Taunting the Gods of the Markets

Oh my, this is not good.

Here is a headline staring out at me in this morning's New York Times business section — "Awash in Liquidity." The piece examined the amount of institutional funds sloshing around the world looking for yield.

Why does this make me tremble? This is why.

To recap the above link ever so briefly, I have had prior run-ins with a prominent declaration that "The world is awash in liquidity" . . . only to see shortly thereafter a dramatic and dismaying drying up of that so-called "excess liquidity."

The example cited in the link above that last made me extremely fretful happened in December 2008. It caused me to suggest at that moment in time that any board should warn its CFO to run for cover and any investor to think about bulletproofing his or her portfolio.

A good call indeed. Within weeks, the market plunged scarily, hitting a low on March 9. It was a gut-punch of a first quarter of 2009.

Will history repeat? Is it again time for boards to tell their CEOs and CFOs to batten down the hatches?

October has been a good month for investors. Call me superstitious, but it sure seems to me that, upon hearing the intrepid claim of a world awash in liquidity, the gods of the markets are then moved to swiftly and ruthlessly vacuum up said liquidity.

If you don't go to cash (or even more cash than is now sitting on your corporate and personal balance sheets), then maybe Bette Davis's legendary line in the movie "All About Eve" is your next best move, now that the gods have again been taunted: "Fasten your seatbelts, it's going to be a bumpy night."

Why Pick on Her?

There is plenty of shame to go around among those who were directors of Lehman Brothers. But I can appreciate the outrage that women feel over the choice of photo by the New York Times to illustrate its article spotlighting directors of companies that collapsed during the financial crisis.

As you can see from the clip above, of all the Lehman board members that it could have chosen to splash across the top of the front page of its business section, the paper chose the one high-profile female director — Marsha J. Evans, a retired U.S. Navy rear admiral who after her distinguished military career ably led such organizations as the Girl Scouts of the USA, the American Red Cross, and the LPGA (Ladies Professional Golf Association) as well as being in demand for corporate board service.

I personally witnessed the umbridge taken over this sexist slight. It happened last month at the all-day globally oriented Gender Balance on Boards conference held in Washington, D.C., at Johns Hopkins University that I previously wrote about. One of the principal speakers held up the NYT offending page for all in the audience to see. A quite audible groan reverberated through the crowd — a room largely comprised of senior women executives, directors, academics and diplomats.

It is hard to tell on whom to pin the wrap for this questionable choice of graphic — the co-reporters (one of whom was a woman), the photo editor, the business editor, the copy desk, the makeup department, and/or other. But the women called it for what it was — a cheap shot.

In light of my previous blog postings this month on the theme of gender balance on boards, I am reminded anew of this experience as another example of the hard path it is, with unpleasant potholes (such as this article treatment) tripping them up, that women traverse to gain access to and succeed in the boardroom.

A Not So Magic Number

We all like to be recognized for our expertise and accomplishments, and people in corporate governance welcome as eagerly as anyone the pat on the back.

My governance colleague, and past Directors & Boards author, Catherine Bromilow brought to my attention her selection (along with two of her PwC colleagues) for the latest "100 Most Influential People in Corporate Governance" list. This is a roundup assembled by the National Association of Corporate Directors that recognizes influencers in all spheres of corporate governance.

Good for Catherine. She is partner in PwC's Corporate Governance Practice. She advises clients on strategies to achieve enhanced transparency and greater director accountability and on providing shareholders with a voice in certain boardroom decisions. She has a long and impressive set of involvements in advancing governance best practices, from her consulting, writings and speeches, and director education engagements. Full disclosure: We also know each other from our service on the advisory council of the Center for Corporate Governance at Drexel University.

Now let me digress. This NACD Directors 100 list always bemuses me. I am never on it. How legit a list can this be if someone who has been engaged in corporate governance for as long as I have — a tenure lengthier than most everyone on the list — and contributed the vast thought leadership to the field that I have in three decades as editor of Directors & Boards — not make this list?

Okay, now let me get down off my high horse and unplant my tongue from where it was just now firmly planted in cheek.

The 100 list is worthy and appropriate recognition and is a good thing for the NACD to be doing.

Here is what is really interesting about this latest list.

Catherine is one of only 15 women on the list. By my count, that means women make up 15% of these 100 key influencers in governance. Why does that figure jump out at me? Because it exactly matches up against the 15% representation of women on the boards of the Fortune 500, according to the 2009 census by Catalyst.

