PULL UP A CHAIR: Governance & The Boardroom. An HR Perspective. Mike Esser. Raoul Choos.

Transcription

1 PULL UP A CHAIR: Governance & The Boardroom An HR Perspective Raoul Choos Vice President raoul.choos@pearlmeyer.com Mike Esser Managing Director mike.esser@pearlmeyer.com September 27,

2 What is Corporate Governance? System of checks and balances between Board of Directors Management Investors/shareholders System structure and practices designed to produce Efficiently functioning corporation Geared toward long-term value creation 2

3 What is Corporate Governance? (continued) Director s fiduciary responsibilities to shareholders and company Duty of care make decisions that are informed Duty of loyalty Act without conflict Always put interests of company before those of individual director Duty to act in good faith in accordance with corporate governance practices 3

4 The Mess We Got Ourselves In Accounting Irregularities Former Tyco CEO Dennis Kozlowski Former WorldCom CEO Bernard Ebbers Greed Fraud Former NYSE CEO Dick Grasso Corruption Former Enron CEO Jeffrey Skilling Former CEO Omnimedia Martha Stewart 4

5 The Clean Up Team 5

6 Our Focus Today The impact governance has had on human resources and the organization as a whole Defining good governance and best practices around it What can HR do to support good governance? 6

7 A Market Perspective Pearl Meyer & Partners and hr.com co-sponsored a web-enabled survey this past August The purpose of the survey was two-fold To ascertain the impact governance has had on the role and visibility of HR, managing the organization, and from a financial perspective To determine the prevalence of companies practicing governance board and compensation best practices 195 companies participated in the survey of which 124 companies were included in our analysis 7

8 Survey Participant Profile EE Count Revenue Size 100% 100% 75% 75% 50% 50% 39% 31% 25% 0% 23% 12% % 19% % % or Greater 25% 0% 2% No Response Less than $300M 20% $300M to less than $1B $1B to less than $10B 7% $10B or Greater Industry Ownership Utilities 6% Services 19% Information Technologies 13% Other 5% Financials 23% Industrials 9% Consumer Discretionary 9% Consumer Staples 6% Health Care 10% Tax Exempt 9% Privately Held - For Profit 26% Closely Held - For Profit 2% Other 6% Publicly Held - For Profit 57% Findings are based on 124 participating organizations. Percentages may not total up to 100% due to rounding. 8

9 What Has Been the Impact on HR s Role? To what extent has the HR role changed in your organization as a result of recent regulatory changes Change in HR Role 100% 75% 50% 40% 44% 25% 10% 6% 0% Significant Change Moderate Change No Change Not Sure Findings are based on 124 participating organizations. Percentages may not total up to 100% due to rounding. 9

10 The Re-Branding of Human Resources The visibility and role of Head of HR in corporate governance at my organization has increased in the last few years. Visibility 100% 75% 50% 31% 40% 25% 18% 11% 0% Stro ngly A gree A gree No Opinio n Disagree Findings are based on 124 participating organizations. Percentages may not total up to 100% due to rounding. 10

11 For the Better? Our Company recognizes the value HR can bring to sound corporate governance. Value Recognition 100% 75% 50% 35% 49% 25% 0% Stro ngly Agree 6% 8% 1% Agree No Opinion Disagree Strongly Disagree Findings are based on 124 participating organizations. Percentages may not total up to 100% due to rounding. 11

12 For the Better? (continued) In general, what effect has The Sarbanes-Oxley Act and resulting governance reform had on the management of your organization? High HR Involvement 62% 7% 7% 24% Positive Effect Little HR Involvement 42% 36% 9% 13% No Effect Negative Effect Don't Know All 31% 40% 18% 11% Findings are based on 124 participating organizations. Percentages may not total up to 100% due to rounding. 12

13 Involvement in What Types of Activities Company strategic planning Board of Director meetings Board Committee meetings (e.g., compensation committee) Executive compensation reviews Employment contracts and change in control agreements Equity plan design Solicitation of shareholder approval of executive compensation and benefits Institution Shareholder Relations (e.g., review of ISS guidelines) Regulatory filings (e.g., proxies, 8k) Regulatory and tax review and compliance 13

14 Yet, There is a Price to Pay For Governance At your organization, the financial costs associated with Sarbanes-Oxley and resulting governance reforms have: Financial Cost 100% 75% 50% 34% 31% 25% 15% 19% 0% Increased Significantly Increased Stayed the Same Don't Know Findings are based on 124 participating organizations. Percentages may not total up to 100% due to rounding. 14

15 It Appears Organizations Are Doing the Right Things Our organization s board has: Board Best Practices Defined Committee Meeting Calendars Formal Board Committee Charters Executive Sessions (Without Management Present) Annual CEO Performance Review Compensation Committee Reference Books Complete Access To Outside Advisors (Ability To Hire/Fire) Yes Considering CEO Succession Plan Annual Board or Board Member Performance Evaluation(s) Formal Board Education Program(s) Defined Retirement Age For Directors Non Executive Board Chairman Lead Director (If CEO Serves As Chairman) 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%...However, there is room for improvement Findings are based on 124 participating organizations. Percentages may not total up to 100% due to rounding. 15

16 It Appears Organizations Are Doing the Right Things (continued) Our organization has: Compensation Best Practices Defined Pay-For-Performance Philosophy Defined Executive Compensation Philosophy Defined Comparative Peer Group For Executive/Board Comp Review s Defined Board Compensation Philosophy Yes Considering Developed Tally Sheets Equity Ow nership Guidelines For Executives Equity Ow nership Guidelines For Board Of Directors 0% 10% 20% 30% 40% 50% 60% 70% 80%...However, there is room for improvement Findings are based on 124 participating organizations. Percentages may not total up to 100% due to rounding. 16

