Making corporate boards more effective

Krishna Pale, Guan Submarines and Walter Salmon. Synopsis Presented by: Brent Lengthener, Chairman and CEO of Lengthener & Associates, Board Member of TAP Oil & Gas and Merit. Participants: Board members from various organizations. Half of the group was made up of international representatives with a strong contingent from Africa, Australia, the I-J and other destinations. This proved to be very interesting in that their insights were from a different perspective throughout.

Preface: This is Part 2 of my notes and subsequent research performed from the week I spent with Jay Lowers and a handful of Harvard Business School faculty members discussing board effectiveness. I am trying to share this information to the best of my abilities so that others can gain additional insights for the companies they lead. Note, these are my notes but I do not necessarily agree with all of the comments and/or insights shared. Also note that these professors are all pro- business and serve on boards as well.

In Part 1, we ended with Case Study 7-Bank of America and Merrill Lynch Case Study 8: Hewlett-Packard Company: The War Within This was a continuation of Case Studies 5 and 6. In September 2006, Haps Board of Directors was in despair. The acquisition of Compact (Case Study 5) had taken a toll. Board members were leaking confidential information and felony counts ensued. All of this marred what seemed to be a great turnaround for HP under Mark Hurt. Key Questions Included: 1. How and why did HP get into this situation? 2. What could have been done to prevent this? 3. How do we prevent this from happening to our boards?

Key Takeaways on Board Dysfunction Mistrust Poor Communication No true team; too many “lone rangers” No consensus on strategy No boundaries between board oversight and management execution Putting personal agenda’s first Independence. Integrity. Innovation. 2 Key Questions Included: 1 . Was Cancan Justified in attacking Target? 2. Who would you side with? Cancan or Target? Why? 3. Could Target’s board have done anything differently to avoid the public conflict this created? 4. If Target can be attacked, then what are the implications for other boards, corporate governance, proxy access and more regulatory oversight?

Key takeaways: Economic downturns create more stress, especially with investors. Rational thinking an quickly go out the door. Presently, think about anyone operating in the Gulf of Mexico and how the stress has increased. Target is one retail outlet that does not fear Wall-Mart. They have their own strategy and are very successful. They have no desire to be a copycat. They are proud of who they are. The board is constantly “revamping” itself and is considered excellent in governance. Even with all it had going for it, they still came under attack. Everyone is vulnerable- especially today with the new changes.

The nominating process will become much more important going forward. Being prepared is ALWAYS key. Additional Discussions: The day is coming when re-nominating boards will be very important. Investor Relations may want to aggressively share what board members are doing, press releases, website, etc, like they do with management. Companies should reach out to large and influential shareholders from time-time. Conference calls and shareholder meetings may need to be “rethought” so as to get more interaction. Make sure the board you have works well as a team. When crisis hits, they need to see themselves as a team versus individuals. Case Study 1 1: FL-CIO Office of Investment and Home Depot On January 3, 2007, Home Depot fired Robert Narrated, its CEO and Chairman, following controversy over his compensation package.

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Marinade’s departure was partly the result of the focused efforts of the FL-Coo’s Office of Investment. The office had executed a website and led an aggressive campaign focused on his pay. Narrated made $240 million in 6 years, but the stock had simply gone down; even with a 19% buy back. Home Depot’s number one competition (Low’s) was beating them at every turn, including watching its market cap go from $16 billion to $47 billion.

Key Questions: 1 . How can a company deal with a focused effort like this? 2. How did Marinade’s compensation impact Home Depot? Key Takeaways: There can be a wide variety of different shareholder groups, all varying and all with different, and maybe opposing, agendas. It is important to think out compensation plans from beginning to end; not only the costs, but the reasoning, the optics, and the story. Make sure you proactively tell the “true story’ regarding compensation versus letting someone else do it for you. Their perception can become other peoples’ reality.

Error as much as possible with performance based compensation versus fixed remunerates. Keep plans understandable and simple. For more good information on excellent pay practices, go to Case Study 4 (in Part 1) about Recruit Benchers PAL. Case Study 12: The Board of Directors at Morgan Stanley & Dean Witter On June 13, 2005, Phillip announced that he would retire as Chairman and CEO at Morgan Stanley & Dean Witter as soon as a successor was found. Morgan Stanley & Dean Witter had been performing poorly and was losing its key talent. His resignation raised two main problems for the board: 1 how to go about finding a new CEO; and 2. How to determine the future direction of the firm. 6 Key Questions: 1 . What is your assessment of how the board handled the situation? 2. How do you explain their decision? Terrible practices were in place and the company had become “institutionalized” Board became infatuated with a strong CEO personality or lost focus A possible successor being guaranteed the “CEO role” in five years is a terrible practice The board sacrificed the vision and mission of the company for friendship and interlocks Most did not understand the business, especially the huge difference between Morgan Stanley and Dean Witter

To remove the CEO, 75% of the board had to agree, which was virtually impossible The way they allowed the CEO to dictate any would-be successor cut them off from some great candidates Case Study 13: Citreous-Wichita-Wells Fargo On October 3, 2008, the CEO of Citreous, who had Just worked out an exclusive agreement to buy Wichita, received a call from Washout’s CEO saying they had Just “cut a new deal” with Wells Fargo. Wells Farads offer was $7/share versus the $1 Citreous had offered. The matchmaker was the IBID. They first worked the deal with Citreous but later reworked a new deal with Wells Fargo.

Even more interesting was new legislation that was being approved to let a profitable bank buy another bank and use its Net Operating Loss immediately. This, at the time, really only worked for Wells Fargo and is one of the reasons it could offer more. 1 . If you were on Agitprop’s board and heard there was a new deal with Wells Fargo, what would you do? 2. If you were on Washout’s board, how would you handle the two opportunities? 3. If you were Wells Fargo, after the favorable tax law change, what would you do? 4. Evaluate what the IBID did by, in essence, brokering to both. Www. Lengthener. M 7 5. Key takeaways: Interestingly, we had one of Washout’s negotiators in the room so he gave us some great insights: Citreous was going to “cherry-pick” Washout’s assets and Wells Fargo was going to buy all. Citreous was not a cultural fit so chances that this would have worked were slim at best. Plus, Citreous did not know retail like Wells Fargo. Wichita believes Wells Fargo has been a “perfect fit. ” The IBID Chair, Sheila Pair, brokered the deal first with Citreous and then, during the due diligence period, was working on a better deal with Wells Fargo. From a legal perspective:

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