restoring trust in corporate governance: the six essential tasks

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


POLICY BRIEF

Policy and Impact Committee of the Committee for Economic Development

iii

Contents

EXECUTIVE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi

I . INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

II . RESTORING TRUST WITH SIX ESSENTIAL GOVERNANCE TASKS . . . . . . . . . . . . . . . . . . . . . . 3

1) RedefiningtheMissionoftheCorporation—andtheRolesoftheBoardofDirectorsandtheCEO . . . . . 3

2) RevampingtheLeadershipDevelopmentProcess . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

3) RefocusingtheProcessforCEOSelection—andforOtherPromotionsinto HighCorporatePositions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

4) ReformulatingOperationalObjectivesforPerformance,RiskandIntegrity . . . . . . . . . . . . . . . . . . . . . . . . . 5

5) RevisingCompensationfortheCEO,SeniorExecutivesandOtherKeyEmployees . . . . . . . . . . . . . . . . . . 9

6) Re-aligningtheBoard’sOversightFunction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

III . OBSTACLES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

1) LaborMarkets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

2) DifferingInternationalStandards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

3) ChangingBoardCompensationAdvisors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

4) Short-TermismofInstitutionalInvestors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

5) ManipulatingtheNumbers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

6) TheReductionofPressureforChange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

IV . ACCOUNTABILITY AND LEADERSHIP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

1) TheMarket . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

2) ShareholderInvolvement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

3) GovernmentRegulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

4) BacktotheFuture:TheDutiesofBoardsofDirectorsandTopBusinessLeadership . . . . . . . . . . . . . . . . 18

ENDNOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

v

Policy and Impact Committee

Chairmen

PATRICK W. GROSSChairmanTheLovellGroup

WILLIAM W. LEWISDirector Emeritus, McKinsey Global

InstituteMcKinsey&Company,Inc .

Members

JOHN BRADEMASPresident EmeritusNewYorkUniversity

BETH BROOKEGlobal Vice Chair - Public Policy,

Sustainability and Stakeholder Engagement

Ernst&YoungLLP

GERHARD CASPERPresident Emeritus and ProfessorStanfordUniversity

MICHAEL CHESSERChairman & CEOGreatPlainsEnergyServices

RANJANA B. CLARKExecutive Vice President, Global Payments

and Global StrategyWesternUnion

ROBERT COLSONPartner - Institutional AcceptanceGrantThornton

W. BOWMAN CUTTERManaging DirectorWarburgPincusLLC

KENNETH W. DAMMax Pam Professor Emeritus of American

& Foreign Law & Senior Lecturer, University of Chicago Law School

TheUniversityofChicago

MICHELLE DENNEDYChief Governance OfficerSunMicrosystems,Inc .

HOWARD FLUHRChairmanTheSegalCompany

PATRICK FORDPresident and Chief Executive Officer, U.S.Burson-Marsteller

CONO R. FUSCOManaging Partner (Retired)GrantThornton

BEN W. HEINEMAN, JR.Senior FellowHarvardUniversity’sSchools

ofLaw&GovernmentFormerGESeniorVicePresidentforLawandPublicAffairs

RODERICK M. HILLS , ESQ.ChairmanHillsStern&MorleyLLP

PAUL M. HORNSenior Vice President (Retired)IBMCorporation

EDWARD A. KANGASChairman and Chief Executive Officer

(Retired)DeloitteToucheTohmatsu

JOSEPH E. KASPUTYSChairman, President and Chief Executive

OfficerGlobalInsight,Inc .

DAVID H. LANGSTAFFFormer President & CEO, Veridian Corp.;

Chairman, Wildheart GroupVeridianCorporation

JOHN C. LOOMISVice President, Human ResourcesGEInfrastructure

BRUCE K. MACLAURYPresident EmeritusTheBrookingsInstitution

MARGERY W. MAYERPresident, Scholastic EducationScholasticInc .

WILLIAM MCDONOUGHVice Chairman and Special Advisor to the

ChairmanMerrillLynch&Co .,Inc .

ALFRED T. MOCKETTChairman & CEOCorinthianCapitalLLC .

LAURENCE G. O’NEILPresident and Chief Executive OfficerSocietyforHumanResource

Management

STEFFEN E. PALKORetired PresidentXTOEnergyInc .

DONALD K. PETERSONChairman and Chief Executive Officer

(Retired)AvayaInc .

LOIS E. QUAMPresident and Chief Executive OfficerTysvar

NED REGANProfessorTheCityUniversityofNewYork

DANIEL ROSEChairmanRoseAssociates,Inc .

LANDON H. ROWLANDChairmanEverGladesFinancial

KENNETH P. RUSCIOPresidentWashington&LeeUniversity

DONNA E. SHALALAPresidentUniversityofMiami

CHRIS SHAYSFormer Member of Congress

JOHN C. SICILIANOSenior Managing Director and CEO,

Investment BoutiquesNewYourLifeInvestmentManagement

PETER P. SMITHSenior Vice President, Academic

Strategies and DevelopmentKaplan,Inc .

JON STELLMACHERExecutive PresidentThriventFinancialforLutherans

FREDERICK W. TELLINGVice President, Corporate Policy & Strategic

Management (Retired)PfizerInc .

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PATRICK TOOLEVice President & Chief Information OfficerIBMCorporation

VAUGHN O. VENNERBERGSenior Vice President and Chief of StaffXTOEnergyInc .

JOSH S. WESTONHonorary ChairmanAutomaticDataProcessing,Inc .

JOHN P. WHITERobert & Renee Belfer Lecturer, Kennedy

School of GovernmentHarvardUniversity

JACOB J. WORENKLEINChairman and Chief Executive Officer,

(Retired)USPowerGeneratingCo .

vii

Corporate Governance Subcommittee

Chairman



Members

MORTEN ARNTZENPresident and Chief Executive OfficerOverseasShipholdingGroup,Inc .

DEBORAH HICKS BAILEYChairman and CEOSolonGroup,Inc .

LYDIA I BEEBECORPORATE SECRETARYChevronCorporation

CATHERINE BROMILOWPartnerPricewaterhouseCoopersLLP



Ernst&YoungLLP

HYE-WON CHOIVice President and Head of Corporate

GovernanceTIAA-CREF

MARTIN COHENManaging DirectorMorganStanley


EDWARD F. COXOf CounselPattersonBelknapWebb&Tyler

STEPHEN A. CRANEChairmanInsuranceandReinsuranceStrategies

MICHELLE DENNEDYChief Governance OfficerSunMicrosystems,Inc .

WILLIAM H. DONALDSONChairmanDonaldsonEnterprises

MAUREEN ERRITYDirector Center For Corporate GovernanceDeloitteLLP

MARGARET FORANVice President, Chief Governance Officer

and SecretaryPrudentialFinancial


BARBARA HACKMAN FRANKLINPresident & CEO and Former US Secretary

of CommerceBarbaraFranklinEnterprises



ADAM J. GUTSTEINChief Executive Officer and PresidentDiamondManagement&Technology

Consultants,Inc .

HOLLIS W. HARTDirector of International OperationsCiti

RODERICK M. HILLSChairmanHillsStern&MorleyLLP

PHILIP K. HOWARDPartnerCovington&BurlingLLP

ROSEMARY M. KENNEYDirector, Corporate Governance &

CommunicationsPfizerInc

JOHN LIFTINGeneral CounselD .E .Shaw&Co .,L .P .

IRA M. MILLSTEINSenior PartnerWeil,Gotshal&MangesLLP

MICHAEL G. MORRISChairman, President and Chief Executive

OfficerAmericanElectricPowerCompany

NELS OLSONManaging Director, Eastern Region; Sr.

Client Partner, CEO & Board Services Practice

Korn/FerryInternational,Inc .


Management

DEBRA PERRYManaging MemberPerryConsultingLLC


(Retired)AvayaInc .

MARK PREISINGERVice President, World Wide Public Affairs

& CommunicationsTheCoca-ColaCompany




Investment BoutiquesNewYorkLifeInvestmentManagement

SARAH B. TESLIKSr. Vice President, Policy and GovernanceApacheCorporation

viii

Corporate Governance Subcommittee

VAUGHN O. VENNERBERGSenior Executive Vice President and Chief

of StaffXTOEnergyInc .

FRANK VOGLPresidentVoglCommunications

JOHN C. WILCOXChairmanSodaliLtd .

HAROLD M. WILLIAMSPresident EmeritusGettyTrust

Guests

MICHAEL CLAESManaging Director, Corporate PracticeBurson-Marsteller

JUDITH SAMUELSONExecutive Director, Business and Society

ProgramTheAspenInstitute

Staff

ELLIOT SCHWARTZVice President and Director of Economic

Studies

STUART KOTTLEResearch Associate

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PREFACE

InaseriesofPolicyStatementssince2006oncorpo-rategovernanceissues,theCommitteeforEconomicDevelopmenthasanalyzed:first,howcorporationscouldregainthepublic’strustinthewakeoftheEnron-WorldComscandals;second,howcorporatedirectorscouldpromotethelong-termenduringquali-tiesoftheirenterprisesratherthangiveintofinancialmarket“short-termism;”and,third,howcorporateleadershipcouldberebuiltbylinkinglong-termperformancewithsocietalgoals .

Sincethesereports,thenation(andtheworld)hasbeenhitbytheworsteconomiccrisissincetheGreatDepression .Onecausewaspoorbusinessdecision-makingbyboardsofdirectorsandseniorexecutivesinboththefinancialandindustrialsectors .Corporatecompensation,inparticular,hasbeensharplycriticizedaspoorlystructured,acauseofexcessiverisk-takingandoutofproportiontogoodjudgmentandcommonsense .Thesedevelopments,combinedwithaconstantmediabarrageofstoriesaboutbusinessissues,havecombinedtodrivepublicconfidenceinbusinesstoaverylowebb .Criesformoreregulationofbusinessarecomingfrommanyquarters .

Inaperiodofeconomicturmoilandpublicpolicyfer-ment,thisPolicyBriefseekstoidentifythesix essential and seamlesstaskswhichboardsofdirectorsandseniorexecutivestogethermustdischargetocreatelong-termvaluethroughstrongeconomicperformance,soundriskmanagementandhighintegrity .Tohelprestoredeservedtrustincorporategovernanceandaccount-ability,itseekstoprovideanactionableframeworkonthefundamentalsforprivate-sectorleadership .Corporateleadersmustbalancerisk-taking (innovationandcreativity)withrisk-management(financialandoperationaldiscipline)andfusehighperformancewithhighintegritytocreatedurable,sustainablegrowingeconomicenterprisesthatbenefitshareholdersandothercriticalstakeholders .

