funds are demanding performance and responsibility on the part of the companies, but not nearly as much as they should be.
Alan Murray: They’re not – if you look at their proxy voting records, the biggies are not at all being responsible in how they vote their proxies. In the last three years, mutual funds have been required to disclose those votes and what it has revealed is that basically mutual funds are rubber-stamping management recommendations. Just before we leave it, this Clear Channel example is a good one, because it is such an egregious contract. There is no other CEO in the S&P 500 that has seven years of pay plus bonus. When the deal was negotiated in 2005, ISS looked at it, Calipers looked at it. They said this is outrageous. And so they had a proxy measure to get people to withhold votes from the Head of Compensation Committee. And most of the activist pension fund shareholders did. That resulted in a 30 percent withhold rate. And the reason it was only 30 percent is because all the mutual funds just went ahead and voted with them.
MOD: Bill, let me bring you into this a little more. How often do you write about governance?
Bill Baue: Governance is really an element of what I’m writing about all the time. I think that SRI [socially responsible investing] is trying to address – increasingly, it’s trying to address social and environmental issues through governance. And it’s saying that these social/environmental issues are not separate from governance. Essentially the terminology, and you’re going to address this later, the acronym ESG for Environmental, Social and Governance. So they’re all being put in together. And a lot of these governance measures are really important to move forward the ability of companies and their shareholders to address social and environmental issues. I think that the upcoming SEC meeting on giving shareholders access to the proxy to nominate directors is going to be huge. The New York Stock Exchange recently, I think it was last week, saying that broker votes can’t be voted automatically anymore. These types of governance changes are important to do as what you were pointing out, is make companies more accountable to their shareholders. And SRI shareholders are increasingly, I think, powerful on these issues.
MOD: Do you think individual shareholders care about any of this?
Bill Baue: I think that they care about it on a visceral level. Whether they care about it on an investing level is another question and I think that’s again where mutual funds come into play. Almost everybody owns mutual funds nowadays. Our whole society is invested at this point, through pension funds and through mutual funds. And most people care about social issues and environmental issues. But there’s a disconnect between how they address it in the corporations that they own. I think it will be important to have individual investors be aware of what their mutual funds are voting. And that’s where the media comes in. In the past three years, I’ve seen increasing coverage of how mutual funds are voting, and critical coverage, which is good.
MOD: Let me turn the page a bit, to another headline. Global Warming. Alan, AIG, one of the world’s largest insurance companies, has in the last couple of months been making a lot of noise about its stellar reputation in the area of the environment, global warming, taking a number of steps in this area. It seems to me AIG was just caught in a big corporate imbroglio just a little less than two years ago. How do you reconcile to that?
Alan Murray: Bill and I were talking about this at the back of the room and I can tell, he and I are going to take very different approaches to this thing because – and it’s not because I think global warming isn’t a problem. I think global warming probably is a very big problem. But I don’t think it’s a problem to be dealt with at the shareholder or the board level. AIG is an insurance company. They’re in the business of assessing risk. Global warming is a risk. Who is better qualified, better positioned to tell us how big the risk of global warming is than the people, the company of AIG? Great, have at it. What disturbs me about what happened in the wake of the scandal at AIG is that Hank Greenberg gets kicked out. Frank Zarb, the new CEO, starts talking to activist investors. And the activist investors start making a lot of noise about global warming. And so they create a Board level committee to look at public policy issues headed by a prominent Democrat, Richard Holbrook. Now that just doesn’t strike me as an exercise in risk assessment. That strikes me as an exercise in politics. And one of the things that is holding back the governance changes that a lot of us think need to happen is the fear on the part of a lot of CEO’s that you’re politicize the board room, and that boards, in effect, become the equivalent of the US Senate and aren’t able to do anything and aren’t able to operate effectively. My own view is global warming is an important issue. AIG is a company that definitely ought to be into it, but it’s not something to be politicized in the boardroom.
