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Institute of Directors of Southern Africa Develops Corporate Governance Assessment Approach

Business Day February 22 – “The governance assessment instrument is set to become a benchmark for measuring how companies perform against the King 3 report, which together with new companies legislation sets the standard and principles for corporate governance in SA. "A quick review of a comprehensive governance assessment instrument report gives a concise, punchy overview of the structures, practices and processes that are in place to promote good corporate governance within an organisation," said Ansie Romahlo, director of the Centre for Corporate Governance.”

Institute of Directors of Southern Africa provided guidance on its new apoproach. It noted that currently the King Report on Corporate Governance in Southern Africa, together with relevant legislation, sets the standard and principles for corporate governance in South Africa. There is however no credible and generally accepted national standard available for measuring how various organizations are performing against an appropriate standard.

The IoD is in the process of developing a governance assessment instrument in the form of an automated web-based tool that will serve as both a measure and an enabler of good corporate governance structures and practices. The instrument, once fully developed, will contain practical guidelines on how to implement good governance.The design of the instrument will be such that it can be employed towards different intents, including:

  Assisting organizations to evaluate their own corporate governance; and

  Providing a mechanism for consultants to evaluate corporate governance at their corporate clients, either as a self-standing  assignment or to verify the results of a self-assessment already performed by the entity.

Features of the national governance assessment instrument:

 Establish data on performance of sectors and industries for benchmarking purposes.

 Capable of being independently verified for credible reporting.

 Different modules for different business sectors to ensure that the whole business spectrum is reached.

 Enabler of governance as it will contain guidelines for implementation.

 Assesses & rates governance structures and practices
A unique feature of the instrument is that it will consist of different modules customised to cater for the needs of, not only listed companies, but also SMEs, non-profit organisations, medical aid schemes, retirement funds, government organisations and public entities. Developing the assessment instrument will therefore, in essence entail tailoring the King III Code for application by each of these sectors.

Due to the independent verification capability thereof and the fact that it will, over time, establish standards and a statistical benchmark for different sectors and industries, the IoD foresees that the assessment instrument will evolve to become an enabler of transparent, credible and measurable reporting to stakeholders.

In due course the IoD also wishes to embark upon the training of individuals who will assist with cascading the implementation of the governance assessment instrument at SMEs and non-profit organisations. We are furthermore planning to eventually roll out this project in the whole of Southern Africa.

Posted 02/22/2010


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CalPERS Board Toughens Ethics Guidelines

CalPERS is the largest public pension fund in the United States with about $200 billion in market assets. It provides retirement benefits to more than 1.6 million State, school and local public employees, retirees and their families, and health benefits for nearly 1.3 million members

The Board of the California Public Employees’ Retirement System (CalPERS) announced that it has strengthened ethics policies that guide how the nation’s largest public pension fund is governed.

At its December meeting, the 13-member Board tightened rules regulating its interaction with CalPERS staff concerning investment proposals and gave the Board President authority to discipline members whose actions violate policy. Board Members also will be required to attend annual training sessions detailing their responsibilities to fund participants and beneficiaries.

“By toughening our governance policies, we’re making sure that Board Members are held to the strictest standards,” said Rob Feckner, President of the CalPERS Board of Administration. “The guidelines help us keep the focus on what’s important – the quality of our investments.”

The Board’s moves followed a review of its Statement of Governance Principles that began in the fall. Among other things, the principles outline the working relationships between the Board President, Vice President, Committee Chairs, Vice Chairs, Chief Executive Officer, and CalPERS staff.

Among the policies approved:

*Board members will be required to refer communication concerning existing or potential investments to CalPERS Chief Investment Officer. The guideline also calls for Board Members to refrain from advocating a course of action concerning an investment with CalPERS staff outside a Board or Committee meeting.

*The Board of Administration President will be responsible for implementing any disciplinary action against a Board member who violates Board policies. The disciplinary action could include admonishment, censure, temporary termination of travel privileges, or the requirement of additional ethical or fiduciary training. The Vice President is responsible for any action against the Board President.

*The Board’s Code of Ethics as well as conflict-of-interest rules will be incorporated into the Governance Principles, creating a single document.

“Our staff must make decisions based squarely on the merits of a transaction,” said George Diehr, CalPERS Board Vice President. “We want independent, objective analysis to be the ultimate guide when it comes to CalPERS investments, and these new policies ensure that will happen.”

Posted 07/01/2010

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New UK Corporate Code Proposed.

Financial Reporting Council Details Reforms.
The revised Code to apply to accounting periods beginning on or after 29
June 2010.

The Financial Reporting Council (FRC) is the UK’s independent regulator responsible for promoting confidence in corporate governance, including through excellent corporate reporting.

The FRC launched a consultation on December 1, 2009, on its proposals to reform the UK’s Corporate Governance Code (formerly the Combined Code). The Code has been revised regularly to ensure it reflects changing governance concerns and practices and economic circumstances. The latest proposals take into account those lessons of the recent financial crisis that are relevant to all companies.

Sir Christopher Hogg, Chairman of the FRC, has led the latest review. He said:

“The principal lesson of the financial crisis is that those on boards must think deeply about their individual and collective roles and responsibilities. The chairman has a vital role to play in ensuring that the executives have appropriate freedom to manage the business but also accept the importance of opening themselves to challenge and earning the trust of the whole board. For their part, the non-executives must have the skills, experience and courage to provide such challenge.

“We have also seen that, in order for UK corporate governance to be strong, boards must embrace the spirit of the code and shareholders must play their part. The Code is made up of strong principles that require careful thought and application to the circumstances of each company. The Code is not a set of rules to be applied unthinkingly. It demands that boards seriously and self-critically assess their performance and openly explain themselves to shareholders. And their assessments must be considered equally seriously by major shareholders if the board’s efforts are to be sustained. The FRC therefore welcomes the Government’s request that it takes on the stewardship of the new code on the responsibilities of institutional shareholders.

“The FRC has not found evidence of serious failings in the governance of British business outside the banking sector. However, the proposed changes to the Code are in our view sensible improvements that would benefit governance in all major businesses. They are therefore commended for widespread adoption through the Code.”

The main proposals are as follows.

  • To enhance accountability to shareholders, the FRC proposes either the annual re-election of the chairman or of the whole board.
  • To ensure the board is well balanced and challenging, new principles are put forward on the leadership of the chairman, the roles, skills and independence of the non-executive directors and their level of time commitment.
  • To enhance the board’s performance and awareness of its strengths and weaknesses, board evaluation reviews should be externally facilitated at least every three years and the chairman should hold regular development reviews with each director.
  • To improve risk management, new principles are proposed on the board’s responsibility for and handling of risk.
  • Proposals are also made to emphasise that performance-related pay should be aligned to the long-term interests of the company and its policy on risk.


The Code, which was formerly known as the Combined Code, will be renamed The UK Corporate Governance Code to avoid confusion among overseas investors.

Consultation on the draft revised Code ends on 5 March 2010. Subject to the outcome of consultation, and the necessary changes to the Listing Rules, the FRC intends that the revised Code should apply to all listed companies with a Premium Listing for financial years beginning on or after 29 June 2010.
In response to the Government’s request that the FRC take responsibility for a stewardship code for institutional investors recommended as by Sir David Walker, the FRC will carry out a separate consultation designed to ensure it can be operated effectively.

Posted 12/01/2009

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The Factors Behind the Failure Rate of CEOs
Guido Stein, Javier Capapé

IESE Business School - University of Navartra, Barcelona - (paper)

CEOs are generally considered to have failed when they are unable to meet the expectations of their boards, shareholders and the market at large, or the company’s stakeholders. This failure becomes official when a company confirms its decision to initiate proceedings for the CEO’s departure. What are the primary factors leading to this dissatisfaction? What is the CEO’s ability to react? And can the top executive be considered a “failure” when receiving a severance package worth millions?

Two decades ago, the research examining the CEO’s career path concluded that around 90 percent ended their careers due to natural causes such as retirement, lack of fitness or death. Hence, only 10 percent were unexpected, caused by another type of factor.
The authors argue that over the past few years this trend has gradually led to shorter, less stable incumbencies lasting between three and five years, due to reasons such as greater internal and external competition, having a corporate vision that is overly focused on the present and, more recently, the global financial crisis – which has resulted in CEO turnover being twice that seen during times of prosperity.
Nevertheless, some studies show that half of CEO failures occur in good business environments. Thus, poor economic performance by an organization does not account for the majority of top-level firings.
According to IESE Prof. Guido Stein and Javier Capapé, in their study “Factores de fracaso del CEO: mapa de un debate” (“CEO Failure Factors: Mapping the Debate”), it is extremely unlikely for these executives to meet the expectations of all the organization’s stakeholders at all times. Therefore, their departure from the company can be caused by a wide range of factors.
The authors divide these factors into two main groups: endogenous and exogenous. This distinction works exclusively on a theoretical level as it is necessary to consider that the CEO’s path is marked by various factors that interact with one another dynamically.

