It was the last SVNACD event of the season and I’m already looking forward to new programs. Another great program, led by the following:

Skip Battle serves as chairman of Fair, Isaac and Company and director of LinkedIn, Sungevity and Workday. He was previously CEO and executive chairman of Ask Jeeves, Inc. Skip served in management roles at Arthur Andersen LLP and then Andersen Consulting LLP, becoming a member of the firm’s executive committee. He is a senior fellow of the Aspen Institute as well as a long-time Institute moderator.

Katie Martin is a partner in Wilson Sonsini Goodrich & Rosati’s Palo Alto office, where she practices corporate and securities law. She has served as a member of the firm’s board of directors and leader of the business law department and its policy committee. She is a director at Nuance Communications, Inc., The Ronald McDonald House at Stanford, WildAid and the WSGR Foundation.

Vince Vannelli is the founder of KPG Ventures, an early stage venture fund. He has more than 20 years operational, sales and business development experience including key leadership positions at several global technology companies. He served as senior vice president and general manager at Inktomi. Vince currently serves on the boards of Clipsync, National Payment Card Association, Solariat, TuneUp Media, Jildy and Expect Labs.

Moderator

Jim Balassone, executive-in-residence, directs the business ethics programs of the Markkula Center for Applied Ethics, Santa Clara University. Jim works with corporate boards, executive teams and nonprofit advisory boards on business ethics challenges, organizational obstacles to ethical behavior, and campaigns to improve ethical culture. His business career spans IBM, Hitachi Data Systems and several hi-tech start-ups.

This program, like all SVNACD programs, was subject to the Chatham House Rule.

Jim Balassone started off the discussion with mention of The Seven Signs of Ethical Collapse by Marianne Jennings. He listed the seven signs as something like the following:

1. pressure to maintain numbers,
2. fear and silence,
3. young’uns and a larger than life CEO,
4. weak board,
5. conflicts of interest (back-scratching dominates,
6. innovation like no other,
7. goodness in some areas atones for evil in others

Using Jennings work as a starting point, Balassone and those on the panel tried to identify signs even more specific to corporate boards.

1. Bigger than life CEO. What is the tone being set?  Hopefully, not “its only illegal if you get caught.” Will staff pass on bad news? What is the board’s relationship. Can they stand up and speak to CEO like any other member of the management team? Don’t be twisting yourself into a pretzel. Checks and balances are important.
2. Conflicts of intrest undermine integrity, lack of integrity, lack of transparency, back scratching. The power is shifting to independent directors because of previous abuses. Changes have mitigated risk somewhat. Duty of loyalty is super important. Foundational to get protection of business judgment rule. Independence is contextual.
3. Silo effect: board members highly specialized in skill or experience; trees and forests. Structural issue. Do you have a weak board that is lost in the trees? Important as the business evolves. Does your board understand the risk? How do you divide your board members into committees. Need overlap between comp and audit to analyze numbers from differing perspectives.
4. Excessive pressure/highly leveraged compensation leads to rule “bending.” Generally more lapses at small companies with fewer policies and procedures. Incentives matter. Booking ahead spins out of control after a few quarters.
5. Intense loyalty distorts integrity and transparency; some real good apologies atone for some bad actions. Is the CEO open to having you talk to staff? That says a lot it they are not. People may do whatever it takes to meet objectives.
6. Conduct in personal life is excused or ignored, e.g. “men behaving badly.” Problem is you may not know. Outside the workplace, can still be our business. If he’s lying ot his wife, is he lying to us? Blackmail risk. NSA example of cheater grabbed and told to resign or call his wife on the spot.
7. Inability/unwillingness to speak truth to power (or hear); don’t ask, don’t tell; appearing stupid. Board members don’t really know each other for quite some time. Make sure everyone weighs in on serious issues. Be religious about allowing some time to talk in general terms about how things are going. Don’t pack every minute of the agenda.
8. Board members acting like caretakers or consultants and not owners; skin in the game. Difference in being owners. Some have heavily arbitraged positions. Hard to satisfy all shareowners. Boards should be interested in the long-term shareowners. You have to be firm against conflicting suggestions. Unethical to not hold an equity stake. Options are skin in the game if that’s all you get for board service. Would not sit on private company going public unless it had dual class shares because of proxy advisors voting grids around compensation, etc. They are terribly misguided. However, difficult to go public without a really glamorous offering like Google or Facebook. Must be big and/or compelling.

