Restoring Trust in Corporate Governance: The Six Essential Tasks of Boards of Directors and Business Leaders Policy Brief January 2010 Policy and Impact Committee of the Committee for Economic Development Restoring Trust in Corporate Governance: The Six Essential Tasks of Boards of Directors and Business Leaders POLICY BRIEF Policy and Impact Committee of the Committee for Economic Development Contents EXECUTIVE SUMMARY . xi I . INTRODUCTION . 1 II . RESTORING TRUST WITH SIX ESSENTIAL GOVERNANCE TASKS . 3 1) Redefining the Mission of the Corporation—and the Roles of the Board of Directors and the CEO . 3 2) Revamping the Leadership Development Process . 4 3) Refocusing the Process for CEO Selection—and for Other Promotions into High Corporate Positions . 4 4) Reformulating Operational Objectives for Performance, Risk and Integrity . 5 5) Revising Compensation for the CEO, Senior Executives and Other Key Employees . 9 6) Re-aligning the Board’s Oversight Function . 10 III .OBSTACLES . 13 1) Labor Markets . 13 2) Differing International Standards . 13 3) Changing Board Compensation Advisors . 14 4) Short-Termism of Institutional Investors . 14 5) Manipulating the Numbers . 15 6) The Reduction of Pressure for Change . 15 IV . ACCOUNTABILITY AND LEADERSHIP . 17 1) The Market . 17 2) Shareholder Involvement . 17 3) Government Regulation . 17 4) Back to the Future: The Duties of Boards of Directors and Top Business Leadership . 18 ENDNOTES . 19 iii iv Policy and Impact Committee Chairmen PATRICK FORD LAURENCE G. O’NEIL President and Chief Executive Officer, U.S. President and Chief Executive Officer PATRICK W. GROSS Burson-Marsteller Society for Human Resource Chairman Management The Lovell Group CONO R. FUSCO Managing Partner (Retired) STEFFEN E. PALKO WILLIAM W. LEWIS Grant Thornton Retired President Director Emeritus, McKinsey Global XTO Energy Inc . Institute BEN W. HEINEMAN, JR. McKinsey & Company, Inc . Senior Fellow DONALD K. PETERSON Harvard University’s Schools Chairman and Chief Executive Officer Members of Law & Government (Retired) Former GE Senior Vice President Avaya Inc . JOHN BRADEMAS for Law and Public Affairs President Emeritus LOIS E. QUAM New York University RODERICK M. HILLS , ESQ. President and Chief Executive Officer Chairman Tysvar BETH BROOKE Hills Stern & Morley LLP Global Vice Chair - Public Policy, NED REGAN Sustainability and Stakeholder PAUL M. HORN Professor Engagement Senior Vice President (Retired) The City University of New York Ernst & Young LLP IBM Corporation DANIEL ROSE GERHARD CASPER EDWARD A. KANGAS Chairman President Emeritus and Professor Chairman and Chief Executive Officer Rose Associates, Inc . Stanford University (Retired) Deloitte Touche Tohmatsu LANDON H. ROWLAND MICHAEL CHESSER Chairman Chairman & CEO JOSEPH E. KASPUTYS Ever Glades Financial Great Plains Energy Services Chairman, President and Chief Executive Officer KENNETH P. RUSCIO RANJANA B. CLARK Global Insight, Inc . President Executive Vice President, Global Payments Washington & Lee University DAVID H. LANGSTAFF and Global Strategy DONNA E. SHALALA Western Union Former President & CEO, Veridian Corp.; Chairman, Wildheart Group President ROBERT COLSON Veridian Corporation University of Miami Partner - Institutional Acceptance CHRIS SHAYS Grant Thornton JOHN C. LOOMIS Vice President, Human Resources Former Member of Congress W. BOWMAN CUTTER GE Infrastructure JOHN C. SICILIANO Managing Director Senior Managing Director and CEO, Warburg Pincus LLC BRUCE K. MACLAURY President Emeritus Investment Boutiques KENNETH W. DAM The Brookings Institution New Your Life Investment Management Max Pam Professor Emeritus of American PETER P. SMITH & Foreign Law & Senior Lecturer, MARGERY W. MAYER Senior Vice President, Academic University of Chicago Law School President, Scholastic Education Strategies and Development The University of Chicago Scholastic Inc . Kaplan, Inc . MICHELLE DENNEDY WILLIAM MCDONOUGH JON STELLMACHER Chief Governance Officer Vice Chairman and Special Advisor to the Executive President Sun Microsystems, Inc . Chairman Merrill Lynch & Co ., Inc . Thrivent Financial for Lutherans HOWARD FLUHR FREDERICK W. TELLING Chairman ALFRED T. MOCKETT Vice President, Corporate Policy & Strategic The Segal Company Chairman & CEO Corinthian Capital LLC . Management (Retired) Pfizer Inc . v PATRICK TOOLE Vice President & Chief Information Officer IBM Corporation VAUGHN O. VENNERBERG Senior Vice President and Chief of Staff XTO Energy Inc . JOSH S. WESTON Honorary Chairman Automatic Data Processing, Inc . JOHN P. WHITE Robert & Renee Belfer Lecturer, Kennedy School of Government Harvard University JACOB J. WORENKLEIN Chairman and Chief Executive Officer, (Retired) US Power Generating Co . vi Corporate Governance Subcommittee