Endogenous Factors

Endogenous factors are those where the CEO has some ability to step in and make changes. This intervention, however, does not always turn out for the best, given that in some cases CEOs can exacerbate the situation or even precipitate their exit from the organization. The primary factors are:

  • Compensation. Compensation for a chief executive is given in a variety of categories, though it primarily includes shares in the company, fixed salary and bonuses. When there is no clear consensus regarding the effects of the CEO’s compensation package, it is helpful to look at the importance of each format within the structure and whether it entails an incentive or a problem.
  • Origin. Distinguishing CEOs as either insiders or outsiders, i.e., whether they were promoted from within the company or brought in as external hires. Numerous studies argue that under equal conditions an insider CEO is more likely to hold on to the position than an outsider, and that 70 percent of the businesses that achieve success have an internal top executive.
  • Being on the board of directors. Having the CEO as a member of this executive body can be harmful or beneficial, depending on the situation. When poor results abound, CEOs may place greater responsibility on top-level executives in order to save their own job. In other studies, however, the internal promotion of the CEO is also tied to the organization’s success.
  • Competencies. Many studies argue that a lack of skills is the main reason for firing a CEO. In this respect, the authors explain that a CEO’s talent declines sharply when changing companies and is not recovered until several years of adaptation have taken place; that a brilliant and rapid ascent does not ensure the CEO’s talent; that these days CEOs are younger, less experienced, and the skills expected of them are no longer honesty and excellence but rather charisma and decisive leadership.


Exogenous Factors
Exogenous factors are variables affecting the CEO’s incumbency upon which the executive is powerless to intervene directly. Moreover, these are circumstances that can occasionally counteract the efforts made in relation to the endogenous factors. The primary factors are:

  • Demographic factors. Variables such as age, origin, duration of the incumbency, the average age of the board members, and the specifics of the outgoing CEO and reasons for his or her exit.
  • Company size and years in business. Larger organizations have higher turnover rates, since CEO replacement tends to be a routine, premeditated process. In small companies, turnover usually has a notable impact on the stock price, something that is occasionally conducive to external hires.
  • Sector. Factors here include the sector’s level of development, the diversity of financial performance and the number of existing businesses. The variables for each of these factors can contribute to both the departure and the survival of the CEO.
  • Characteristics of the board of directors. Most studies consider that having a majority presence of external members spurs the demise of the CEO, if that entails an increase in the share price. With respect to size, it is generally agreed that a large board increases the chances of CEO turnover given that it is easier to create various interest groups.
  • Succession plans. If the process is under way, it should be executed properly and not rushed, so as to avoid failure and ensure that the new CEO progressively acquires all of the necessary competencies.
  • Mergers and acquisitions. Distinguishing between the synergistic variety, which translates into income for the merging businesses, and the disciplinary variety, in which the performance of the organization being acquired falls below the sector’s average. Only in the latter case is it common to see the management team get replaced in order to improve the performance of the acquired company.


Although the authors underline the difficulties of providing valid conclusions about a common model of failure, their study examines the hits and misses of various prior studies and points out the need to carry on with the search and gear it toward qualitative analysis and the use of new methodologies. They feel that accomplishing more rigorous results requires longitudinal studies to analyze failure throughout the professional career of a specific CEO or the turnover history of a particular company.

The authors also suggest taking a more in-depth look at aspects such as the differences of CEO failure in each sector, CEO competencies as an endogenous factor, the development of the stock market and the exact meaning of the term “failure.”

Posted 23/10/2009

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Chairing the Board
The Case for Independent Leadership in Corporate North America
A report by the Millstein Center for Corporate Governance and Performance, Yale School of Management

Find the full report. See the CALPers endorsement.


FACTS: According to the report, the number of non-executive chairmen at companies in North America has been increasing year by year. Recent figures, according to the 2008 Spencer Stuart Board Index, indicate that the last decade has seen a growing trend in separating the roles of the Chief Executive Officer (ceo) and the chairman of the board. In 1998, 16% of the Standard & Poors 500 featured distinct chairmen. Data shows that in 2008 as many as 39% appoint someone other than the ceo to chair the board.

Traditionally, even in companies that split the role, the chairman was not completely independent, but rather commonly the ex-ceo or another related party. During the past four years, Spencer Stuart, a sponsor of the Chairmen’s Forum, has tracked the trend of appointing independent chairmen who have no prior relationship with the company. In 2004, just 7.6% of all chairmen were designated as independent of management. In 2007, the figure rose to 13% and climbed to 16% in 2008.

A RiskMetrics study, expanded to include S&P Mid and SmallCap companies, shows the appointment of independent non-exective chairmen to be slightly higher at 23% and 27% respectively for 2008, a cumulative increase of 17% from 2006 for the s&p 1500.

But, the report stresses that, “Despite this movement toward independent chairmanship, there is little practical advice on what a non-executive chairman does and how the role differs from a chairman with executive powers. Also lacking is guidance on the profile and the ideal attributes of non-executive chairs, or whether appointing a lead director is an adequate alternative to separating the roles of chairman and ceo.”

The report’s conclusions are based on discussions at Yale among leading experts in the management school’s “Chairmen’s Forum.” The report’s executive summary makes the following points: -

• Independent chairmanship of a public company is now a growing successful model of corporate board leadership in the US and Canada.

• Global experience has shown that the model is a tested instrument of governance. Having an independent chairman is a means to ensure that the ceo is accountable for managing the company in close alignment with the interests of shareowners, while recognizing that managing the board is a separate and time intensive responsibility.

• The independent chair curbs conflicts of interest, promotes oversight of risk, manages the relationship between the board and ceo, serves as a conduit for regular communication with shareowners, and is a logical next step in the development of an independent board.

• A corporate board can mitigate concerns about overlapping responsibilities by clearly spelling out the different responsibilities of the chair and ceo roles to the company and shareowners, agreeing on a definition of independence, effectuating successful strategies and risk management policies, and making careful personnel choices.

• Peer independent chairs believe that lead directors are not considered the equivalent of board chairmen by the board or shareowners, even when such directors are provided with comparable authorities. “He who sits at the head of the table runs the meeting.”

• In the context of this economic crisis, boards should adopt independent chairmanship as an important voluntary and proactive element in restoring market trust in enterprise.

• Through this report the Chairmen’s Forum is issuing a call on all North American public companies to voluntarily adopt independent chairmanship as the default model of board leadership, upon succession to a combined CEO and chairman. A board could do so, for instance, through bylaw or charter amendments. If corporate directors choose to take a different course, either by combining the two posts or naming a non-independent chair, they should explain to their corporation’s shareowners why doing so represents a superior approach to optimizing long-term shareowner value.

Commenting on the report, Rob Feckner, CalPERS Board President said, “Managing the board is a separate and time-intensive responsibility that should be under leadership that is separate from the CEO’s job of managing the company. We strongly endorse this proposal to split the chair and CEO leadership roles, which already is an objective of our own set of global corporate governance principles.”

“Besides CalPERS, policies of the ICGN and the Council of Institutional Investors support the position that the board of directors should be chaired by an independent director,” said George Diehr, Chair of the CalPERS Investment Committee. “Otherwise, the CEO and chairman roles should be combined only in very limited circumstances that should be explained to shareowners in proxy materials. If there are combined roles in such cases, the board should name a lead independent director.”

Posted 04/28/2009


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CalPERS (the California public employee pension fund with over $170 billion under management) Reports:

Diverse Corporate Boards of Directors Achieve Higher Performance

Companies that have diverse boards perform better than those with similar director profiles in terms of ethnicity, gender and skill sets, according to a report delivered to the California Public Employees’ Retirement System’s (CalPERS) Investment Committee.

The report -- Board Diversification Strategy: Realizing Competitive Advantage and Shareowner Value – said companies without ethnic minorities and women on their boards eventually may be at a competitive disadvantage and have under-performing share value. 

“Research suggests that companies with more diverse boards, especially gender based diversification, have higher performance and key financial metrics such as return on equity, return on sales, and return on invested capital,” said the report by Virtcom Consulting.

“These findings validate our ongoing efforts to diversify boards and improve portfolio companies’ operating performance and stock returns,” said Rob Feckner, President of the CalPERS Board. “Companies can no longer compete in the changing global marketplace by staying with the status quo.”

Virtcom said core business concepts such as competitive advantage, organizational performance, creativity, innovation and shareowner value are the new talking points linked to a diverse slate of board directors.
The report also expanded the traditional definition of “diversity” beyond gender and ethnicity to diverse skill sets that also tend to enhance performance.

“Corporate directors should address accounting or finance, international markets, business or management experience, industry knowledge, customer-based experience or perspective, crisis response, leadership and strategic planning as well as address historically underrepresented groups on the board, including women and minorities,” said the report.

Other key findings included:

  • Women comprise more than half of the U.S. population but hold only 17 percent of corporate board seats at Fortune 100 companies.
  • A selected group of companies with a high ratio of diverse board seats exceeded the average returns of the Dow Jones and NASDAQ indices over a five-year period.
  • Each of the selected companies had an executive responsible for managing their diversity initiatives.

“Corporate boards need to recognize that diversity is an important business issue that will give them a competitive advantage,” said George Diehr, Chair of CalPERS Investment Committee.

