BulletProofBlog the blog on crisis communications

Each week, Bulletproof Blog features exclusive interviews with thought leaders on issues of critical importance to companies and countries. This week, with boards of directors dealing with increased shareholder pressures on issues ranging from executive succession to executive compensation, we interview Dr. John Holcomb, a professor at the University of Denver’s Daniels College of Business.

A nationally recognized expert on issues of corporate governance, corporate responsibility, and crisis management, Dr. Holcomb shared his insights on how boards can best cope with a new era of shareholder accountability with Bulletproof™:

What are the keys to successful executive succession? Given that succession planning is clearly the board’s purview, to what extent does the board need to lead this effort? What should management’s role be?

John Holcomb: I believe the board should assume a much more active role in executive succession.  Ram Charan of Harvard Business School points out that board activity on executive succession probably represents 80 percent of the value that boards deliver, and yet they spend less time on that issue than on all others. The board needs to create an executive succession plan and take the lead in identifying future CEO candidates and meeting with them personally. It all too often defers to outside recruiters and search firms.

The board also needs to appreciate that cultivating CEO and leadership candidates internally can answer several problems. The board will have greater assurance that the candidates have been fully tested and that they have an in-depth knowledge of the company and its problems. The board can also avert the need to turn to a “star” outsider who may be much more expensive. In that respect, an effective executive succession plan can be a large part of the solution to the executive compensation issue. That is why shareholders are showing a much greater interest in the executive succession issue.

The board also needs to create a leadership development program that includes all executive ranks, ideally modeled on such leading programs as those at General Electric and Procter & Gamble, and then charge top management with implementing the program.

How can public companies best manage a new era of shareholder activism? If companies move proactively, does it offer them the opportunity to “recruit” shareholders as allies?

John Holcomb: Public companies need to reach out to institutional shareholders on a regular basis and especially to activists that might pose threats of proxy fights for control of the firm. Firms must always attempt to anticipate future shareholder demands and challenges through active monitoring and dialogues. Corporate boards cannot afford to simply delegate these functions to investor relations departments but must themselves proactively engage shareholders. In fact, knowledge of and connections to the institutional investor community should be a criteria in selecting at least some of the outside directors on the board.

Regarding shareholder resolutions, top management and boards can often successfully negotiate with outside sponsors, granting some concessions in return for withdrawal of a resolution. Even better, if companies and boards continually survey the evolving priorities of shareholder activists, the companies can adjust their policies in advance and thereby avoid being targeted by a resolution. By anticipating and adapting to shareholder priorities, corporations can avoid the expense and time of dealing with proxy fights and debates at annual meetings.

Of course, some shareholder gadflies will never be satisfied, and in those cases, firms must strongly defend their policies and positions to all shareholders to garner support.  As in many political battles, companies can often split the opposition and win support from more responsible shareholder critics while isolating those with the most extreme and unreasonable demands. By fostering sound and respectful relationships with shareholder activists over time, some of those shareholder groups might become ambassadors for the company, partnering with the firm to blunt legislative or regulatory pressures or even to train their sites on competitors of the firm. In that sense, a strong policy of shareholder relations can contribute significant benefits to competitive strategy. 

Given the role that the so-called “Pay Czar” has had with those companies that still have TARP funds, what trends/practices in executive compensation do you see other companies adopting now, before they might be forced to do so?

John Holcomb: Some of the “Pay Czar’s” initiatives make sense and are actually based on some “best practices” that have already been adopted by certain companies. To downplay cash in favor of stock or restricted stock – admittedly a debatable approach for some companies – does make sense for most. Basing compensation on longer term performance has virtually become a cliché and has been initiated by many firms. The pay czar may be cutting the issue too finely by defining the “long term” based on two- and four-year increments, though, and several firms have actually pushed the time horizon further into the future. That is just one example of how voluntary governance reforms, tailored to the needs of particular firms, are vastly preferable to uniform regulatory requirements imposed on all firms, regardless of their competitive or industry situations.

Compensation committees can also anticipate and deflect regulatory pressures by changing their performance metrics to include broader financial measures than stockholder return. The Pay Czar prefers return on investment as a far better measure. Valuation is a complicated issue, but some firms also include customer satisfaction and employee satisfaction criteria when determining pay for performance. 

There are other initiatives that compensation committees can adopt to anticipate and adapt to shareholder demands and regulatory pressures as well. Even though the evidence is divided on the effectiveness of “say on pay,” it may be inevitable, and firms like Aflac have already voluntarily adopted programs of shareholder advisory votes on executive compensation. 

Following on the heels of recent SEC rules, several firms have also devised “total tally sheets” in disclosing total pay packages to shareholders, allowing for more meaningful information disclosure. Companies might also abandon using the compensation of peer companies as benchmarks for their own compensation programs – an approach favored by pay consultants that only serves to continually ratchet up compensation for top management across all industries.

Board nominating and governance committees might also try to avoid any specter of cronyism on compensation committees by avoiding placing on comp committees CEOs  who have a stake in seeing overall compensation creep upward. Instead, boards might nominate real experts in compensation to that committee.

Finally, as mentioned earlier, a solid executive succession plan can contribute mightily to restraining excessive compensation by not having to overpay for an outsider. Boards should also exercise restraint in the amounts they allocate to golden parachute and severance payments, if authorized at all. They should also be aware of the internal and political backlash created by excessive pensions and perks.

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Larry Smith is Senior Vice President of Levick Strategic Communications, the nation's top crisis communications firm, and a contributing author to Bulletproof Blog. Connect with Levick on Twitter: @Levick.