Merging an Airline–Creating a Culture

Chicago’s newest hometown CEO,  Jeff Smisek took to the stage at the Executive’s Club of Chicago and offered some simple lessons for creating a new culture for the 86,000 employees of United, the largest airline in the world.  Yes, he addressed the huge challenges facing the enterprise—taxes, regulation, a capital intensive and labor intensive business. But, he noted, if you get the culture right, everyone is focused on doing the right thing and United-Continental will not just be the biggest airline but the best—the world’s leading airline.

Smisek acknowledged that mergers are difficult enough for employees but if you have the same terrible boss after the merger as you had before the merger, it’s not going to help you make the airline better. The new United has a new culture based on dignity and respect.  “It’s simple. It’s what your mommy told you: ‘Treat people the way you want to be treated and never tell a lie.”

That culture will encourage employees to use their best judgment in doing the right thing, the key to being a great company. And, he’s made it the responsibility of the top 700 leaders in the company to help him root out the bad bosses by tying it to their compensation.

His remarks were brief, the answers to questions candid and forthright and the warm welcome conveyed the audiences support that he’s the man to get the job done.


The Leadership Style of Steven Jobs

The iBooks will be appearing on iPads (and Kindles) shortly:  how the leadership style of Steven P. Jobs created the most valuable company in the world.
The obituaries reminded us that this was the man who transformed the way we use technology, how we listen to music, watch TV shows and movies. Not only a genius, Steve Jobs will be remembered as the leading figure of our time.
Jobs saw himself as neither a hardware engineer nor a software programmer, but a technology leader who chose the best people possible.  And once they worked for him, he encouraged them, yes but more often he prodded and criticized them.  Occasionally, he even humiliated those who dared to bring him anything short of “insanely great.”
Be careful, leadership gurus, how you spin these critical characteristics.  In anyone less than Steve Jobs, that is, all of us, such insistence on being better, not settling for less could turn mean, harsh, brutal.
Steve Jobs meddled, demanded that everyone do better. Steve Jobs who suffered his own purgatory at a young age, grew success outside of Apple and returned to create greater triumphs in recreating the company, embodied the gifts and the knowledge to elicit extraordinary loyalty.
“He was the most passionate leader one could hope for, a motivating force without parallel,” wrote Steven Levy, author of the 1994 book “Insanely Great,” which chronicles the creation of the Mac.



Why Tone at the Top Matters

In the face of whistleblowers, tone at the top of the company has never been more important. So is the board’s role in both overseeing and monitoring the culture of an organization.

In a webinar, sponsored by Jim Kristie of Directors & Boards magazine and
the law firm Morvillo Abramowitz, Barry A. Bohrer and Richard D. Weinberg
discussed “Internal Investigations 2011: What Directors Need to Know.”

In light of the new SEC rules that reward whistle-blowers with rich bounties,
the renowned attorneys stressed the need for strong compliance programs and a
corporate culture that encourages employees to report problems early.

Weinberg suggested that boards consider “prepared preliminary action plans,”
which could include how the board would handle an internal investigation,
vetting outside attorneys and forensic experts in advance and discussions about
whether they would delegate oversight of the investigation to audit or a
special committee.

How the board handles the investigation is critically important in terms of
disciplinary action. Did the organization self report? Did they handle the
investigation expeditiously and credibly?  Did they engage independent
help in the form of advisors, attorneys and forensic specialists?

Shareholders, employees and the public are watching.

Prepare for 2012 Proxy Season Now

Given the dramatic level of shareholder approval for most compensation programs during the 2011 proxy season, many directors may be inclined to view the historic Shareholder Say on Pay and frequency of Say on Pay votes as over and done. They would be mistaken.

In Winston & Strawn’s excellent eLunch (webinar) program last week, Preparing for the 2012 Proxy Season: Governance and Executive Compensation Strategies,” Michael Melbinger, Christine Edwards, Oscar David, Erin Stone and Erik Lundgren reviewed the past season and advised that this is no time for complacency. (The presentation is still available online.)  Boards should be reviewing what they learned from their shareholders and preparing for the upcoming season, which will feature more Dodd-Frank requirements in the CD&A and other disclosures that link pay to performance.  “Prepare early.  Think about it now.  Tell your story,” Melbinger told the audience.