CalPERS has written diversity guidelines into its Principles of Accountable Corporate Governance to encourage companies to take into account “historically under-represented groups on the board, including women and minorities.” The pension fund also is raising the corporate board diversity issue with candidates for its 2009 Focus List of underperforming companies, and is encouraging proxy advisors to adopt a principles-based approach on the issue.

Posted 02/23/2009


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Are Corporate Boards Lagging on CEO Oversight?  Booz & Company Offers Suggestions for Reform

A recent survey by Booz & Company dispels the notion that CEOs are swiftly kicked out if company performance is weak.  Many CEOs are accused of focusing too much on short-term strategies, as a way of keeping their position, and making decisions with lower risks.  The results of this survey conclude that boards are increasingly giving CEOs more latitude than might be expected, which means that strategies based on the short-term in order to stay on top might be unfounded.   It also suggests that there is much room for improvement in the way boards of directors oversee their CEOs.

Data shows even the worst-performing CEOs face a low probability of being forced out in the short-term, and there has been a downward trend in CEO turnover since 2005.  Overall, the likelihood of a CEO being dismissed for poor performance is only 2.1 percent.  Also, those companies that showed a two-year stock price decrease of 25 percent and that underperformed its regional industry peers by 45 percent has only a 5.7 percent chance of being dismissed. 

CEOturnoverCEO turnover has much to do with the reigning corporate governance model, the survey said.  During the course of 2007, Booz & Company interviewed members of the world’s 2,500 largest public companies.  Many regional differences in corporate governance structures were clear. 


European CEOs have the highest turnover, at 17.6 percent.  This is due in large part because European companies do not combine the role of the CEO and the Chairman, which makes the CEO position more vulnerable, the survey states.  Since governance reforms were instituted in the 1990s, power has shifted from CEOs to boards and shareholders.


American CEOs have a lower turnover rate, at 15.2 percent.  The survey states the American tradition of combining the CEO and Chairman roles give position more security.  Americans also use what they survey calls the “apprenticeship model.”  Americans tend to appoint “apprentice” CEOs who take the reins while the outgoing CEO serves on the board as chairman, typically at the start of the new CEO’s tenure.  This type of strategy can sometimes prevent innovation and change within the company, the survey states.


Japan holds the lowest turnover rate at just 10.6 percent.  The country also follows a unique governance model whereby the CEO never holds the joint title and forced successions are not customary.

Suggestions for governance reforms:

In order to increase board oversight of the CEO and encourage business innovation, the survey offers several recommendations for reform.  The survey notes that in the last decade, outside pressure for reform has been strong and external oversight has increased.  The following recommendations are more focused on internal reforms. 

According to the survey, the company should create an organizational structure that nurtures talent and better prepares companies for succession.  A reason why many companies decide to stick with an “apprentice model,” particularly Americans, could be a lack of available talent, the survey states.  It is also important to choose a CEO that embodies both the perspective of an insider and an outsider.  The survey notes a trend in boards nominating outsiders for the CEO position, which the survey data shows they consistently under-perform those CEOs chosen from the inside.  Therefore, the survey suggests that a new CEO must have deep knowledge of the company, but have the foresight to encourage change if necessary. 

Posted 7/9/08

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CalPERS Lists Corporate Governance Failings in FIve American Companies

The largest public pension fund in the U.S. is willing to work with these companies to encourage reforms

The California Public Employees’ Retirement System (CalPERS) listed five American companies on its 2008 Focus List to highlight the pension fund’s concerns about stock and financial underperformance, and corporate governance practices.

To select Focus List companies, CalPERS begins by screening hundreds of public companies and ranks them based on total stock return, capital efficiency measures, and governance practices, according to the CalPERS website. CalPERS engages many of these underperformers to improve their governance practices, particularly in the area of director accountability.

The following are a list of specific concerns CalPERS brings against each company and how the fund is working with the companies to effect change.

Cheesecake Factory, California-based restaurant company

CalPERS’ Concerns:

  • Cheesecake Factory’s stock has severely underperformed relative to the Russell 3000 index and its industry peer index over the 1, 3 and 5 year time periods ending February 29th.

  • Deterioration in annual business fundamentals such as same store sales, operating margin, return on assets and return on equity.

  • Lack of board accountability – The company would not agree to seek shareowner approval to remove the company’s 80% supermajority voting requirements in the articles and bylaws. Only a small minority of companies in the Russell 3000 have voting thresholds of this magnitude.

  • Concern over shareowner rights – The company would not agree to grant shareowners the right to act by written consent.

  • Board Entrenchment Concern – Uncontested director elections are currently conducted using a plurality vote standard.

  • The company does not currently disclose a policy for recapturing executive compensation (“Clawback Policy”) in the event of executive fraud or misconduct.

What the company agreed to do:

Seek shareowner approval to declassify the board.

Hilb Rogal & Hobbs, Virginia-based insurance-brokerage firm

CalPERS’ Concerns:

  • Hilb Rogal & Hobbs Company’s stock has underperformed relative to the Russell 3000 index and its industry peer index over the 1, 3 and 5 year time periods ending February 29th.

  • Lack of Board Accountability – The company would not agree to seek shareowner approval and recommend a “FOR” vote to remove its classified or “staggered” board structure.

  • Shareowner Rights Concern – The company would not agree to seek shareowner approval to remove the company’s supermajority voting requirements in the articles of incorporation.

  • Board Entrenchment Concern – The company would not agree to implement a majority voting standard for director elections.

  • The company would not agree to adopt and disclose an executive compensation “clawback” provision in the event of employee fraud or misconduct.

CalPERS 2008 Shareowner Proposal:

CalPERS seeks to remove the company’s classified or “staggered” board structure. CalPERS believes that annual elections for directors provide greater accountability to shareowners.

Ivacare, Ohio-based health care equipment provider

CalPERS’ Concerns:

  • Invacare’s stock has severely underperformed relative to the Russell 3000 index and its industry peer index over the 3 and 5 year time periods ending February 29th.

  • Lack of Board Accountability – The company would not agree to seek shareowner approval and recommend a “FOR” vote to remove its classified or “staggered” board structure. CalPERS believes that annual elections for directors provide greater accountability to shareowners.

  • Board Entrenchment Concern – The company would not agree to implement a majority voting standard for uncontested director elections.

What the company agreed to do:

Remove certain supermajority voting requirements, nominate an independent chairperson or adopt independent lead director board structure with disclosed duty statement, disclose clawback policy and disclose annual equity dilution levels.

La-Z-Boy, Michigan-based furniture company

CalPERS’ Concerns:

  • La-Z-Boy’s stock has severely underperformed relative to the Russell 3000 index and its industry peer index over the 1, 3 and 5 year time periods ending February 29th.

  • Deteriorating trend in annual business fundamentals including revenue growth and operating margins.

  • Lack of Board Accountability – The company would not agree to seek shareowner approval and recommend a “FOR” vote to remove its classified or “staggered” board structure.

What the company agreed to do:

Remove supermajority voting requirements and adopt a majority vote standard for director elections.

CalPERS 2008 Shareowner Proposal:

CalPERS seeks to remove the company’s classified or “staggered” board structure. CalPERS believes that annual elections for directors provide greater accountability to shareowners.

Standard Pacific, California-based homebuilding company

CalPERS’ Concerns:

  • Standard Pacific’s stock has severely underperformed relative to the Russell 3000 index and its industry peer index over the 1, 3 and 5 year time periods ending February 29th.

  • Lack of Board Accountability – The company refused to seek shareowner approval and recommend a “FOR” vote to remove its classified or “staggered” board structure.

  • Shareowner Rights Concern – The company would not agree to seek shareowner approval to remove the company’s 80% supermajority voting requirements in the articles and bylaws. Only a small minority of companies in the Russell 3000 have voting thresholds of this magnitude.

  • Board Entrenchment Concern – The company would not agree to implement a majority voting standard for director elections.

CalPERS 2008 Shareowner Proposal:

CalPERS seeks to remove the company’s classified or “staggered” board structure. CalPERS believes that annual elections for directors provide greater accountability to shareowners.

Posted 3/25/08

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UK Report Shows Female Representation Has Improved in FTSE 100

The Cranfield International Center for Women has been tracking women leadership progression in the FTSE 100 companies since 1999.  The 2007 Female FTSE Report shows significant improvements in female appointments.  According to the report, 20 percent of new appointments went to women.  In 2007, there were 30 female appointments, up from 23 appointments in 2006. 

The most significant progress was made in the number of female non-executive directors.  In 2006, 13.7 percent of women filled non-executive director positions and in 2007, that number increased to 14.5 percent.  There was little change in the number of female executive directors, 11 in 2007 which is down from 13 in 2006, but more companies had multiple women on their corporate boards.  Sainsbury topped the list with the highest male-female board ratio.  Females make up 30 percent of its corporate board.

The retail sector was found to be the leader in female directorships, with 17 percent.  Also, traditionally male-dominated industries have appointed more women overall to leadership positions.  Anglo American has a female CEO and Shell has one executive and two non-executive directors who are females.

This year has seen a significant increase in the number of female directors of non-European descent. However, there are still only eight women (8%), and all are non-executives.

In addition to the FTSE 100, the Cranfield Center started tracking trends in the FTSE 250.  Findings show that the FTSE 250 companies fall significantly behind the FTSE 100 in terms of female representation.

