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Corporate governance

Toray Group Website — Effective Use Of Visuals

Based in Japan, Toray Group is an integrated chemical company. The company has 37,924 employees and 1,471.6 billion yen (2009/03) in sales. First let’s go to About Us

Toray Group: About Section

Note the use of image visuals. This gives a personality to the website. You get a feeling that there are people are behind this site. Profiling the message from the CEO also is an effective technique. Also deciding to put “Our People” is telling, hmm what’s that phrase “people are our most important asset”.

Navigate to Corporate Governance. There is a comprehensive description but not overly wordy explanation of the company’s Governance process supplemented by a visual diagram —

Toray Group Corporate Governance

The visual is a good supplement to the text and enhances communicating Toray’s Governance process.

Now let’s view what is an excellent use of a video, Toray at a Glance, to explain the company’s businesses, performance, strategies and at the end links to more information.

Toray Group At a Glance

This is one of the most effective website communication techniques I have seen.

Lesson Learned — enhance your website communications by thoughtful use of visuals.

Economic Crisis — Risks…And Opportunities

First let me share what I think is the seminal quote on the root cause of the current Economic Crisis. This is from Stephen Green, Group Chairman, HSBC, UK, speaking at the Economic Forum at Davos–

This is about values that have developed in the markets in recent years. We have moved from the old cliché ‘my word is bond’ to a culture and atmosphere where ‘if there’s a transaction, if there’s a market for it, and I have a contract, and it’s legal, that’s it; I don’t need to think about the underlying right or wrong, suitability or unsuitability. The Values behind Market Capitalism • Tony Blair • Stephen Green • Indra Nooyi • Shimon Peres • James J. Schiro • Jim Wallis
Moderated by • Maria Ramos Thursday 29 January 2009

Brilliant!

Source: NEOFORMIX

The Chinese Culture has long associated crisis with risks and opportunities and so it is with the current World Economic Crisis. The risks are well known and widely publicized. But, there are opportunities if you are smart enough to look for them.

Business leaders first need to come clean and admit that they failed and then focus  on opportunities. For example GE‘s CEO Jeff Immett in his letter to shareowners says —

Let’s face it: our Company’s reputation was tarnished because we weren’t the “safe and reliable” growth company that is our aspiration. I accept responsibility for this. But, I think this environment presents an opportunity of a lifetime. We get a chance to reset the core of GE and focus on what we do best. We can reset expectations for our performance. And we can participate in the changes required in the broader economy.

… The current crisis offers the challenge of our lifetime. I’ve told our leaders at GE that if they are frightened by this concept, they shouldn’t be here. But if they’re energized, and desire to play a part in transforming the Company for the future, then this is going to be a thrilling time to be a part of GE.

GE’s Board seems to have felt the pain and see the need for change. The need for change must start and be embraced from the top.

In the McKinsey Report The crisis: Mobilizing boards for change —

The solution is to explicitly change the way the board interacts. The chairman should insist that members articulate what they have thought but have not had the confidence to express. These conversations will often be more conceptual than rote, and participants will have to take the risk of “saying something stupid.” Chairmen will need to muster up the courage to drive relentlessly the discussions that will take most boards into deep and frightening waters. Long-cherished assumptions, existing plans, or defined ambitions may go down the drain.

Next, crises open up changes that were not possible in “normal times”. There must be a realization that disruptive changes will be needed —

A crisis is a chance to break ingrained structures and behaviors that sap the productivity and effectiveness of many organizations. Such moves aren’t a short-term crisis response—they often take a year or more to pay dividends—but are valuable in any scenario and could help a company survive if hard times persist. Although employees may dislike this approach, most will understand why management aims to make the organization more effective.

This may, for example, be the time to destroy the vertical organizational structures, retrofitted with ad hoc and matrix overlays, that encumber companies large and small. Such structures can burden professionals with several competing bosses. Internecine battles and unclear decisions are common. Turf wars between product, sales, and geographic managers kill promising projects. Searches for information aren’t productive, and countless hours are wasted on pointless e-mails, telephone calls, and meetings.

Leading through uncertainty

More resources at — The Crisis A new era for management

The Economic Crisis provides an opportunity for companies who aren’t already, to get serious about Ethics. Now is the time for the Board to set the “Tone at the Top” on Ethics, to establish an Ethics Officer and develop an Ethics based Corporate Culture.

Another opportunity is to improve your Corporate Reporting to stakeholders. Companies need to use their websites to maintain or rebuild their reputations — clearly explain your strategy and how you will accomplish it, improve how you display the Board and the Management Team, and clearly show the risks the company is facing and how it will manage them. More on this in a future post.

Smart leaders will find opportunities in the current Economic Crisis to build the way to an improved future.

Investor Relations and Executive Pay

In Washington, politicians are making hay with the public’s perception that greedy CEOs and executives were asleep at the switch as their companies circled the drain.

So far, the only concrete action taken has been the limit placed on executive compensation at financial institutions that receive Federal bailout money under the TARP program.  But, that doesn’t mean that more noise isn’t being made in more quarters than ever before.