The SEC wanted Say on Pay to cause boards to interact with shareholders.  That’s what happened, particularly for companies with contentious issues.  Those that prepared executive summaries, used charts and plain English to explain their compensation plans and even those who filed supplemental materials were largely successful.

The curtain has been lifted. Shareholders have greater expectations for communication with the board, more involvement in governance.  Smart boards will anticipate shareholder issues and minimize contentious issues. Don’t
wait for 2012 proxy season.  Begin now.

Don’t Be a ‘Sitting Duck’–Advice on Avoiding Activist Shareholders

Poor financial returns, low stock price, a board that hasn’t changed for over a
decade—these are some of the board characteristics that attract activist
investors. To make the case for board change, the activists will attempt to
draw a correlation between poor financial and operating performance with poor
oversight as a way to blame the board.

In a Blank Rome LLP webinar, partner Keith Gottfried warned participants not to be
that board. Conduct your own evaluation of the board’s vulnerabilities: Has the
board failed to hold management accountable? Is the compensation excessive?
Does the board lack sufficient industry experience? Has the board explained how each director is qualified?  Is the board lacking in diversity? Is the board sufficiently independent?  Is there a perception that the board is not “fully engaged”?

Paul Schulman of MacKenzie Partners and Chris Cernich of ISS also participated in the webinar.

Shareholders are now part of the governance dialogue.  Not only must the board carry out its duty of care to represent all shareholders, but they must convey in
board structure and leadership how the board governs.  The webinar together with the presentation is posted on the Blank Rome website.

Mid-Market Companies Need Independent Directors

In their excellent paperprivate company posted on the Newport Board Group website, Gary Kunkle and Mark Rosenman discuss the need for independent directors at private, growth-oriented companies.

Entrepreneurs, they say, “need to look beyond day-to-day operational firefighting.  They need the timeliest, savviest, most reliable counsel about markets, trends and companies.” The authors provide a helpful guide to the natural stages of enlisting advisory help.  Sure, the entrepreneur can go it alone, but he or she is likely to fall victim to “myopic decision-making to which nearly all closely held companies are prone.” A private company may seek independent board members when it needs liquidity but the right independent advisors can bring so much more to emerging companies. Not only do independent directors help the entrepreneur to develop stronger, more professional management, but they often oversee the creation of financial and operational controls. The presence of talented business men and women serving as independent directors also sends a message to world that the CEO entrepreneur is confident enough to challenge his thinking in growing a stronger company.

Value and Best Practices in CEO Succession Management

successionIn its webinar on CEO Succession and Compensation co-sponsored by NACD, Pearl Meyer & Partners Yvonne Chen and Matt Turner discussed the growing visibility and importance of the CEO succession process and effective compensation practices. The issues abound, whether it’s the board’s oversight role in developing strong internal candidates for the job, having an immediate successor in place in case of an emergency or keeping those “runner ups” engaged in the company if they are not selected for the post.  High profile CEO succession failures have a demonstrated negative impact on the company’s stock and create a host of challenges related to employees and public relations.  Moreover, it is clear that when a company goes “outside” to find a new CEO, it’s more costly—79 percent of those CEOs who are paid more at target than the prior CEO are external hires.

One of the questions posed during the webinar was about the performance of internally developed CEOs versus externally recruited CEOs.  A recent study by the Kelley School of Business of Indiana University, led by Fred Steingraber, directly addresses this question.  An article outlining the study’s findings (co-authored by me) appeared in a recent issue of Corporate Board Magazine. The study, which details the superior performance of internally developed CEOs, examined the leadership of the most successful non-financial S&P 500 companies from 1988 through 2007. The 20-year duration was critical to the study because it minimized distortions of performance that could have occurred over shorter time spans of three, five or even 10 years. In addition, this two-decade period was characterized by different economic cycles, globalization, dramatic technology advances, shifting consumer preferences and changes in leaders competing under a wide variety of conditions.

In our article, we summarized how this group of 36 S&P 500 non-financial companies was distinguished by consistent, superior leaders over the 20-year span, outperforming the remaining S&P 500 firms in seven measurable metrics: return on assets, equity and investment, revenue and earnings growth, earnings per share (EPS) growth and stock-price appreciation.

We believe this study demonstrates the ability of “home-grown leadership” to consistently generate superior results and the importance of the board’s focus on effective CEO succession.

