Tuesday, October 13, 2009

Board Pay: View from Warburg Pincus

The passing of Lionel Pincus on Oct. 10 reminds me of an excellent corporate governance article for Directors & Boards that came out of the Warburg Pincus investment firm in 1998. It wasn't written by Mr. Pincus, a legend in private equity investing, but by the firm's then president and vice chairman, John Vogelstein (pictured at the time of the article's publication).

Writing as a PE investor and board member — in fact, I titled the article "As I, an Owner-Director, See It," Mr. Vogelstein offered up a set of measures that, in his words, "have the likelihood of improving the functioning of U.S. boards." At the time of the article's publication he was a director of Advo Inc., Golden Books Family Entertainment Inc., Journal Register Co., Knoll Inc., Mattel Inc., and Vanstar Corp. Here were three of his recommendations:

• "I have observed that directors who own meaningful (to them) amounts of stock pay more attention to the stockholders' interests and generally do a better job. Consequently, I would increase and formalize the ownership requirements for board representation. There are far too many 100-share directors engaged in determining the fate of multibillion-dollar corporations."

• "I would pay all directors' fees 50% in cash and 50% in stock, with the requirement that the director continue to hold the stock so long as he or she remains on the board. But stock acquired in the manner would not substitute for the ownership requirements I mentioned above; a director has to have some personal net worth on the line."

• "I would do away with annual retainers — a director who misses a meeting shouldn't get paid — and I would significantly increase attendance fees. I would also require any director who missed more than 50% of a company's board meetings for two years in a row to resign from the board."

Vogelstein has been in the investment business for 55 years and is still with Warburg Pincus, holding the title of managing director and senior advisor of the firm's U.S. Advisors. He joined the firm in 1967, shortly after its founding. And he still keeps his hand in as a corporate director, serving on the board of Flamel Technologies.

In the 10-plus years since his article's publication, boards have made progress on some of his metrics. Meeting attendance is much improved, for one. We need further improvement on director "skin in the game." I too have championed that directors be required to hold on to any and all shares until they resign from the board. We have a long way to go on that initiative. All in all, a set of strong beliefs on enhancing director performance by this longtime board authority that retain much applicability to today's governance practices.

As is this philosophy re CEO performance: Wrote Vogelstein, "We have a saying at Warburg Pincus — 'We have never fired a bad CEO too soon.' " With beliefs like these, there is no question how he and Lionel Pincus built Warburg Pincus into one of the most storied forces in the private equity industry.