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May 12, 2016 - Issue 2.19 - Your weekly news on all things board.
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Director's Domain: News & views for today's boardroom. Brought to you by Boardspan.
Executives behaving badly. Unfortunately, it’s nothing new, but it can have a devastating effect on a company and put a board under unenviable scrutiny. A new Stanford Business School report, “Scoundrels in the C-suite,” notes that “media coverage of CEO misconduct is significant,” with some incidents garnering hundreds of mentions in the press—and lots of pressure on boards to make things right and to explain how “this” could have happened on their watch. For a timely example, look no further than this week’s news that the high-profile board of the LendingClub fired its CEO after an internal review showed that the firm had sold $22 million in loans to an investor without the loans meeting that investor’s requirements. The media coverage has been fast and furious, with some commentators suggesting that the board acted appropriately by taking immediate action and others suggesting that if the board had done a proper job of monitoring the company, this never would have happened. Right on cue, a Harvard Business Review article argues that we put too much stock in boards’ abilities to oversee complex companies and that “monitoring” is actually an unrealistic expectation. Lots of big ideas to chew on this week!
 

The Hot Seat


High-powered Board Ousts LendingClub CEO

“The star-studded board of publicly-traded fintech company LendingClub unexpectedly ousted its chief executive and chairman Renaud Laplanche from the company he founded more than nine years ago. Lending Club’s board features a who’s who of Wall Street, including John Mack, the former CEO and chairman of Morgan Stanley; Mary Meeker, a former Morgan Stanley managing director and research analyst and current partner at VC firm Kleiner Perkins Caufield & Byers; Hans Morris, the former president of Visa who also spent 27 years at Citigroup; and Larry Summers, former Director of the National Economic Council for President Obama and Secretary of the Treasury for President Clinton, just to highlight a few of the names…. Specifically, the board said that Laplanche gave nearly $22 million in near-prime loans to a single investor in March and April that [violated the investor's requirements] … Morris said that the issue of the loan sale was discovered internally and it was ‘promptly escalated’ to the audit committee.” YAHOO FINANCE


Could the Board Have Done More, Sooner?

“LendingClub Corp.’s announcement Monday of, not one, but two unrelated yet high-profile internal control failures cast the company’s corporate governance in a distinctly unfavorable light, according to Cynthia Clark, director of the Harold Geneen Institute of Corporate Governance at Bentley University. ‘Certainly, these are not the hallmarks of good governance,’ said Ms. Clark, an associate professor of management. ‘Either the board doesn’t have the information it needs or it’s not paying attention.’" WALL STREET JOURNAL

Across the Board

Curated news and insights from the world's boardrooms.

 

Misbehaving CEO? What’s a Board to Do?

“Although the appropriate response to illegal activity is likely to be very clear, it is less obvious what actions directors should take when the CEO engages in behavior that is questionable but not illegal—for example, a CEO making controversial public statements, having relations with an employee or contractor, or developing a reputation for being rude, overbearing, or verbally abusive. The decision becomes more important when these actions are picked up by the news media, bringing public attention to the executive behavior. In this case, the board must decide whether and how to investigate, and whether or not to address the matter publicly or privately.” STANFORD UNIVERSITY GRADUATE SCHOOL OF BUSINESS


What If Our Expectations of Boards Are Just Plain Wrong?

“Analyzing nearly 300 research articles that examined the effectiveness of board monitoring, we came to the conclusion that it is unreasonable to expect boards to be able to do an effective job at ongoing monitoring.… Even when boards are filled with capable, motivated directors, we believe that there are simply too many barriers that prevent them from effectively protecting shareholders. In order to gain the full value from a board, we believe that shareholders and regulators need to focus on what boards can do, and then recalibrate their expectations.” HARVARD BUSINESS REVIEW
 

