BP Failed 'Surprise Governance'

Re the FT, BP Chief Tony Hayward is out. And as the Wall Street Journal reflected today on its editorial page, "You don't preside over an environmental catastrophe of such magnitude and survive in such a job, at least not if you run a publicly held company in the private economy."

Directors & Boards has some experience with ousted BP CEOs. Back in 1992 I published an article written by Robert Horton (pictured), chairman and CEO of what was then called British Petroleum. Shortly after the article's publication (and not in any way causally related), he was deposed in a palace coup. His ouster followed a slump in earnings but, in the estimation of close observers, his abrupt departure was more related to personality and culture clashes with the board and other top executives as he endeavored to shake up the oil giant.

A rereading of his article, which I titled "Surprise Governance," still persuades me that he had it right in the advice he offered to business leaders on how they must be mentally thinking and personality poised to meet sudden threats that come at them. His advice certainly would have applied to Tony Hayward and the current BP board and management:

• "Faced with the unpredictability of almost every aspect of business in today's chaotic world, the average corporate leader might be forgiven an erosion of will, if not a failure of nerve. Whatever happens, however buffeted by surprise, a company must respond effectively to every event. It is up to the company's leaders to see that it does."

• "When you never know how your company is going to be surprised from day to day, the great need is to meet each surprise with more knowledge and creativity. One thing about surprises is that rarely do you get to repeat a previous solution."

• "No company can ever draw up sufficient policies governing what might have to be done on the spur of the moment. Individuals must be quick to see connections and grasp the implications of events. And they must be given the power to respond without bogging down."

• "In today's business world, the people in place must learn to meet surprise with flexibility and grace. The prime value is shifting from respecting experience to treasuring understanding."

• "Beyond all the other attributes out of business history, today's global manager must learn new traits of flexibility, collegiality, openness, and trust."

"By definition," Horton noted, "the businessman cannot plan for surprises — a surprise foreseen is an oxymoron." True enough, but per Horton what should not be an oxymoron is a prepared board, one that is ready to tackle surprises with that enlightened combination of flexibility and grace. That was not the BP board.

Portrait for Directors & Boards of Robert Horton in 1992 for his article.

The Real Volcker Rule

The Dodd-Frank Bill signed today by President Obama incorporates what most legislators and market participants would admit is a watered-down Volcker Rule — the former Federal Reserve chieftain's proposal on restricting proprietary trading by banks.

Bank CEOs are glad about that, but what they might really be glad about is that another Volcker Rule did not get written into the legislation: a mandate to separate the chairman and CEO positions at banks and financial institutions.

"My favorite idea on corporate governance is that I like the idea of separating the chairman and chief executive officer" Volcker told Directors & Boards lead columnist Hoffer Kaback when being interviewed for a cover story in the journal in 2000. Here is more of what he said:

"Chief executive officers like to be chairmen. There's no question about that. But, most specifically, when a company gets into trouble, and if there's some question about the CEO in terms of his tenure, responsibility, the need for new blood, or whatever, it's just much more difficult to make the change when you don't have an alternate source of leadership on the board other than the chief executive himself.

"A bank gets into trouble. As the bank regulator, you at least raise the question whether part of the trouble isn't the management. Who do you talk to without using a two by four? You look for some leadership in the bank to change policies or change direction, and board members say, 'That's not me. I don't have any responsibility. All I am is a poor board member. Go to the chairman.' Well, the chairman is the problem."

Volcker did not think much of the lead director as an alternate source of board leadership — "in a lot of situations it may be a second-best solution." The best option, one he liked both as a regulator as well as a director — he was at the time of the interview with the James Wolfensohn boutique investment bank and serving on several corporate boards — is separating the top roles.

His firm conclusion: Having "a [nonexecutive] chairman who can set the agenda for the board and stay in close contact with the chief executive, and be simpatico but nonetheless bring independent judgment that doesn't always come out very clearly in a board meeting because of the collegiality involved and the reluctance to speak out, is useful."

