Dow Chemical Delegates Duties

Toyota, Crisis Management??

The Full Story - 2009 Exec/Director Comp Survey

New Directors Question - Supreme Court Ruling

Corporate America and Scott Brown Can America's corporations learn anything from the astounding political upset in Massachusetts? We think so. First, Scott Brown listened to his buyers (voters) on a one on one and large-scale basis. Then, he drilled down on critical issues. People weren't against healthcare per se; they understood the bill on the table and it simply didn't meet their expectations. Finally, Brown identified the emotional mood of the buyer (voter), focused on it and addressed it; his buyers saw him and associated with him and his pickup truck and barn jacket.

Ed Note: Boards and senior management could well reflect on what are their relationships (real relationships) with their customers, who is in contact with them, and what actual input are customers giving regarding the company's product, plusses and minuses? The danger is, at the senior level, that information is filtered through layers of staff and a variety of consultants, or, even worse, reflects samples that are too small, or mistargeted. In these demanding times, buyers at all levels and of every product are becoming more sophisticated, often out of necessity. Marketing Risk Management: Miss that factor, miss that sale.

Worth a Reflective Look is the Dow Chemical / Rohm and Haas deal. Dow was dragging its feet in the spring of last year in its proposed $16.3 billion buyout of Rohm and Haas. A $17 billion joint venture with Kuwait crashed and with it $9 billion Dow was going to use on the Rohm and Haas deal. As Dow dragged its feet, Rohm and Haas got tough and sued for completion or break up fees. The deal was eventually completed, with cash from a new preferred stock offering and $9.2 billion from a short-term loan. As a result, S&P downgraded Dow's credit rating to junk, where it remains today. A recent WSJ interview with CEO Andrew Liveris describes how he managed the crisis, which should be of director interest. Liveris broke his team down into groups, one running the business and focusing on customers, another focusing solely on Rohm and Haas integration issues, another on finance and credit, one on divestiture, and one on litigation.

Ed Note:We wrote extensively about this buyout, commenting on the advisability of proposing a buyout to Rohm and Haas, financed significantly by the uncompleted and eventually canceled Kuwaiti joint venture. From a board standpoint, this remains a lesson in bad timing and the risk of interconnected deal financing. Correspondingly, there is a positive lesson learned relative to how the CEO took a difficult situation and effectively divided and coordinated the areas of responsibility.

Fact of Note, Exports. In 2009, China became the world's top exporter, $1.2 trillion, surpassing number two Germany. It also announced recently it had become the world's largest automobile market with sales of 13.6 million vehicles, which exceeded the traditional leader, the US with 10.9 million.

Ed Note:From a strategic perspective, it will be interesting to see whether these impressive export numbers put pressure on Beijing to let the Yuan rise, rather than keeping it at artificially low rates.

Goldman the Benevolent. Do the Board and senior management at Goldman really believe that their $500 million fund for loans to small businesses and all of their discussion about bonuses and stock and possible mandatory charitable contributions, is really going to mollify the average American?

Ed Note:In our opinion, Goldman is a highly successful, very well run company, but in many ways, this discussion pushes the envelope and has only one benefactor in mind: Goldman Sachs. From a board perspective, positive PR is obviously not a serious concern for them.

New Buzzword. In several articles regarding Goldman Sachs's quarterly earnings, they referred to "negative compensation." Keep in mind we are not accountants or auditors, but have looked at a few financial statements over several decades. Our first impression was, is this some new definition of "clawback," whereby the recipient (employee) gives back money? No, upon closer investigation, it was the reduction in an accrued compensation expense that resulted in unexpected and higher earnings.

Ed Note:It does make one wonder whether Wall Street would describe something as basic as a push up and call it instead a self-propelled callisthenic chest press.

Fact of Note: Of the 100 largest companies by revenue, 70 say they have so-called "clawback" provisions that allow them to recoup pay. That's up from 16 in 2006. Source: Equilar.

Ed Note:Having the plan in place and actually utilizing it are two entirely different things. Recovering cash when the money has been spent, or the employee has left the company is extremely difficult. Recovering equity is somewhat easier, because the company most likely still has physical control over it. If the board is considering "clawbacks," the justification for the potential action must be clearly defined beforehand, and be litigation proof.

