"If Only ..."

The Wall Street Journal nicely cited the insurance industry's big dinner this week for Chesley "Sully" Sullenberger. Lloyd's Chairman Lord Levene presented to the US Airways pilot who landed his jet safely in the Hudson River the Lloyd's Gold Medal for Saving Life — an award that recognizes acts of courage. The WSJ reports that a gold version of the medal has been awarded only once before, in 1921.

Per the WSJ: "Lord Levene in his remarks noted that Capt. Sullenberger says he simply did what he was trained to do. Said Lord Levene: 'If only the banking industry had been following that philosophy over the last few years.' "

Kind of reminds me of something that John Maynard Keynes said about the banking industry many bad loans and economic crises ago: "The problem with banking is that there are not enough bankers."

A thought that we might extend thusly: "The problem with governance is that there are not enough directors."

Sure, there are plenty of directors, and no surfeit of individuals enamored of the idea of serving on a corporate board. But how many are willing to educate themselves rigorously, to become truly skilled in the ways of directorship, and, most crucially, are primed to act courageously and with requisite expertise at moments of crisis?

Yes, we all know there are lots of exceptional directors — men and women who deserve gold medal recognition for their service to management and shareholders. But, as we've witnessed so painfully, when the controls fail and things — whether it be whole economies or individuals companies — look like they're headed for a crash landing, we realize how right Lord Peter Levene and John Maynard Keynes are: how avoidable disaster is when those at the controls are performing at the level that their position demands.

Exec Pay: A Campfire Tale from Bohemian Grove

Supreme Court nominee Sonia Sotomayor is getting flak for her membership in the Belizean Grove, an elite all-women's club. As the AP reported, the Belizean Grove "bills itself as women's answer to the 130-year-old male Bohemian Club in California."

The Bohemian Club's Bohemian Grove activity (photo from past gathering) is a two-week retreat in July in the redwood forest where the rich and powerful in the business and public sectors come to play — and actually take in some enlightenment, too. According to this fact sheet, "There are speeches, known as 'Lakeside Talks,' wherein high-ranking officials disseminate information which is not available to the public at large."

Generally what happens at the Bohemian Grove stays at the Bohemian Grove. But one of these Lakeside Talks surfaced 25 years ago and came into my possession, sent to me by the gentleman who delivered it — a quite senior board member of several major industrial companies. With tongue not all that lightly planted in cheek, this corporate statesman delivered a volley of zingers at the Grove habitues. A sample:

"While not in the management manuals, here are a few tried and true ways that corporate leaders have developed and refined over the years to guarantee freedom from want.

"First, you appoint an executive compensation committee composed exclusively of outside directors. This allays suspicions from critics, and it is risk-free as long as the members are chosen with care. And, of course, you choose them.

"The next step is to have the compensation committee adopt a resolution stating, in effect, that in order to obtain, retain, and reward superior executive personnel it is the policy of the company to pay compensation above average competitive levels.

"Such a policy will never be successfully challenged. It is a 'motherhood' issue. The logic is unassailable. Good performance deserves above-average recognition. Poor performance requires above-average motivation.

"With this policy in place, the third step is to couple it with an annual survey of the compensation practices at your 'peer' companies, on the modest assumption that there are any. This is standard operating procedure and it virtually guarantees an ever-rising level of top-executive compensation."

There may be a double standard that's working overtime among Sotomayor's critics. That's bad enough. What's sadder to contemplate is that if the Belizean Club dispenses this kind of insightful counsel by the powerful and the privileged on the uses — and abuses — of power and privilege, how regrettable that Sotomayor is feeling forced to resign her membership.

Up with the Uptick Rule

The Wall Street Journal is reporting this week that the SEC has been deluged by support for the return of the uptick rule — the trading rule in which there had to be an uptick in a stock's price before traders could short the shares. The agency put the proposal out for comment in April, and is receiving comments until June 19.

Boards and CEOs hate short sellers. I never met a CEO who thought his company's stock was priced correctly. And then, to think that there is someone out there who is betting against the stock strikes most as just beastly.

I have a comment to make about the uptick rule. It's something that I observed that never got the attention that it deserves. The uptick rule was suspended in July 2007. Shortly thereafter, the first big quakes happened in the market.

I remember it well. I took a vacation in August 2007 to Boston with my wife to visit an exhibition of Edward Hopper at the Boston Museum of Fine Arts. (Pictured is Hopper's "Office at Night," my favorite work by the artist, a reproduction of which hangs in my office.) That week in mid-August the market convulsed. I spent way too much time in the hotel room glued to CNBC watching as the market just dropped and dropped some more, and then dropped yet again. Unbeknownst to all, this was just the opening salvo of the market rout to come over the next 18 months.