Viacom’s Health Plummets Along With Redstone’s

“It's an open secret in Hollywood that [Viacom chairman emeritus Sumner] Redstone is barely physically functional, often not conscious and unable to feed himself. Nonetheless, he is stubbornly holding on to the vestiges of his power at Viacom.... It has been an instructive drama. So many American media empires have been built on the strength of a single powerful personality — whether Rupert Murdoch, Ted Turner, Steve Ross, Punch Sulzberger or Ralph Roberts. The test of these empires has often come at the moment of leadership succession, and in this case it's clear that there are consequences when the founder won't let go…. Viacom, a $16-billion company with 10,000 employees, is suffering as a result of all this. The maneuvering and competing camps among the National Amusements Inc. trustees and the Viacom board of directors has created a fatal lack of direction.” LOS ANGELES TIMES
 

Transparency or Privacy: Which Comes First?

“After a judge abruptly dismissed a lawsuit over Sumner Redstone’s mental competency on Monday, casual observers may conclude that the issue is settled – that at least in the view of Judge David Cowan, Redstone is competent. But it isn’t settled at all, and in fact the proceedings in the case last week raise a new issue: Did the CBS and Viacom boards, of which Redstone was executive chairman, have a duty to tell shareholders about his condition?” FORTUNE


Uber’s New Uber-Powerful Public Policy Advisory Board

“Uber convened the first meeting of an eight-person public policy advisory board that it formed in order to discuss regulatory issues plaguing the company around the world. It includes a who’s who of high-powered municipal leaders with local expertise, from former U.S. Secretary of Transportation Ray LaHood to former European Union antitrust commissioner Neelie Kroes…. Forming this advisory board is tacit acknowledgment on Uber’s part that its playbook of entering a market without express permission may not be as well-received as the company initially hoped and also isn’t conducive to a long-term, smooth-running operation." RE/CODE
 

iRobot Chided for Failing to Improve Governance

“An activist shareholder battling with iRobot’s management just won a big victory in his campaign to get on iRobot’s board: an endorsement from an influential shareholder advisory firm. Institutional Shareholder Services this week endorsed Red Mountain Capital’s slate of two candidates for the iRobot board of directors, picking them over management’s choice. The investor advisory firm also chided iRobot in a report about the fight, accusing the Bedford company and its board of not taking key steps to improve corporate governance until Red Mountain started agitating for changes last year.” BOSTON GLOBE
 

Is Your Board’s Composition an Invitation to Activists?

“Board composition [says a new paper from PwC],  can be a trigger for shareholder activism. ‘Directors with very long tenures or who lack deep industry knowledge may be targets for activist investors. Others may go after perceived governance weaknesses as a means to gain support from other institutional investors concerned about board composition. Shareholder activists often seek board seats at investee companies–and many are winning them,’ says PwC…. Boardroom performance needs to be monitored. ‘Regular reviews of board performance should be carried out and assessments made of gaps in skill or experience amongst the members,’ say BlackRock’s proxy voting guidelines for U.S. Securities (February 2015), quoted by PwC’s paper.” FORBES
 

VW Board Finds No Fault with Management

“Volkswagen's board of directors has recommended shareholders formally approve the work of the company's top management team for last year despite the scandal over cars rigged to cheat on U.S. diesel emissions tests…. A vote to approve management's work for the year is mostly a legal formality at German annual meetings, though shareholders can show annoyance by withholding votes. The company said Wednesday the board based its decision on information from the not-yet complete investigation by U.S. law firm Jones Day. It said that so far ‘no serious and manifest breaches of duty’ by top managers had been found. That includes former CEO Martin Winterkorn, who resigned.”  BUSINESS INSIDER
 

Chipotle Board Comes Under Fire

“Chipotle Mexican Grill Inc's shareholders approved a proposal on Wednesday to give investors more power to shake up the burrito chain's board after a string of food safety-related outbreaks undermined confidence in its directors. Over the board's objection, investors at Chipotle's annual meeting passed a non-binding proposal that would allow an investor or group of investors owning 3 percent or more of the company's outstanding shares continuously for three years to nominate directors to the board…. ‘Today's vote serves as a wake-up call for a board that urgently needs to restore investor confidence in the wake of costly risk oversight failures,’ Scott Stringer, investment advisor at the proposal's sponsor, the New York City Pension Funds, said in a statement.” REUTERS
 

