Archive for January, 2011

Closer Look Series: Topics, Issues and Controversies in Corporate Governance, No. CGRP-12, By David F. Larcker, James Irvin Miller Professor of Accounting, Director of Stanford Graduate School of Business Corporate Governance Research Program And Brian Tayan,  Stanford GSB casewriter and MBA ’03 Date: 01-24-2011

• CEO Health Disclosure at Apple: A Public or Private Matter? (PDF)

In recent years, much attention has been paid to CEO succession planning as a risk management issue.  However, it is not clear what information the company should disclose on this matter or how extensive the disclosure should be.  This is particularly true when it comes to companies whose CEOs are experiencing health issues.

On the one hand, shareholders value detailed disclosure on the health of the CEO because it helps them to make a reasoned assessment of whether and when a transition might occur.  On the other hand, health information is a private matter, which the CEO may not wish to disclose.

We examine this issue as it has unfolded at Apple.

• How extensive should disclosure on CEO health be?
• How should the board weigh its obligations to shareholders against the protection of privacy?
• Should the board disclose other, less sensitive information regarding CEO behavior that might be material to the market price of the stock price (such as a distracting divorce, excessive stress levels, or risky hobbies)?

Read the attached Closer Look, and let us know!

Executives’ Words Contain Clues to Deception
Stanford Business Magazine, Winter 2010-2011

Language may be a better predictor of a company’s health than accounting reports, according to Prof. David Larcker.

by Robert D. Hof

Just days after Bear Stearns collapsed and was sold for a pittance to J.P. Morgan Chase, rival Lehman Brothers was weathering the economic downturn pretty well, to hear chief financial officer Erin Callan tell it. In a quarterly conference call on March 18, 2008, she assured financial analysts that the company’s businesses remained “strong.” In fact, Callan used that word 24 times during the call, added “great” 14 times, and piled on “incredibly” 8 times. She used “challenging” 6 times and “tough” just once. “Well, that wasn’t too bad,” a Wall Street Journal writer blogged at the close of the call. Yet by September, after it became obvious that risky investments masked by accounting gimmicks might sink the company, Lehman had plunged into the largest bankruptcy in U.S. history…

♦Think you can spot a CEO bluffing? Take the quiz!

Commentary by David F.  Larcker, James Irvin Miller Professor of Accounting & Director, Stanford GSB Corporate Governance Research Program; and Brian Tayan, Stanford GSB Case Writer, MBA ’03.

The Dodd Frank Financial Reform Act requires that publicly listed companies submit executive compensation plans to shareholders for an advisory vote of approval (say on pay).  At issue is no longer whether such votes should be held, but at what frequency (annually, biennially, or triennially, to be decided by shareholders on a company-by-company basis).

While the rules are set, the implications for the board are far from clear.  How will the board respond to a say-on-pay vote that garners a simple majority but is not convincingly in the company’s favor?  What percentage of dissent would cause you as a board member to rethink the executive compensation program?

One option is to take a hard line.  As a board member, you might rightfully claim that 51% approval is majority approval, and the company therefore has the general support of shareholders.  But this attitude likely would be perceived as hostile and probably wouldn’t stand over the long term.

On the other hand, you might strive to achieve nearly unanimous consensus.  To do so would require extensive outreach to shareholder groups, including those who routinely vote against compensation plans as a matter of principle.  This would involve considerable time on the part of compensation committee members, time which may not be well spent.

Preliminary feedback suggests that boards are currently struggling with this issue.  According to a recent study by Towers Watson, half of all companies stated that they do not know what level of shareholder support they would consider a “success.” Among those who did have an opinion, the average response was 80%.

Intuitively speaking, 80% may be the right threshold, but the board will have to be prepared for a variety of outcomes.  For example, in 2009, the shareholders of AFLAC (which voluntarily adopted say on pay that year) approved executive pay-for-performance policies by a vote of 804 million to 21 million (97%).  By contrast, in 2009, the shareholders of Motorola approved executive compensation policies by a much closer margin, 1,244 million to 708 million (64%).

Question: If you were on a board of directors, what level of support would you consider a “success?”  How would you respond if this level was not reached?

Let us know, your comments are welcomed!

Sources:
AFLAC, Form 10-Q Filed May 8, 2009

Motorola, Form 10-Q, Filed May 6, 2009

Towers Watson Press Release 01/05/2011