I always drew a heavily dotted line between the lifting of the uptick rule and, in the immediate aftermath, the market's first big free fall. So I'm in favor of reimposing the rule. If the academics and their studies are right that the uptick rule has no influence in a stock price's downward spiral, then what's the harm in reinstating it? And if the rule does ameliorate the short-selling forces that would send a stock plunging, then let's bring it back, as there must have been a good reason to have it in the first place.

CEOs and boards will never be free from short sellers. But on the chance that this is a minor market adjustment that can restore some bit of rationality to how their shares trade, then this is one less thing for them to worry about. That's a good thing ... as there is plenty else going on in their governing lives at the moment to be concerned about.

My 'Gisele' Governance Indicator

May of 2009 — oh my, what a month in governance. Just take a glance at some of the headline stories this past month:

• Bank of America was good for a trifecta: Ken Lewis stripped of chairman's title; regulators urged a board revamp; and the lead director quit.

• SEC said it is considering changes to exec comp disclosure rules.

• The Target proxy battle came to head.

• Justice Department announced it will be cracking down on corporate bribery.

• GM hired a search firm to find new directors.

• AIG announced new board members, and that CEO Ed Liddy would be stepping down.

• Board ties at Apple and Google came under scrutiny.

• The Federal Reserve Bank of New York's governance under attack, with Fed Chairman Steve Friedman also serving as a director of Goldman Sachs raising conflict of interest questions.

• Senator Charles Schumer introduced his governance legislation in Congress.

• Three directors at Pulte Home failed to receive a majority vote.

• CalSTRS, the second-largest pension fund in the U.S., wrote to 300 companies which it has shares in to adopt 'say on pay.'

• And the SEC, in a 3 to 2 vote, put out a proposal for adoption of proxy access.

Could this be some kind of a peak in governance activity? Think "Gisele" for an answer.

Remember when supermodel Gisele Bundchen (pictured) got a lot of ink for wanting only to be paid in euros and not dollars? Granted, the dollar was skidding terribly at the time. Well, I thought to myself, that's probably a "ringing of the bell" for the low in the dollar. Sure enough, and shortly enough, the dollar rebounded.

We may have another Gisele-type indicator of a turn in the trend. Something that also happened in May not on the list above was that the New Yorker devoted a full-page to critiquing the performance of boards (granted, the issue was dated June 1 but released the week prior).

This may be a soft "bell ring." I'd feel a lot more comfortable in calling a peak in governance under fire if it was Sports Illustrated or Vogue or "Saturday Night Live" doing a take down on board performance. But when I see the New Yorker piling on, my thoughts drift to my Gisele indicator.

My prediction: It's all up from here for the remainder of the year for restoring the integrity of the corporate governance system.

Peter L. Bernstein, 1919-2009: Got Growth?

Are you a board member of a growth company? Or, are you a board member of a growth stock?

Interesting question. They're not the same thing, as explained eloquently by Peter L. Bernstein in a classic analysis published in the Harvard Business Review in 1956. That essay, titled "Growth Companies vs. Growth Stocks," is included in a collection of classic writings on investing called, fittingly enough, Classics: An Investor's Anthology (Dow Jones Irwin, 1989) — which, thanks to my membership in the CFA Institute, is one of my most-thumbed-through reference works in my library.

Bernstein died on June 5. His obituary in today's New York Times offers an excellent portrait of this seminal thinker on how markets work and of the many contributions he made to the investment management profession.

I just dipped back into his "Growth Companies" analysis for a nugget of insight useful to board members on the question posed at the top. Here is what he called his "two rather heretical" but "constructive" points of view:

1) "Growth companies constitute a very small and select rather than a broad and important roster of corporate enterprises."

2) "Growth stocks are a happy or haphazard category of investments which, curiously enough, have little or nothing to do with growth companies."

"The ability to create its own market," Bernstein wrote, "is the strategic, the dominating, and the single most distinguishing characteristic of a true growth company. ... In short, the real growth company is, to borrow sociologist David Riesman's phrase, 'inner-directed' rather than 'other-directed.' It is a nonconformist in economic society. It adapts the outside world to itself by creating something or a demand for something which did not exist before, instead of adapting itself to changes in the outside world. It does not necessarily grow faster than the economy as a whole, but it does grow faster than the markets in which its products are sold."

The "most important conclusion" Bernstein drew from his analysis is that "the term 'growth stock' is meaningless: a growth stock can be identified only with hindsight — it is simply a stock which went way up. But the concept of 'growth company' can be used to identify the most creative, most imaginative management groups; and if, in addition, their stocks are valued at a reasonable ratio to their increase-in-earnings power over a period of time, the odds are favorable for appreciation in the future."