Bill Baue: Well, I think that the idea that this is a – that global warming is a political issue, certainly Democrats and Republicans might address it differently. But increasingly it’s a non-partisan issue. You look at the group of evangelicals who have created the group, I think Richard Cizick is a main mover with that, where these are evangelicals who you would typically associate with right-wing Republicanism, who are coming out and saying global warming must be dealt with. So I would not agree with the fact that this purely a political issue. I would say that it is a risk issue. I would say that the activist shareholders were coming in and forcing the board to do it because they had research showing that the management was asleep at the wheel on this. And when management isn’t dealing with global warming –
Alan Murray: But they changed the management. They got new management, which is the way a board should deal with this. If the management is asleep at the switch, change the management. But don’t get a bunch of board members who don’t know anything about risk assessment making the judgments about global warming.
MOD: Let me jump in here. Bill, at the heart of some of this, it seems to me, is mainstream media versus the viewpoint of the socially responsible investor, and maybe alternative media, for the lack of a better term.
Marty Schenker: But in a certain sense it’s relevant because what we try to do is tell our customers, who are extremely motivated by having a return, give them the information they need to make investment decisions that will provide that return. So if AIG is asleep at the switch on global warming, the marketplace is going to be a perfect avenue to correct that mistake, by forcing the share price down and getting people unhappy with the returns they get from AIG shares and forcing the issue that way.
MOD: Does it go – it seems to me the heart of the question is to what degree does corporate reputation figure in the share price, the ultimate underlying question. If you do a good job on the environment, you do a good job on social issues, does that matter to a company’s valuation? Yes, no?
Alan Murray: I think the thing we’ve learned in the last five years is that corporate reputations are incredibly important. What we’ve really learned is that big, public companies are to some degree political institutions. And if they don’t have the goodwill of the public on their side, they can get in deep, deep trouble.
MOD: So we’re sort of in agreement that reputation is important. You’re talking about the level, or the degree to which politics get injected. You just said it’s a political institutions, so you’re talking about to what degree politics, and whether it becomes partisan politics. And that’s a danger. Clearly, as HP illustrated, boards are not always in synch.
Alan Murray: Yes, it’s very hard to feel good about board governance after having spent the last three months as I have, covering the Hewlett Packard Board of Directors.
MOD: Here we have a company that had a sterling reputation in the area of corporate responsibility, sterling reputation in the area of governance, ranked highly by anyone in this room probably. Most people in this room are familiar with the subject.
Alan Murray: One interesting point is that in the early days of the HP controversy which the Journal spearheaded, the share price of HP did not move at all. It was only until there was the prospect of criminal investigation that could effect the day-to-day operation of HP that the share price started to drop. So whether or not reputation by itself means anything to share price is something that I don’t think you can prove.
MOD: One of the things that struck me, I thought the HP thing, in a way, showed that the governance system was working. Yes, there had been friction on the board, fracture on the board. Yes there had been pretexting and lying. But once the issue was discovered, it was disclosed. A member of the Board forced disclosure to the SEC and within six months, things had emerged.
Alan Murray: Right, if you’re willing to put all the noise aside, what HP has done over the last three years or four years looks really very smart, because they had this charismatic, high-profile marketing-directed CEO who got them through the Compaq merger, facing a ton of flak. And then they let her go and brought in a CEO who was operations-oriented to make the whole thing work. So in one sense, they’ve done their job very well. But I do think the noise, in spite of the fact that the market was willing to shut out the noise for a week or so, the noise matters. And reputations matter and ultimately, it did matter.
MOD: Let me turn the page yet again, to a totally different subject. Marty, foundations are big thing. Bill and Melinda Gates have a foundation that is a 30 billion dollar endowment. Warren Buffett has just agreed to give them yet another 30 billion plus 60 billion dollars. They’re on track to be giving away three billion dollars a year. From people I know who work in the world of philanthropy, the Gates Foundation is transforming the way the world works, forcing other foundations to do business in a different way. The founders of Google have said that they’re – they’ve started a foundation and they say that the foundation may be more important ultimately than Google itself. We’ve just had a Nobel Peace Prize awarded in the area of micro credit, funded in part by private funds. Your ultimate boss, Mike Bloomberg, has said that he’s going to start a foundation. He keeps saying it; every time somebody says he should run for president, he says no, I’m going to start a foundation. Do you cover foundations?
