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.

Stephen Cooper on Why CEOs Fail

Stephen Cooper has just parachuted into yet another troubled situation — Metro-Goldwyn-Mayer Inc., where he will be helping to lead a recovery of the film studio. This "turnaround guru," as the Wall Street Journal called him, has made several appearances in the pages of Directors & Boards, most notably as a cover story author in 2002 with his article,"Why CEOs Fail."

It appears from the initial reports of the ouster of MGM CEO Harry Sloan that the challenge ahead is a balance sheet one, trying to get out from under a mountain of debt piled on in an LBO five years ago. But in reviewing Cooper's article, in which he laid out what he termed "the six key factors that can lead a company into troubled waters," it's worth highlighting the one that, of all six, he reserves special mention:

"By far the single most critical factor responsible for CEO failure is management denial. It is not unusual in my business to receive a call midweek from a company that suddenly finds itself unable to meet Friday's payroll. How does this happen at large, multinational companies run by skilled people, who presumable have operating and financial controls in place?

"In my experience, surprises of that magnitude are fueled by an ongoing management mindset that leans on reactive excuse-making rather than proactive ferreting out of problems.

"Ironically, it can be a company's very success that lulls a CEO into complacency. And in complacency are sown the seeds of mistaking symptoms for causes, shunning bad news, and avoiding tough decisions."

Cooper was serving as interim CEO of Enron Corp., heading that historic salvage operation, when he wrote those words for us. MGM is no Enron, but it is yet again a prominent example of what Cooper says he has seen over and over in the many "meltdowns" he has worked on — "a combination of systemic flaws, strategic errors, and human failings ... exacerbated by weaknesses in current corporate governance practices."

I wish him well in the MGM revival, but something makes me think there won't be a lot of new lessons learned in this turnaround. He, and we, have seen this picture before. It's called "Why CEOs Fail."