Lots of audience participation at this one. Ethical relativity. Scott Thompson’s resume. Do you pay attention to the small things because they might get bigger? Judgment call. How problematic is the circumstance? They must have concluded they were misled. Apparently he had given resume to headhunter with the “second degree” claimed.

In this situation, there was an activist shareowner after him and they negotiated for three seats on the board, so some see questionable motives behind the board’s action. Others say he filed with SEC and it was wrong. You don’t do that. Bad judgment. If the press and active shareholders weren’t involved, nothing would have happened.

Agreement on dual class because they have no choice with Glass Lewis and ISS. 5% of public companies now have but more in the case of companies that can do it.

Doing more thorough background checks, especially as part of IPO process. Where do you go for third party advice for board members? Other board members – lead, chair. Outside counsel. Most committee charters specify they can hire independent counsel. Peer exchanges. Have to be concerned about confidentiality.

Use of special committees, when? When you need independence. Going private, inherent conflicts of interest. When dealing with derivative claims. When you’ve got a job that you don’t want a standing committee to do… CEO search, lawsuit, smaller portion of board.

CEO/Chair split. The people who most want it combined are usually the situations where it is most inappropriate and where the spit is most needed.

Takeaway: My biggest takeaway from the meeting was the apparently growing opinion in Silicon Valley that rating agencies, such as ISS and Glass Lewis are so powerful and use such a badly designed and executed check box approach that companies increasingly feel the need for dual class structures. Further discussion revealed that most (not sure about Facebook) are being structured so the dual class expires with the death of the founder.  At least that’s better than carrying the legacy down through generations.

Yet, dual class structures are antithetical to the wishes of institutional investors. See, for example, the discussion at Weathering a Crisis: Weil in Silicon Valley.  GMI Ratings has already identified over 200 dual class publicly traded companies in the Russell 3000. Read Kimberly Gladman‘s insights concerning where dual class shares have led radio broadcaster Emmis Communications [NASD:EMMS] on  the HLS Forum on Corporate Governance and Financial Regulation, The Dangers of Dual Share Classes.

I wonder if we are nearing a tipping point where shareowners are willing to consider a whole new template for voting advice? The best alternative I have seen is Mark Latham’s Ultimate Proxy Advisor Proposal – Revised, where a company would hold a competition for proxy advisors giving public advice on the voting items in the proxy filing.

Under Latham’s proposal, the company would pay for a competition in conjunction with entry fees from proxy voting advisors and potential. Prizes would be awarded based on votes by shareowners evaluating how informative the advice provided was. Instead of allowing about $2,000 – $4,000 to research the company and the proxy (as is currently done by ISS and Glass Lewis), this system would award $30,000 or more and would facilitate much more extensive research. Voting advice could be tailor-made to the individual firm. Are we there yet?

I used an earlier and much more cumbersome model of the proxy advisor proposal back in 2000 and won about 18% of the vote, even though the process outlined in that proposal would take up to three years instead of one to implement under the terms of the revised proposal. Maybe frustration with the box ticking approach has risen to the level where shareowners are willing to vote for such a system. We even might attract hedge funds like ValueAct Capital and Relational Investors to perform the analysis. They probably have better skills, but would they be objective… maybe yes if awards weren’t limited to one information provider. An added benefit might be slowing down the movement to dual class shares.

To contact James McRitchie directly, please email jm@corpgov.net