Restoring Trust in Corporate Governance:The Six Essential Tasks of Boards of Directors


ThisPolicyBriefisreleasedwhennecessary,spiritedandextensiveregulatorydebatesaretakingplaceonthesafetyandsoundnessofthefinancialsystemandongovernanceissuesapplicabletoallpubliclyheldcompanies(e .g .,disclosureoncompensationandrisk;enhancedshareholderrole) .But, the Policy Brief purposely focuses exclusively on private sector self-determi-nation, not public sector regulation.Thereasonforthisapproachisstraightforward:adeep-seatedbeliefthat,whatevertheoutcomeofthemanypublicinquiriesandvariedpublicpolicydebates,onlytheleadershipofcorporations—boardsofdirectorsandseniorexecu-tives—canmakethecomplexdecisionsthatwillyieldsustainable,durablecreationofvaluewithsoundriskmanagementandhighintegrity .Becausethisroleofcorporatedecision-makingisenduringandcriticaltoournation’seconomicwell-being,thePolicyBriefencouragescorporationstofocusontheseessentials,whicharefundamentalregardlessofpolicyoutcomes,aswemoveacrossthebusinesslandscapealteredbytheGreatRecession .

ThisPolicyBriefseekstobuildon,addtoandtightlyfocustheworkofCEDandotherleadinggovernancegroupsontoday’sproblems .ItalsointegratesinsightsfromBenW .Heineman,Jr .’songoingresearchandwritingoncorporateintegrity .Itisintendedtobeanactionable,practicalideal .Itisintendedtostimulatediscussionontheessentialsofcorporategovernance .Itis,ofcourse,hardlythefinalwordonthistopic .But,forthosewhomustfocusonmakingreal-worlddeci-sionsaboutthedestinyofpubliclyheldcompanies,itisaninvitationtofocuseddebateoncorporateleaders’mostfundamentaltasks .

ThisPolicyBriefisauthoredbyBenW .Heineman,Jr .,formerGESeniorVicePresidentforLawandPublicAffairs .HeisaCEDTrusteeandchairoftheCEDSubcommitteeonCorporateGovernance,seniorfellowatHarvardUniversity’sLawSchoolandKennedySchoolandmemberoftheadvisoryboardoftheMillsteinCenterforCorporateGovernanceand

x

PerformanceattheYaleSchoolofManagement .HeistheauthorofHigh Performance with High Integrity (HarvardBusinessPress,2008) .ThePolicyBriefwaswrittenwiththeactiveengagementandadviceofCED’scorporategovernancesubcommittee .

ACKNOWLEDGEMENTS

Wearegratefulforthetime,effort,andcareputintothisPolicyBriefbyMr .Heineman,theCEDTrusteesandotherparticipantsintheSubcommitteeonCor-porateGovernance,andotherexpertsandcolleagueswhocommentedonearlierdraftsofthisreport .WethankElliotSchwartz,CEDVicePresidentandprojectdirectorfortheSubcommitteeonCorporateGovernance,andStuartKottle,CEDResearchAssociate,fortheirassistance .WearealsogratefultobothStephenM .DavisandIraM .MillsteinoftheMillsteinCenterforCorporateGovernanceandPerformanceattheYaleSchoolofManagement,StephenB .YoungoftheCauxRoundTable,andRoderickHillsoftheHillsProgramonGovernanceattheCenterforStrategicandInternationalStudiesfortheirendorsementandsupportofthisPolicyBrief .

PatrickW .Gross,Co-ChairPolicy and Impact CommitteeChairman,TheLovellGroupFounder,AMS,Inc .

WilliamW .Lewis,Co-ChairPolicy and Impact CommitteeDirectorEmeritus,McKinseyGlobalInstituteMcKinseyandCompany,Inc .

xi

Thebusinesscommunityfacesacrisisinconfidence .Manyareasking:howcancorporationsgovernthem-selvesmoreeffectively?

—This Policy Brief describes six fundamental, inter-related tasks which boards of directors and senior executives should discharge in governing publicly held corporations in order to regain the vital trust upon which business is based.Ithopestomakeasingularcontributionbydefiningthesixessentialgovernancetasks,byemphasizingtheirinterrelation-shipandbyshowingthattheseseamlesstasksarethetouchstoneofcorporateaccountability .

Boardsofdirectorsinparticularshouldfocusonthesesixtasksinclarifyinga“right-sized”rolegoingforward .Thiswillrequirefocusedintensity .But,theCEOandotherseniorcompanyexecutivesmustmakethesetasksthecoreoftheirleadershipandmanagementeffortsasthey“govern”thecompanyonaday-to-daybasis .ThisPolicyBriefisnotjustabouttheroleofboardsofdirectorsbutalsoabouttheimportanceofapowerfulboard/business-leaderpartnershipindirect-ingthedestinyofpubliclyheldcorporations .

Byshowinghowclosely,indeedseamlessly,thesesixtasksrelatetoeachother,thisPolicyBriefhopestoprovideanaffirmative,actionableframeworkwhichboardsandbusinessleaderscanapply,asappropriate,intheirowncorporations(totheextenttheyarenotdoingsoalready,whichsomecertainlyare) .Althoughwritteninaprescriptiveform,thispaper,preparedintheaftermathofthegreatesteconomicdown-turnin60years,isintendedtostimulateanimportantdiscussionontheessentialsofcorporategovernance,nottoexhaustorendit .Itencouragesdebateonthesubstanceofwhatcorporationsshoulddo,notjustontheprocessesforhowtodoit .

Thesixseamlesstasksare:

1) A redefinition of the mission of the company—and the role of the board of directors and the CEO tocreate

durablevalueforshareholdersandotherstakeholdersthroughsustainedeconomicperformance,soundriskmanagementandhighintegrity .Thisrequiresthatleadersmustfindasoundbalancebetweenrisk-taking(innovationandcreativity)andrisk-management(financialandoperationaldiscipline)andmustfusethishighperformancewithhighintegrity(commit-menttolaw,ethicsandvaluestoreducelegal,ethical,reputational,publicpolicyandcountryrisk) .Theemphasisonshort-termmaximizationofshareholdervalueshouldbereducedsignificantly .

2) A revamped internal leadership training process builtontheseintegratedessentialsofperformance,riskandintegrity—andonacultureinwhichallarehonoredandexemplified .

3) A refocused CEO selection process,flowingfromarevisedleadershipdevelopmentprocess,whichseeksabroadersetofskillsappropriatetoaredefinedmission .

4) A restatement of fundamental but operational finan-cial and non-financial measurements for performance, risk and integritythatexpressesthenear,mediumandlong-termcorporategoals—withprimaryfocusoncreationofsustainablevalueforshareholdersandotherstakeholders,suchasemployeesandcustomers,essentialtothecompany’swell-being .

5) A revision of compensationfortheCEOandtopbusinessleaders—andforotheremployeeswithsignificantimpactonthecorporation—whichisbasedonrealperformanceagainstthoserestatedoperationalobjectivesintheperformance,riskandintegritydimensions .Althoughtopbusinessleadershipwillreceivesubstantialannualcashcompensation,asignificantproportionofcompensationinaparticularyearwillbevariablecashandvariableequitywhichwillbepaidoutorheldbackovertimeasobjectivesaremet,exceededormissed .

6) A re-alignment of the board’s fundamental oversight functionwiththehighestpriorityperformance,risk

Executive Summary

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andintegrityissues—thoseoperationalobjectiveswhicharecentraltoattainmentofcorporatemissionandtocompensationbasedontheimpactofactionsoverbothnearerandlongerterms .

Corporations’currentstatementsofpurposemaymakereferencetothesesixfundamentaltasks .But,thetasksmayeitherbelostamidstmanyothercorporategoalsormaynotbematchedbyrobustpractice .Theharshrealityisthatbusinessorganizationsmustbedesigned—byboardsataconceptuallevelandbusinessleadersatbothaconceptualandoperationallevel—tocheckshort-termism,greedandcorruptionandtochannelcapitalism’sinnovationand“animalspirits”intosustained,durablecreationofrealeconomicvaluewithinaframeworkoffinancialdiscipline,law,ethicsandvalues .

Arelentlessfocusonthesixfundamentaltasksisanimportantguidetocreationofsustainableshareholderandstakeholdervalue .Moreover,developingappropri-ateexecutivecompensation—thegovernancetopicgeneratingthemostpublicheattoday—canonlyflowfromdefinitionofcorporatemissionandarticulationofrelatedoperationalgoalsandmeasurements .

—This Policy Brief also identifies difficult, real-world problems which boards of directors and busi-ness leaders must candidly confront because these issues can undermine a corporation’s will and ability to discharge the six, seamless tasks in a meaningful way. Theseproblemsinclude:competitioninthelabormarketfortopexecutiveandotherbusinesstalent;dif-feringregulatorystandardsandtheriskofregulatoryarbitrage;thelimitationsofmanycurrentcompensa-tionconsultants;theincreasingshort-termismofmanyinstitutionalinvestors;andthedangersofgaminganysystemofmeasurements .Eachcompanywillneedtodeviseitsownresponsetotheseissues .Thisreportbrieflynotessomepossiblesolutionstotheseproblemsintheinterestofstimulatingdebateandhighlightinggovernanceagendaitemsforfurtherresearchandanalysis .

—Finally, the Policy Brief discusses the ultimate governance question: how can corporate account-ability be assured?Thepricingsignalsfromthestockmarket,anenhancedshareholderroleingovernanceandincreasedgovernmentregulationallmayhavea

role .Butallhaveimportantimperfectionsinassuringaccountability .Allarethesubjectofstrenuousdebate .

ThemostdirectaccountabilitymechanismissoundstewardshipbytheCEOandseniorexecutivesunderthedirectionandoversightofhard-working,independent-mindedboardsofdirectorswhoarebestpositionedtobalancethemanycompetinginterestsatplayinallsignificantcorporatedecisions .Criticsarguethatthisaccountabilitymechanismisweakbecauseboardscanbeself-perpetuatingandinwardlooking,incapableofaskingCEOshardquestionsandignoringimportantshareholderorotherstakeholderconcerns .

Buttheothermethodsofaccountabilityare,inmanyrespects,allaimedatthefundamentalgoalofthisPolicyBrief:strong,energizedboardsandbusinessleadershipdedicatedtothedischarge,ingoodfaith,ofthesixessentialfunctions,inpartthroughmeaningfulconsultationwithshareholdersandotherimportantstakeholders .