Ed Note:Last year FINRA, the Financial Industry Regulatory Authority, saw a 57% jump in breach of contract arbitration cases, which sometimes involve "clawbacks."

Toyota, Our Observations. For a company that has been a market leader, across their brand names (Toyota, Lexus, Scion) and models, at least for the last five years, they have not handled the sticking gas pedal crisis (4 million affected worldwide) very effectively. For example: information was coming via the media rather than corporate statements. Rather than the parent, individual dealers were being quoted relative to the possible fix and timetable. It appears Toyota was caught unaware by apparently related but different recalls. Until this week, they had never formally gotten control of or gotten in front of the story. Piecemeal information from various sources, none of them official, is never the appropriate way to handle a crisis.

Ed Note:The question is where was the Board in this process? Is their governance structure so entirely different that they were unable or chose not to take a leadership position

Ed Note:In terms of magnitude of the crisis, the company was prompted to halt sales of more than ½ of its US models. Meanwhile, Ford posted its first annual profit in 4 years. Now, both Ford and GM seem to be taking advantage of the situation.

Q4 GDP Growth was 5.7%. While impressive, people with whom we have spoken, who have multiple recessions under their belts, say that number is not sustainable and is heavily influenced by restocking. In our opinion, things are improving, but much more slowly than the GDP number indicates. Employment is not significantly growing, nor is consumer demand, and for smaller firms, credit for expansion is still difficult to attain.

Ed Note:From a board perspective, along with senior management, this is going to be the critical challenge going forward: preparing for improvement relative to spending on capital investment, inventory expansion, and new hiring, but at the same time, not getting too far ahead of the curve.

One More Worry: Is campaign spending a Board consideration? Regretfully, in the short run, it may well be. A recent Supreme Court decision, 5 to 4, essentially will allow unions and corporations to spend unlimited amounts to influence a political election. The previous restrictions had been in place for 63 years, and allowed only individual contributions through corporate focused PACs. While the unlimited funds cannot go directly to a candidate, they can directly support the candidate or a specific issue. This decision may also impact relevant state laws.

Ed Note:From a board and director standpoint, what is your role if the company decides that they will spend significant monies on either a specific candidate's election, or the support of some specific initiative? Is the Board part of the decision? Does it put in guidelines? And how does it handle the out of control, politically motivated CEO? In the meantime, there is no question that, with new SEC rules and regulations, how the company and the Board handle this item will be a focus of shareholder attention and possibly activism.

The Political Landscapenormally should not be a director-level concern. However, in our opinion, some knowledge and reflection is mandatory. First the healthcare bill was poorly written, poorly marketed, filled with irrelevant perks, and lastly, had no expense reductions. However, from a strategic standpoint, in our opinion, the healthcare issue will not go away, simply because the rising costs are not sustainable to individuals, and, eventually, not to corporations.

The second issue is Washington's push toward Wall Street regulation. We feel, at the Board level, there should be some discussion, perhaps offline, relative to your position on this issue and the strategic impact on your firm. The self-serving Wall Street spin is already starting.

Symbolic of the Problem. Real estate firm Tishman Speyer Properties will give up the 11,000 unit property Peter Cooper Village and Stuyvesant Town complex, which it bought in 2006 for $5.4 billion, including $4.4 billion in debt. Equity investors included blue chip entities like CalPERS, The Church of England, and Singapore Investment Corp, along with Hartford Financial Services. However, Tishman was only in for $112 million of its own money, roughly 2.5%.

Ed Note:As your board is discussing any type of bank regulation and its overall economic impact, consider this example of low down payment in a highly leveraged deal. Isn't this exactly the problem that caused the Savings and Loan crisis—high leverage and no skin in the game?

Whitacre Stays at GM. From a board perspective, Whitacre is from outside the auto industry; he came onboard as Chairman last summer, so the Board has had adequate observation time. Since December, he has been a proactive interim CEO, recruited several senior executives and made a positive contribution to GM's marketing. ("May the best car win.") However, the Board should be alert to the possible ego impact, "I'm the only man who can do this job." If that were to happen, how would the Board mitigate it before there is the return to the good old days of the CEO and his rubber stamp board?

Ed Note:Interestingly, all three US automakers are being run by individuals who do not have long-term backgrounds in the automotive industry.