Marty Schenker: Yes, we do. It’s not mainstream coverage for Bloomberg, but since many of our customers are people who give, and when you look at reader statistics for Bloomberg stories, stories about giving are universally among the most read stories among our customer base.
MOD: No kidding? Why is that, do you think?
Marty Schenker: I think that there’s an absolute fascination on the part of people with some means on how others are spending the money. And they want to know who’s getting it, and why. And perhaps with an idea of replicating that. There is a very generous spirit among people, or maybe it’s somewhat conscious really, to figure out how to use the wealth that they have in a positive way.
MOD: Bill, as a cynical journalist, philanthropy often comes under the microscope because it’s an easy way to get good press. What are these foundations about? Are they dramatically different from philanthropy in the past, or is it something new?
Bill Baue: I think Bill and Melinda Gates and Warren Buffett’s gift to them is transforming how this is happening. Bill and Melinda Gates are active in micro-finance, which Dr. Mohammed Yunus just won the Nobel Peace Prize for. And I think that that, that his wining that, is significant, that he won the Peace Prize. He didn’t win a price in economics. It’s the idea that finance now has a role in creating peace, in social justice. And I think also you mentioned Google. Google, I think an interesting thing about them is that they are not – their model is to have it not be a purely philanthropic enterprise. And I also think that micro-finance has recognized that philanthropic donations are actually in some ways counterproductive. What they’re looking for is actual investment, where there’s returns. Because philanthropy can dry up, whereas actual financial models, loan models, investment models, are sustainable. So I think that we’re seeing a transformation of the philanthropic world, at least in that area of micro-finance which now has, as we know, the spotlight is on micro-finance. So I think it’s sort of, it’s counter-intuitive that you’d have micro-finance practitioners who you would think would sort of be supportive of philanthropy, they’re actually saying no, we don’t want the gift as much as we want a sustainable investment.
MOD: I want to ask you, to what degree should companies concern themselves with poverty, in the United States or internationally?
Alan Murray: Well, it’s an interesting question because a lot of what I see going on in the name of corporate social responsibility is happening because governments aren’t doing their job. And this, poverty, should be something that should be dealt with by governments not by corporations. But if it’s not being dealt with, what do you do? And particularly if you’re a big, global company and you’re working in countries that don’t have effective governments, then that seems to me where there are serious questions about what are your responsibilities as a company. And more and more companies are saying we have to do something What I find interesting, when I talk to people about this, is that more and more, it’s not driven by their sense of responsibilities to shareholders. Shareholders are basically interested in making money. But it’s more driven by their sense of responsibility to employees. The people who are the most active social responsibility programs that I know of say they do it mostly because it helps them attract good people, because people want to be part of an organization that’s doing good.
MOD: How about their customers? Does that matter at all?
Alan Murray: It may in some cases matter to their customers. You have some people, this whole stakeholder language is taking hold. I had this incredible conversation with A.G. Laffley at Proctor & Gamble where I was talking, I was asking him about his shareholders. He goes well, we don’t talk much about shareholders any more. He said we talk about our stakeholders. I said well, who are your stakeholders? He said well, they’re our customers. By customers, he means the retailers. And then the potential end consumers. And then they are the communities those potential end consumers live in, because we realize that all our consumers are citizens. And you sort of start adding up the pieces as he’s going down this list, and you realize you’re talking about somewhere north of half the population of the globe that are stakeholders of Proctor & Gamble. That’s why I say these guys are realizing that running big, public corporations is a political job and they’re acting like politicians.