The Cranfield International Center for Women Leaders, based in the UK, is committed to helping organizations to develop the next generation of leaders from the widest possible pool of talent. It focuses its research, management development and writing on gender diversity at the leadership level. 

Posted 11/14/07

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Critical Mass on Corporate Boards: Why Three or More Women Enhance Governance

As corporate Boards of Directors come under mounting scrutiny, their lack of female members is drawing increasing criticism. Many women's groups and governance experts argue that companies must hire more women directors not only in order to apply the same diversity ethics to their boardrooms that they hopefully do to their employees, but also because diverse boardrooms improve corporate governance and ethics. The Critical Mass project is the first research study to examine multiple perspectives on the impact of the number of women on corporate boards of directors. The executive summary of its report "Critical Mass on Corporate Boards: Why Three or More Women Enhance Governance" by Vicki W. Kramer of V. Kramer & Associates, Alison M. Konrad of the University of Western Ontario, and Sumru Erkut of the Wellesley Centers for Women, is reproduced below with permission from the Wellesley Centers for Women.

To download as .pdf

"Critical Mass on Corporate Boards: Why Three or More Women Enhance Governance"


Corporate governance reform has been a hot topic for a number of years. Congress, the Securities and Exchange Commission, the media, and large shareholders have been pressuring corporations to improve their governance. In the face of the public failure of companies such as Enron and WorldCom, some boards have been accused of being asleep or at least acquiescent, often focusing on short-term earnings and permitting runaway CEO compensation. While many companies are demanding more competent directors, the traditional pool of directors is no longer adequate to meet the need for independent, outside board members required by Sarbanes-Oxley and other reform guidelines – particularly since CEOs are limiting the number of boards on which they serve. Nominating committees and search firms are enlarging the scope of their search for qualified directors and dipping into new pools of candidates, including women. Yet some of the largest companies still have no women directors, and of those that do, only a small percentage have more than two women directors. The most recent Catalyst report (2005 Catalyst Census of Women Board Directors of the Fortune 500) indicated that women held only 14.7 percent of all Fortune 500 board seats. Among the Fortune 500 companies, 53 still had no women on their boards, 182 had one woman, 189 had two, and only 76 had three or more women directors.

Does it matter to corporate governance whether women serve on a board? If so, does it make a difference how many women serve? Is there a critical mass that can bring significant change to the boardroom and improve corporate governance?

Based on interviews and discussions with 50 women directors, 12 CEOs, and seven corporate secretaries from Fortune 1000 companies, we show that a critical mass of three or more women can cause a fundamental change in the boardroom and enhance corporate governance.

Our study extends current research and writing on corporate governance, particularly work that draws attention to the importance of boardroom behavior and dynamics. In addition to employing critical mass theory, we build on research on minority and majority influence on group decision-making as well as tokenism theories.

Women Directors Make a Difference

We find that women do make a difference in the boardroom. Women bring a collaborative leadership style that benefits boardroom dynamics by increasing the amount of listening, social support, and win-win problem-solving. Although women are often collaborative leaders, they do not shy away from controversial issues. Many of our informants believe that women are more likely than men to ask tough questions and demand direct and detailed answers. Women also bring new issues and perspectives to the table, broadening the content of boardroom discussions to include the perspectives of multiple stakeholders. Women of color add perspectives that broaden boardroom discussions even further.

How Many Women Constitute a Critical Mass on a Corporate Board?
The number of women on a board makes a difference. While a lone woman can and often does make substantial contributions, and two women are generally more powerful than one, increasing the number of women to three or more enhances the likelihood that women’s voices and ideas are heard and that boardroom dynamics change substantially. Women who have served alone and those who have observed the situation report experiences of lone women not being listened to, being excluded from socializing and even from some decision-making discussions, being made to feel their views represent a “woman’s point of view,” and being subject to inappropriate behaviors that indicate male directors notice their gender more than their individual contributions.

Adding a second woman clearly helps. When two women sit on a board, they tend to feel more comfortable than one does alone. Each woman can assure that the other is heard, not always by agreeing with her, but rather, by picking up on the topics she raises and encouraging the group to process them fully. Two women together can develop strategies for raising difficult and controversial issues in a way that makes other board members pay attention. But with two women, women and men are still aware of gender in ways that can keep the women from working together as effectively as they might, and the men from benefiting from their contributions.

The magic seems to occur when three or more women serve on a board together. Suddenly having women in the room becomes a normal state of affairs. No longer does any one woman represent the “woman’s point of view,” because the women express different views and often disagree with each other. Women start being treated as individuals with different personalities, styles, and interests. Women’s tendencies to be more collaborative but also to be more active in asking questions and raising different issues start to become the boardroom norm. We find that having three or more women on a board can create a critical mass where women are no longer seen as outsiders and are able to influence the content and process of board discussions more substantially.

Impact on Corporate Governance
Having a critical mass of women directors is good for corporate governance in at least three ways:

1. The content of boardroom discussion is more likely to include the perspectives of the multiple stakeholders who affect and are affected by company performance, not only shareholders but also employees, customers, suppliers, and the community at large.

2. Difficult issues and problems are considerably less likely to be ignored or brushed aside, which results in better decision-making.

3. The boardroom dynamic is more open and collaborative, which helps management hear the board’s concerns and take them to heart without defensiveness.

This paper has important implications for improving corporate governance. It shows that diversity is an issue of governance and that increasing the representation of women on every board is a good governance issue. It also supports the value of moving beyond CEOs, who still tend to be white males, when looking for board candidates. And it shows that simply putting one woman on a board does not necessarily permit that board to benefit fully from gender diversity.

Finding Qualified Women
Are there enough qualified women available to substantially increase the representation of women on Fortune 1000 boards without sacrificing the quality of decision-making? If being a Fortune 1000 CEO is a prime qualification – as it has been often in the past – the answer is No, because few Fortune 1000 companies are led by women. But being a CEO isn’t critical for all board members. In fact, many white men on these boards don’t meet that qualification.

Although our respondents consider it important to have some CEOs on a board, they see no reason why all board members must be CEOs and some good reasons why not all members should be CEOs. Indeed, because women tend to bring new perspectives, a new and desirable leadership style, and a willingness to tackle tough issues, they arguably have more of what it takes to contribute to boards than some CEOs, whom our respondents see as having more narrow views and sometimes being more willing to smooth-over tough issues than to process them fully. Male CEOs looking for board candidates may still be drawn to men with whom they are comfortable and with whom they socialize, but some CEOs themselves recognize that that is not necessarily good for corporate governance.

Our respondents were adamant that women should not be brought on as tokens simply because they are women. To serve boards well, women need high-level corporate experience or the knowledge, skills, and abilities needed to contribute to board discussions. Although boards may have to reach a bit deeper into the senior-management ranks to find more women, women who have succeeded in business careers in corporate America are eminently qualified to contribute to these boards – as are successful women entrepreneurs, lawyers, nonprofit executives, consultants, and academics.

To improve board governance, our research shows that boards should actively seek qualified women board members and not be satisfied with just one or two women on their boards. Nominating committees should not try to be “gender-blind.” Rather they should consider increasing the number of women an important part of their role and should insist that search firms bring them diverse slates of candidates that always include qualified women. Since corporations say they value “outside the box” thinking, they need to look outside the box to recruit women, who bring a new perspective and style that enhances the quality of discussions in the boardroom.

For the full report, please visit the Wellesley Center for Women's website.

Posted 11/9/06

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U.S. CEO Firings and Corporate Governance

Silicon Valley Chiefs Quit in Options Scandal. The chief executives of McAfee, the antivirus software maker, and CNET, an online publisher, on Wednesday were the first chief executives of major companies to quit over the stock options compensation backdating scandal that is sweeping across Silicon Valley (FT, 10/12/06).

An article in Business Week (10/12/06) discusses the resignations in light of a surge of CEO's losing their jobs:

"The numbers are staggering. According to Liberum Research, at least 21 CEOs were fired outright in the first three quarters of 2006—one every 13 days on average—nearly double the 12 chief executives who walked the plank during the same period in 2005. Of the 21, at least six represent fallout from the backdating scandal. In addition to McAfee and CNET, the affected companies are Comverse Technology, Vitesse Semiconductor, and Monster.com....

Experts on governance and leadership say the reason so many corporate chieftains are meeting with ignominious ends is the changing nature of the board of directors. Boards are newly empowered to be more active in all manner of corporate affairs, at the same time that they're being held to a higher standard of accountability by shareholders than ever before. Since the Enron collapse in 2001, the governance revolution that swept through corporate boardrooms has resulted in boards willing to stand up to management, and reforms such as the Sarbanes-Oxley Act that create incentives for directors to do so. The result: a lot of itchy trigger fingers....

...Boards are much less tolerant than they were, more independent of management, and more likely to act in event of a problem," says Charles M. Elson, a corporate governance expert at the University of Delaware. Evidence of the newfound independence is everywhere, he says, including recent executive departures at Boeing, RadioShack, and Hewlett-Packard. "I think the board has changed fundamentally. It's much more of a monitoring institution than it was."