The problem, of course, is perception.  Most people, and even most investors, have never risen into the executive ranks, so they have no idea what the view looks like from there.  Even fewer have ever been privy to the inner workings of a corporate board.  It is no wonder, then that from the outside, it looks like a seat on the Board of Directors is a free ride and that everyone from CEOs and CFOs to junior executives are grossly overpaid fat cats who smoke cigars and laugh inside backrooms as thousands of “real workers” are laid off.

Investor Relations and the Perception of Executive Pay

While it is undoubtedly too much to ask for any IR department to turn around the public perception of CEO and Board member pay, there is still much good that can be done.

Even before the current economic crisis much of the population viewed the high compensation of CEOs and others as nothing more than undeserved mega-salaries that were rubber stamped by do-nothing Boards of Directors who have seemingly never in the history of business found any reason not to award substantial performance bonuses regardless of how far the company had sunk.  Investors have given more benefit to company executives under the auspices that if the company is well managed and it (or more specifically its stock) performs well, then who cares how much the guy in the big office makes.  Even this goodwill has worn thin among recent revelations.

How then, can something as simple as an IR website make a difference?

First, ask this simple question.  Where on the company website can someone find information regarding executive compensation?

How many clicks does it take to get there from the IR homepage?  What text is displayed on those clicks?  How many people out of 100 would know to look under those clicks.

Second, ask this question.  Regardless of where the information exists, does it say anything other than the equivalent of the board will set performance goals and then set compensation based on how well those goals are met?

The answer to the first question is exactly why people, both investors and the general public, think that companies are hiding something when it comes to executive pay.  When it comes to how executives are paid and evaluated, it is often easier to find out the percentage change in the amount of depreciation written off against a three-year old take-over target’s assets in regards to… Well, you get the picture.

The answer to the second question is why investors, politicians, and the public think that executive pay is a blank check passed out without regard to any factors whatsoever.

A Better IR Approach

While specific performance objectives and actual target figures are often confidential for a variety of reasons, it does not follow that no information at all can be offered to investors who want to know just how the management of the company they are potentially interested in investing in are being evaluated and paid.

First, offer a better path to information regarding executive pay.  Yes, you know, as do many sophisticated investors, that such information is frequently listed under Corporate Governance, or something similar.  However, a link from inside the main IR areas can do wonders to decrease the perception that this data is deliberately being hidden.

Second, consider plain language explanations regarding certain compensation features, especially bonuses.

Perhaps nothing rankles Main Street, and their representatives in Congress more than seeing an executive at a struggling company receiving fat performance based awards.  The problem often stems from a misunderstanding that all performance metrics are based on “this year” or some other time frame.  An executive who joined the company 7 years ago with substantial bonuses for growing earnings by 10% might still be reaping those deserved awards despite the current negative trend, which can still easily be above where the company was 7 years ago.

Simply breaking out a general category of compensation among such broad areas as long-term performance awards, previously met objectives, or something similar can begin to clue in investors that these are not phony bonuses and awards.  As an added bonus, it reminds investors that the current management team has had success running the company in the past and that they are likely the best people to right the ship in whatever stormy waters the economic winds have whipped up.

As is often the case, broader more available communication can go a long way in creating a better investor experience and expectation.

Financial Crisis and Leadership or Lack Of

In my book, written after the “Enron Era”, I wrote about a Business School-Media-Corporate complex —

This Business School-Media-Corporate complex seems to have engaged in a group think of enormous proportions—professors, consultants, journalists, students and executives all feeding on their own diets of best practices, theories and what defines leadership.

  • Business schools taught Ethics as a sideline.
  • Many companies have lofty Mission Statements and Operating Practices statements that address ethics, but do little to enforce them.
  • Journalists give interviews to glitzy executives who brag about what they are doing to improve profits.
  •  Executives courted Wall Street analysts who might improve their stock ratings.

Business is at a crossroads. Capitalism is facing a crisis. All of us who believe in business—from CEOs to business-school professors—must recognize that we have contributed to this crisis. 

“Memo to: CEOs,” FastCompany, June, 2002″

Once again we have a flood of articles about a Leadership Crisis. There’s Fortune Magazine’s “How the fallout from the financial crisis could breed a new type of corporate leader”. Then there’s BusinessWeek’s “Leadership and the Financial Crisis”. And again there’s the debate about the role of Business Schools.

Enron Era Redux? No, this crisis is much worse. The impact of the Enron era was primarily limited to employees and investors. The current crisis has brought us to the brink of an international economic collapse.

In some of my posts, I have singled out some companies such as Nexen and Rio Tinto as models of ethical practices. Unfortunately for many of us, their model was not replicated in the companies that caused the current crisis.

Perhaps Warren Buffett has the key —

Executive compensation is the acid test of corporate governance. Financial incentives determine what objectives an organization pursues, and they drive the way managers conduct a business.

Boards should add an ethics component to senior management’s compensation package.  Components of typical executive compensation include —

  • a cash base salary;
  • annual (short-term) incentives;
  • long-term incentives;
  • supplemental retirement; and
  • other executive benefit.