* * * * *

Manyreports,likethisone,addresshardproblems,withdeepstructuralroots,bycallingforleadership .Toooftenthatpleagoesunanswered—orthestruc-turalproblemsaretoointractable .Buttoday,withagovernancecrisisinconfidence,itisintheinterestofcorporationsandofcapitalismitselfforpeopleinleadershippositionstrulytoaddressthegovernanceproblemsoftheeraandprovideaclear,credibleandpowerfulprivatesectorresponse .

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Thebusinesscommunityfacesacrisisinconfidence .Manyareasking:howcancorporationsgovernthem-selvesmoreeffectively?

ThisPolicyBriefdescribessixfundamental,inter-relatedtaskswhichboardsofdirectorsandbusinessleadersshoulddischargeingoverningpubliclyheldcorporationsinordertoregainthevitaltrustuponwhichbusinessisbased .

Asdiscussedinmoredetailbelow,thefirst taskistoredefinethecorporatemissionawayfromshort-termmaximizationofshareholdervaluetowardsthreereinforcingobjectives:creationofdurablevalueforshareholdersandstakeholdersthrough—

a . sustainedeconomicperformance b . soundriskmanagementand c . highintegrity .

Fromthisgeneralrestatementofmissionflowthefive other tasks:

2 . revampedleadershipdevelopment; 3 . refocusedCEOselection; 4 . reformulationofoperationalgoalstoreflect

thebroadermission; 5 . revisionofcompensationtorewardattain-

mentofthoseoperationalgoals;and 6 . re-alignmentofboardoversighttotrackthe

highestpriorityperformance,riskandinteg-rityissues .

Boardsofdirectorsinparticularshouldfocusonthesesixtasksinclarifyinga“right-sized”rolegoingforward .Thiswillrequireenergyandintensitywithinthenormaltimeparametersofboardservice .But,thislaser-likeboardfocuswillonlybepossibleiftheCEOandotherseniorcompanyexecutivesalsomakethesetasksthecoreoftheirleadershipandmanagementeffortsasthey“govern”thecompanyonaday-to-daybasis .ThisPolicyBriefisnotjustabouttheroleofboardsofdirectorsbutalsoabouttheimportanceofa

powerfulboard/business-leaderpartnershipindirect-ingthedestinyofpubliclyheldcorporations .

Byshowinghowclosely,indeedseamlessly,thesesixtasksrelatetoeachother,thisPolicyBriefhopestoprovideanaffirmative,actionableframeworkwhichboardsandbusinessleaderscanapply,asappropriate,intheirowncorporations .Suchaframeworkisofspecialimportanceinorientingthecompanytowardstheessentialinanerawhenanycommonalityamongshareholdershasbrokendown—indeedshareholdershavemanyconflictingobjectivesandagendas—andwhenstakeholders,too,makemanycompetingdemandsonthecorporation .Theforwardtrajectoryofcorporationsinvolvesabalancebetweenmanycompetingobjectivesandclaims—notpursuitofonesimplegoal—and,attheendoftheday,onlyboardsandseniorexecutivescanmakethecomplexdecisionstofindtherightbalance .

Althoughwritteninaprescriptiveform,thispaper,preparedintheaftermathofthegreatesteconomicdown-turnin60years,seekstostimulateanimportantdiscussionontheessentialsofcorporategovernance,nottoexhaustorendit,byarguingfortheprimacyofthesixfundamentaltasks .Itencouragesdebateonthesubstanceofwhatacorporationshoulddo,notjustontheprocessesforhowtodoit .Itdiscussesillustrativeconceptstoprovidecontextbuthopestoavoidmind-numbingorrotebox-checkingdetail .

Thiscrisisofconfidenceincorporategovernancehasmanyorigins .Majorfinancialinstitutions(banksandinvestmentbanks)andindustrialcompanies(automobiles)havegonebankruptwithsignificantinjurytoallstakeholders .Importantfinancialservicecompaniescontributedtothecreditmelt-downandsevererecession(through,amongotherthings,poorriskmanagement,highleverage,inadequateliquidity,creationofill-understoodproducts) .High,poorlystructuredcorporatecompensationhasdrawnsharpcriticismasacauseinexcessiverisktakingandas

I. Introduction

2

outofproportiontogoodjudgmentandcommonsense .Andothercorporationsinboththefinancialandindustrialsectors,eventhosewhicharewell-run,arenotimmunefromgeneralreputationalharmtobusinesscausedbyalmosttwoyearsofheadlinesaboutcorporateproblems,excessesandfailures .

Toaddresstheserealandperceivedissuesaboutcorporateleadership,aboutcorporations’abilitytogovernthemselveseffectivelyandaboutcorporateaccountability,therearetwobroadoptions:

• morepublic-sectorregulationtolimitprivate-sectorself-determinationeitherinthefinancialsectororacrossallpubliclyheldcorporations;and

• morebroad-gauged,transparentandeffectiveprivate-sectorleadershiptoarticulatethecorepurposesofpubliccorporationsandtocarrythemoutwithrigor .

ThisPolicyBrieffocusesonthesecondoption:enhancedcorporateself-governanceatallpubliclyheldcompanies .1Itbuildsonpriorpolicystatementsfromleadinggovernancegroups2andonrecentreportsaboutthecausesandcuresofthefinancialandauto-mobilecompanymelt-downs .3

It hopes to make a singular contribution by defining the six essential governance tasks, by emphasizing their interrela-tionship, and by showing that these seamless tasks are the touchstone of corporate accountability.

Acompanyculturethattrulymakesthesixintercon-nectedtasksarealityisnecessarywhetherornotthereisadditionalpublic-sectorregulation .Somecompaniesdischargesomeofthesetasks;somemaydischargeall .But,tomeetthedemandsofthetimes,allcompaniesmayfindithelpfultore-assesstheircurrentapproachagainstthesesixpriorityactions .Attheendoftheday,whatevertheresultofthepublic-policydebatesaboutgovernancestructureandprocess,onlyout-standingboardsofdirectorsandoutstandingbusinessleadershipcantogethermakecorporationswork .

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II. RESTORING TRUST WITH SIX ESSENTIAL GOVERNANCE TASKS

Inthisperiodofeconomicupheavalandchange,boardsofdirectorsandCEOsarebuffetedfrommanysideswithconflictingdemandsaboutwhattheyshoulddo .Acommonboardlamentisbeingoverwhelmedwithtoolittletimeandtoomuchcomplexity .

Inarguingthatboardsofdirectorsandbusinessleadershipmustdischargesixcoretasksinordertoregainpublictrust,thisPolicyBriefunderscoresthattheseareseamless,buildinguponandreinforcingeachother .Whilethedetailsofdischargingthesetaskswillnecessarilyvarywithcompany,industry,geographyandcompetition,focusingonthemtogetherasaction-able,corefunctionswillhelpanswerthepressingquestionaskedbyboardsandbusinessleaders:whatshouldbeourprioritytasks?

Attemptingtodrawthelinebetweenboard-of-directorandbusiness-leaderresponsibilityisnotthepurposeofthisPolicyBrief .Thelong-standingpropositionthattheboardofdirectorssetsthecorporation’sdirectionandoverseesimplementation—andtheCEOandseniorexecutivesleadandmanagethecorporationit-self—continuestoapply .Toomuchofthegovernancewriting,especiallysinceEnron,hasemphasizedtheboard’sroleinbeingacheckandbalanceonmanage-ment,asiftheyarenecessarilyinperpetualopposition .

But—and this must be emphasized—iftheboardcorrectlydefinesthejobsoftheCEOandtopbusinessleadersandchoosestherightpeople,theprimaryrelationshipshouldbeaquestioningbutaffirmativepartnership .Thatpartnershipcriticallybutconstruc-tivelyteststhereasonablenessofboth thefundamentalsystemsandprocessesinstitutedbymanagementand thehighprioritydecisionsandresultsflowingfromthosesystemsandprocesses .

1) RedefiningtheMissionoftheCorporation—andtheRolesoftheBoardofDirectorsandtheCEO .

Fartoomuchemphasishasbeenplacedinrecentyearsonthesinglecorporategoalofmaximizingshort-term

earningspershare,stockpriceandshareholdervalue .Asdiscussedbelow,thisisdue,inimportantpart,topressuresexertedbythechangeininstitutionalinves-torswhoareincreasinglypreoccupiedwithshort-termresults,withbeatingcompositeindustrybenchmarksandwiththeirownabsoluteprofitability,ratherthancompanyfundamentals .

Astatementofthemissionofpubliclyheldcompanies,appropriatetothesetimes,iscreationofdurableshareholderandstakeholdervalueby:

• Attaining high performancewhichmeans:strong,sustainedeconomicgrowth;throughthecontinuousprovisionofhighqualitygoodsandservices;whichinturnprovidedurablebenefitsforshareholdersandotherstakehold-ers(creditors,employees,customers,suppliers,communities,regulators)uponwhomthecompany’shealthdepends .

• Highperformanceentailsanessentialbalancebetweenrisk-taking(thecreativityandinnova-tionsoessentialtothegrowthofoureconomy)andeconomicrisk-management(thefinancial,commercialandoperationaldisciplinessoessentialtothesoundnessanddurabilityofbusinessinstitutions) .

• Creating a culture of high integritywhichmeans:robustadherencetothespiritandletteroftheformalrules,legalandfinancial;adoptionofglobalethicalstandardswhichareinthecompany’senlightenedself-interestandwhichbinditanditsemployeesasiftheywereformalrules;andsecuringemployeecommitmenttothecorevaluesofhonesty,candor,fairness,reliabilityandtrust-worthinessinallinternalandexternalrelationships .

• Highintegrityhaspositivebenefitsinsidethecompany,inthemarketplaceandinaglobalsocietybutitalsoaddressesseriouslegal,

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regulatory,reputational,communicationsandpublic-policyriskswhicharealsoimportantfacetsofcontemporarybusiness .

• Fusing high performance with high integrity .Thisfusionofsustainedeconomicperformancewithastrongcommitmenttolaw,ethicsandvaluesisthefoundationofthecontemporarycorporation .

• Properly addressing business-in-society issues. Inbalancingrisk-takingwithriskmanagementandinfusinghighperformancewithhighintegrity,contemporaryCEOs,andtheirtopbusinessassociates,needtopaysystematicattentiontobusiness-in-societyissues:howsocietycanandwillaffecttheconductofbusiness;howbusinesshasanimpactonsociety;andhowbusinessleadersshouldshapeandcommunicatethealignmentofbusinesswithsocietalintereststhroughtheconceptofcorporatecitizenship .4

Asemphasized,eachcompanywillgivedetailedmeaningtotheseconceptsofperformance,riskandintegrity,buttogethertheyconstitutethecoremis-sionofthecontemporarycorporationanddefinethefundamentalroleoftheboardofdirectors,theCEOandotherseniorexecutives .