Posted 10/12/06


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The State of Corporate Governance in China: Overview and Trends

As China's role in the global economy becomes more and more imporant, so too does its corporate governance structures, how they are regulated and where their weaknesses lie. In his paper, "The Trends of Transparency, Laws and Regulations on Chinese Corporate Governance," co-author Professor Chi Guotai of Dalian University provides an overview of the corporate governance system in China - laws and regulations, recent trends, and where reforms are needed. The paper is divided into three sections, the third (which is posted below) explains the factors influencing and reasoning behind China's governance structure, the effects state owned enterprises have on corporate governance, and the main problems with current system.

To download the full paper, including endnotes and the first two sections which cover the general structure and development of Chinese corporate governance please follow this link.

Trends in Chinese Corporate Governance
by Chi Guotai, Yang Zhongyuan, Zhao Guangjun, Li Gang

Motivations for Changes in China-Based Corporate Governance

In China, corporate governance is structured for solving the inherent two basic problems within the firm. The first is the incentive problem, namely, how to motivate all participants of the firm to contribute to the firm's output, given that output is a collective outcome and individual contribution is hard to measure. The second is the management selection problem; which means, what kind of mechanism can ensure that only the most entrepreneurial people are employed to fill in the management position. Based on the benefit mechanism, what the reform of corporate governance has to reply is that, which type of enterprise system is most advantageous in guaranteeing investors to obtain the reasonable investment repayment” and protect their property in the listed companies. Or specifically, how to guarantee the exterior investor's legitimate rights and interests not to be infracted by the insider (Managers and the big stockholders who control the stockholder's rights).

The Effects of China State-Owned Enterprise Reform

Chinese state enterprise reform has been relatively successful in solving the short-term managerial incentive problem through both its formal, explicit incentive system and its informal, implicit incentive system. However, it still failed to solve the long-term managerial incentive problem and the management selection problem. An incumbent manager may have incentives to make short term profits, but at present there is no mechanism to ensure that only qualified people can be selected for management. The fundamental reason is that managers of SOEs are still selected by bureaucrats rather than capitalists. Since the bureaucrats have the authority to select managers but do not need bear the consequences for their selection, they do not have proper 6 incentives to find and appoint high ability people. Since good performance does not guarantee that the incumbent manager will stay long, and the manager does not have long-term incentive. To ensure that only high ability people will be professional managers, authority of selecting management should transferred from bureaucrats to capitalists. This calls for privatization of the
state-owned enterprises.

The state-owned enterprise (SOE)’s reform has been quite successful in terms of improvement in total factor productivity (TFP). According to many studies, the annual increase of TFP has been 2-4% since 1979, much higher than in the pre-reform period. However, the reform has not been successful, at least in terms of profitability of SOEs. It is widely reported (and most people believe) that one third of SOEs make explicit losses, another one third make implicit losses, while only one third are slightly profitable.

Main Problems of Corporate Governance in China

- Stock structure is not reasonable, non-circulative stockholders take the holding position. The majority of these listed companies in China evolved from State-owned/ State-controlled enterprises. Due to restrictions in market capacity when offering shares to the public, the portion of shares available to the open market is relatively low. After the offering, more than half of the available shares are held by the promoters. This has enabled “control” of the company to remain with the promoters who are State-owned shareholders or State-controlled shareholders. Now,
among all the Chinese listed companies, about 65% hold the state as their No.1 stockholder, which take over 40% stock share of each company, once the subsidiary successfully lists IPO, the parent company would take the listed company as money drawing machine. It will harm the assets of the listed company. This should kill listed companies, and violate the rights and interests of the middle and small stockholders.

- The percent of negotiable securities is relatively low. As discussed above, the promoters hold the majority stake. Based on existing regulations, State-owned shares and legal entity shares held by the promoters are not traded in the open market. As such, more than half of the shares are non-negotiable securities. In addition, for listed companies that went public in the earlier days, shares held by the public cannot be traded in the open market until three years after the company has been listed. This reduced the amount of negotiable securities.

- The number of individual shareholders is relatively high. The Chinese securities market is primarily made up of individual investors and institutional investors. These individual investors are segmented, segregated and the shareholding ratios are relatively low. In addition, other factors including geography, time-zone, etc., will further restrict individual investors’ participation in the management and significant-decision-making process in listed companies.

- The difference of company stock structure. Between the parent corporation and the subsidiary corporations, black-box transactions happen frequently. These hurt both listed corporations and the public investors. And the directors and managers of the corporations mainly come from the controlling shareholders’ companies or units. There is no effective managers’ market among Chinese listed corporations. Company manager capacity and experience is not their main employment factors.

- The regulation system is invalid. The board of directors and the general managers of the state proprietary stock companies are appointed by the State Department. Chairman of the board of director is often general manager at the same time. The function of decision making of the board of director could not separate from the executing function of the management. This directly results in the invalidation of the control system.

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Integrity and Culture: The Crucial and Most Difficult Challenge for Boards of Directors

Article published in Directors Monthly

By Frank Vogl

August 21, 2006

The ethics of American corporations are better than their reputation. The 2005 National Business Ethics Survey conducted by the Ethics Resource Center showed that American workers have seen improvements in integrity standards in their workplaces in recent years and they view current standards as being quite high. Then, compared to 20 years ago, more U.S. companies are pursuing sound environmental programs, taking greater account of human rights and labor rights issues in their overseas workforces, and being more pro-active to end discrimination against minorities. More U.S. companies are putting more resources into compliance with ethics codes and standards than ever before.

However, many of these achievements are overshadowed by the headlines about corporate fraud, CEO crime, greed and lying, as well as record fines for wrongdoing.   So egregious have been the scandalous actions of a number of top corporate executives that restoring public trust in business is certain to be a long-term undertaking.  Further deterioration in public trust may encourage additional governmental regulation of business, with damaging consequences for our free enterprise system.

Moreover, the costs to corporations of scandals are greater than is widely perceived. In cases such as Barings and WorldCom it meant bankruptcy. In many other cases the scale of fines and litigation associated with civil suits has been very substantial; top management and the board of directors has been totally distracted from key business operations; blows to stock market confidence have hit the share price very hard and have had an impact on the company’s finances; damage to relationships with many stakeholders have been severe; and, difficulties have arisen in the recruitment of excellent employees.

Due to the combination of academic research, surveys, expert reports on companies like Tyco and Fannie Mae that had major crises, and best practice examples, understanding of the actions needed to make corporations behave better is growing. An increasing number of scholars (such as Linda Klebe Trevino, Michael Brown, Ronald Berenbeim, Patricia Harned) are now highlighting the central importance of building an integrity culture in an organization that is driven by leaders who are sensitive to stakeholder perceptions of the ‘tone at the top.’

But, scholarship and advocacy may sound good in theory, but issues of integrity and corporate culture are exceptionally difficult to deal with in the board-room.  Corporate board directors want to focus on concrete actions. Many of them come to meetings with a mindset influenced over many years by legal practice or advice from corporate lawyers. They are familiar with rules, regulations, compliance standards and they are confident about directing management to apply appropriate corporate management systems to ensure adherence to the law.  But integrity and culture sound very fuzzy and herein resides a crucial problem.

However, companies that lack an ethical compass sink?  An ethical compass is not just an ethics code nailed to corporate notice board. It is not just an obscure scrap of paper that, as we saw at Enron, the board can briskly hurl aside when it is most convenient to do so. Long-term successful companies are those that are driven by core values set within a corporate integrity culture. And, after all the scandals of recent times, public prosecutors and officials from the enforcement division of the Securities and Exchange Commission are now looking very closely at companies that appear on their radar screens as to whether they have put in place specific approaches that ensure that they are indeed appropriating in accord with integrity values.

This poses a huge challenge to boards of directors. How often have we heard directors say that they consider the managers of their companies to be honest and decent fellows and therefore they can be trusted? But, such instincts on the part of board members no longer suffice. Somehow boards must get to grips with the vague and fuzzy notions of ethical corporate culture, but how?

This is a challenge that needs to be faced by the full board of directors and not just a board committee, such as one on governance. The fact is that if the company acts in an unethical manner and this is exposed and hits the front pages of the Wall Street Journal then the damage to almost every facet of the corporate business can be formidable.  To enable the full board to have confidence in the ethical practices of its corporation it needs assurance, above all else, that an integrity culture is being built.

It is no longer possible for companies to erect vast pyramids of hierarchical management layers where the actions of subordinates are closely monitored by their immediate superiors. Employees in companies that seek to be lean and flexible and competitive have to be trusted. Top management has to have a system in place that assures it that its employees know right from wrong, understand that doing business correctly is not a matter of choice, but an absolute necessity. The key to securing such a system rests in ensuring that all employees have shared values. But how does the board of directors feel comfortable that this is really the case?

Directors need to be able to see the vague and good sounding ideas about culture and ethics translated into concrete steps that can be placed within a clear operational framework.  The more straightforward the framework, the easier it becomes for the board to monitor performance. And oversight by the board in this area has now become an imperative. A starting point is the development of a framework based on eight areas of reform.

To read the full article, with footnotes, download here.

Frank Vogl has given a number of other speechs on global corruption and global ethics. Please click here to read more.