MOD: Let me flip one more page, and then we’ll take a couple of questions. Alan, I’ll use a jumping off point. We’re less than a week away from mid-term elections. You wrote a column a couple of weeks ago. I’m going to ask all of you to react to this, though. Alan’s point was that the mood created by excesses, and I’m going to paraphrase Alan, excesses in executive compensation, a lot of these economic issues, a lot of people, a lot of average Americans are feeling left out, perhaps. There’s a sense that the system may be rigged, I think is the term you used, rigged against them. And that this has implications not only for these coming elections, the mid-term elections, but for 2008. And that ultimately this may be bad for big business because people may be reacting to all of this. Bill, do you get any sense of how the politics kick in on any of this?
Bill Baue: I think that executive compensation is something that has a lot of people really angry. Because there’s such a disconnect, because they’re not seeing – they’re seeing the stratification between wealth and poverty increase. And this is where I would say that it’s a systematic issue. It isn’t an issue that just has to do with reforming CEO pay. And this is where I would disagree that having a money-grubbing CEO is what you necessarily want. I do think that you have to have pay for perform – there are many people who feel like you do have to have pay for performance. But I think this is where corporate responsibility is sort of showing that there’s a bigger picture, that being a money-grubbing CEO isn’t necessarily – this is what’s getting companies into trouble reputationally now. So in terms of the day-to-day voter, I’m not sure whether they see a connect directly to all of these issues. But I do think that they see a problem with CEO pay and that it’s not being dealt with very well by government regulators.
Marty Schenker: I would say that what it does do, at the treetop level, it just adds to the undermining of confidence in institutions like Congress. When individuals go into the voting booth, I doubt CEO pay is going to be the gating issue for whether they vote for this candidate or the other. But what it does do is create a level of cynicism among the population which will tend to filter down into just throwing the rascals out, no matter who they are. And so I don’t know that CEO pay as an issue, or corporate governance as a single issue has an impact on the elections.
Alan Murray: Can I just say one thing? Because I don’t think – Americans have never been into the politics of envy, partly because Americans have always thought someday I’m going to be there. The real problem is not CEO pay; I think that’s become sort of a flashpoint or a symbol. The real problem is increasingly people out there feel this unease about their own circumstance. They know – they don’t just see the statistics. They know that median pay isn’t rising very fast. They know that more and more of their health care expenses are being pushed back on them, not being paid by their employer or the government. They know that a job with a company is no longer a kind of a lifelong deal, where your pay keeps going up and you get a nice gold watch at the end. There’s a lot of insecurity involved in the workplace now that wasn’t there 20 years ago. So they’re feeling all these things themselves. And then they look at the CEO who keeps going up and up and up, and getting these huge paychecks, and it makes them mad.
MOD: One more go-round. Look ahead in the next year, the next 12 months, the year 2007. Bill, what are going to be the big stories? If you were prognosticating – I’m vamping a little bit to give you some time to think. What are the big stories for the next 12 months?
Bill Baue: Well, I think climate change is going to continue to be a major issue in this space, and increasingly I’m seeing “mainstream” media covering climate change in a more intelligent way. I think that mainstream media did not cover climate change particularly well for a long time. And especially the connection between climate change and business. I think that they saw these two things as divorced. And I think increasingly through things like the shareholder activism, of groups like CERES and others, they’re seeing that you can’t divorce a huge issue like climate change from business. And that, in fact, business are going to be a large part of the solution to climate change. So I guess what I would like to see is not the question of if, but rather the question of to what degree are business going to step up to the plate and do things like AIG is doing. Whether they do it at the board level or the management level, we can duke that out later. But it needs to happen. And media needs to cover it in a more comprehensive way. And I see that happening.