Bank chairmen-CEOs may feel they dodged a bullet on the Volcker Rule's intent to separate out their proprietary trading arms. Little do they know what kind of bullet they dodged had a Volcker Rule to separate their titles been embedded into the Dodd-Frank Bill.

Goldman: What Might Have Been

There is no surprise that Goldman settled with the SEC yesterday. The firm would have been foolish not to, and the sooner the better. Two surprises did come out of the settlement, one minor and one major:

• The minor surprise was the settlement amount of $550 million. I thought the SEC would peg the fee to get out of the penalty box at $1 billion, a number that would memorialize for the ages the whole reason it brought its case against Goldman. In my opinion, at its core this case was never really about Abacus. It was a statement by the SEC that the ethos of Wall Street, from the head firm (Goldman Sachs) down through the tentacles of every trading outfit, was poisoning the capital markets and jeopardizing the soundness of the economic system. The lower number dialed down that statement, but the SEC accomplished its intended and appropriate "come to Jesus" moment.

• The major surprise was that Lloyd Blankfein kept his hold on the firm. "Some had speculated the legal dustup would at least cost him his chairmanship," noted New York Times reporter Graham Bowley in his account of the leadership implications of the SEC deal for Goldman.

I never expected that the SEC would force Blankfein out. I did anticipate that, in allowing him to stay on as CEO, the agency would insist on the firm having an independent nonexecutive chair. This would not have to be a permanent split, but long enough — perhaps two years — for the firm to rebuild its battered reputation.

This is the action that would have made a substantial statement to a nation still suffering from the ill effects of a Wall Street gone amuck that the leading firm in finance is indeed serious and committed about finding its "true north" again.

I use that phrase deliberately, because here is the thing — Goldman Sachs has sitting on its board the one person who could step into the nonexecutive chair role and get the firm perceived as being regrounded in a sense of ethical leadership. That person is Bill George (pictured). Mr. "True North" himself.

A passing glance at Bill's career — his business accomplishments and contributions to the thought leadership of "doing the right thing" — would persuade that Goldman had taken a decisive step in addressing its defaced image. That should have been a desired outcome of the settlement, one that the firm fully embraced — meaning that Goldman might have proactively taken this action, with or without SEC prompting. It certainly could live with shared leadership, as there is a legacy of shared leadership (albeit insiders) of the firm, as witness the eras when John Whitehead and John Weinberg shared the reins, and then when Robert Rubin and Stephen Friedman were co-leaders.

So, a major surprise in the Goldman SEC settlement, and a major missed opportunity for the firm to restore a sacred reputation for trustworthy and far-sighted leadership.

It Happened in Norway . . . What About Here?

In 2003 women represented 7% of board directors in Norway. Today, that total is 40%.

What happened? In 2003 the Norwegian Parliament introduced legislation that instituted a gender quota for the country's major companies. The formal mandate was that at least 40% of both genders must be represented on the board. Companies were given two years to comply.

The quota achieved its goal. Other countries are exploring similar legislation.

"The use of quotas is simply a tool to display women's competencies," said Auden Lysbakken, Norway's Minister of Children, Equality and Social Inclusion. He reviewed the country's experience with board quotas at the Global Roundtable on Board Diversity, an initiative of the World Bank's International Finance Corporation. The Roundtable was held in March 2010, ably organized and conducted by Irene Natividad, chair of Corporate Women Directors International.

While the news concerning board diversity among U.S. companies is not all bad — see the findings that Directors & Boards came up with for 2009 as per the blog post below — the numbers pulled from most surveys might be summed up in two words: "glacial progress."

How long would it take for women to hold 40% of all U.S. boards seats? Let's face it — we will never see it, not in the lifetimes of anyone now serving on boards or those newly coming into board eligibility. That is, if present practices persist.

So, let's put the hard questions out there. Is a board quota a good thing or a bad thing? Could it work here? Why or why not? Should a quota — or some form of a quota — be tried here? What's to fear? What would stop it from working? What could go right? What could go wrong?