Chairman MICHELLE DENNEDY JOHN LIFTIN Chief Governance Officer General Counsel BEN W. HEINEMAN, JR. Sun Microsystems, Inc . D . E . Shaw & Co ., L .P . Senior Fellow Harvard University’s Schools WILLIAM H. DONALDSON IRA M. MILLSTEIN of Law & Government Chairman Senior Partner Former GE Senior Vice President Donaldson Enterprises Weil, Gotshal & Manges LLP for Law and Public Affairs MAUREEN ERRITY MICHAEL G. MORRIS Director Center For Corporate Governance Chairman, President and Chief Executive Members Deloitte LLP Officer MORTEN ARNTZEN American Electric Power Company MARGARET FORAN President and Chief Executive Officer NELS OLSON Overseas Shipholding Group, Inc . Vice President, Chief Governance Officer and Secretary Managing Director, Eastern Region; Sr. DEBORAH HICKS BAILEY Prudential Financial Client Partner, CEO & Board Services Chairman and CEO Practice PATRICK FORD Solon Group, Inc . Korn/Ferry International, Inc . President and Chief Executive Officer, U.S. LYDIA I BEEBE Burson-Marsteller LAURENCE G. O’NEIL CORPORATE SECRETARY President and Chief Executive Officer BARBARA HACKMAN FRANKLIN Chevron Corporation Society for Human Resource President & CEO and Former US Secretary Management CATHERINE BROMILOW of Commerce Partner Barbara Franklin Enterprises DEBRA PERRY PricewaterhouseCoopers LLP Managing Member CONO R. FUSCO Perry Consulting LLC BETH BROOKE Managing Partner (Retired) Global Vice Chair - Public Policy, Grant Thornton DONALD K. PETERSON Sustainability and Stakeholder Chairman and Chief Executive Officer PATRICK W. GROSS Engagement (Retired) Ernst & Young LLP Chairman Avaya Inc . The Lovell Group HYE-WON CHOI MARK PREISINGER ADAM J. GUTSTEIN Vice President and Head of Corporate Vice President, World Wide Public Affairs Chief Executive Officer and President Governance & Communications Diamond Management & Technology TIAA-CREF The Coca-Cola Company Consultants, Inc . MARTIN COHEN NED REGAN HOLLIS W. HART Managing Director Professor Morgan Stanley Director of International Operations The City University of New York Citi ROBERT COLSON LANDON H. ROWLAND RODERICK M. HILLS Partner - Institutional Acceptance Chairman Grant Thornton Chairman Ever Glades Financial Hills Stern & Morley LLP EDWARD F. COX JOHN C. SICILIANO PHILIP K. HOWARD Of Counsel Senior Managing Director and CEO, Patterson Belknap Webb & Tyler Partner Investment Boutiques Covington & Burling LLP New York Life Investment Management STEPHEN A. CRANE ROSEMARY M. KENNEY Chairman SARAH B. TESLIK Insurance and Reinsurance Strategies Director, Corporate Governance & Sr. Vice President, Policy and Governance Communications Apache Corporation Pfizer Inc vii Corporate Governance Subcommittee VAUGHN O. VENNERBERG Guests Staff Senior Executive Vice President and Chief MICHAEL CLAES ELLIOT SCHWARTZ of Staff XTO Energy Inc . Managing Director, Corporate Practice Vice President and Director of Economic Burson-Marsteller Studies FRANK VOGL JUDITH SAMUELSON President STUART KOTTLE Vogl Communications Executive Director, Business and Society Research Associate Program JOHN C. WILCOX The Aspen Institute Chairman Sodali Ltd . HAROLD M. WILLIAMS President Emeritus Getty Trust viii Restoring Trust in Corporate Governance: The Six Essential Tasks of Boards of Directors and Business Leaders PREFACE This Policy Brief is released when necessary, spirited and extensive regulatory debates are taking place on In a series of Policy Statements since 2006 on corpo- the safety and soundness of the financial system and rate governance issues, the Committee for Economic on governance issues applicable to all publicly held Development has analyzed: first, how corporations companies (e g. ,. disclosure on compensation and could regain the public’s trust in the wake of the risk; enhanced shareholder role) . But, the Policy Brief Enron-WorldCom scandals; second, how corporate purposely focuses exclusively on private sector self-determi- directors could promote the long-term enduring quali- nation, not public sector regulation. The reason for this ties of their enterprises rather than give in to financial approach is straightforward: a deep-seated belief that, market “short-termism;” and, third, how corporate whatever the outcome of the many public inquiries leadership could be rebuilt by linking long-term and varied public policy debates, only the leadership of performance with societal goals . corporations—boards of directors and senior execu- Since these reports, the nation (and the world) has tives—can make the complex decisions that will yield been hit by the worst economic crisis since the Great sustainable, durable creation of value with sound risk Depression . One cause was poor business decision- management and high integrity . Because this role of making by boards