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In the following article the authors discuss the concept of stakeholder boards, an idea which, while prevalent in Europe, has not yet become a major topic of corporate governance in the US.

Designing Stakeholder Boards in Developing Countries
A Policy Brief

Bryane Michael (Linacre College, Oxford) and Serdar Dinler (CSR Association)
Article originally appeared in the Spring 2006 issue of Governance

Why should the owners of a company allow others to take major corporate decisions? The stakeholder board concept asks stock holders to decrease their control over corporate decisions. Or so it seems. While the debate continues in the corporate governance literature, many companies are already experimenting with the stakeholder board. Stakeholder boards are Boards of Directors which include members who are not stockholders or company management. DPL Inc. -- a utility company based in Dayton, Ohio -- represents an example (which went wrong). According to the Corporate Library (a major Internet watchdog of corporate governance practices and abuses), “DPL...is currently mired in controversy – and significantly dominated by Kohlberg, Kravis, Roberts & Co. Since the controversy began, several local leadership directors, instead of appropriately representing the community’s interests...have mostly deserted the board, leaving the future of the firm almost solely in the hands of KKR interests. The resulting level of risk, to DPL’s shareholders as well as the community it serves, has only increased as a result.”(1)

Yet, despite the controversy and uncertainty surrounding the use of stakeholder boards in developed countries, developing countries are being urged to adopt these types of boards. In China, for example, a number of state-owned enterprises have been encouraged to adopt stakeholder boards. Yet, a recent report notes that “these multi-stakeholder boards have not only been inactive, they lack a clear focus. The government needs to clarify whose interests these boards should represent.” (p. 8).(2) A main reason for these poor results has been lack of guidance. Either recommendations are Panglossian (arguing that stakeholder boards must or must not be adopted en masse) or clouded in technical jargon. Pierick et al.  (2004) is representative of a wide range of papers which presents complicated models with easily more than ten variables which affect corporate responsibility.  

This policy brief reduces the complexity behind the issue of stakeholder boards and explores the trade-off between increased information flow to the company from external actors (such as suppliers, customers and regulators) and the weakened incentives to maximise shareholder profits (and thus decreased economic efficiency). This policy brief also tries to serve as a vade mecum -- using extensive footnotes to point the reader to future information. This brief is aimed at policymakers and business people and not particularly academics.

Why Talk About Stakeholder Boards?

Increased diversification in the Board room partly reflects the increased fuzziness of organisational boundaries in the last 15 to 20 years.(3) Pro-Natura is an international network of NGOs which seeks to work with business  (unlike many NGOs which fear co-option). Once a company has chosen to engage in environmental activity (for whatever reason), it must decide whether to work with Pro-Natura or to work on its own. Clearly the decision to outsource represents an extension of the company (where labour and capital work for the company even though they “belong” to Pro-Natura). Pro-Natura also takes business like decisions in order to meet the objectives of its partner.  Pro-Natura is a business-like NGO and an NGO-like business. Business in the Community represents an example of companies banding together to form an NGO. The aim of the collaboration is to promote NGO-like objectives (through work on CSR). Yet, businesses ultimately take decisions through their membership rights. Orinoco (the Oxford Scrapstore) is an Oxford based registered charity whose paint and tool recycling programmes make a profit and support its operations. In each of these cases, the answer to the question “who are we” clearly impacts board membership.   

While organisational fuzziness may (or may not) be a new phenomenon, non-profit interests have always been a part of business.(4) The Turkish bank VakifBank represents an example of an institution (established in Ottoman times) whose goal has always been charitable. VakifBank receives bequeaths and administers the resulting trusts to build schools and hospitals. The Indian company Tata is widely known in India for its work in the local community ever since its inception. Tata is a large economic entity, yet its influence in Indian society stems in part of its involvement in social projects. In both cases, Board members of been cognizant of stakeholder interests.  

A new type of industrial cluster is starting to form around the world. Porter (1985) talked the interaction of local business in Italy which allowed the shoe industry to become highly profitable during the 1970s and 1980s.(5) Bresnahan and Gambardell (2004) talk about the interaction between business, government, and financiers in Silicon Valley to make computer companies operating there highly innovative and profitable during the 1980s and 1990s. By the late 1990s and early 2000s, new groups are forming based around the interaction between business and NGOs. Digital Bridge and Anchorage in Bangalore (India) are an example of a for-profit business which works with an NGO to obtain training and access to ideas from the donor community.

Stakeholder Versus Shareholder Boards

These examples cast new light on ideas from finance about the separation of ownership and control. Authors such as Hart (1995) and Freeman et al. (1990) discuss the tension between company management (who wants to see new ideas prosper) and financiers (who want a return on their money). Naturally, financiers worry about managers taking their money either directly or indirectly by shirking – and thus managers want a say in how their money was used.(6) The major insight of much finance literature though is that dividing ownership and control may provide everyone with incentives needed to maximise their wealth.(7) Giving some control to others besides the financiers may increase their incentives to make the company work well. The following attempts to summarise the main lessons from theory and practice.(8)

Lower “Discount Rates.” Hall and Soskice. (2001) note that German bank finance may be better than American equity finance because it is “patient capital.”  Anglo-American equity finance often provides deep financial markets. However, stock investors looking at quarterly returns may dispose of assets which would be valuable in the long-term. Rhenish bank-centred finance may provide an alternative because investors are more patient. These investors are said to have low “discount rates” – they do not heavily discount (or disparage) the future. Other stakeholders (such as workers or even local communities) offer services to the firm which is not finance, but just as valuable. Unions offering wage concessions is a common example. Indian Biscuit (not the real company’s name) offers another example. India Biscuit is a small enterprise with only 40 workers located in a tiny village in Karnataka. In 2002, India Biscuit’s factory caught on fire. The local village rushed to put out the fire. In economics language, the villagers sacrificed their short-term interest for their enlightened long-term self-interest interest in having a responsible company in their community.

The logic behind lower discount rates underpins “relational contracting.” Many scholars are that East Asian (and especially Japanese firms) were so competitve in the second half of the 20th century because they took a stakeholder perspective. (9) Toyota for example, would maintain close relationships with suppliers and communicate constantly. Mazda – when it had financial difficulties in the 1980s – was given extensive support by its suppliers and other stakeholders so it could survive.   

Increased “informational capital.” The Board is a decision-making body, but it is also a deliberative body. Each member brings his or her own resources and informational networks to bear. Lorsch (1989) has argued that boards of directors often have insufficient information with which to perform their duties. Most commentators disparage “interlinking directorates” (or the same board members sitting on each other’s boards). While such a practice may be a type of collusion (and this remains to be proven), interlocking directorates are an effective way of information gathering. The same logic extends to other stakeholders. By bringing in different skill sets, this increases the skill-set available for use. So far, these boards have been located either in utilities and state—managed enterprises, or business minded NGOs.

Making Net Organisational Capital. Stakeholder boards are not designed to promote political participation the company (though they serve that function as well). (10)  Board members contribute to the profitability of the firm. Barton et al. (1989) evoke the idea of “net organisational capital.” The company in its daily work runs up a set of “chits” vis-a-vis its stakeholders. If it serves a customer well, it can expect future business. The expectation of future business almost acts as a type of “account receivable.”  Similarly, a company which angers a supplier can expect future retaliation and should think of this action today as an “account payable.”

More Money. In most of our executive training (especially in developing countries), business people ask how they profit from having the more socially responsible policies which a stakeholder board would pursue. Figure 2 shows some of these ways which made the business people sit up and take notice.

Figure 2: Making Premia vis-a-vis the Company’s Stakeholders

Workers/Employees. The firm can earn a Corporate Social Responsibility (CSR) “wage discount.” The average wage differential between the private sector and the charity sector is roughly $30,000 per year in the US. While firms engaging in CSR can not all benefit from such large reductions in wages, the gains can be significant.  In one medium sized Turkish company we were working with, the wage bill was roughly $30,000 (on average to make the calculations easy) over 70 employees. If the company could reduce its wage bill by 20%, the net savings would $420,000.

Customers. CSR can improve profitability by lowering costs and raising demand. Entire market segments such as Fair-trade Coffee or the Body Shop’s offerings are based on social responsibility. (11) Maintaining relationships with customers also decreases the likelihood that customers will stop buying from a particular seller. Sasser and Schlesinger (1997) present evidence that customer and employee satisfaction and loyalty predict better future financial success than past financial data. Such importance of perhaps explains why the travel company First lists the establishment of a stakeholder board as a key achievement in its service to customers.

Financiers. For large companies, investments by socially responsible investors can make CSR attractive. However, even for small companies, CSR can help reduce the cost of bank finance or increase accounts payable times. Banks set an interest rate based on their perceived riskiness of the borrower. If the borrower can convince the bank that risk is reduced because other stakeholders will step in if problems arise, then the risk premium charged might fall. Turkish Holdings (a company we have been working with) provides an example. We had discussed a tender for $20 million dollar project. If Turkish Holdings won, it would finance the cost of the project with bank finance and then receive its money upon completion. Sitting with staff of the companies finance department and external finance officials, we discussed ways CSR programmes might make the company less risky. By the end of the conversation, most of the participants at the event did not find it unreasonably that the bank would drop the lending rate to 2% -- representing a savings (not including compounding) of $400,000.   