I am going to seek out expert opinion from my network of colleagues, and we will report back. I will make this the cover story in the Third Quarter edition of Directors & Boards. Stay tuned as we crunch down on one of the most provocative issues in board composition and recruiting.

Illustration: "The Scream" by Norwegian artist Edvard Munch, exhibited in the National Gallery of Norway.

Yes! There Is Good News on Women Directors

Most of the surveys on women on boards are pretty punkish — showing incremental, at best, advances by women in securing board seats. Among the key findings in ION's 2010 survey released in March:

• The low number of women directors and executive officers in U.S. public companies has stayed more or less the same, with small variations from year to year.

• In the 14 regions represented by ION's member organizations, women hold between 8% and 18% of the board seats in all the companies included in the research.

• In Fortune 500 companies in ION's 14 regions, women hold between 12% and 19% of all board seats. Nationally, the comparable figures for Fortune 500 companies are 15% (2009 Catalyst Census) and 16% for the S&P 500 (2009 Spencer Stuart Board Index).

The only good news that I ever see are the numbers that we here at Directors & Boards report — and do we have some exceptional numbers that we are just releasing for 2009.

Last year, women represented 39% of all new board appointments! That is up from the previous record high of 25% representation in 2008. And way way up from the more typical 13% when we first started recording board appointments in 1994.

That 39% figure represents 165 women out of 424 board positions filled in 2009 as recorded in the Directors & Boards Directors Roster.

We do an authoritative tracking on a quarterly and annual basis of public company board appointments. I have reviewed the parameters of our Directors Roster reporting here. These are numbers you can take to the bank.

Something big happened in 2009 — women did indeed make a major advance in securing board appointments. We may be the lone voice in the wilderness of board diversity surveys to note that, but it is true and it offers the promise of much stronger advancement by women in the boardroom in the future.

Pictured is Janet Jankura, who was elected to her first corporate board in 2009; she is profiled in the special Governance Year in Review issue of Directors & Boards in a new series called "My First Board," reported by Roster Editor Kelly McCarthy.

New Directors: The Numbers Are In

The numbers are crunched, and here is how year 2009 shaped up for director recruiting.

According to the Directors & Boards Directors Roster, the journal's quarterly and annual reporting of executives named to public company boards, we tracked a total of 424 new director appointments named to 326 company boards. Here is where the new directors came from, ranked by predominance of background:

1. Retired Executives: 170 (40%)

2. Senior Officers: 65 (16%)

3. Chairmen/CEOs: 57 (14%)

4. Finance: 47 (11%)

5. Academia: 39 (9%)

6. Consultants: 22 (5%)

7. Not for Profit: 14 (3%)

8. Legal: 6 (1%)

9. Miscellaneous: 3 (1%)

Total: 424 (100%)

Women: 165 (39%)

Source: Directors & Boards Directors Roster

The number of new women directors is worthy of further comment. See the follow-on blog post of July 12.

Seven pages of the Governance Year in Review special issue of Directors & Boards just coming off press are devoted to "Who's on Board 2009" — a sampling of this new director activity. The article displays the companies adding one or more (as in the government-mandated cases of AIG and General Motors, for example) new board members, who those new directors are and their titles and affiliations at the time of appointment. A superb mini-data base for those wanting more detail beyond the numbers. The Directors Roster is sponsored by our close colleagues at Heidrick & Struggles International.

Pictured is John Lechleiter, chairman, president and CEO of Eli Lilly & Co., who joined the board of Nike Inc. in 2009; he represents a declining category from which new directors are being successfully recruited, i.e., a sitting CEO. In 2008 Chairman/CEOs represented 21% of all new directors.

Juanita Kreps: No Napping for Her

I found in my archives a funny story Juanita Kreps told to Forbes magazine in 1976. She was sitting in a corporate board meeting during a complicated financial discussion. An elderly fellow director was beside her, napping peacefully. "Just as the vote was to be taken," she said, "he woke up and proceeded to explain the issue to me!"

Such was life for women on boards in that pioneering decade.