17 Governance Best Practices Boards carry out oversight duties though Committees Audit Compensation Governance (nominating) Greatest potential HR involvement Compensation Committee HR as lead, working closely with Legal and Finance Governance Legal likely to lead, with HR as partner 17

18 Comp Committee Procedures Where Does HR Fit In? Competitive assessments (conducted regularly) Comprehensive view of executive compensation and benefits Comparison to market and best practices Executive pay-for-performance relationship Effectiveness in supporting desired philosophy and objectives Competitive peer group selection Management AND Board input and approval 18

19 Comp Committee Procedures Where Does HR Fit In? (continued) Tally Sheets Design Formal analysis of all elements of executive compensation and benefits Assessment of costs under various scenarios Termination (voluntary, involuntary) Change-In-Control Retirement Board education on best practices 19

20 Comp Committee Governance Best Practices Structure Charter Philosophy Procedures Decisions Disclosure 20

21 Comp Committee Structure Comprised of at least two independent Directors Three to five members is more typical Independent as defined by IRC Section 162(m), NYSE/NASDAQ listing standards, and SEC Rule 16b-3 Recommended by Governance/Nominating Committee, approved by Board Professionally diverse (not all former/current CEOs) 21

22 Comp Committee Structure (continued) Review of each Committee member to determine the existence/scope of any Interlocking Board relationships Service provider relationships Prior business relationships (including ties created by philanthropic activities) Personal friendships and family relationships Committee Chair and memberships should rotate periodically 22

23 Comp Committee Charter Written responsibilities and authority Composition Duties and Responsibilities Meet at least quarterly Communication with full board Communication with shareholders Use of outside resources 23

24 An Example of Statement of Responsibilities Compensation CEO performance review CEO pay decisions Annual merit budget Other senior executives Incentive plan oversight Stock plan oversight Benefits and perquisites Reporting to Board / shareholders Annual self-evaluation Succession planning Director compensation 24

25 An Example of Scope and Nature of Authority ISSUE/PLAN Hire Fire Performance Review Salary Incentives Equity Perquisites NQ Benefits Employee Benefits Employment contracts CIC / Severance EMPLOYEE CATEGORY Section 16 Other Executives Managers and Professionals Exempt Non-exempt Hourly Part-time NATURE OF ACTION Advise/review Recommend Approve 25

26 Comp Committee Philosophy Overall objectives of program and desired positioning both externally and internally Purpose and positioning of each element Salary Annual incentives Long-term incentives (including equity) Stock options Benefits Perquisites Employment / change-in-control / severance agreements 26

27 Comp Committee Philosophy (continued) Program considerations Stock ownership guidelines/requirements Limits on equity dilution SEC / Stock exchange requirements Deductibility [IRC 162(m)] Accounting impact Comparative positioning of pay at other levels of organization Definition of performance to be rewarded 27

28 Comp Committee Procedures At least four meetings per year Planned calendar/agenda Sufficient meeting time for the agenda items Evidence of deliberation Review at one meeting; vote at sequent meeting Materials provided one week in advance, action items clearly identified Meet in executive session at every meeting Access to management and in-house staff support (human resources, legal) 28

29 Comp Committee Procedures (continued) Direct relationship with outside advisors (compensation consultants and/or law firm) Minutes should include a record of key deliberations and materials reviewed by the Committee Committee report/updates to the Board 29

30 An Example of a Meeting Schedule & Agenda Quarter 1 st 2 nd 3 rd 4 th Set current year incentive goals Approve option grants Approve salary increases Approve proxy disclosure Approve prior year incentive awards (after Audit Committee certifies financials) Review benefits and perquisites programs Review insider trading policy and activity Evaluate Committee performance Review competitive positioning of pay program Review performance vis-à-vis peers Review general trends Activity Approve prior year incentive awards after Audit Committee certifies financials Early look at incentive plan results Approve any plan changes for coming year 30

31 Comp Committee Decisions Determination of supporting data requirements for pay decisions and frequency/timing of market data reviews Identification of market parameters and peer group Establishment of stock ownership/holding guidelines Control and reduction of dilution impact Sign-off on special compensation or contingency arrangement, future compensation arrangements, unusual perquisites or benefits, employment contracts, or other initiatives that put the company at risk 31

32 Comp Committee Disclosure Committee should have a clear process for drafting and reviewing the Compensation Committee Report in the annual proxy statement Committee should also review other compensation disclosures Proxy exhibits/materials (tables, discussion of certain relationships, new/amended plan documents, etc.) Shareholder approval of equity plans and resulting dilution 10-K information on cost of equity compensation and pension plans Committee should favor full disclosure of key compensation arrangements, even if beyond current requirements 32

33 Comp Committee Disclosure (continued) Disclosure includes any management contract or compensatory plan, contract or arrangement in which Named executive officer or Director participates Equity is awarded under a non-shareholder approved plan SEC staff interpretation expected shortly; many Committee actions may trigger real-time disclosure In addition, related agreements may need to be filed as exhibits to the next 10-Q or 10-K New SEC rule requires real-time Form 8-K disclosure within four business days of material definitive agreements. 33

34 What Can HR do to Ensure and Support Sound Governance? Identify gaps between current company practices and best practices and plans to bridge them! Assemble compensation reference book detailing all elements of current compensation program and levels of all executives Develop compensation committee calendar Conduct executive total compensation review from both an internal and external perspective Educate and evaluate Directors Operationalize governance in compensation and other human resource programs throughout organization 34