Alan Murray: Well, I think corporate reputation is going to continue to be a big problem. A lot of CEO’s who I talk to, when Enron hit they thought oh, no, we’re in for a couple of bad years here. We’re going to lay low, and then it will blow over and then we’ll come up and go back to business as usual. And it hasn’t happened. And while the initial power was the power of the scandals, the thing – I do think part of what’s really fuelling it now are the pay issues. And I think that’s going to continue to be a problem. And as I said in that column you cited, the interesting thing to watch as we move towards the 2008 election is whether you hear, particularly from Democrats, but you hear more and more of what you heard a fair amount of in this election: big business bashing, protectionism, anti-immigration sentiment. Sort of the Lou Dobbs package is what it is. I don’t know if any of you watch Lou Dobbs. I find it very scary, but he’s tapped – and his ratings aren’t that big, but he’s tapped into something that is out there and going on right now. And I think that’s going to drive a lot of this for the next few years.
Marty Schenker: Well, besides the Bloomberg for President issue, I actually think that mutual funds, and their role in corporate governance, and their role as essentially trustees for shareholders among Americans will be much more in the forefront in the next year. It’s always been my thought that when you give a mutual fund your funds, you have an absolute right to know what they’re doing with it, and how they’re voting their shares. But most mutual funds don’t even disclose how they’re investing for six months after the fact. And the relationship between mutual funds and these companies that they invest in, and the brokerage firms that execute trades, is something that needs to be examined.
MOD: Just to go to show that there are no wrong answers, all of these things are inter-related, mutual funds and the implications of how mutual funds vote will affect how companies handle executive compensation. It will affect how they handle global warming. So it is all part of the package. Let’s go to some questions, and I hope there are some questions. Anyone have a question? Yes, Steve Diamond.
Q: When you’re talking about governance, we seem to not talk about the responsibility of these board members who all too often just hang in line with the CEO, who also happens to be a board member. Do you guys see that as something that’s going to boil up at some point as well?
Alan Murray: I think it is boiling up. Bill talked about this. The problem is that board members have always had their bread buttered by the CEO, by management. So who do the board members really work for? Well, we say they work for the shareholders, but they really work for the CEO. But that may be changing. I think this SEC meeting is very important. We seem to be moving towards a world where large shareholders can actually place people on a board, the kind of Zack Carter at Marsh McLennan model, where directors know that they’re there because shareholders put them there, not because the CEO put them there. That’s going to change things dramatically, in some ways clearly for the better. I don’t think they’ll let employment contracts like the ones that the guys at Clear Channel got go through. But I think you can also raise a question whether maybe in some ways they change it for the worse. If the result is a Hewlett Packard situation where you have a bunch of warring directors, if the Board of Directors, as a said earlier becomes the functional equivalent of the US Senate, then we have a big problem.
MOD: The dysfunctional equivalent.
Alan Murray: They’re dysfunctional. Dysfunctional equivalent, exactly. Good way. The corporation has been the greatest wealth producing creation – it was – of the 20th century. And it’s changing very rapidly in the 21st century and not all the changes are for the better.
Marty Schenker: One sidebar issue is finding competent directors, and finding people willing and able to spend the time and the energy and have the independence. There are 9,000 public companies or something like that.
MOD: Will all of this make it more difficult to find competent directors?
Alan Murray: It already is. Tom Neff, who runs Spencer Stuart, says they used to get, when they were going to search for a director, they’d pick up their first or second choice. He said now they often go to their ninth or tenth choice, because the first ones say no.
Bill Baue: And there’s concerted efforts to train, I think, some in the social responsibility movement has seen this as an opportunity. The state of Connecticut is doing a program to train women to be board members, taking women who would be good candidates and making them – preparing them for these positions which are increasingly opening up because of new independence requirements. And the same thing is happening around diversity, to create more diverse boards which is something that CSR – it fits under the CSR umbrella.
MOD: Another question. And if you can, identify yourself please. The man with the mic, I guess, gets preference.
Q: Thanks. My name is Don Carly. I’m with a not for profit called The Institute for Sustainable Communication. You were talking about the difficulty of getting board members, and one of the facts is that transparency and sunlight are somehow difficult for people to deal with when they’ve been accustomed to opacity. This is one of the issues. It’s also, it seems, driving a number of companies to consider going private, to avoid the scrutiny and transparency. I’m interested in how you see the corporate cultures adapting to transparency and stakeholder engagement as an alternative to a perimeter defense that circles the wagons, mounts the machine guns, and pulls down the blinds.