Corporate Retreats. Be sure that you don't book a resort and spa. Go for a hotel and lodge instead. Same thing, only from the Dragnet days, "the name has been changed to protect the innocent."

Mutual Fund Boards are putting more skin in the game, according to trade group Investment Company Institute. 28% of the funds required directors to own fund shares in 2008, up from 6% in 1996. Davis Advisors requires their independent directors to own, in fund shares, at least 3 times the annual directors' fees.

Ed Note:Additional information can be found at many fund websites and also at Morningstar.com.

Foreign Investing. Around the world, foreign investing was down 39% from 2008 ($1.7 trillion to $1 trillion). Developed economies received 41% of the total, developing countries received 39%. In China, foreign investment dropped just 2.6%, while the US was down by 57%. The US still remained the largest recipient of foreign investment, while China moved into second place, overtaking France and the UK. Source: UN Conference on Trade and Development.

Fin Coms and Cash. Many of you hopefully are on the board of companies that are flush with cash. This is most likely the result of decreased spending, especially on payroll, and in other cases, dividend cutbacks. The result is you may be sitting on a war chest of idle cash, which is very attractive to hedge funds, private equity funds, and occasionally, Uncle Sam. Therefore the question is what are your options? Capital investment, M&A, payroll expansion, increased dividends, or a stock buyback?

Ed Note:From afar, it would be inappropriate for us to do anything more than suggest a focused discussion at the Fin Com or Board level.

Need Money? Fin Coms should consider the possibility of selling junk bonds if they need cash. For the week ended January 15, companies sold $11.7 billion in high-yield bonds, the largest amount on record. Note, some of the issuers are owned by private equity firms desirous of paying dividends to their limited partners.

Ed Note: From a historical standpoint, in 2009, 11% of high yield issuers fell into default. Also, today many junk bonds, apparently denying any historical lessons learned, lack covenants that require specific liquidity levels or performance targets.

The Current Workforce should be a subject for discussion at both the senior management and board level. Specifically, boards should be reviewing what is the company's policy to identify and retain key employees? If pay increases are not realistic, focused perks can be. History has shown that when the market improves, people switch jobs, sometimes with no more reason than, "I need a change of pace."

Ed Note: This responsibility probably will fall to the Comp Committee, which should spend time reviewing whether a retention plan is in fact in place, and that it addresses both reality and the needs of the corporation going forward. If management says, "They're happy here, and also there's no place for them to go," then you've got a problem. The flipside is, what is the company doing about identifying and recruiting top external talent?

Saddle Up Milwaukee-based Harley-Davidson posted its first quarterly loss since 1993. Directors, men and women, the American road calls, and you only live once. BUY A HARLEY! Our recommendation: choose the more conservative models, have a minimum of three lessons, and verify the appropriate insurance coverage.

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Video: The Changing Role of the Comp Committee

Comp Committees Update

Return of the Poison Pill

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The Take Charge Chairman is certainly what General Motors' Chairman Ed Whitacre appears to be. First the government tossed out Rick Wagoner, then along came pro-active Chairman Whitacre, and CEO Fritz Henderson is out just nine months after taking over. Both Wagoner and Henderson were 25-year GM veterans. The Board's theme is, "You can't have rapid and strategic changes with the same old team." Reasons for Henderson's departure seem to be the slow corporate turnaround and failed divestitures, most recently Opel and the collapsed Saab deal.

Ed Note: From a board perspective, the challenge is, will you want Whitacre to stay on as CEO, or will the Board be able to find a competent outsider to fill what is without question an international corporate hot seat? Comments on The Exchange Click here

Details of the Deal. Boards should be aware that Starent Networks Corp, which is in the process of being acquired by Cisco, recently settled a shareholder suit from a union pension fund. The charge was the board failed in its "duty of care" accepting an offer price that was too low. The settlement appeared to be the payment of the plaintiff's legal costs and some clarification of the decision making process.

Ed Note: While the details appear somewhat sketchy, the board lesson learned is that there is a need for a thoughtful and well documented acquisition process by the board which can be made public if necessary. This documentation could apply to the seller, accepting an offer too low, or the buyer, paying a price too high.

