Editor: What was the thought process behind creating the Lead Director Network?
Baxley: The lead director role has been an area with relatively little formal guidance as to how the role should be structured or how directors should conduct themselves. The role itself is relatively new; General Motors may have been among the first companies to have a lead director in the 1990s, but the role didn't become widespread until after Sarbanes-Oxley was enacted. After Sarbanes-Oxley, many companies began designating either "lead directors" or "presiding directors." The formal duties of those individuals were to preside over meetings of independent directors and to receive shareholder communications. Over the last several years, lead directors have begun to play a much greater role in important matters such as corporate strategy, independent investigations and major M&A transactions. We wanted to provide a forum in which lead directors, presiding directors and non-executive chairmen could draw from their experiences and learn from each other. A byproduct of each meeting is a report we call "ViewPoints," which summarizes the key discussions among the members of the Network, but which keeps their individual views anonymous to ensure that the discussions are robust (http://www. kslaw.com/portal/server.pt?space=KSPublicRedirect&control=KSPublicRedirect&CommunityId=433).
Stein: It is important to note that the LDN doesn't have an agenda to promote specific structures or titles for board leadership (such as requiring an independent board chair). The Network focuses on board leadership - in whatever form that takes - and its purpose is to provide for private discussions about improving the performance of corporations and earning the shareholders' confidence through more effective board leadership. The members also discuss specific approaches and processes that may help achieve those ends.
Editor: Describe King & Spalding's involvement with the LDN.
Baxley: King & Spalding has always been significantly involved with corporate governance issues. Being involved in discussions with directors from leading companies permits us to expand our thought leadership in this area. We are active with clients in this area, and we also are engaged in writing and professional speaking on these topics. The input that the LDN provides allows us to be better informed about lead directors' views on cutting-edge issues in the corporate governance arena.
Editor: Could you talk specifically about some of the issues discussed at the most recent LDN meeting?
Stein: I should first mention that the members of the Network select the topics for each of their meetings. The first LDN meeting, in July 2008, focused on the role and value of lead directors; the second meeting, in November 2008, considered the board's role in corporate strategy. For its third meeting in March 2009, it was not surprising that the LDN members chose to focus on two events having enormous impacts on corporate America: the financial crisis, which has stressed every American company in ways that they had never imagined, and the changes in the administration and in Congress. The directors were very keen on meeting in Washington with guests well situated to discuss these issues. The two guests were Evan Bayh, Democratic senator from Indiana, and Sam Nunn, a three-term senator from Georgia who is also the lead director of Dell. Members discussed legislative and regulatory changes that are affecting their companies, including those enacted in response to the financial crisis. At the meeting, the members also discussed the question of splitting the chairman and CEO roles. While this issue doesn't relate directly to legislation or the financial crisis, it draws discussion whenever companies face difficult challenges and is always a hot topic during the proxy season, especially so this year.
Editor: Was there any discussion of what can be done to avoid future risk management issues?
Stein: At the prior LDN meeting in November 2008, two months into the financial crisis, the LDN members focused on how the current economic and financial crisis arose. There has been a lot of discussion as to how the board is supposed to oversee risk management and the function of independent directors in the risk management area.
Baxley: Most people seem to agree that boards should be more involved in understanding the risks that the corporation is facing and that they should be more involved in working with management and helping them identify and work through these types of issues. There's no simple solution that can be applied as a catch-all for every industry, but an emerging view is that the board should be more involved in issues of enterprise risk, assessing what those risks are and having a better sense of how the company can manage those risks.
Stein: Board leaders clearly view themselves as being able to contribute in the area of risk management by working collaboratively with the CEO and the senior management team. And CEOs generally want their board leaders to challenge them appropriately and to work collaboratively with them on risk management, strategy, regulatory matters and other important issues.
Editor: Did they talk about the role of the audit committee and how the audit committee should work together with the board?
Baxley: Historically, the audit committee function has focused on financial and accounting issues, but there are separate enterprise risks for the business beyond financial and accounting risks. I expect that you will see independent board members even more focused in the future on monitoring, evaluating and assisting management in identifying and addressing those enterprise risks, in addition to the traditional financial and accounting issues.
Stein: Going back to 2002 and Sarbanes-Oxley and the NYSE listing requirements, there was a change that made the audit committee responsible for overseeing legal and regulatory compliance, as well as the company's risk management function. Now, seven years later, there's a view by some that while the audit committee may be well-suited to address financial and accounting matters, a different set of skills may be needed to address enterprise risk management issues. So, we're seeing other board committees and other board members become more active in some of these areas.
Editor: What was the view of the lead directors on the subject of splitting the chairman and CEO roles?
Baxley: Generally, the members were concerned about a bright line rule that would require splitting the chair from the CEO in all circumstances. In particular, they noted that such a split could create confusion among employees, investors and other constituencies as to who exactly is leading the company. The members did note that there may be some circumstances where it could be appropriate to split the roles. For example, when a new CEO is appointed, there may be a transition period where he or she does not have the chairman title. The other situation is where the company is in a distressed situation and outside stakeholders advocate a split. For example, if a company is in bankruptcy, a creditor's committee may push to split the role.
Editor: Was there any discussion of shareholder nomination of directors or other issues being promoted by activist shareholders?
Baxley: In the short term, I expect that issues such as say-on-pay and other executive compensation issues are likely to dominate. Over the long run, there very well may be an increase in shareholder proposals advocating shareholder nomination of directors. I expect that our members will continue to monitor trends regarding this issue.
Editor: What are board leaders saying about retention bonuses and other forms of incentive compensation?
Stein: There have been countless headlines about perceived abuses of retention bonuses, so this has become an important topic for board leaders. In many instances, the use of retention bonuses is essential, satisfies every criterion of sound business judgment and makes good business sense. There are many circumstances where these types of arrangements are appropriate and in the best interests of the company and its shareholders. For example, a company in the process of being sold cannot be certain that the transaction will take place and does not want to lose key talent because of the uncertainty. Or, if the company is in financial distress or in bankruptcy, key employees may want to leave in favor of another, more stable, company. In those circumstances it is in the best interests of the company and its shareholders to put in place an incentive for those employees to remain. The names and details of these arrangements will change from time to time, but companies do need the ability to retain their key people in difficult times.
Editor: Do the lead directors feel any need for caution with respect to luxuries and perks?
Stein: One point that was specifically discussed at the most recent meeting was the current reaction against anything resembling corporate luxuries or perks. While some of that sentiment has arisen in response to abuses and may be legitimate, the backlash against corporate spending is having a negative impact on portions of the U.S. economy, particularly the hotel, travel and restaurant industries. There was a sentiment expressed at the meeting that this is an example of where social policy conflicts with economic reality.
Editor: It sounds to me like these LDN members are extremely enthusiastic about what they're doing and feel there's tremendous added value in having a function of this kind.
Baxley: We've been very excited about the Network for that reason. We determined from the beginning that it would be a network for the members, and the members are very thoughtful about the issues and topics they want to consider. Each time they meet they develop new ideas and thoughts as to the issues they should be focused on. They take their roles very seriously; they're very enthusiastic about these roles and are working to help their companies and their shareholders.