What's up with this 15% figure for women board leadership? It's a not so magic number, that's what. And my tongue is not planted in cheek when I say that.

Pipeline to Nowhere

She's pretty — that's Katharine Weymouth, pictured at right, publisher of The Washington Post and CEO of Washington Post Media (and newly elected board member of the Washington Post Co.), who was the keynote speaker at a business leadership event in Philadelphia last week. But the report released at this event was anything but pretty.

The event was the unveiling of the annual survey of women on boards in the top 100 companies (by revenue) in the Philadelphia metropolitan region. This is a survey done by Philadelphia's Forum of Executive Women. The 2009 board composition tally was unveiled on Oct. 8. Here are some of the key findings:

• In percentages, women held 11% of board seats at Philadelphia's largest public companies, up slightly from 10% in 2008.

• In terms of the number of board seats, women held 90 of 844 total board seats at the 100 companies.

• 43 companies had no female board members.

• 8 companies had three or more female board members.

• 7 board seats were held by women of color.

The Forum survey also tallies women in the executive suite. There is no robustness in the numbers to be found there either:

• Women held just 11% of the top executive positions in 2009, the same representation as in 2008. That is, women were in 71 of the 645 top spots.

• 57 of the companies had no women among the top executives.

In reaching to find a "somewhat more encouraging" number, the Forum looked at five-year data. The meager finding:

• The number of women holding board seats increased from 84 in 2005 to 90 in 2009, a 7% rise.

• The number of women in C-suite positions increased from 62 to 71, a gain of 15%.

Concludes Forum President Ellen Toplin: "There have been some gains over time but the numbers point to a stubborn trend: While more women than ever are in the corporate talent pipeline, companies continue to tap mostly men for top positions."

Show of Support for Gender Quota on Boards

The majority of directors, both men and women, do not favor a gender balance quota on corporate boards. That is one of the major findings in a survey of nearly 400 male and female board members done earlier this year. The results were released on Oct. 6 at a briefing at the 21 Club in New York. The survey was conducted by Heidrick & Struggles International Inc., WomenCorporateDirectors (WCD), and Dr. Boris Groysberg of the Harvard Business School.

Now, here is who supported diversity quotas for boards: 25% of the women directors. And for the men? No surprise that it is a number that barely registers on the meter: 1%.

There were many other important findings that came out of this survey, which I will be citing in my blog and in Directors & Boards as time goes on. But this is the story that was buried in the overall report: That one-quarter of the women directors favor a board gender quota is an astonishing show of support for this controversial tactic.

This quota finding hits the market just as the new edition of Directors & Boards comes off press with our major examination of board gender balance and the pros and cons of a gender quota (front cover pictured).

A lead article offers up a Norwegian minister who walks the reader through his country's thinking on legislating a gender balance board quota and the process of how it got there — i.e., from women holding 7% of board seats in 2003 to today's mandated representation of 40%. That is quite a tale, one that is getting worldwide attention, providing the template for other efforts to institutionalize a quota system or contemplating a move in that direction.

Another article in this new edition takes our own informal poll on whether to mandate a board gender quota in the U.S. We asked a select group of directors, recruiters, and governance experts to write a brief essay attacking or defending the concept. Interestingly, that roundup of opinion mirrors the Heidrick/WCD survey.

"It is interesting to see in the survey and in our conversations with women directors around the world how the idea of quotas is gaining traction," says Alison Winter, co-founder and co-chair of WCD, which has over 700 members serving on over 850 boards in 27 global chapters. Look for more traction as this survey and the new issue of Directors & Boards roll out over the next few weeks.

Birth of the Hedge Fund

Every day UPS delivers to my office at least one or two, sometimes three or four, review copies of new business books from publishers. Only a tiny fraction make it into "Book It: Best Bets for Board Reading" — a popular section of each issue of Directors & Boards that spotlights a handful of these new books.

It is one of my favorite pieces of each edition to pull together. I select the chosen few for "Book It" and present a brief passage from each book that serves two purposes: 1) to give the Directors & Boards reader a taste of the book, and 2) the passage must be a sprightly written and observed pointer in leadership that stands alone in the telling. If both objectives are achieved, the hope is that "Book It" prompts a few extra sales of the spotlighted books. My colleagues in the book publishing industry tell me how much they like our "Book It" feature for bringing some much-needed attention to their offerings in a crowded market.