2) RevampingtheLeadershipDevelopmentProcess .

Corporationsoftenprovidehighlyspecializedtraininginsuchbusinessskillsassales,marketing,finance,IT,businessdevelopment,manufacturing,engineeringandproductortechnologydevelopment .Theyalsomayprovidelessspecialized,moregeneraltrainingforP&L(profit-and-loss)managers,whoarepromotedfrompositionsofnarrowexpertisetoassumebroaderoperationalresponsibilities .Suchgeneralmanagertrainingcustomarilyfocusesonachievingcommercialgoalsindifferentenvironments .

• But,withcarefulboardoversight,theCEOandothertopbusinessleadersmustinstitute management development processesforcorpo-rateP&Landfunctionalleadersthat,atearlystagesintheircareers,putstrongemphasisnotjustondevelopingspecializedexpertiseoronachievingcommercialgoalsbutondevelopingtheexperienceandskillstodothisthrough

balancedrisk-managementandperformancewithintegrity .Thisemphasisonriskmanage-mentandanintegritycultureshouldbeatalent-managementimperativeasindividualsrisewithinthecorporationandfaceincreas-inglybroaderchallengesrequiringintegrationofallthreedimensionsofcorporatemission .

• Suchdevelopmentwillinvolvebroader and different educational courses offered by the corporation during an individual’s career ontheinterrelationshipbetweenperformance,riskandintegrityinthecontextofaglobalsociety .SuchcoursesmaybeofferedinsidethecompanyorinexecutiveMBAorexecutiveeducationprograms—butarethinkingofsuchcourses,bothinthecompanyandinacademia,maybenecessary,givenabroaderdefinitionoftheCEOandbusiness-leaderroleandtherobustdebateaboutnecessarychangesinbusi-nesseducationasaresultofrecentbusinessfailures .5

• Suchleadershipdevelopmentwillalsoentailgiving high-potential individuals a broader range of assignments earlier in their careers—e .g .,workingonateamscrubbinganewproductlineforitsrisks;beingintegraltoamajorinternalinvestigationofpotentialwrong-doing;helpingtoascertainthegeopoliticalissues,aswellasthebusinessissues,inlocatinganewmanufacturingfacilityinoneofthreeorfourSoutheastAsiannations;assessingsupply-chainrisksandopportunities—andthird-partysuppliers—inemergingmarkets .Establishingthetheoryandpracticeofsystematicallyimplementingcross-functionalassignmentsforup-and-comingleadersisavitalrolefortheCEOandseniorHRleaderworkingwiththemanagementdevelopmentandcompensationcommitteeoftheboardofdirectors .

3) RefocusingtheProcessforCEOSelection—andforOtherPromotionsintoHighCorporatePositions .

Theultimateresultoftheinitialtasks—redefiningthemissionofthecompanyandtheCEOandrevampingleadershipdevelopment—shouldbeaCEO-succession

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processwhichexpresslysearchesforandthenselectsanewleaderforthecompanywhosepersonalityandcareerreflectthecombinationandintegrationofthenecessaryperformance,riskandintegritydimensions .

• Asitbeginsthissuccessionprocess,theboardofdirectorsshouldrestateandreiter-atethemissionofthecompanyandthekeycharacteristicsofbalancingrisktakingwithriskmanagementandfusinghighperformancewithhighintegrityinacompany-specificarticulationofpurposeaimedatbothinsideandoutsideaudiences .

• Inexercisingthisfunction—whichhashistori-cally(andproperly)beenviewedasitsmostimportanttask—theboardshouldhopefully(ideally)beabletochoosefromastrongtalentpoolinsidethecompany .

• Similarly,promotionstoseniorcorporateleadershipjobswhichtheCEOrecommendsandtheboardofdirectorsapprovesshouldbeawardedtoindividualswhohavethebroadconstellationoftalentsandskillsrequiredbythecontemporarycorporationwitharedefinedmission .

Theneedforcoreeconomicperformanceskills—fi-nancial,commercial,operational,strategic—areasimportantaseverintheCEOandtopbusinessleaders .Nothingsaidhereisintendedinanywaytodiminishtheprimacyofhigheconomicperformanceinabusi-nessorganization .Butfailuresofbusinessleadershipintherecentpasthavefrequentlybeenduetoseriousweaknessesinriskassessmentandmanagement,ortoseriouslapsesinadheringtolegal,financialorethicalstandards .

Thesefailureshavehadsignificant,evencatastrophic,impactsonshareholders,creditors,employees,custom-ers,suppliersandcommunities .Theyhave,overtime,erodedthetrustuponwhichsuccessfulconductofbusinessdepends .AcontemporaryCEOmusthaveprovenskillsinriskmanagement,increatingacultureofintegrityandinunderstandingbusiness-in-societyissueswhichposeboththreatsto,andopportunitiesfor,thecorporation .Strengthincommercialopera-tionsandstrategyisabsolutelynecessary,butnotsufficient,intoday’sbusinessenvironment .

4) ReformulatingOperationalObjectivesforPerfor-mance,RiskandIntegrity .

Howthecompanymeasurescommitmenttoitsfunda-mentalmissionovertheshort,middleandlongtermis,ofcourse,acriticaltaskindrivingdesiredbehaviorandsettingthetermsforcorporateaccountability .6Boardsofdirectorsandbusinessleadershipmusttogetherdefineaconcise,comprehensiveandrobustsetofoperationalobjectivesacrossthedimensionsofeconomicperformance,riskmanagementandhighintegritywhichcanbeclearlycommunicatedinsideandoutsidethecompany .Somewillbeenduring,likefundamentalsystemsandprocesses .Otherswillneedmodificationasthecompetitive,regulatoryandgeopo-liticallandscapechanges .

Thisannualprocessoftranslatingthebroadarticula-tionofmissionintooperationalobjectivesrequiresgreatcareandsustainedattention .Itshouldmeasurebothfinancialandnon-financialfactors .Itmustbecomeacorefeatureoftheboard/business-leadershiprelationship—ajoint“deliverable”attheendofoneyeartoprovideanaccountabilitytestinthenext .

Someimportant,illustrativemeasuresfollow .Eachcompanywill,ofcourse,explicitlyarticulateandclearlyexplaintheoneswhichitchoosestousebecauseeach,byitself,cancreateorhideproblems .7

a . Sustained Economic Performance. Thesemeasure-mentsshouldbeinsulatedasmuchaspossiblefrombook-keepingmanipulationandshort-termstockpricefluctuations .

• Theefficientuseofcapitalthroughsuchmeasurementsasreturnonassetsandreturnoninvestedcapital .

• Operationalexcellenceasreflectedincashfloworoperatingmarginsorproductivityincreases .

• Strongconnectionstocustomers,throughsuchmeasuresas:marketshare,increasesinrevenues,repeatcustomerpercentages,assess-mentsofcustomersatisfaction,newproductsaspercentageofofferings,brandstrength .Forallthepastfocusonshareholders,thecoreactivityofthecorporationissellingqualitygoodsandservicestocustomers,the

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stakeholdersuponwhomthecompanytrulydepends .

• Employeemotivation,satisfactionandindi-vidualproductivity .

• Themoretraditionalperformancemeasuresofnetprofits,earningspershare,stockpriceincreases,totalshareholderreturnandreturnonequity .Whilethesemetricsofeconomicperformanceshouldnotoverwhelmallothers,theywillcontinuetobeimportant .Oneofthechallengesishowtogivethemtheirdue,notmakethemdominantandthusputthemincontextwiththemanyothermeasuresofperformancewhichmakeforastrong,growingcompany .

• How,andtowhatdegree,changesinnewtechnologies,newproducts,newacquisitions(ordispositions)andnewgeographiesposi-tivelyimpacteconomicperformance .

• Performanceagainstpeercompaniesinallthemeasurementsmentionedabovewheneverpossible .

b . Systematic Risk Management for Economic Performance.Riskdisciplinesmustbematchedwithdecisionsaboutsettingandimplementingeconomicperformanceobjectives .ThisPolicyBriefdiscusses,inthissection,direct economic risksrelat-ingtocapitaladequacy,leverage,liquidity,interestrates,currency,credit-worthinessofcounterpar-ties,productsandoperations .Othercriticalriskswhichcanindirectly affect economic performancesuchaslegal,reputational,ethical,IT,supplychain,countryandgeopoliticalissuesarediscussedinthenextsection(onintegritymeasurementsandprocesses) .

Thegoal,ofcourse,isnottoeliminateeconomicrisktaking—riskistheverynatureofbusiness .Indeed,thedrumbeatofriskdiscussionsintherecentpast,whileunderstandable,shouldnotob-scuretheessentialroleofbusinessincreativityandinnovation .Ratherthepurposeistounderstandriskstotheextentpossible,mitigatetotheextentpracticableandtoensurethatthereisadequatespreadofrisksoiflargeknownorunknown

adverseeventsoccurthecompanyisprotected,notfromdeclinebutfromdestruction .

Aprefatorynoteonriskorganization:therearemanydifferentwaystoorganizeriskfunctionsbothinsidethecompanyandattheboardlevel .ThisPolicyBriefdoesnotattempttosaywhatisthebestorganizationalform .Thatwilldependoncompanymissionandculture .Asindicatedbelow,itdoessaythat,insidethecompany,thereneedtobeindependentexpertsonvariousdirectandindirecteconomicrisks .Attheboardlevel,eachoftheseindependentcompanyexpertsshouldbedirectlyconnectedtoacommittee(beitAudit,anewRiskCommitteeoraPublicAffairsorPublicResponsibilityCommittee) .Ultimatelypullingallthethreadsofriskstogetherfortheenterpriseis,however,theresponsibilityoftheCEO(the“chief ”riskofficerinaveryrealsense)andoftheboardofdirectorsasawhole .

i. Within the company

• Insidethecompany,theeconomicriskfunc-tionmustbeindependentofoperationalbusinessleadership .ItmusthavedirectaccesstotheCEO—and,onhighestprioritymat-ters,totheboard .Assessingwhethersuchanindependentriskfunctionexists,thequalityofitspeople,andwhereitreportsareallpartofariskmeasurementprocess .