Government. Working with government can certainly help promote the passage of regulations (or the application of regulations) which help the company. Anti-corruption is also a CSR issue. A strong CSR policy can be the best defense against bribe related costs. One head of a Russian Services (which was large in its area but small relative to the Russian economy) told us their bribe policy and their terrorism policy were the same – never negotiate. An economist might argue that the policy acts as a “credible commitment” by the company not to pay bribes – no need to even ask!

According to Besant-Jones and Tenenbaum (2001), “the California experience suggests that stakeholder boards will work only if they are limited in size, voting rules ensure that one or two classes cannot control the board's decisions, and a single regulator can step in when there is a deadlock.” (12) These companies were required by law to have stakeholder boards in order to participate in local energy projects. Yet, the problem was probably not simply stakeholder involvement, but too much stakeholder involvement. In other cases, too little stakeholder involvement results in the classic corporate governance problems.

A Simple Model of Stakeholder Board Design

Much of the literature talks about stakeholder boards in either glowing or disparaging terms. A more nuanced view of the decision to establish a stakeholder board would not view stakeholder boards as an all-or-nothing proposition. Much the synergy from having a collection of stakeholders comes from the extra revenue per customer from better products and lower costs paid to the factors of production. Each stakeholder makes a marginal contribution to that increase in profits. Of course each stakeholder adds or subtracts value depending on the individual’s own skill set and personal relationships. Yet, abstraction to explore general principles can be useful.

The marginal productivity of each stakeholder representative on the board is shown in Figure 2. Adding one extra stakeholder increases enormously the synergy with the interests of financial interests and adds new perspectives. Dispersion is relatively low because the one stakeholder represents a minority. At the other end of the spectrum represents a full-stakeholder board with a number of varied interests. The optimal lies in the middle and depends on the relative distraction versus synergy extra members bring. (13)

Figure 2: The Optimal Number of Stakeholder Representatives


All stakeholder board representatives are not the same – individual differences matter. Like all business decisions -- including human resource decisions used on employees – the a Board member should increase profits. Unlike democracies where representativeness should be strived for, a method of triage of board members should be put in place. (14) The problem with many previous attempts at making stakeholder boards is that designers tried to use democratic principles of representation and used an all all-or-nothing view of stakeholder boards. (15)

Shareholders are leery of stakeholder boards because they believe that these stakeholders are unable to take sophisticated business decisions. The easiest solution is to give them a business education! Companies like Citigroup give management training in the local communities in which they work. Such expertise could be used in the Board room as well. The UK Institute of Directors offers many types of Board-level training programmes. Both options are not very expensive.

Shareholders are also leery because they fear that inefficient stakeholder representatives will slow down decisions and militate for non-economic decision making. However, Board members should have performance criteria like any other company employee. Stakeholder board members are just as accountable to these criteria. These members can also be sacked or shuffled if they prove too disruptive.

Recommendations for the Design of Stakeholder Boards

Stakeholder boards in developing countries should not simply follow the practice of developed economies. Stakeholder boards may be even more important for developing countries. First, capital markets are much less developed. In classic economic theory, efficient capital markets will place resources where they are most useful. Without these markets, the “invisible hand” of the market must be replaced by the “visible hand” of the stakeholders themselves. Second, these countries have increased government participation and increased socialistic leanings in the design of the business system. Many advisors suggest removing these structures and allowing “free markets” to work. Instead, these structures must be used – important organisational capital lies within them. Institutions such as TOBB in Turkey help coordinate business policy and many developing countries have similar structures.

A national co-ordinating body may help define the role of stakeholder boards in a particular country. Kar CSR (Hindi for Do CSR!) represents a forum for defining the role of stakeholder boards. Started by local NGO (Anchorage), this Karnataka-wide programme aims to train government, business, and NGOs. It hopes to co-ordinate CSR activity through the establishment of a Committee of Stakeholders. These stakeholders represent state and local government officials, media representatives, industry members, trade associations, and NGOs among others. They do not sit in companies. Instead, they sit together to advise on how members from their stakeholder group can sit together in companies. They also work together to define CSR priorities. A Secretariat supports their day-to-day work.

How to Design a Stakeholder Board in Brief

To design a stakeholder board, the company should define the importance of shareholder interests in its profits, decide on a number of stakeholder members, conduct triage based on particular individuals strengths and weaknesses, and be prepared to change board composition as particular stakeholders become more or less important.


-Argandoña, A. (1998). The Stakeholder Theory and the Common Good. Journal of Business Ethics 17(9-10). July: 1093-1102.
- Baker, G., R. Gibbons and Kevin J. Murphy. Relational Contracts in Strategic Alliances. Available at: http://www.nber.org/~confer/2002/allis02/baker.pdf
Barton, S. L., N. C. Hill, and S. Sundaram. (1989). An Empirical Test of Stakeholder Theory Predictions of Capital Structure. Financial Management 18(1): 36-4
- Berman, Shawn L., Andrew C. Wicks, Suresh Kotha, and Thomas M. Jones. (1999). Does Stakeholder Orientation Matter? The Relationship Between Stakeholder Management Models and Firm Financial Performance. Academy of Management Journal 42(5). October: 488-506.
- Besant-Jones, J. and Bernard Tenenbaum. (2001). Lessons from California's Power Crisis.  Finance and Development 38(3). September.
- Brenner, Steven N., and P. L. Cochran. (1991). The Stakeholder Theory of the Firm: Implications for Business and Society Theory and Research. International Association for Business and Society Proceedings: 449-467.
- Freeman, R. Edward, and William M. Evan. 1990. Corporate Governance: A Stakeholder Interpretation. Journal of Behavioral Economics 19 (4): 337-359.
- Hart, O. (1995). Firms, Contracts, and Financial Structure. Oxford: Clarendon Press.
- Hall, P. and D. Soskice. (2001). Varieties of Capitalism: The Institutional Foundations of Comparative Advantage. Oxford.
- Jones, T. (1995). Instrumental Stakeholder Theory: A Synthesis of Ethics and Economics. Academy of Management Review 20: 404-437.
- Key, S. (1999). Toward a New Theory of the Firm: A Critique of Stakeholder Theory. Management Decision 37 (4): 317-328.
- Lamb, W. B. 1994. Measuring Corporate Social Performance: A Stakeholder Approach. International Association for Business and Society Proceedings: 247-252
- Lorsch, J. (1989). Pawns or Potentates: The Reality of America's Corporate Boards Harvard Business School Press.
 -Miller, Richard Lee, and William F. Lewis. (1991). A Stakeholder Approach to Marketing Management Using the Value Exchange Model. European Journal of Marketing 25 (8): 55-68.
- Pierick, E., V. Beekman, C. van der Weele, M. Meeusen and R. de Graaff.
A framework for analysing corporate social performance Beyond the Wood model
Available at: http://www.lei.dlo.nl/publicaties/PDF/2004/5_xxx/5_04_03.pdf
Porter, M. (1985). Competitive Advantage: Creating and Sustaining Superior Performance. Free Press.
- Reed, D. (1999). Stakeholder Management Theory: A Critical Theory Perspective. Business Ethics Quarterly 9 (3). July: 453-484.
- Sasser, E. and L. Schlesinger. (1997). The Service Profit Chain. Free Press.


(1) Kohlberg, Kravis, Roberts & Co. (KKR) become famous for the 1988 leveraged buyout of RJR Nabisco – still the largest leveraged buy-out in history at a cost of nearly $25 billion. Other acquisitions have included Samsonite, Safeway,Texaco, Gillette, Playtex, Borden and Beatrice. 

(2) Available at: http://www.acga-asia.org/loadfile.cfm?SITE_FILE_ID=26

(3) Such fuzziness has always existed as Jones (1995) argues in the conceptual relations between company and society. However, the fuzziness we refer to is concrtely the organisational delimitation between NGOs, business and government. 

(4) Argandoña (1998) tries to establish an ethical foundation for stakeholder boards from the concept of promoting the “common good.” This section should make clear that resort to such concepts is unnecessary given the important gains deriving from “enlightened self-interest.”

(5) We will not repeat this analysis other than to note that these areas had supply conditions which favored high quality products, competition which drove innovation, suppliers who were responsive to company needs and picky consumers of these products.

(6) The summary presented does not do justice to the ideas of these authors and is presented to provide the practitioner with a simply overview of these ideas.

(7) Barton et al.‘s (1989) regression analysis supposedly shows that increased amounts of “net organisational capital” (given by a stakeholder approach) increases profitability and results in lower debt ratios.

(8) The following exposition focused mostly on positive features. Authors such as Key (1999) and Reed (1999) are critical of the entire notion of stakeholder involvement in corporate decisions.

(9) Baker at al. (2002) offer a wonderful exposition of the issues around relational contracting.

(10) The Board room is actually a highly politicised place – for more see Freeman (1994).

(11) Miller and Lewis (1991) make a strong case for using stakeholder concepts in marketing.