Answers to The Big Questions Facing Today’s Directors

“Corporate governance has seen some substantial reforms in the past decade. With the recent surge of shareholder activism, and the rising demand for more accountability from boards, the prospect of more reforms seems increasingly likely, as investors and managers alike seek answers to questions such as: Can shareholder activists play a positive role in corporate governance? What is the role of dissenting directors, and should board members strive for less unanimity in decision-making? Can directors engage with shareholders and activists, and if so, what are the proper rules of engagement? Do board members who are women get treated differently than their male counterparts, and if so, how can this be fixed?” PROMARKET
 

Index Funds Have Positive Impact on Governance

"What happens when index funds run Corporate America? Hedge fund activist Bill Ackman posed that question recently in his fund’s annual letter to investors. It’s a really good one. No one knows what consequences the boom of passive investment funds will have for the corporations they own. It’s something my coauthors and I explore in a forthcoming research paper…. We show that passive institutions do indeed positively shape firms’ governance policies. Our findings run contrary to the presumption that passive investors lack the willingness and ability to influence firms’ policy choices." HARVARD BUSINESS REVIEW
 

Just For Fun: Try Your Luck at Becoming CEO

“For the past 16 years, we've studied the background of incoming CEOs at the world's largest 2,500 public companies as part of the annual Strategy& CEO Success study. Take this quiz to assess your immediate chances, based on the data we've collected, of becoming a chief executive in your chosen industry.” STRATEGY+BUSINESS
 

Boards & Favors: Careful What You Ask For

“It was a pretty fast summer-job search for the son of the board chairman of the $12 billion Hershey Trust. And his dad took care of it. Robert Cavanaugh told the trust's top executive last April that his son Robert might have missed the window to get a summer internship and needed help. Within days, the executive, Eric Henry, contacted two money-management firms under contract with the charity and emailed the son's resumé. By the end of the month, both firms had made offers.... The internship has led to complaints of conflicts of interest at the top levels of the trust and to an internal probe by outside lawyers that cost the education charity $650,000...” PHILLY.COM


From the Archives

Ten Reasons Diversity is Good for the Boardroom

“It’s not uncommon for a CEO’s first instinct to be to create a board that looks good to the public, and that also carries some cachet with important constituencies – laudable goals but not necessarily lofty ones. Looking good and being good are not always one in the same. There are also some CEOs who would view the perfect board as one that’s easy to manage – a board that’s compliant and one that doesn’t push back. A board’s purpose is to govern not comply. A good board listens, contributes, challenges, and when necessary pushes back. In my experience I’ve found that the best boards are also the most diverse boards." FORBES via BOARDSPAN
A Seat at the Table

★ Kim Metcalf-Kupres, VP and CMO for Johnson Controls, joins the board of Oshkosh Corp. ★ Attivo Networks, a provider of cyber security threat detection welcomes to its board Charles Giancarlo, former EVP and chief technology and development officer for Cisco Systems. ★ Real estate investment firm Ventas appoints James D. “Denny” Shelton, former CEO and chairman of Triad Hospitals, to serve as the company’s independent presiding director. ★  Ocean Power Technologies, a pioneer in ocean wave energy conversion, welcomes to its board Steven M. Fludder, CEO of alpha-E, a company that develops and markets next-generation lithium batteries, and Robert K. Winters, EVP and the GM of investor relations consulting firm Alpha IR Group's New York City office. ★ Celsius, maker of a negative-calorie drink, appoints to its board Hal Kravitz, CEO of high alkaline and enhanced water brand AQUAhydrate and a former executive at Coca-Cola. ★ Discount variety store chain Dollar Tree appoints former Lowe’s Cos. former chief customer officer Gregory Bridgeford to its board of directors. ★
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