Kreps, who died on July 5, had some notable firsts that she leaves behind as her legacy. She is perhaps most well known for being the first woman to hold the position of U.S. Secretary of Commerce. She was Jimmy Carter's Commerce Secretary from 1977-1979. As the New York Times noted in its obit, not only was she the first woman but also the first economist (she was a professor of economics and vice president of Duke University) to hold this Cabinet post.

When she was appointed in 1972, she was the first female director of the New York Stock Exchange. And when you look at the impressive list of corporate boards that she served on, likely she was the first woman director to be welcomed into certain of these boardrooms: American Telephone & Telegraph Co., Armco Inc., Chrysler Corp., Citicorp, Deere & Co., Eastman Kodak Co., J.C. Penney Co. Inc., RJR Nabisco, UAL Corp., and Zurn Industries.

Another first: When the National Association of Corporate Directors inaugurated its Director of the Year Award in 1987, Juanita Kreps was the chosen one. That was a progressive call on the part of the NACD to institute this award by recognizing a prominent woman in the boardroom.

She seems to have been the right woman at the right time for her government, business, and academic engagements. But more than anything related to gender, as the NACD award attested, she brought "gold standard" thinking into the boardroom. Here is a key observation Forbes reported about her back in the mid-1970s:

• She says she's on the board to make management talk about things they would otherwise overlook. "Our job is not only voting on questions brought before the board," she observes, "but deciding what subjects to insist on discussing." There is just one thing that bothers her: "The trouble isn't whether you have the courage to raise the issues. Where you might fall down in your obligation to stockholders is in not knowing enough about what's going on to make an intelligent decision."

Boards at their best — that was Juanita Kreps.

Shift Happens

The fourth annual Year in Governance special edition of Directors & Boards just coming off press (cover pictured) is a document that records for posterity the next momentous attitudinal shift that will drive governance in the era ahead.

As you might imagine, there have been a lot of shifts that have taken place in corporate governance.

A big one early in my three-decade tenure as editor of Directors & Boards was the shift to a board composed of a majority of independent directors. It was not uncommon in the early 1980s to see many insiders sitting on boards. Those of you who share with me a little gray hair may recall that in 1978 Johnson & Johnson was threatened by the NYSE with delisting unless it opened up its board to independent directors.

Here are a few other shifts that have taken place over the past 30 years:

• More women being added to corporate boards.

• The adoption of executive sessions of the board.

• The embrace of the lead director concept.

• The increased splitting of the chairman and CEO positions.

• Greater usage of search firms in recruiting directors.

• The change in scope of the nominating committee of the board to a broader-gauge corporate governance committee.

• Vastly expanded purview of the audit committee.

• Much more box-ticking, instigated by court cases like Van Gorkom and Caremark and legislation like the Foreign Corrupt Practices Act and Sarbanes-Oxley.

• A reining in of "overboarded" CEOs and other types of directors.

I could go on and on. But what I would be going on about are what I consider process shifts. Much rarer have been attitudinal shifts — a revision, revolutionary rather than evolutionary, in the mental construct of the role of a director and the role of the board.

In 2006, at the annual conference of Yale University's Millstein Center on Corporate Governance and Performance, I heard former SEC Chairman William Donaldson identify perhaps the most momentous attitudinal shift taking place in the boardroom in the past half-century when he remarked: "It used to be said that it's the CEO's board; now, it's the board's CEO." That was a big and bold statement.

Here is the next momentous attitudinal shift that will energize governance in the coming era. It is pinpointed by Vanguard Chairman Emeritus John Brennan in his keynote article for the Governance Year in Review issue: "There has been a great attitudinal shift in boards away from what is right for the insiders to what is right for the shareholders."

That is huge. You might say that this should have been the mental construct of the board all along, but obviously when we look at board decision making in executive compensation, M&A, management performance and succession, capital investments, and other metrics, it can be a hard case to make that what many boards do is right for the shareholders.

Shift happens. And if Jack Brennan and many of his peers in the investor community are right, it is happening now.