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Meeting LogisticsHolding more meetings won’t always improve board dynamics.. Though more complex companies or companies in dynamic industries might consider more frequent meetings,most b

Meeting Logistics

Holding more meetings won’t always improve board dynamics ing longer meetings won’t ensure the board is adding value Butmeetings must be designed to give the board the time it needs to

Hold-do its real work Though more complex companies or companies

in dynamic industries might consider more frequent meetings,most boards can probably cover it all in eight meetings per year.These meetings can’t simply be morning presentations, fol-lowed by lunch Given the external context, risk factors, macro is-sues, compliance issues, and all the rest, there’s simply not enoughtime to hold meaningful dialogue between breakfast and lunch.Progressive boards set aside a full day for meetings; some may evenrun a day and a half each

The meetings themselves should have agendas that build onthe Twelve-Month Agenda and maximize discussion time Direc-tors should come to meetings with board briefings read in full and

be prepared to jump right in with dialogue and questions Severaltopics described in this book deserve periodic attention duringboard meetings That is, the board should be sure to include onthe meeting agenda discussions on the following topics:

• Balance sheet, twice per year

• Leadership gene pool and succession, twice per year

• CEO compensation, once per year

• Risk, once per year

• Strategy, once or twice per year outside of board meetings

• Crisis management, once per year

These are guidelines, not rules And it doesn’t mean these ics are not discussed at other board meetings One company goes

top-so far as to set up a checklist of board requirements and meetings(see Exhibit 11.2) In this way, the board can monitor over timethat it is covering its responsibilities

To develop the agenda for a particular meeting, the lead rector might work with the CEO to form a preliminary agenda Di-rectors then provide input of their own, and the agenda is adjustedwell in advance of the meeting

di-Exhibit 11.2.

Review procedures designed to promote integrity and candor in the audit of the company’

Nominating and Governance Committee reviews the board’

the directors as part of evaluation Qualifications and per

Other Dir

Non-executive directors who are not fully employed do not ser

other public company boards Non-executive directors who are fully employed do not ser

company boards CEO does not ser

Many directors will also assemble the night before a board ing officially begins They’ll gather for informal meetings over din-ner or cocktails with fellow directors or with management Thisinteraction is an essential part of forming a rich board dynamic, and

meet-an excellent chmeet-ance to gauge direct reports meet-and up-meet-and-comingmanagers These apparently social occasions serve a purpose andare a good way to jump-start the group dynamics

Chapter Twelve

Working with Investors

External pressures have forced boards to change, but they cannotrelinquish control of their own destiny and that of the company

As boards come of age, the thoroughness of their processes andthe depth of their discussions will give them the confidence tostand firm amid conflicting demands

The challenge is to be responsive to external constituencies butnot let them replace the collective judgment of the board Just asthe board must maintain a good relationship with the CEO whilemaintaining an independent viewpoint, it should also listen to em-ployees, customers, suppliers, investors—anyone who has a stake

in the company—but reach its own collective conclusions aboutwhat is right for the long-term viability of the company It can’t af-ford to be swayed off course by vocal and persuasive third parties.The challenge is particularly complex and requires the utmostsophistication and judgment when it comes to investors Directorshave to find mechanisms to assess what sources the board shouldlisten to, what concerns are legitimate, and how to beware of self-interest

Sources the Board Should Listen To

When investors pressure management to divest, restructure, pay adividend, or make some other strategic move, the board mustweigh carefully whether the complaints are legitimate It may behelpful to consider first who is making the demand The share-holder base is not monolithic It is made up of many types of in-vestors, with different motives ranging from long-term growth to

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short-term hedging That dynamic makes markets efficient vehiclesfor raising capital But it also confuses the definition of an investor

as an owner.