• Thefundamentaljoboffinancialriskmanage-mentdirectedateconomicperformanceistoassessmajor,directanddiscreteeconomicriskdimensionsofthefirm—e .g .,capital,leverage,liquidity,credit,currency,market,opera-tions—throughprocess-mapping,identifica-tionofimportantriskareas,anddevelopmentofrisk-mitigationmeasuresandcontrols .Activitiescoveredrangefromnewproducts,tonewgeographies,tonewcustomers,tomajorareasofexistingoperationalexposure .Companiesmustalsorigorouslyassessoff-balance-sheetrisksaspartofthisactivity .8Thesefundamentalrisksystemsandprocessescanbeassessedandmeasured .

• Asamatterofbusinessdecision-making,theriskfunctionshouldhaveanopportunityin

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frontoftopleadership(separatefromthebusinessleadersproposingacourseofaction)topresentimportantissues .Theriskfunctiondoesn’tmakethedecision:topbusinessleadersand(onhighprioritymatters)theboardofdirectorsmustexpresslybalancewell-artic-ulatedrewardandrisk .Butboardsandtopbusinessleadersmustunderstandasclearlyaspossiblenotjusttherewards,butalsotherisksthroughcandid,systematicpresentationsbythoseexpertinrisk .A healthy, candid debate is critical.Again,itispossibletoassesswhethersuchinteractiontookplaceduringthecourseoftheyearontherightsetofpriorityissues .

• Riskmanagementmustalsoascertainthesystemicrisktothecorporationfromthecombinationoffinancial,commercialandoperationalrisks .Withoutenteringthevoluminousandspiriteddebateaboutmath-ematicalriskmodels,itisfairtosaythat,whiletheyhaveutilityinmeasuringsometypesofsystemicrisk,theyarenotbetterthantheirassumptionsandthepastdatafromwhichtheyareconstructed—whichcanwellbeinadequateintimesoffuturestressordisloca-tion .Systemicriskassessmentinvolvessomescenario-planningaroundworst-casecriticalissues—suchasleverage,liquidity,currency,creditandoperationalrisks—includingthoseoccasionedbymajorglobaleconomicdislocations .

• Thecompanymustdecidehowtospreadriskprudentlysothatevenanunknown,low-probabilityeventinaparticularareaoractivitycannotsinkthecompany .Articulationofthisspread-of-riskphilosophyandadherencetoitisalsoanimportantriskobjective .

• Similarly,thecompanyshouldinstituteearlywarningsystemsoneconomicrisks—whetherinregularvaluationofassets,orchangesinmarkets,orunforeseenmovesfromcompeti-tors—whichtriggerahigh-leveldiscussionofrisk-taking/risk-managementissuesthatcouldleadtochangesincourse .

ii. At the board committee and full board level

• Thereshouldbeaboardentity—whethertheAuditCommitteeoranewRiskCommit-tee—whichhasthetaskofassessingthedirect economic risksnotedabove(capital,leverage,liquidity,credit,market,operational)confront-ingthecompany .Workingwithmanagement,itshouldreviewandagreeuponthefunda-mentalsystems,processesandmeasuresforassessing,mitigatingandmonitoringrisk,asdescribedimmediatelyabove .Itshouldreceivetimelyupdatesonthestatusofhighrisksfac-ingthecompany .Itshouldalsoreceivereportsfromrelevantriskofficialsinacompanyonwhetherthosereceivingcompensationaboveacertainlevelhaveidentifiedrelevantrisksandtakenappropriaterisk-mitigationsteps .(Thisactivityisrelevantbothtoaccountabilityandtocompensation .)

• Ultimately it is the job of the full board to un-derstand the work of the business leadership and the risk/audit committee on the assessment and management of the high-priority risks associated with economic performance which can seriously injure the corporation.Significantallocationofitslimitedtimeshouldbedevotedtothissubjectofpriorityriskissues .9

c . Promoting High Integrity and Assessing Legal, Coun-try and Geopolitical Risk .Amajorchangeformanycorporationswouldtobeexplicitaboutmeasuringbusinessleadersoncreatingacultureofintegrity,asdefinedabove(law,ethics,values),andassessingintegrityrisksassystematicallyasthecorporationreviewseconomicrisks .10

i. Inside the company

• Acompanycanmeasuretheintegritypromo-tioneffortsofitsCEOandotherseniorexecutivesacrossatleastfivedimensions .Haveleaders:

—adopted key principlessuchasconsistencyandcommitmentinbothwordsandactions;embeddingintegritydisciplinesinbusinessoperations;havingsystematicprocessesforsurfacing,analyzinganddecidingethicalissues;givingemployeesvoicetoexpressconcerns;protectingcompanysecurity?

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—adopted key implementing practicestomakethosefoundationalprinciplesareality(riskassess/riskmanagefundamentalbusinessprocessesintersectedbyvarietyoflegalre-quirements;insurethatsystemsforpreventing,detectingandrespondingtointegrityissuesarerobustacrossbusinessesandgeographies)?

—created an affirmative culture of integritywhereemployeesarenotjustafraidofviolatingrulesbutaffirmativelywanttodotherightthing?Culturecanbeassessedbyanumberoftechniques,includinganonymousinternalsurveys,externalreputationalsurveysand360evaluationsofkeyleaders .

—performed well against peers(comparisonstootherdivisionsinsidecompaniesortoexternalpeercompanies,in,forexample,environmen-talcompliance)?

—established and met annual goals and objectives(howarehardproblemshandled,keypeoplehired,identifiedweaknessesremedied)?

• Aswithfinancial,commercialandoperationalrisks,companiesshouldestablish“integrity”early-warningsystemstoidentifyimportant,emergingriskswhichcanhaveindirecteco-nomicimpact(aswellasotheradverseeffects):

—Changesinbroadpublic-policyarchitecture(e .g .,tax,trade,environment,healthcareetc .) .

—Changesinimportantbutmorefine-grainedlegalorfinancialrulesthatcanhaveasignifi-cantimpactonthecompany .

—Changingethicalexpectationsanddemands .

—Securitythreatstopeople,facilities,infor-mationandsupplychain .

—Changinggeopoliticalorcountryrisk .Inparticular,anunderstandingofgeopoliticalcontextiscriticalbecauselow-probabilitybuthigh-impactevents(militaryaction,currencydevaluations,politicalupheaval)can,ofcourse,havedramaticimpactonbusinessoperations .

Properlydesigned,suchearlywarningsystemsgatherinformationsystematicallyandpresentissuesonperiodicbasistobusinessleadersfordecision .Isdetailedanalysisbeyondissueidentificationneeded?Businessleadersmustdecide .Ifso,shouldthebusinesstakeanticipatoryactiontogetaheadofthecurve(e .g .,adoptconsumerprotectionsinfinancialservicestoanticipateregulatorychangeandavoidenforcementactionsandconsumerlawsuits)?Boththeprocess(doeseveryappropri-atebusinessunithavesuchprocessesrelevanttotheirproductmix?)andtheresults(werechallengesanticipated,ifnotwhynot?)canbeassessed .

ii. At the board committee and full board level

• Aswithfinancialrisk,acommitteeoftheboardofdirectorsshouldberesponsibleforreviewingandagreeinguponthefundamentalmeasuresforpromotingintegrityandthesystems,processesandmeasuresforassessing,mitigatingandmonitoringintegrity,countryandgeopoliticalrisk .Asnotedattheoutsetofthissection,whetherthisistheAuditCom-mittee,aspecialRiskCommitteeoraPublicResponsibilitiesorPublicAffairsCommitteewillturnoneachcompany’sculture .(Jointcommitteemeetingsmaybeappropriateonsuchtopicsascountryorgeopoliticalriskwhichhavemultiplecausesandimpacts .)

• Finally, as with economic performance, it is ultimately the responsibility of the full board to oversee basic integrity risk-mitigation systems, processes and priority results and assess whether an integrity culture exists.

Insum,thesebasicoperationalgoalsandmeasure-mentsacrossperformance,riskandintegritydimen-sionsareessentialforallocatingresponsibilityandensuringaccountabilityinsidethecorporation .Buttheyalsoshouldprovideapublictemplateforaccount-abilitythatisameaningfulalternativetothereduc-tionist,attimesmisleading,metricofshort-termsharepriceasindicatorofcompanyvalueandperformance .11(Seepage11fordiscussionofaneedforcorporationstoarticulatetheseoperationalgoalspubliclyinordertofixtheirresponsibilityandaccountability .)

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5) RevisingCompensationforCEO,SeniorExecu-tivesandOtherKeyEmployees .

ArevisedapproachtocompensationflowsfromaredefinitionoftheCEOrole,revampedleadershipdevelopment,anewprocessforCEOselection,anddevelopmentofbroaderoperationalobjectivestoholdexecutivesaccountable .Itshouldreinforceandbereinforcedbythoseothertasks .Thebroaderpurposeistochangecompensationbasedonshort-termresultsthatignorelong-termrisksandtousecompensationtoincentivizeshort,mediumandlong-termvaluecreationattainedwithsoundriskmanagementandwithhighintegrity .Thepurposeofcompensationis,ofcourse,toattractandretaintalent,butwithinthatbalancedframework .Selectcompaniesaremovingexplicitlyinthisdirection .12

ThesettingofcompensationfortheCEOandtopbusinessleadershipisafundamentalroleofthecom-pensationcommitteeandthenthefullboard .But,developmentoftheoverallcompensationphilosophyanditsapplicationtotopcompanytalentshouldbeajointboardandseniorexecutivefunction .

ThisPolicyBriefadvancesthefollowingconceptsforarevisedapproachtocompensation .Theseconceptsareconsistentwiththoseadvancedinotherrecentanalysesandreportsasaconsensusisbeginningtoformonnewpayprinciples(ifnotyetoncriticaldetailsandmethodologies) .13

• CompensationfortheCEOandtopbusinesslead-ersshouldturnonactionsandresultsinthethreeseparateoperationalareascomprisingcorporatemission:sustainable,durableeconomicperfor-mance;effectiveriskassessmentandmitigation;andpromotionofanintegrityculturethroughsystemsandprocessesembeddedinbusinessoperations .Eachshouldbeadiscreteelementinacomprehensivepayregimewhichthenusesthemincombinationtodeterminetotalawards .

• Althoughtopbusinessleadershipwillreceivesubstantialannualcashcompensation,significantcompensationin a particular yearwillbevariablecashandvariableequitywhichwillbepaidoutorheldbackovertimeasperformance,riskandinteg-rityobjectivesaremet,exceededormissed .Theseobjectivesshouldgenerallyreflectrelativeeffort

ofleaders—comparedtopastresultswithinthecompany(positiveornegativetrends)oragainstpeersorboth .Deferredcashhastheadvantageofavoidingstockpricemanipulationandprovidingnecessaryliquiditytoindividuals .Deferredequityhastheadvantageoftyingemployeestothelong-termcreationofshareholdervalue .14

• Variablecashgrantedinasingleyearwillbesomemultipleofannualcashandshouldbepaidoutinincrementsonamulti-yearschedule .Somemissesduetonegligentorintentionalacts—asignificantmisstatementoffinancialsuponwhichcompanyresultswerebasedoraseriousfailuretoweighriskoramajorintegritylapse—canleadtocompletecancellationofthevariableout-yearcompensation .Othersmissesduetoserious,avoidablemistakesmayleadtoadiminutionbutnotcancellationofvariablecompensation .