(12) According to Navigant Consulting, “flaws in the market rules can favor the stakeholders in the market over consumers or others less well represented by stakeholder Boards.... As a result, some jurisdictions which started with stakeholder Boards have moved towards independent Boards. In California, one of the first reactions to the crisis by FERC was to unseat the stakeholder Board.” Available at: http://www.nbmdc-ccmnb.ca/docs/IssuePaper-Systems_Operator.doc

(13) Depending on the relative dispersion or synergy, a “corner solution” may exist such that it is optimal for none or all Board members to be stakeholders rather than shareholders.

(15) Berman et al. (1999) rightly find that stakeholder representation increase profitability. However, the diversity of that representation does not, “community, diversity, and the natural environment--failed to exhibit statistically significant impacts on firm financial performance. This is particularly true for the measures relating to community relations and diversity” (501).

(16) Such thinking still pervades thinking about stakeholder boards. Brenner and Cochran (1991) elaborate a very complicated method of assigning stakeholders “weights.”

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VW Corporate Governance: The Story Continues

After months of speculation the Supervisory Board of Volkswagen unanimously agreed on May 2, 2006, to extend the contract of CEO Bernd Pischetsrieder to 2012. All 10 trade union delegates on the company’s supervisory board, led by the IG Metall trade union chief Jürgen Peter, who is also the Supervisory Board deputy chairman, agreed to the renewal. But according to an analysis on an international socialist website on May 9, 2006 many employees are unhappy that their union leaders should support an executive who plans far-reaching workforce cuts in order to return the company to substantial profitability. The CEO had announced plans to cut 20,000 jobs at Volkswagen’s six German plants in Wolfsburg, Hanover, Cassel, Braunschweig, Emden and Salzgitter, while simultaneously lengthening the workweek from 28.8 to 35 hours, without any corresponding wage increase.

The unanimous support of the employee representatives on the Supervisory Board is only one questionable issue that lingers after months of speculation over the leadership of the company. Another issue that has come to the fore, in part stimulated by the VW development, relates to the length of new CEO contracts in Germany.

Germany’s top government authority on corporate governance is set to consider whether to recommend that CEO contracts should be limited to three years, rather than the current standard of five years at a meeting next month. The Regierungskommission Deutscher Corporate Governance provides a standard governance code for German business as a general guideline. The organization does not have binding authority, but its recommendations are increasingly being adopted, according to its latest report.

Further, VW remains in the headlines because its former human resources chief, Peter Hartz, could face a possible prison sentence for alleged embezzlement in a major  corruption scandal.  The challenge for Bernd Pischetsrieder, according to German press reports, is to assert his leadership, create sales momentum behind the company’s new models, restructure the German plants to reduce costs, and overcome months of bad press to strengthen VW’s general image and brand.

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All The Rage

Will Independent Directors Produce Good Corporate Governance?

By Peter J. Wallison
American Enterprise Institute
January 6, 2005

That public companies should be governed by independent directors has become conventional wisdom. Yet, academic studies suggest that supermajorities of independent directors may have a negative effect on corporate performance, and experience with recent corporate scandals suggests that independent directors are not effective in preventing financial fraud. A close examination of the incentives of independent directors, and their access to information, may explain both phenomena, and raises questions about whether a supermajority of independent directors should be the “gold standard” of corporate governance.

Of the many demands of the Sarbanes-Oxley Act, none has had more far-reaching consequences than the requirement that audit committees be composed entirely of independent directors. With this act, Congress put its imprimatur on the general notion that more independent directors on corporate boards would improve corporate governance--an idea that had already attracted widespread support in the courts, among corporate governance specialists, and even in some business groups. As a result, shortly after the adoption of the act, both the New York Stock Exchange and Nasdaq established rules requiring that the boards of listed companies be composed of a majority of independent directors, and the idea took hold that an independent board was a “best practice” that all corporations should adopt.

Thus, in a 2003 report, a committee of the Conference Board--a prestigious business organization--declared: “Every board should be composed of a substantial majority of independent directors. This goes beyond the proposals by the New York Stock Exchange to have only a majority of independent directors.” And in 2004, with this idea obviously in mind, the Securities and Exchange Commission (SEC) adopted a rule requiring that 75 percent of a mutual fund’s directors be independent of the investment adviser--and that the board have an independent chair--if the fund and adviser wished to take advantage of some important exemptions from the Investment Company Act of 1940. That well-managed companies should be governed by a board with a supermajority of independent directors had now become conventional wisdom.

Yet, many years of academic research have provided little empirical support for the idea that independent directors contribute to better corporate performance or governance, and a number of detailed studies have shown either no relationship or a negative relationship between corporate performance and the presence of a large percentage of independent directors on corporate boards. The most widely cited and influential of these studies seemed to show a negative correlation between board composition and performance that appears to become more pronounced as the percentage of independent directors on corporate boards increases. Similarly, a study of mutual fund performance also showed that funds headed by a non-independent chair performed better for their investors than did funds headed by independent chairs. If a majority was good, it seems, a supermajority would be better.

To be sure, requiring more independent directors on audit committees or boards was done in order to obtain better governance, not better performance, and better governance could be considered a value in itself, irrespective of its effect on corporate performance. But studies have not shown that boards with a supermajority of independent directors are superior at monitoring, either. Accordingly, it is somewhat surprising that support for corporate governance by a supermajority of independent directors became so widespread after the adoption of the Sarbanes-Oxley Act; the empirical data associated with its effect on corporate performance was at best ambiguous, and its supposed association with good governance practices was at best theoretical.

If we consider the inherent characteristics of independent directors--their lack of knowledge about the company they are supposed to be governing and their limited incentives to learn more or take risks--it becomes somewhat easier to understand why supermajorities of independent directors have failed to prevent financial fraud in cases such as Enron or, when studied carefully, are correlated with negative effects on corporate performance.

More of this essay at AEI

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“Rewarding Virtue – Effective Board Action and Corporate Responsibility.”

December 1, 2005
Report by a group of leading UK institutions: Business in the Community, About FTSE Group, Insight Investment

Key Recommendations of the report include that the Board of Directors should:

• Set values and standards for the business
• Think strategically about corporate responsibility in the context of market pressures
• Be constructive about regulation, delivering self-regulation and supporting government intervention to correct market failure
• Align performance management, rewarding responsible success over the long-term
• Create a culture of integrity, setting the right tone at the top and cultivating the right values in the corporate culture
• Use internal control to secure responsibility, safeguarding standards with robust audit and control systems.

According to the report’s lead author, Craig Mackenzie, head of investor responsibility at Insight Investment, “Corporate responsibility sets the terms of a mutually valuable contract between companies and society. But short-term pressures can lead companies to behave irresponsibly. The board has a decisive role to play in resisting these pressures – serving the public interest and safeguarding long-term shareholder value.”

Stephen Howard, managing director of Business in the Community said “This report shows that corporate responsibility is not an optional extra. Principles of honesty, care, fairness and accountability are an essential part of long-term business success. The more effective boards can be at delivering corporate responsibility the more trust and freedom business deserves from its stakeholders and regulators.”

Mark Makepeace, chief executive of FTSE Group, commented “The recommendations in this report will help identify best practices in the governance of corporate responsibility at board level. We hope that it will facilitate the future development of international standards and that the debate will help inform the work of the FTSE4Good Policy Committee in this area.”

Directors duties

The Combined Code on Corporate Governance says that boards “should set the values and standards of the company and ensure that it meets its obligations to shareholders and others.” (Section A.1) (www.fsa.gov.uk/pubs/ukla/lr_comcode2003.pdf)

The Company Law Reform Bill (published November 1 2005) will require directors, in their effort to promote the success of the company, to take account of the company’s impact on the community, the environment, employee interests and relationships with other stakeholders and the company’s reputation for maintaining high standards of conduct. (S.156) ( www.publications.parliament.uk/pa/ld200506/ldbills/034/2006034.htm)

About Insight Investment : Insight Investment Management (Global) Limited is the asset manager of HBOS plc. Insight Investment manages funds for institutional and retail clients across the full range of asset types, with £84 bn in assets under management as at 30 September 2005. www.insightinvestment.com

About Business in the Community
: Business in the Community in the UK comprises over 750 member companies, with a further 2000 plus engaged through its programmes and campaigns. Its stated purpose is to inspire, challenge and support business continually improving its impact in the community, environment, marketplace and workplace. www.bitc.org.uk

About FTSE Group: FTSE Group creates and manages stock market indexes. Note the FTSE4Good series. www.ftse.com.

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REUTERS' Governance in the Board Room

Reuters Builds Strong Independent Board of Directors

In an interview with the Financial Times (September 27, 2005) Niall Fitzgerald, former joint chairman of Unilever and now Chairman of Reuters, provided an in-depth view of the role of the Board of Directors with particular emphasis on non-executive independent directors. As Fitzgerald sees it, good governance requires Board members to devote very considerable time to a corporation’s affairs and to be well informed. It also requires a diversity of membership in the Board that fully reflects the range of experiences key to the company’s businesses. The Chairman rejected the suggestion that independent directors may lose their independent approaches if they are on a Board for a long time and noted that most of the members of the Reuters Board are quite new. He has established a secure website just for Board members to enable them to obtain highly detailed information on many aspects of the company.

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