Alan Murray: My favorite example of this, and I wrote a column about this, is comparing – a few years ago, you had three guys competing to be CEO of General Electric. Jeff Immelt got it. Bob Nardelli didn’t; he went off to run Home Depot. And the other one is McNerney, who went to 3M and then Boeing. But to me, Jeff Immelt and Bob Nardelli are the bookends of this. Jeff Immelt has said hey, I know it’s a different world than the one Jack Welch lived in. I’ve got to talk about things like global warming. I’ve got to engage with shareholders. He’s out there talking all the time. He’s limited his own pay. He’s not a money-grubbing capitalist in a sense. He made the decision, I’m going to hold down my own pay because I have to do that. And Nardelli has taken the exact opposite route. This amazing move where he said well, they’re going to – the ASCME is going to come to our shareholders meeting and protest, therefore, we’re not going to have any of our directors show up at the shareholders meeting. That’s unbelievable! The directors report to the shareholders, and they’re not going to show up at the shareholders meeting? So, you see both approaches going on right now.
Bill Baue: I think also there’s been a transformation, that sort of circle-the-wagons mentality, I think that that’s always going to be – there’s always going to be the confrontational element between companies and their various stakeholders. But I think that – and I’m sure many of you practitioners know this better than I do, that that model is shifting towards a more collaborative approach where we’re recognizing that we’re in this together, and that companies are going to come up with better solutions when they collaborate with their stakeholders than when they fight with them. So I see that transformation taking place.
Marty Schenker: I also just want to throw in the whole idea of regulation or regulating transparency is something that we have to look at very carefully. Regulation (FD), which required that companies disclose material information in a timely manner, one would argue, has led to less information rather than more because of companies feel that they’re going to run afoul of those regulations if they provide any information outside of a broad venue. Which in some cases leads to lots of surprises.
MOD: On the broader social front, I was talking earlier at breakfast with a couple of colleagues about a lot of it rests in execution. And companies are just beginning to learn; they want to do the right thing. They want to put out a corporate citizenship report, or a CSR report. And then they suddenly realize that there are thousands and thousands of people who have all this data about them. And then that engenders a whole bunch more questions and a whole level of analysis that companies have to brace themselves for. So there’s a tendency to not answer the phone call because (a) you don’t have enough time in the day. And companies are going to have to learn how to execute on all of these issues and confront a whole new set of issues. And to some degree it may not be circling the wagons. It may be that there’s not enough time in the day to deal with all of these new layers that are presenting themselves.
Alan Murray: Mike, can I throw one more thing in here? The other thing that makes me uneasy about these conversations about corporate social responsibility is the definitional problem. What are they talking about? I was at a conference last week; it was about index investing. But there was a woman who stood up and said we need a good index for socially responsible funds because I know a lot of people and they only want to invest in socially responsible funds. And she had around her neck this animal – I think it was a fox. It was very pretty. I thought, I know a lot of people who think that that’s – that social responsibility means don’t give any money to any company that would kill that fox. So there’s a huge definitional problem here, when you get into this triple bottom line. It’s not just a triple bottom line, there are so many bottom lines. It’s very difficult for corporate managers to deal with.
MOD: Right, and I think everyone understands that. You’re right. That’s a good point. Next question. Anybody?
Q: Dirk Olin; I’m with The Institute for Judicial Studies. I’m interested in some legal structure questions, but particularly one that had some salience for awhile and seems to have fallen by the wayside. Could you talk about the implications of boards hiring their own in-house counsel, as distinct from one reporting to the CEO externally?