• Variableequityshouldalsobegrantedinoneyearbutonlyvestinout-yearsdependingonattainmentofperformance,riskandintegritymeasurements,althoughthemixmightbetiltedmoretobalancedeconomicperformance(inthedifferentcategoriessummarizedabove,efficientuseofcapital,opera-tionalefficiencies,relationshipswithcustomersetc) .Stockpriceincreasesandtotalshareholderreturnshouldbeafactorbutnotthefactor .15Again,theseperformanceoptionsorRSUsshouldbewithheldorclawedbackforseriousnegligentorintentionalactssimilartothecancellationofvariablecashgrants .So,too,lessermistakesmayleadtodiminution,notcancellation .Tominimizemanipulationofbusinessforshort-termstockgainsevenintheout-yearsaholdingperiod,beyondthevestingperiod,maybeappropriate .

• Variablecashandvariableequityawardsmayalsobedesignedintheyeartheyaregrantedwithincentivesforsustainedperformanceintheout-years .Forexample,iffutureoperationalobjectivessetinyearoneareexceededinsubsequentyears,thencashandequityawardsfromyearonewhicharevestinginthosesubsequentyearscouldbeincreased .

• Incancellingvariablecashorvariableequityawardsforperformance,riskorintegritymissesduetonegligentorintentionalacts,boardsshould

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utilize“hold-backs”and“claw-backs .”A“hold-back”occursduringthevestingperiodoftheaward:thecashorequitynevergoestotherecipi-ent .Ahold-backoccursatthediscretionofthecompany,andemployeeshavetobringanactioniftheybelievethecorporateactionwasimproperorunfair .A“claw-back”occursafterthevestingperiodandrequiressometypeofformalcompanyactiontodemonstratethatclearlyarticulatedstandardstriggeringaclaw-backwerebreached .16

• Similarly,compensationplansmustriskassessjobsbelowthetopbusinessleadersandapplynewcompensationdesignforindividuals,notjusttopofficers,withtheabilitytocommitresourceswithsignificantlong-termopportunitiesandrisksforthecorporation(e .g .,thosewhosellinstrumentscreatinglong-termobligationsforthecompany) .Compensationdesignwillturnonspecificperfor-mance,riskandintegrityparametersapplicabletothoseindividuals .But,thevariablecashandequitycompensationwilloutweighannualcashcompensation .Heretoo,theboardshouldhavethepowertohold-backorclaw-backvariablecashorequityfornegligentorintentionalmisseswithinadefinedsphereofresponsibility,aswellasprovidingfordiminutionoraugmentationoftargetcompensationintheoutyearsdependingonenhancedorpoorresults .

• But,evenforthoseindividualsimportanttocompanyperformance,compensationshouldhaveanimportantelementbuiltoncompanyanddivisionresults,notonsolocontributionsalone,tohelpcreateastrongandloyalculture .

• Applicationoftheseprincipleswouldsharplyreducetwoproblematiccompensationmechanismswhich,intheviewofanumberofcommentators,droveshort-termismandexcessiverisk-taking:

—the“naked”stockoptionwhichrewardsasimpleincreaseinsharepricedisconnectedfromattain-mentofpriorityoperationalgoals;and

—thehugeannualcashbonusawardedwithoutregardtoriskconsequencesintheout-years .

• Suchacompensationredesign—likeestablishingmeasurementsforrisk,performanceandintegrity

accountability—requiresnewthinkingandhardwork .

—Oneproblemisdevisingmulti-factormea-surements(performance,risk,integrity)intherightproportionsthatreflectthemissionofthecompanybutarenotsocomplexastobeconfusingoropaquenorsosimplisticastobeadistortionofreality .

—Aseconddifficultyisascertainingwhencompanyleadersorindividualperformershavemadeadifferencebytheirefforts—thekindofdifferentiationwhichshouldbeatthecoreofallcompensation—orwhetherexogenousconditionshaveaffectedresults,eitheronthepositiveorthenegativeside .Leadersandkeyemployeesshouldnotbepenalizedforeventsbeyondtheircontrol,butneithershouldtheyberewardedexcessivelyforsuchoccurrences .

—Athirdcriticalissueispayequity(whichhasdrawntremendousfireinthefinancialsector):boththeabsoluteamountandtheamountrelativetootherkeypersonnelinsidethecorporation .Companiesneedtofaceintothequestion:howmuchistoomuch?

Alltheseissuesshouldbeaddressedinarevisedcompensationregime .

• Therevisedapproachtocompensationsshouldbecommunicatedinclear,understandabletermstoshareholdersandothers .Meaningful,nuanceddiscussionwithappropriategroupsabouttheap-proachtocompensation,includingbutnotlimitedtoshareholders,ismoreimportantthanablunt“advisoryvote”ofcompensationphilosophy,mea-surementsandresultsatshareholders’meetings .

6) Re-aligningtheBoard’sOversightFunction .

Thecriticaloversightfunctionoftheboardofdirec-torsshouldbealignedwiththeperformance,riskandintegritymeasurementswhichindicatewhetherthecompanyisattaininghighperformance,soundriskmanagementandhighintegrityandwhichwillbeusedindeliveringcompensationtotheCEOandtopbusinessleadershipoveramulti-yearperiod .

Thisalignmentshouldhelpdirectorsfocus,intheirlimitedtime,onwhatisessential .

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• Properlyseen,“strategy”fromtheboardperspec-tiveisnotjustcommercialstrategy,butthemostimportantperformance,riskandintegrityissuesfacingthecorporationbothinthecomingyearandoveralonger-termplanninghorizon(3-5years?) .

• Attheendofeachcalendaryear,theCEOandtopbusinessleadersshouldpresenttotheboardofdirectorsalistofkeyperformance,riskandintegrityissues .Fromthislistandfromtheirownassessmentofcorporatechallenges,theboardwillchoosethepriorityboardmeetingissuesforthecomingyear .Thischoicewillsetthecoreboardagenda,subject,ofcourse,totheemergenceofnewhigh-priorityissues .Arobustdirectordiscussionofthesepossiblepriorityissues,notjustaquickrubberstamp,shouldoccuratthiscriticalend-of-yearevent .

• Theindependentboardchairorpresidingdirectorwillensurethattheseissuesare,infact,coveredindepthduringthecourseoftheyearandthatthecoretrade-offsandconsiderationsarefairlyandcandidlydiscussedwiththeboard(whetherinwrittenmaterials,oralpresentationsorsomecombination) .Requiringboardstogiveapprovalsorconsideredviewsonhardissuesafterjustonemeetingshouldberesisted .Structuringsequentialdiscussionsofcomplexandimportantissuesoverseveralmeetingsmayhelptheboardmorefullycometogripswithprioritymatters .Theboard’staskistoreview,appraise,critiqueandenrichtheanalysisanddecisionrelatingtotheseissues .17Thebusinessleadersshouldstrivetopresenttheboardwithhigh-qualityinformationfocusedonthepriorityissuesandtherealchoicesoroptions .Quality,notquantity,andabsolutecandoronthehardissues,notvaguedescriptionsofthedecision,shouldbethetouchstones .

• Attheendofeachyear,theCEOandbusinessleadersshouldprepareareportforboardofdirec-tor’sreviewonhowthecompanyhasperformedonthevariousmeasurements—andwhether,inlightofexperienceandemergingdevelopments,themeasurementsforthefollowingyearshouldbemodified .Suchasystematicreview,coupledwiththeagenda-settingexerciseforsubsequentboardmeetings,canrequiresignificantboardattentioninthefourthquarterbothtoassessthecurrentyear

andtoplanforthesubsequentone .Itishardtoimagineabetteruseofboard/managementtime .SuchareviewmayalsorequireintensediscussionsbetweentheboardleaderandtheCEOinadvanceoftheboardmeetingtoimprovethecandorandcompletenessofthepresentation .

• Toincreaseaccountability,theboardofdirectorsandbusinessleaderscouldconsiderhowtomakeareportavailabletothepublicwhichinclear,conciseformdiscussestherecordoftheyearagainstoperationalgoals—andtheoperationalgoalsandissuesforthefollowingyear .Atpresent,discussionsatend-of-yearanalysts’meetings,inProxyStatements(e .g .,onexecutivecompensation)andinAnnualReports(CEOletter/ManagementDiscussionandAnalysis)maynotpresentaclear,comprehensibleaccount—inplain,understandablelanguage—ofpastgoals,presentrecord,futuregoals .AnewjointBoard-CEOstatementorrecastingoftheCEO’slettertotheshareholdersintheAnnualReportcouldconstitutesucha“plainEnglishreport .”18

* * * * *

Carryingoutthesesixfoundational,interrelatedgovernancetasksisthecoreofaright-sized,criticalbutconstructiverelationshipbetweenacorporation’sboardofdirectorsanditsCEO/seniorbusinessleadership .Carryingthemoutwellshouldhelpcreateastrong,durablegrowingcorporation—andcouldaddressthecurrentcrisisofconfidenceinthegovernanceofcorporations .

13

Boardsofdirectorsandbusinessleadershipmusthonestlyconfrontkeyobstaclestothisbasicreorienta-tionofcorporategovernance .Abriefenumerationofsalientproblemsfollows,whichisintendedtoraiseissuesforfurtherdiscussion,action,researchandanalysis .

1) Labor Markets. Canindividualcorporationswhichdefineshort,mediumandlong-termperformance,riskandintegrityoperationalobjectives—andbasesignificantdeferredcompensationontheirattain-ment—competeinthelabormarketforbusinesstalent?Otherbusinessentitieswillingtouselargeamountsofcashandoptions,withfewerpay-outrequirements,mayseektoattracttopleadersandperformersinaverycompetitivelabormarket .

—Oneapproach,beyondindividualfirminitiativesandwellshortofcomprehensivepublicregulation,isforcorporationsinaparticularindustrygroup(orinamoregeneralbusinessassociation)todevelopacodeofcompensationprinciples(inamannerthatmustavoidantitrustconcerns) .Acorporation’scommitmenttosuchacodeandsubsequentimplementationcouldbereportedinsequentialProxyStatements .Suchcodesmusthaveprincipleswhicharespecificenoughtoguideaction .Theymustalsoavoid“leakage”eitherthroughaninabilitytoascertainclearlywhethersignatoriesarekeepingtheircommitmentsorthroughtherefusalofpeerentitiestosignupinthefirstplace .