And favorable odds for a stimulating and rewarding board experience. Something to think about from this heralded investment strategist as you take measure of your current board involvements or contemplate a future board invitation. There are not many growth stocks around right now in this economy, nor much in the way of growth, but there will be some day again.

John Whitehead's Decisive D-Day Decision

Today marks the 65th anniversary of D-Day, the Allied invasion on the beaches of Normandy. John Whitehead was there that day. 

John, well-known for his leadership of Goldman Sachs and his service to many other public, private, government, and philanthropic entities, served for a stint as a member of the editorial advisory board of Directors & Boards. I learned about his D-Day experience when I read his 2005 memoir, A Life in Leadership [Perseus Books], in preparation for a cover-story excerpt we published to tie in with the book's release.

John, a Navy ensign, was put in charge of his own landing craft plus five other boats ferrying soldiers who would be in the first wave of assault troops hitting the beach. Here is just one brief snippet from the book of the action he saw on that fateful day:

 "By 6 a.m. we'd circled up at about 800 yards from the shore, before our final run to the beach. All five of the boats in my little squadron had stayed together and were ready to go. The light had brightened enough that I could actually see the hands on my wristwatch, and I could communicate with the other boats by hand signals. At about twenty past, I waved them in with a hard chop of my arm. Go!

"We roared ahead until about a hundred yards from shore, when a long string of heavy metal bars called Element C's or 'Czechs,' for the country where they were made, angled up menacingly toward us out of the water. We'd been warned to look out for them. Early reconnaissance that morning by a group of courageous Navy SEALS had not discovered them.

"Our orders were to crash straight through to the beach, but I gave the signal to hold up, and it's lucky I did. For the Element C would almost certainly have hung us up, capsizing us all in the surf and creating a log jam of incoming boats.

"I had all the [landing craft] in my group make a sharp left and run parallel to the beach in search of an opening. We finally found one about a hundred yards down, and we turned toward the beach again. This brought us well to the south of where we were supposed to be, but there was nothing to do about it. Actually, it proved to be a lucky break, for German mortar shells soon blasted the shoreline at the spot where we were supposed to have landed."

Much more action was ahead (you can see in the book jacket above a scene from the inside of the landing craft looking out onto the beach). But I'll fast-forward to John's concluding paragraph of his chapter on D-Day:

"I felt thankful that I had survived the worst part. I took a few deep breaths and suddenly felt elated, proud to have played a part in what was maybe the biggest battle in history. At that moment, soaked to the skin, seasick, dead tired, cold, still scared, I would not have wanted to be anywhere else."

Note that on-the-spot decision he made to veer slightly off course to find a better path to the targeted outcome. That's leadership thinking — the kind of leadership thinking that he brought to bear throughout his storied career. With leadership instincts like that, it's no wonder he achieved so much success and recognition for himself and his "shipmates" all through his life. 

And it's no wonder our nation has so much to be thankful for on this day as we honor the gallant fighters, like John Whitehead, who put their life on the line for duty, honor, country, and freedom.

Board Etiquette Rule No. 1

June 1 through June 7 is National Business Etiquette Week. Yes, that is news to me, too. But apparently this is the second annual celebration of this event, according to the experts at the Protocol School of Washington. You can brush up on some top business etiquette tips in the school's official announcement of its sponsorship of the second annual marking of this special week.

Which got me to thinking about board etiquette. There is a National Etiquette Week, which (I just learned, too) ran from May 11 through May 15, and now a National Business Etiquette Week ... so what about an officially designated National Board Etiquette Week? Maybe that's something Directors & Boards, as the grandaddy of governance journals, should put on the events map.

Which means I'd need to come up with an authoritative list of board etiquette tips. Well, I have Rule No. 1 already designated: Don't Die in a Board Meeting — That's Quite Rude.

You think this may be far-fetched? Not at all. A past author of mine was a witness to this violation of board etiquette. 

Harry Bruce, chairman and CEO of the Illinois Central Railroad from 1983 until his retirement in 1990, wrote a cover story for Directors & Boards in 1997 that was chock full of profound insights and advice on governance drawn from his career in business, which began in 1959 with U.S. Steel Corp. This incident, and accompanying advice, made it into his article:

"A board is supposed to be made up of senior advisers with substantial years of business experience behind them. Nevertheless, be careful of letting a board get too old. An elder statesman or two can be useful, but gray hair alone doesn't guarantee experience or the willingness to apply it. I once witnessed a director enter the boardroom in a wheelchair pushed by a male nurse. During the meeting the director died. This sort of thing can be awkward."

Awkward, indeed. And now, very unofficially, a violation of Board Etiquette Rule No. 1. Stay tuned for more additions to the list.