Alan Murray: Boards more and more – one of the problems boards have is – I should say, by the way, that Dirk and I share a sordid year. We were roommates in Washington, DC and he had the animals that tore up all my furniture. But I’m not going to hold that against him. Boards don’t – Patty Dunn was saying this at Hewlett Packard. I have no staff; it’s just me. And more and more boards are insisting, and shareholders are insisting, that they have attorneys, that compensation consultants report to them and to them only, and don’t do separate work for the company. Obviously it’s now required by law that the auditors report to them and not to the company. So I think the answer is yes, it is happening and it’s probably necessary.
MOD: One more question.
Q: Thank you. I think this is a great discussion. By the way, I’m Whitney McKnight, Whitney McKnight and Associates, and I have a media and corporate communications firm. I represent some ethics and compliance professionals. I had a lot of questions. I think you guys did a great job discussing things this morning. But pursuant to the last couple of questions, I was wondering about your feelings when it comes to should a corporate compliance director in companies report to the CEO, or are they better off reporting to the board?
Marty Schenker: Well, to the extent that a board has an independent chairman, I would suspect that that would be the best route, to report to the chairman, which then allows a certain level of independence from the personal viewpoints of the CEO would be my view.
MOD: I think from what little I know, one approach is you report to the CEO, but there’s a path to board, there’s a separate path. The problem you run into is that if everyone winds up reporting to the board, it’s kind of hard to function.
Q: It would seem to be a way to indemnify the corporate compliance director. In other words, who could fire the corporate compliance director for doing his or her job? Or not?
Alan Murray: It’s kind of like an inspector general in government. Don’t some corporate compliance officers have dual reporting responsibilities?
MOD: One more question. Anybody else?
Q: Melanie Tovey; I’m a professor at Caine University of Business Ethics, etc., etc. You haven’t really mentioned health care. And I was wondering about the extent to which you would connect social responsibility issues with the healthcare crisis we’re facing, specifically regenerative medicine I think could use some support from business. And certainly I think that there’s an issue of, to some extent, a responsibility when companies are decreasing benefits for employees. I didn’t really hear much about healthcare and I was wondering, especially since healthcare will probably bankrupt our country in a couple of years.
Marty Schenker: This speaks directly to what Alan was saying earlier. There are certain government roads and certain corporate roles.
Alan Murray: This is clearly a governmental role. This is clearly a governmental problem and the government isn’t dealing with it, and so what do companies do? Look at Wal-Mart. They’ve got – it’s ludicrous for Maryland to pass a law telling Wal-Mart that they have to do X for their employees that applies to Wal-Mart only. It’s ludicrous. But on the other hand, governments aren’t dealing with the problem and that puts companies in a bind.
Bill Baue: That’s an interesting example, where it’s a government putting it back onto the company. From Wal-Mart’s perspective, the whole – the economy of covering healthcare has become problematic and Wal-Mart is particularly, I think, problematic in how they sort of lower the floor on that. So I think that that was the government stepping in and saying well, we have to at least set a minimum level that a company has to address this. Yes, in practice it applied only to Wal-Mart, so there was a degree of singling only Wal-Mart out. But by the same token, Wal-Mart is such a pervasive employer. It’s one of the employers that went over that threshold and was behaving in ways that one could characterize as egregiously. If you looked at that confidential memo that was leaked, it raises the question of how ethically Wal-Mart acts when it tries to prevent employees from being hired based on their health profile. That’s an ethical question right there. But I would basically agree that this is an area where government traditionally addressed it. And I think it’s an area, among many others, where companies are being increasingly held accountable and are going to have to address it in the absence of governmental action. I don’t have answers on how they do that. But they’re going to be expected to do it more and more, unless government steps up to the plate.
MOD: Okay, there you have it. Healthcare, global warming, executive compensation, governance. I’m sure there are a few that I’ve forgotten that we’ve covered in the last 50 minutes, and many more we haven’t even discussed. But there’s a lot on our plate, a lot on the plate of corporate responsibility officers for the next year to come. I want to thank our panelists, Bill Baue, Alan Murray, Marty Schenker. Thanks very much.