—Alessdifficult,moretraditionalapproachistorelyoninstitutionalloyaltyspawnedbystrongleadership .Suchleadershipcancreateexciting,empowered,growingcorporationsservingcustom-erswithgreatproductsandservicesandmeetingfascinatingchallengesintheglobalmarketplace .Manypeoplehaveimportantvalues,otherthanmoney,thatneedtobeservedinaninstitution—andgreatleadershipcanmakethosevaluescome

alive,cancreateloyaltyandcan,thus,attract,retain,promoteandchallengeoutstandingindi-vidualsfromallovertheglobe .Forthoseemploy-eesmotivatedsolelybygreed,littlecanbedonebyanindividualfirmdedicatedtothechangesinmeasurementsandcompensationdescribedabove .

2) Differing International Standards. Becauseofitscentralitytotheeffectivefunctioningoftheglobaleconomy,thefinancialsectoristhesubjectofproceduralorsubstantiveregulatorydebatesad-dressingsomeorallofthegovernanceissuesraisedabove—aswellasimportantquestionsrelatingtobroaderissuesofsafetyandsoundness .(Seenote1 .)Forexample,theG-20recentlyannouncedasetofbroadprinciplescoveringriskandcompensa-tionpracticeswhichshouldbesubjecttonationalregulation .19But,theprospectsforgenuinehar-monizationofnationallaws—orevensignificantconvergence—aremixed,atbest .20Untilthathappensacrossmajorcapitalmarkets,thereisagenuineriskthatcompaniesortalentedindividu-alsinthefinancialsectorwilltakeadvantageof“regulatoryarbitrage”toavoidgovernmentalpressuresforthetypesofchangesoutlinedabove,evenifthosechangesareundertakenvoluntarilybyfinancialinstitutions .Similarregulatoryarbitragemayoccurwithnon-financialpubliccompaniesasaresultofdifferentregulatoryregimesacrossthegloberelatingtogovernance(andotherimpactful)regulatoryissues .

—CompaniesconcernedabouttheissuesinthisPolicyBriefneedtoconsiderpoliticalactionintheirmajormarketstourgeasmuchuniformityaspossible .Suchpoliticalactioncouldbedirectedatregulationwhichtheybelieveisanecessaryfloorunderprivateaction .Butitcouldalsobeaimedatregulationswithwhichtheymaydifferbutwhichwillhavegreateradverseimpactiflackinginuniformity(e .g .,capitalrequirementsorliquidityprotections) .

III. Obstacles

14

3 Change in Board Compensation Advisors .Manycompensationadvisorstoboardsareexpertincomparingexecutivecompensationdeliveredatonecompanytocompensationdeliveredat“peer”companies .Theyareexpertindesigningvariousmechanismsfordeliveringthatcompensation—salary,bonus,deferredsalary,deferredbonus,stockoptionsorrestrictedstockunits .But,forboardsofdirectorstorevisecompensationofseniorexecutivesandtooverseebroadercompanycompensationregimes,theyneedtheirownadvi-sorswithadditionalexpertise .Manyreportsfocusontheadvisers’independence .Thatisimportant .Butarevisedskillsetisofequalimportance .

—Compensationadvisorstoboardsneedtohaveadetailedunderstandingabouthowthecompanyworksinthecontextofglobalmarketsandglobalsocietysothattheycanhelptheboardhaveitsownperspective,whenworkingwithmanagement,todefinetheoperationalperformance,riskandintegrityobjectiveswhichareappropriatetothecompanyanduponwhicharevisedcompensationregimemustbebuilt .Findingsuchanadvisor—withbusinessaswellascompensationexpertise—mayrequireboardstogobeyondthetraditionalcompensationconsultingfirms .Eventually,anewcadreofindependentconsultantscanemerge,butonlyifboardsofdirectorsmakeclearthattheywantadvisorswhocanhelpanalyzethebusinessgoalswhichmustnecessarilyprecedecompensa-tionsounddesign .

4) Short-Termism of Institutional Investors. Perhapsthemostdifficultofthesedifficultissuesishowdocorporationsresisttheshort-termismofcertain,importantinstitutionalinvestors?Suchinvestorstodayownmorethan60percentofU .S .equitiesanddrivethedirectionofthestockmarkets .Institutionalinvestors—whethertraditionaloneslikepension,insuranceandmutualfundsornewermoreoneslikehedgefundsormicro-secondtrad-ers—maybeprimarily,evenexclusively,interestedinshort-termprofitstobeatcompositebench-marksortoattainhighlyremunerative“2-and-20”absolutereturns .Individualinvestorsplacetheirfundswithinstitutionalinvestorsandarelikelytocaremoreabouthowtheinstitutionmanagestheirmoney,thanabouttheunderlyingperformanceofthecompaniesownedbyvariousfunds .There

isnowsubstantialdebateaboutwhether(oroverwhatperiod)thestockmarketaccuratelyreflectsthe“value”and“performance”ofacompany,especiallyastheaverageholdingperiodforequitiesisnowlessthanayear .21

Thesefinancialintermediariescancreatepres-suresforbehaviorsthatarenotintheinterestofsustainedvaluecreation .Indeedtheycaninjurethecompanybyforcingbadbusinessdecisions(ill-consideredrisk-taking,improperleveragetoboostearningstemporarily,deferredinvestmentsormaintenancecosts,delayofR&D)orbycreatingpressuresforillicitones(fraudulentaccounting,improperpayments) .Theseintermediariesmaycarelittleforacorporation’sotherstakeholderswhohavealong-termfinancialinterestinthecompany(e .g .,long-termshareholders,creditors,employees,customers) .Althoughempiricalresearchisneededtounderstandtheirimpactonthemarketinnear,middleandlong-termtimeperiods,thereislittlequestionthatinstitutionalinvestorswithashort-termorientationareanincreasinglypowerfulforceintheequitymarkets .

Twoseasonedobserversdescribetheproblem .Inanewbook,economistHenryKaufmansays:“Mostinvestmentrelationshipstodayareveryfickle .Portfolioperformanceismeasuredoververyshort-termhorizons… .Daytradesandport-folioshiftsbasedonthepricemomentumofthestock—ratherthananythinghavingtodowiththeunderlyingfundamentals—arecommonplace .”22IraMillstein,apioneerinthegovernancemove-mentandproponentofshareholdervoice,hasrecentlyexpressedsimilarviews .23SohavetheFederalReserveandregulatorybodiesinEurope .24

—Oneansweristobeginamuchcloserexamina-tionofthegovernanceofthesevarioustypesofinstitutions,thecompensationoffundmanagersandtheneedforgreatertransparency .25But,giventhevarietyofinstitutionalinvestors,itmaybealongprocesstoevaluategovernance,fundmanagerincentives,thedifferentmarketimpactofdifferenttypesofinstitutionalinvestorsand,ultimately,whetheranyprivateorpublic,substantiveorprocedural,“governance”reformsarenecessaryorappropriate .

15

—Asecondresponseistoconsideradjustmentstocurrenttaxandotherpublicpolicyprovisionswhichmaypromoteshort-termism .26

—Athirdapproachisforboardsandcorporateleaderstoresiststronglytheclaimsof“short-term-ers”where,inthebestexerciseoftheirjudgment,actionstopumpupshort-termearningsandstockpricewouldbeharmfultocreationoflong-termvalue .Instandingupinsuchcircumstances,businessleadershipneedstoestablishmeaning-fulengagementwithotherinvestorswhohavealongertime-frame,eithertosecuresupportforthecorporation’smission,objectivesandmethodofcompensationortomakeappropriatechangessuchlong-terminvestorssuggest .Obviously,companiestalkwithmajorshareholdersandholdanalysts’meetings .Butitisworthexaminingwhetherthisprocesscanbeenhancedbymorecomplete,transparentdiscussionofthesixseam-lesstaskswithadvisorycouncilsofshareholders,consistentwiththestricturesoffairdisclosuretoallinvestors .Aquestionofgreatmomentiswhetherthoselonger-terminvestorsconcernedaboutdurablegrowthofcorporationscancountertheinfluenceofotherfinancialintermediariesfocusedonlyonmarketmovementsandtheirownshort-termprofits .

—TheUnitedKingdomisconsideringtransfor-mationofthethirdapproachintoamoreformal“stewardshipcode”for fund managerswhich,amongotherthings,establishesbestpracticesforinstitutionalinvestorsthatchoosetoengageindiscussionsaboutlong-termstrategy(attimescollectively)withcompaniesinwhichtheyinvest(whilenotprecludinga“sell”decisionifthatisdeemedthemosteffectiveresponse) .Underthisproposedregime,institutionalinvestorschoosingnottocomplywiththe“stewardshipcode”wouldneedtoexplaintheiralternativebusinessmodelandreasonsfornotsubscribingtothe“steward-ship”code .27

5) Manipulating the Numbers.Whileitisimportanttotranslatearedefinitionofmissionintoopera-tionalfinancialandnon-financialobjectivesacrossperformance,riskandintegritydimensions,thesemeasurementsmustbemeaningfulandcarefullyimplemented .Whileitistrue,asageneralmatter,

thatmeasurementsdrivebehavior,itisalsotrue,that,whenconsequential,thereisalwayspres-suretomanipulatethemeasurementstohidenon-performance .

—Boardsofdirectorsandbusinessleadersmustuseauditsandotherchecksandbalancestoensurethatmeasuresaremilestonesonthepathtocorporatevirtuenotnumberstobe“gamed”ontheroadtocorporatehell .

6) The Reduction of Pressure for Change.Althougheffectsofthecreditcrisis,thedeeprecessionandhighunemploymentarelikelytoremainforsometime,signsofbottomingoutorofnascentrecoverymayremovepressureforregulationwhichisalwaysatitsheightwhencircumstancesareattheirworst .Andthethreatofnewregulationisoneofthedriversforprivate-sectorchange .Willcompaniesstillfaceintotheneedforre-evaluatingandpos-siblyrevampingtheessentialsofgovernanceastherecoverygrowsinstrength?

—Allcompanies,even(orespecially)well-man-agedones,shouldviewthisperiodofeconomicdiscontinuityasanappropriatetimetoreviewthefundamentalsofwhatthecorporationstandsforandwhatareitscoregovernancetasks .Infact,improvementintheeconomy,howeverslight,maylessentheneedforfull-timecrisismanagementandfreeuptimetoaddressthesefoundationalissues .