Critical Need for Boards to Understand Their Shareholders

say on payIt’s clear that “Say on Pay” is not going away.  For companies whose shareholders rejected or expressed concern about the executive compensation programs with large numbers of negative votes, now is the time for boards to create a strategy to engage with shareholders to better understand their concerns.

Compensation consultant Robin Farracone of Farient Advisors warns boards not to “just sit there and do nothing” because it invites opposition to grow. Let it fester, she says, and it places the board and the company in a negative spotlight that “creates reputational damage and could even have a depressive effect on the stock price.”  

Boards have been reluctant to engage with shareholders because they often don’t have a picture of what a board engaging with shareholders might look like.  Often, they believe it is the job of the investor relations department. But “say on pay” focuses on the board’s role in approving compensation programs for the named officers for the company.  And shareholders expect the board to be responsive. 

“Good engagement takes different forms, but it’s critical to get an early start,” says Patrick McGurn of ISS, also interviewed in the Corporate Secretary article.  The Dodd-Frank requirement for Say on Pay voting was designed to encourage dialogue between the board and shareholders.  Some boards, like Prudential, established a dedicated compensation committee email address and actively seeks electronic queries on pay matters and anything else related to board work.  Prudential regularly sends board members and representatives on engagement exercises with investors.

Not only should board members be able to demonstrate that the compensation program is aligned with performance, but they should be able to explain compensation in general terms.  This has proven to be a difficult task that directors should correct by requiring themselves to explain

SEC Smackdown

The-Securities-and-Exchange-CommissionThe US Chamber and others cheered the decision of the US Court of Appeals in overturning “proxy access,” which would have given large shareholders the right to nominate their own slate of directors. However,  it would be wise for sitting directors to think beyond the safety of their own board terms.

In rushing to get the rule in place, the SEC failed to “determine the likely economic consequences” of the rule and its effect on “efficiency, competition and capital formation” — all of which it must do by law.

But directors should consider the level of shareholder concern about their governance record–and not just the unions that are seeking increased benefits. Creeping federal regulation is the result of “corporate officers and directors are not doing their jobs,” according to Hillary Sale in her paper, The New ‘Public’ Corporation. “They have failed to understand the force of public scrutiny and have, thereby, failed their corporations.  They are not good public company stewards.”

The message to companies about the past ten years of increasing shareholder power is that shareholders are part of the governance conversation. Whether the SEC redoes its analysis and reissues its rule, corporate directors would do well to consider the level of shareholder disappointment that helped create Dodd-Frank and develop more effective board-shareholder engagement to satisfy and encourage long-term investment and participation.

British Boards: Evolution or Revolution?

britishThe Spencer Stuart study, “Evolution or Revolution? Changes in Britain’s boards of directors from 1960 to 2010” is an important contribution to the field of corporate governance. In crediting author Sir Geoffrey Owen for his role in telling the story, Mark Stroyan, Managing Director of Spencer Stuart characterizes the history as both fascinating and important.  As it illuminates the past, the study sets the stage for the discussion of how boards will continue to adapt in the future.

 The search firm identified five concerns that boards need to address: 1) Preparing the next generation of chairmen with the caveat that not all CEOs are automatically suited to becoming chairmen, noting the critical skill of running a board meeting, drawing out and listening to all points of view, synthesizing the arguments and reaching conclusions without appearing to dominate. 2) The right of non-executives to seek advice because creating supplementary information channels is important for non-executive chairmen to discharge their duties in leading the board in oversight. 3) The pressure to appoint more women to boards has resulted in quotas in Norway.  And while many protest that there aren’t enough women with the relevant experience to serve, their view is that “there is a pool of potential candidates if boards are prepared to look less at proven general management experience and more at talent potential—to consider creative ideas and take some calculated risks.

While many sitting CEOs find it too time-consuming to sit on additional boards, Owen posits that 4) it is in the long-term interest of business that more working CEOs serve on boards. The 5th challenge is to create more engaged boards but they note that when there are individuals in the boardroom who are really not contributing, it is “always uncomfortable to change the status quo” and ask the poor performing directors to leave.

One of the more interesting sidebars is “The Decline of the Guinea Pig,” which described the job of an independent director as a “delightful perk for important (and often self-important) business folk at the end of their professional career.”  These independents were “sometimes known as ‘guinea pigs’—for a guinea and a free lunch they were happy to sleep through any chief executive’s presentation of his corporate plan.”