Treat the Disease, Not the Symptom

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Expert Perspective by Grahall’s OmniMedia Editorial Board

expert perspective telescopeIn the October 23, 2009 Reuters article “Anger Over Wall Street Pay Puts Spotlight On Directors” the authors say that “Directors of public companies, especially those who sit on compensation committees, will feel the brunt of the growing focus on pay, at a time when many institutional shareholders and governance critics demand the ouster of ineffectual directors.”

Directors might wonder how they can avoid criticism around compensation decisions, and certainly they do have some very specific actions they can take.  For example, Directors must have complete confidence in the independence of their advisors and especially their compensation consultants.  Directors should be wary about presentations about executive pay that are based solely on market data and lack consideration of their company’s corporate business and people strategies.  The bottom line here: make sure your compensation decisions are defensible, transparent, easy to communicate and solidly understandable.  

But Grahall also suggests taking a step back and adopting a broader perspective.   Potential concerns with the processes of determining executive compensation might reveal a bigger problem.  Inadequacies in compensation decisions might be a symptom of  a larger problem in overall Board governance.  (For more information, see OmniMedia blogs Of Peers and Paradoxes , It’s Complicated  and other OmniMedia Blogs ).

So how does a director, an executive, the media or an investor know if a company’s compensation policy is at fault or if that is simply a symptom of a larger “disease” in Board governance?

Start with a look at your ISS Corporate Governance Quotient (CGQ).  CGQ is “corporate governance rating system provided by Institutional Shareholder Services (ISS)….  [It] evaluates the strengths, deficiencies, and risks of a company’s corporate governance practices and board of directors.

CGQ uses a comprehensive set of objectives and consistently applied criteria for each of the companies rated. The database… includes underlying data points for up to 63 corporate governance variables, categorized under four areas of focus: 1) board of directors, 2) audit, 3) anti-takeover provisions, 4) executive and director compensation.”  (From Yahoo)

A low CGQ score is a good indication of problems with governance, which will undoubtedly spill over into all Board activities – including executive compensation decisions.  Maybe it’s time to ask if the Board governance processes overall need to be reviewed.

Another important component of Board governance is how much the board members themselves are paid.  Grahall is finalizing soon-to-be-released research on Board of Directors governance, which considers the roles of boards, the contributions they make and the pay that they receive.  The basic premise is a “pay-for-performance” model for Boards of Directors.   If boards make large contributions, they should receive higher pay; limited contributions call for lower pay.  And this applies not only to boards generally, but to the contributions of each individual board member.  (For more information on Board roles and contributions see Omni Blog: They Work Hard for The Money)

Grahall can help companies assess the “contribution quotient” for its board of directors.  This information would be important in any complete review of Board Governance.

As Sylvester Stallone said in his role as Marion Cobretti in the 1986 film Cobra:  “You’re a disease – and I’m the cure.”

Contact Grahall’s OmniMedia Editorial Board at edie.kingston@grahall.com

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