Further muddying the water is the fact that, according to guard Guard founder John Bogle (quoted on the Vanguard Website), 56 percent of equity shares are controlled by the hundredlargest institutional managers, who are actually proxies for mutualfund investors, pensioners, insurance companies, and other enti-ties In a sense, they are “derivative shareholders,” in that theirshareholder status is conferred on them by other people’s money.Many of these professional managers make their bonuses based onshort-term performance, which means their outlook is decidedlyfocused on the short term Indeed, the average holding period forinstitutionally owned shares is only eleven months, according toBogle It is unlikely that their motives are the same as those of a trueowner, one with skin in the game who is in it for the long term.There are, however, institutional holders whose opinions mat-ter Some hold large blocks of stock for long periods of time Theseinvestors may not understand the company as well as the board,but they are sophisticated businesspeople who understand thecompetition and the marketplace They can tell the difference be-tween external pressures and inadequate management, and willgenerally keep quiet unless they perceive serious missteps relative

Van-to the economy or competiVan-tors So when the head of a $10 billioncompany fails to give an acceptable range of guidance for eightconsecutive quarters, which has happened, these investors begin

to gripe That’s when the board and management should listen.Boards should interact directly with the company’s Investor Re-lations Department to get information on investors’ concerns.Some have the director of IR visit the boardroom on occasion totell the board directly what word is coming in from investors everyday A good board makes sure top management is responsive toand communicating with these investors That could mean pushingback, but it must be done respectfully rather than antagonistically.The CEO’s credibility is very important and the board shouldcoach the CEO if that credibility is slipping

Likewise, the board itself needs to maintain its own credibility.Controversies will emerge; directors should develop a process todeal with them and to communicate directly with major investors,

if necessary Boards should carefully discuss how to do that out enfeebling the CEO.

with-One way to establish credibility over time is to open up a ular communications channel with investors Intel has at least twodirectors address the annual meeting each year, on topics such asthe board’s audit process and executive compensation Providingsome transparency into the board’s operations will help the pub-lic see that the board is working hard on its behalf

reg-Another way to communicate with investors is to include in thecompany’s annual report a letter from the lead director or Gover-nance Committee Chair, signed by all non-executive directors.Committee Chairs could write their own letters The communiquéswould outline the functioning of the board or committee, accom-plishments over the past year, and the goals for the coming year.Over time, the transparency will improve the public’s comfort levelwith the board These practices let everyone know the board is dili-gent, not negligent, and listening to investors’ concerns

Legitimate Concerns

A broader range of investors are active today, and when they aredissatisfied with the company’s earnings or direction, they insist onchange Investors are no longer content to vote with their wallets(that is, sell their shares) or to resort to a leveraged buyout whenmanagement and the board are unresponsive

Serious long-term investors raise many legitimate issues thatboards have to consider:

• Forcing divestiture: It’s common for investors in struggling firms

to demand that underperforming divisions be divested Foryears, Motorola CEO and Chair Chris Galvin resisted thepressures of shareholders who wanted the company’s semi-conductor division sold But he never made a compelling casefor holding the unit, and he couldn’t turn it around He waslet go late in 2003 and the company announced it would in-deed spin off the semiconductor unit, even before namingGalvin’s replacement

• Strategy: In September 2003, Kodak CEO and Chair Dan Carp

announced a plan to shift Kodak’s strategy more aggressively

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into digital products As part of the strategy, the dividend wascut dramatically and $3 billion was designated for acquisitionsand internal investments Investors voiced two complaints:First, some investors wanted the company to shrink and keepthe dividend Second, other investors didn’t think the com-pany could execute its ambitious strategy Carp spent a lot oftime publicly defending the strategy approved by the board.

• CEO: The run-up to Disney’s annual shareholders meeting

in March 2004 was a prominent demonstration of investorsout for a CEO’s head, in this case Michael Eisner’s Pressuremounted on the board to act The board decided not toremove Eisner, but stripped him of the Chair position

• Tainted director: Directors who serve at a company where fraud

is alleged become tainted, in the eyes of some investors Thiswas particularly true for the highest-profile corporate failures,such as Enron, whose directors came under fire in their otherdirectorships

• Compensation plan: GlaxoSmithKline had to revamp the

com-pensation plan for CEO Jean-Pierre Garnier in 2003 after U.K.shareholders rejected a proposal that included a potentiallysignificant severance if things didn’t work out