Goldman and Reality? The company is about to announce the biggest employee payout in the firm's 140-year history. Analysts expect 2009 earnings per share to be 20% lower than 2007, roughly equal to 2006 earnings. The decline is caused by issuing 100,000,000 new shares to strengthen the firm's capital position. A recent WSJ article states that the company is putting temporary employees and consultants into its total reported head count, reducing payout per employee. As a result, some shareholders are becoming quite noisy, relative to "What's in it for me?"

Ed Note: In a separate but related item, there is more frequent media coverage of why Washington bailed out AIG by purchasing billions of AIG's CDSs that had Goldman as a counter party and thereby at risk. Since the taxpayers own at least 80% of AIG, we could well begin to ask, as a result of the AIG bailout, which resulted in the CDS Goldman bailout, "What's in it for me, the taxpayer?"

Comp Committees and Retention. There is a theory and some evidence that many employees change jobs as a recession wanes. Therefore, some discussion relative to a plan to both identify and retain critical employees is worthwhile. Pay increases may not be feasible, but job flexibility, from both an assignment and time standpoint, could be a low-cost retention tool.

Ed Note: Specific details are not the responsibility of the Board, but certainly the goals and components of the retention plan should be, relative to labor force risk.

The SEC and "Clawbacks." A Wells notice has been filed by the SEC indicating that their staff is recommending civil enforcement action to "clawback" bonus pay. In this case, the notice was to Ian J. McCarthy, the current CEO of Beazer Homes USA. This will mark the first time the agency has used this civil action against a sitting CEO who benefited financially from the alleged fraud, but did not participate in it. Related action determined the Chief Accounting Officer was the perpetrator of the fraud.

"The SEC's action relies on a provision of Sarbanes Oxley that lets the government try to recover ("clawback") incentive-based compensation from senior executives when their company is accused of reporting inaccurate financial data." Source: WSJ.

Ed Note: From a Comp Committee standpoint, this action supports the wisdom of bonuses paid over several years, based on verified multi-year performance. If successful, this SEC action will represent application of the term "clawback" to executive pay simply based on benefiting from rather than participating in fraud-related underperformance.

Comp Committees and 401ks. The Obama administration has recently overridden a Bush ruling that would have allowed mutual fund companies and brokers who sell investment products to also provide investment advice to 401k and IRA customers. The risk cited was that the advice from the seller or management company would be self-serving and not independent.

Ed Note: This action does not represent closure on the issue. The Department of Labor said it would propose a new rule on investment advice but gave no future date. Stay tuned.

Borrow Now, Cash is King. The market for all types of public debt, including junk rated, continues to be strong. Global investors have bought more than $2.7 trillion of new corporate bonds this year, contrasting with less than $1.7 trillion in all of 2008. Source: Dealogic. Much of the proceeds from the new debt is being used to refinance existing debt. This refinancing, according to BofA Merrill Lynch, is well above the historical average of 52%. From a finance committee standpoint, some cynics may say, "This refinancing is merely postponing a day of reckoning." However, on the optimists' side, this cash could provide enough staying power to improve corporate operations to survive this economic crisis.

The FCC and the Internet. The battle cry is, "Here We Come," as the government moves to take greater control over the Internet and have consumers pay higher phone charges to expand nationally cheap broadband access.

Ed Note: If you're on the board of a company that is involved in any way with the Internet, this is an issue that must be followed. It is far too early to render any opinion, but certainly, being behind the knowledge curve relative to this tax/charge is not where you want to be.

Worth Watching are the larger retailers as we head into the holiday shopping season. Inventories are being tightly managed, lower cost goods are being offered at planned discounts rather than reactive ones, and promotions appear to be well-thought-out and offered early in the season.

Ed Note: While you may not be on the board of a consumer company, it would be informative to watch from two perspectives. First, how well this carefully planned merchandising plays out, and second, what is the consumer's reaction?

You're on the Board at Mercedes (Daimler AG) and you're contemplating a US introduction of smaller cars. They will offer upscale features and finishes such as Volkswagen's A3 and BMW's AG 1 Series and Mini Cooper. CEO Dieter Zetsche, when discussing future automotive luxury: "It will be fewer CO2 emissions and be more modest in appearance." Broadly speaking, Mercedes stand for luxury; BMWs stand for performance and engineering.