I learn a lot in editing the "Book It" feature. For example, in considering Randall Lane's book, The Zeroes (Portfolio, 2010), I learned about something I had not given much thought to – the birth of hedge funds (and, yes, the breathtaking hedge fund fee structure). Let me share Lane's interesting bit of business history:

A writer for Fortune named Alfred Winslow Jones, in the course of preparing a story on stock market forecasting, developed a strategy that held that selling some stocks short (betting that some prices would go down) while simultaneously buying others, and borrowing against both types of trade for added oomph, would provide a “hedge” against market risk, at least matching the overall market in good times while greatly outperforming it in bad. “Speculative techniques used for conservative ends,” as he put his leveraged “long-short” philosophy.

In 1949, he raised $100,000 — $40,000 of which was his own — and thus the first “hedge fund” was born.

By the mid-1960s, Jones had proven phenomenally successful, and copycats abounded, notably Michael Steinhardt and George Soros. Most, however, did not adhere to Jones’s long-short model, and the roiling 1970s markets efficiently punished that oversight; by 1984, a researcher could locate only 68 hedge funds globally.

But Jones’s influence was far from finished. In 1952, three years into his fund, Jones institutionalized an innovative compensation system for himself. He didn’t follow the structure of a mutual fund, which generally charges 2% of all money managed to cover costs and its fee. Rather, Jones arranged to get 20% of the profits. In other words, while a mutual fund manager was mostly incentivized to not lose money, Jones was incentivizing himself to make money, and taking an outsized cut if he did.

For some boards that get into their gunsights, hedge fund managers are not the most popular people. The next time a hedgie starts upsetting your boardroom apple cart, you might let out a little curse directed at that Fortune writer who got hit by a Newtonian apple in the 1940s about a new way to coin money in the capital markets.

A Board Mystery: The Case of the Emeritus Director

It happened again this week — a request for a copy of "The Enigma of the Emeritus Director." This is an article Directors & Boards published in our Fall 2003 edition, written by Dan Dalton and Catherine Daily (now Dalton) of the Kelley School of Business at Indiana University.

Invariably every couple of weeks I get an emailed request for this article. Apparently there is so little in the governance literature that deals in detail with policies and practices related to designating an emeritus director that our article comes up high in the Google search rankings.

In fact, I just tested it — and yes, what comes up second in the Google listing, at least on this day, for Emeritus Director is a condensed version of the article that I ran in our monthly e-Briefing newsletter in 2005. In that adaptation I offer to send readers the full version published in the print journal, which stimulates the emailed requests for the full article.

I am always happy to share this article because the authors' research fills in a lot of the missing pieces on what this relatively obscure board title is all about. (Pictured is noted venture capitalist Arthur Rock, cited in the article as an emeritus director of Intel Corp. at the time of the article's publication.) As they acknowledge in their article, "We are not familiar with any general source that one might consult for guidance on the status of emeritus personnel on the board, their efficacy, or their related rights and privileges."

Dan, dean of the Kelley School at the time of the article's writing and now director of its Institute for Corporate Governance, and Catherine, the institute's research director, ably fill in the blanks. They analyze three different models of emeritus director and address such specific matters as the independence of an emeritus director and what the term limits and compensation might be for this special breed of board member, as well as other questions that come up in transitioning a board member to this status.

With the dearth of information on how boards employ the emeritus director designation, the authors propose that companies can and need to do a much better job of disclosure to take what they call the "mystery" out of this board practice. Here is their conclusion:

For those firms relying on emeritus directors, proxy material might include that the board of directors has authorized the director emeritus designation and an explanation of eligibility requirements (e.g., distinguished service, years of board service, reaching mandatory retirement age). These materials should also define what the term is for emeritus status (lifetime designation? to be reviewed every five years?) and grounds for withdrawing emeritus status.

Such disclosure should also include the roles and responsibilities of emeritus directors (voting privileges? board attendance at will or by invitation? both full board and committee meeting participation?). And, of course, the compensation and benefits that accrue as a function of emeritus status should be clear, particularly to the extent that they differ from compensation and benefits awarded to non-emeritus board members (advisory or consulting services?).

Since such disclosures are still slow in coming, it appears I can count on many further requests for a copy of "The Enigma of the Emeritus Director."