Adding an ethics component should not be difficult and would contribute to improved ethical behavior. This will be covered in a future post.

A final insight on effective leadership is offered by Carly Fiorina, former CEO of HP. In a Wall Street Journal Opinion piece she said —

There is no doubt that government will now play a greater role in key industries. While this expanded role is perhaps vital for a time, our Founding Fathers knew that government’s power should be limited. If we are to emerge stronger from our current crises, businesses must restore their credibility and regain the American people’s trust by embracing accountability and transparency.

At no time in human history have we been so unconstrained by our array of capabilities or so challenged by our worst excesses. Never have common sense, good judgment and ethics mattered more.

Indeed.

NEXEN — Corporate Governance Done Right

I briefly mentioned Nexen in a previous post, but I thought it worth a more detailed look. Let’s look at their comprehensive Corporate Governance site.

You will see a few items of note —

  • INTEGRITY. HONESTY TRANSPARENCY is boldly displayed. They get it that these are the key to good Corporate Governance and they explain how they execute what they say.
  • All relevant documents are easily accessible.
  • Board meeting documents are also clearly displayed and accessible.

OK so far so good. Let’s take a closer look. The next navigation option is Integrity, click it and you see the CEO and the statement —

Integrity is not just a value at Nexen – it’s a way of life. Employees are educated to make ethical business decisions and are encouraged to ask questions about the integrity of a decision or course of action. Operating with integrity not only improves our reputation and helps our performance; we believe it’s the best way to successfully do business.

This is an excellent example of “tone at the top” being cascaded through the employee ranks. I find it noteworthy that the Code of Ethics is at the bottom of Integrity Navigation. Nexen first explains what it does to promote Integrity throughout the company.

An interesting feature is that in the Integrity Resources section (upper right), there is a link to Company Policies to “help employees and stakeholders comply with our core values”. This takes you to what has to be one of the most comprehensive displays of a company’s guidance on a wide variety of issues.

If you want a model of doing Corporate Governance right, look at Nexen. No wonder that they have received awards for effective Boards and Governance.

Larry Ellison’s $72 million Pay Package

Larry Ellison, founder of the technology company Oracle, is worth an estimated $25 billion (USD) and is one of the top 5 wealthiest men in the USA. Seems he wants to be the wealthiest. On August 28th, the news carried the story about his pay and its largess —

Aug. 28 (Bloomberg) — Oracle Corp. founder, Larry Ellison, the fourth-richest man in America, is drawing criticism from some shareholders for a $72 million pay package that’s 12 times bigger than the median pay of CEOs in the technology industry.

This is a subject that is not new. I remember a television broadcast in the mid-1990s (WCBS (US) 60 Minutes), that covered CEO pay in light of many employees losing their jobs. One commentator compared the ratio of CEO pay to the average worker. It went something like this — the ratio of the average CEO’s pay to that of the average worker is similar to what existed in 1789 France, when Louis XVI was king . You know what happened to Louis XVI, and by the way, they got his wife, too. Seems that nothing but the ratio has changed.  John C. Bogle in his article “Reflections On CEO Compensation”, Academy of Management Perspectives May 2008 displays this table —

By this measure the ratio increased from 42 in 1980 to 281 in 2004. There is continuing debate on just what is appropriate CEO compensation. This may be a topic for a future post. For now I will use Forbe’s Magazine CEO Compensation Efficiency Rank —

Methodology: Compensation rank is based on total compensation for latest fiscal year. Total compensation for each chief executive includes the following: salary and bonuses; other compensation, such as vested restricted stock grants, LTIP payouts and perks; and stock gains, the value realized by exercising stock options. Efficiency rank is based on our chief executive’s performance/pay score. Ranks are given only to chief executives who have a six-year tenure and six-year compensation history. The most efficient rank is 1 and least efficient is 175. Compensation rank is based on total compensation for latest fiscal year.

Where’s Larry? Here he is. Seems he got a poor Efficiency rating.

There are also Corporate Governance issues here. Ellison recommended his compensation to his Board’s Compensation Committee. In addition, some large shareholders are expressing their opposition to Ellison’s compensation. The “say on pay” plan, which goes before investors at an Oct. 10 meeting, could get at least a third of the votes, says Scott Adams of the American Federation of State, County and Municipal Employees and the California Public Employees’ Retirement System. Even though that would fall short of the majority needed to pass, it still would show shareholder concern about Ellison’s pay. Once again the Court of Public Opinion might trump any regulations or laws.

What Larry Could Have Done

Oracle is not on Fortune’s best places to work index. It has 84,233 employees.  Let’s say he announced that even though the board awarded him the $72 million, he would give half of it to all employees. This would be only 0.14% of his $25 billion treasure chest. Each employee would get an surprise $500 bonus. Might not be much, but can you imagine the positive effect on employee morale and public opinion?

I expect more developments on CEO Compensation since some practice experts believe this issue will be key in the evolution of Corporate Governance.