Ed Note: As a board member, you probably should remember that American automotive tastes can turn on a dime. Historically, bigger, faster is better. Therefore, how do you ensure that this introduction minimizes risk and maximizes the company's chance of success? Keep in mind, Mercedes' Chrysler acquisition was basically a disaster.

Return of the Poison Pill. This was a technique used to ward off unfriendly acquisitions by offering friendly investors the right to buy a large number of shares, thereby diluting the hostile bidder's stake. In the last decade, the policy has waned. However, according to RiskMetrics, 26 companies are considering putting such a policy to a vote this Spring.

Ed Note: From a governance standpoint, many of these new proposals are for a short period of time. Previously, poison pills were multi-year actions and did not require shareholder approval. This is a trend worthwhile for the Governance Committee to follow.

Proxy-voting Advocates are on the rise. From a Governance Committee standpoint, you should be aware that independent websites are being established that give investors more information and make proxy voting simpler. A new site, MoxyVote.com, is worth a quick look. A relevant issue is whether more individuals will in fact vote now that the NYSE bans brokers from voting in their clients' behalf. Another point for discussion is, does your company allow shareholders to vote in advance of the annual meeting via websites such as proxyvote.com?

Ed Note: Today the Governance Committee should start to discuss the various sources of information that will be available to investors beyond the company's own website. Do actions such as this make a stronger or weaker case for investor outreach by the board and company?

The Law and Credit Rating Firms. Already facing a significant number of private lawsuits, the three firms, Moody's, S&P, and Fitch, are now targeted by the attorney general of Ohio. "We believe the credit rating agencies, in exchange for fees, departed from their objective neutral role as arbiters," Attorney General Richard Cordray.

Ed Note: As we mentioned in a previous article, the current defense from the rating firms states that the ratings they present are Constitutionally protected as free speech. Interesting defense?

Connecticut Joins Ohio in suing the credit rating companies for "negligent, reckless and incompetent work," regarding debt purchases by the state pension funds.

Ed Note: From a Finance Committee standpoint, these lawsuits will most likely continue. If your company is issuing debt, there should be a discussion relative to how much credibility these rating firms have lost and how, if at all, it will impact the cost of your debt offering.

The Cadbury Caper remains a complex one, as original bidder Kraft Foods hangs tough with its first offer. Meanwhile Hershey and Ferrero attempt a counter bid. These two firms are both closely held from an ownership standpoint, especially the Hershey Trust, which wants to use non-voting stock. Another barrier is which parts of the Cadbury business go to what buyers. Another critical question is whether Nestlé and Unilever will remain on the sidelines or jump into the fray.

Ed Note: From a board standpoint, this underlines the need to understand the complexity of an unsolicited offer to buy. This is made more complex when the buyers are large, public, closely held or private firms all with different goals relative to the seller's product and market sectors.

Commercial Real Estate and You This sector remains a troubled one, with vacancies increasing while the payment clock ticks down on debt used for overpriced acquisitions. Unlike the crisis with residential mortgages held by individuals, it is less likely that the Federal Government will step in simply because companies don't vote.

Ed Note: It would be worthwhile for the Audit/Finance Committee to discuss what impact this expanding problem might have on your lenders, but also, more directly, do falling prices present a corporate opportunity or risk?

Vertical vs. Virtual. From a board and strategic standpoint, now that you have completed the outsourcing of various functions, pushed inventory back up the supply chain, focused on the most profitable and critical components of your business, the trend says, "Virtual is over, now go vertical." With Larry Ellison of Oracle buying Sun Microsystems, the intention is to move into software, computers, and computer components. Three years ago, he stated that Oracle's focus would be software, and that computer hardware isn't "a business we have any ambitions in." In going vertical, he is joined by PepsiCo, buying up its bottlers for marketing and distribution control, and Boeing, doing more component manufacturing rather than just final assembly because of the vendor problems with the Dreamliner.

Ed Note: The stated reasons: more control over raw material, distribution and quality control. From a board perspective, this is a radical transition, certainly providing revenue for the strategic consulting firms, as well as the M&A investment bankers. For many of us, we have enough historical insight to know that all of these strategies move in trends and cycles and require thoughtful analysis rather than simply joining the parade.

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This week on The Exchange: Jack Welch's recent comment in BusinessWeek on the Employee Free Choice Act. Click the link above to read and add your own thoughts.