• Social responsibility: The oil majors have become lightning rods

for activists who call for more responsible business practicesaround the world These increasing pressures are coming notonly from picketers but also from investors

• Dividend policy: For many years, investors watched Microsoft

build up hoards of cash—over $40 billion at the end of 2002while it generated nearly $1 billion in free cash each month—yet the company never paid a dividend The company finallyrelented by paying an annual dividend in early 2003 A sub-stantial special dividend was announced the following year

• Succession: In the United Kingdom, Fidelity Investments joined

a number of shareholders in blocking the 2003 appointment

of Michael Green as Chair of ITV, the merged Carlton munications and Granada Media In October, the board capit-ulated and decided to search for a new Chair

Com-Getting results further emboldens investors The public paign against management and the board of Disney in early 2004,

cam-led by former directors Roy Disney and Stanley Gold, embarrassedthat board into taking action The company was not at all nearbankruptcy at the time Indeed, the dissidents may have mistimedtheir battle—the company began to demonstrate far improved fi-nancial performance just as the fight began to heat up Neverthe-less, they had legitimate complaints about senior management overthe preceding few years, especially about the disturbing lack ofboard involvement on a succession plan The incident gave a lot

of energy and publicity to other activists “A director’s willingness tosay, in the boardroom, that an investor’s criticism may have meritcould have saved many companies and their investors untold grief

over the past few years,” says Fortune’s Colvin.

Still, while the board has to listen to investors, it sometimesmust ignore what they say and help the CEO withstand their criti-cism Not all vocal shareholders are serious long-term investors, asDisney and Gold were; some are chasing fads or are in it for aquick buck or for political gain If the board believes in the com-pany’s strategy, and that the CEO is executing the correct balance

of short-term and long-term objectives, it should stand behind theCEO in resisting these short-sighted pressures A number of energyindustry CEOs showed courage to stay the course when investorswanted them to follow Enron’s strategy It was a difficult period forthese CEOs, but the confidence their boards showed in them paidoff when Enron’s flaws were exposed

The new reality is that boards have to be sensitive to the cerns of serious long-term shareholders and at the same time fil-ter out the shrill demands and the self-interests of short-terminvestors Directors have to discern who is complaining and why,get to the heart of long-term investors’ grievances, and be prepared

con-to stand up con-to the rest

Beware of Self-Interest

The Wall Street community presents issues for boards above andbeyond investor relations The world of investment bankers, equityanalysts, credit analysts, and now governance analysts consists ofsmart businesspeople with good ideas, but it is also rife with con-flicting interests Many of these professionals have something valu-able to say, but boards must consider the sources

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Governance analysts, for example, are gaining influence, spite their arguably flawed methodologies Some of the researchersattempt to sell advice to the very companies they are rating, setting

de-up a conflict of interest Nevertheless, some investors are listening

to the raters and putting pressure on companies based on the vey findings The board has to be cognizant of the issues the gov-ernance analysts raise and conscious of whether their argumentsare gaining any traction with mainstream investors

sur-Likewise, buy-side analysts have significant influence in the vestor community Their research of the industry, competitors, sup-pliers, and customers can be helpful to management and the board

in-in settin-ing the external context for strategy It can go too far, ever, when the analysts begin to make strategy recommendations—

The nexus of power to run the business must be with the CEOand the board—both The best CEOs are powerful in the good sense

of the word—they have command of the business, receive inputfrom and stand up to constituencies as necessary, address issueshead on, confront strong individuals when needed, and so on.Boards must be just as powerful in doing their job of helpingmanagement make sense of internal and external complexities andensuring that the talk matches reality If the CEO is incapable ofrunning the business properly, replacement is necessary Moreoften, the CEO needs the board’s input, coaching, and support.Today’s directors have a calling, and they must respond by con-tinually improving their practices Only a strong board can counter-balance the many people with influence whose desires and ambitionshave been misaligned with creating intrinsic value These influ-encers include those compensation consultants who have workedone-sidedly to maximize the benefits and minimize the risk to theirclient CEOs; some investment bankers, analysts, accountants, and

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