17

Thecrisisofconfidenceincorporategovernanceleadstotheultimategovernancequestionofhowboardsofdirectorsandbusinessleadersareheldaccountable .Althoughanumberofmechanismsexist,theyallleadbacktofindingboardsofdirectorsandbusinessleaderswhocancreatesustainedeconomicvalueforshare-holdersandotherstakeholderswithhighperformance,soundriskmanagementandhighintegrity .

Thisissobecause,whilethemainaccountabilitymechanismshavestrengths,theyhavealsohavelimitations .28

1) The Market .Oneanswertotheaccountabilityquestionisstockprice .Maximizationofshareholdervaluehasbeenseenastheultimategoalofthecor-porationandthusthemeasurementbywhichboardsandseniorbusinessleadersareheldtoaccount .Asdiscussed,theeventsofthepasttwoyearshaveraisedimportantquestionsabout“efficient-market”and“rational-choice”theorieswhichpositthemarketaccu-ratelyassessesthevalueofthecompany .Animportantquestionis“when”isthemarketyieldingthe“right”valuationanswer,given,amongotherthings,theriseofshort-terminstitutionalinvestors,theasymmetryininformationascompaniesandproductsbecomemorecomplex,thepossibilityofnon-rationalorirrationalbehavioratanypointintimeandtheperiodiccreationofbubbles?29

—So,eventosaythatthe“long-termvalue”ofacom-pany’sstockisanimportantwaytomeasureaccount-abilityistoraisequestions .Whatis“long-term?”Isachangedvaluationinout-yearsasteadytrendovertimeorsimplya“short-term”valuationatsomefuturepoint?Inlightofthewidelydivergentinstitutionalin-vestortimeframes,objectives,products,riskappetites,incentives,governancestructures—andtheirrationali-tiesandinefficienciesofthemarket—thereareseriousandintensedebatesinthebusiness,economicsandfinancecommunitiesoverwhether,whenandtowhatdegreestockpriceisthepropermeasureforholdingcompaniesaccountable .

IV. Accountability and Leadership

2) Shareholder Involvement .Asecondanswertotheaccountabilityquestionismoreshareholderinvolve-mentinthegovernanceofthecompany .Suchinvolve-mentcanbeimposedbyregulatoryentities(federalgovernment,states,stockexchanges)oradoptedbythecompanyitself(throughvoluntarychangesorthroughresponsestoshareholdervotes) .Onetypeofchangeisaimedatenhancingshareholder“advisory”voice .Recentexamplesare,ofcourse,“say-on-pay”shareholderadvisoryvotesandattemptstomakeiteasierforshareholderstocallameeting .Asecondisdirectlytoaffecttheelectionofdirectors .Onerecentexampleistherequirementthatdirectorswhoreceivelessthan50percentofvotescastshouldresign(orberemovedfrom)theboard .Anotherlong-standingandcontroversialissueinvolves“ballot-access”proposalswhichwouldmakeiteasierfordissidentshareholderstoputadirectornomineeupagainsttheboard’sownslateintheelectionofdirectors .

—Ofcourse,asnoted,thereisnosuchanimalasa“shareholder .”Instead,equityownersareamenagerieoftheindividualandinstitutional;theshort,longorboth;thetechnicalornot .Whethershareholdersarepartofthesolution(becauseboardscanbecomplacentandself-perpetuating)orpartoftheproblem(becauseoftheshort-termismofimportantinstitutionalinves-torsdisconnectedfromanyconcernaboutthefunda-mentalsoftheunderlyingcompany)isalsoasubjectofspiriteddebateregardingshareholder“voice,”“access,”and,ofcourse,therulesgoverningtakeoverandcontrol,theultimateexerciseofshareholderpower .

3) Government Regulation .Athirdaccountabilitymechanismisgovernmentregulation,wherepublicdecisionslimitthediscretionandself-governanceofprivatecorporations .Suchlimitationsinour“mixed”economyhave,ofcourse,existedsincethe19thcenturyandhavecoveredawidearrayofissuesfromtaxestodisclosuretolistingrequirementstoenvironmentalhealthandsafety .

18

Today,inthecaseoffinancialinstitutions,globalregu-latorsareconsideringanumberofsubstantiverequire-ments,whichwouldlimitbusinessdecision-making:e .g .,counter-cyclicalcapitalrequirements,liquidityprotections,accountingstandardrevisions,creditagencyreform,regulationofcomplexproducts,author-itytoaddresssystemicrisk,andspecialoversightforlargecomplexorganizations .Similarly,withrespecttoallpubliclyheldcompanies,variousprocedural/disclo-surerequirementsarealsounderconsideration,suchasincreasedtransparencyabouthowriskismanagedandhowcompensationisdesignedinordertodiscourage“excessive”risk-taking .Organizationalmandates—suchasa“risk-committee”requirement—arealsobeingconsidered .

—Here,too,therearesharpdebatesabout:theshapeofregulation,itseffectiveness,itspossibleunintendedconsequencesanditsimpactonthenecessaryinnova-tionandcreativitywhichdrivecompaniesandtheeconomy .

*****

4) BacktotheFuture:TheDutiesofBoardsofDirectorsandTopBusinessLeadership .Attheendoftheday,thisPolicyBriefnotestheseimportantaccountabilitymechanisms,andsomeofthekeyissuestheyraise .But,becauseofitsfocusonself-governance,itdoesnotaddressthedebatesswirlingaroundthem .Instead,itstressesthatthegoalofaccountabilitymechanismsbrieflydescribedabove(withacaveataboutshort-terminvestorsdisinterestedincompanyfundamentals)is,orshouldbe,aboardofdirectorsandtopbusinessleadershipthatdischargesthesixseamlesstaskswithvision,energyandeffectivenesstocreatelong-termvalueforshareholdersandstakeholders .

Thestockmarket,theshareholders,andthegovern-mentcannotleadandmanagethecorporation .Theultimateaccountability—andresponsibility—stilllieswiththeseniorexecutivesandanengagedboardofdi-rectors .Thisissofortraditionalbutstillfundamental

reasons .Corporatedecisionsrequirejudgmentinmakingtheinevitabletrade-offs .Onlymanagement,underboardoversight,caneffectivelyimplementthecorporatemission .Indeed,outstandingleadershipfromboardsandbusinessleadersanswerstheprob-lemswhichtheotheraccountabilitymechanismsseektosolve—outstandingleadership,notcomplacent,self-protectingboards .

But,asthisPolicyBriefhasargued,boardsofdirec-torsandseniorexecutivesmustexplicitlyaddressthisfundamentalissueofaccountability .Accountabilitycanbeimprovedifcorporateleadershipfocusesonthesixseamlesstasksandifitarticulates,bothinsideandoutsidethecompany,asetofperformance,riskandintegrityoperationalobjectiveswhichareclearandunderstandableandagainstwhichboardsandseniorexecutivescanbemeasuredandheldresponsible .Suchmeasuresflowfromaredefinedmissionwhichshapesleadershipdevelopment,CEOselection,anddefinitionofoperationalobjectives .Thesetasks,inturn,focusexecutivecompensationontherightissuesandre-alignboardoversightontherightpriorities .Candorinassessinghowthecompanyisdoinginrelationtoitskeyoperationalobjectivesisessentialtoaccountabil-ity—andtocreationoftrust .

Inthisturbulentera,whendebatesabouttheroleofmarketprices,shareholderactionsandgovernmentregulationareonthefrontburner,itisvitalthatboardsandbusinessleadersstepuptothequestionsaboutthecapacityofcorporationstogovernthem-selveseffectively .

Manyreports,likethisone,addresshardproblems,withdeepstructuralroots,bycallingforleadership .Toooftenthatpleagoesunanswered—orthestruc-turalproblemsaretoointractable .Buttoday,withagovernancecrisisinconfidence,itisintheinterestofcorporationsandofcapitalismitselfforpeopleinleadershippositionstrulytoaddressthegovernanceproblemsoftheeraandtoprovideaclear,credibleandpowerfulprivatesectorresponse .

19

Endnotes

1 Infocusingonself-governanceissues,thePolicyBriefdoesnotintendtominimizetheimportanceofthepublicpolicydebateonhowtoassurethesafetyandsoundnessoffinan-cialinstitutionsinthefuturethroughregulationofsuchis-suesascapitalrequirements,liquidityprotections,systemicrisk,specialregulationoflargefinancialinstitutions,ratingagencyreformandreformofaccountingstandards .

Similarly,thePolicyBriefdoesnotarguetheprosandconsof,norminimizethepotentialimportanceof,moregeneralgovernancepublicpolicyissueswhicharecurrentlythesubjectoflegislativeorregulatorydebates:e .g .compensation(sayonpay,clawbacks,noseveranceforpoorperformance,independenceofcompensationcommittee,independenceanddisclosurerelatingtocompensationconsultants;disclosureofrelationbetweenpayandrisk);directorelections(proxyaccess,banonbrokervoting,abolitionofstaggeredboards,majorityvoteinuncontestedelections);risk (creationofspecialriskcommittee;increaseddisclosureonrisk);other (independentboardchair;disclosureofreasonsforboardchair/CEOstructure) .ThePolicyBriefdoesaddressanumberoftheseissues,butinthecontextofdesirablecorporateself-governanceandself-determination .

2 See,CommitteeforEconomicDevelopment, Built to Last: Focusing Corporations on Long-Term Performance,(Washington,D .C .:CED,2007);CommitteeforEconomicDevelopment,Private Enterprise, Public Trust: The State of Corporate America After Sarbanes-Oxley,(Washington,D .C .:CED,2006);TaskForceoftheABACommitteeonCorporateGovernanceIssues,Report on the Delineation of Governance Rules and Responsibilities(Washington,D .C .:ABA,2009);AspenInstitute,Overcoming Short-Termism: A Call for a More Responsible Approach to Investment and Business Management(Washington,D .C .:AspenInstitute,2009);TheConferenceBoard,The Conference Board Task Force on Executive Compensation, (NewYork,NY:2009);NationalAssociationofCorporateDirectors, Key Agreed Principles to Strengthen Corporate Governance for US Publicly-Traded Companies (Washington,D .C .:NationalAssocia-tionofCorporateDirectors,2009);NationalAssociationofCorporateDirectors,White Paper on Oversight of Risk,(Washington,D .C .:NationalAssociationofCorporateDirectors,2009) .

3 FinancialStabilityBoard,FSB Principles for Sound Compensation Practices: Implementation Principles, (Basel,Switzerland:FinancialStabilityBoard,2009);UKFinan-cialServicesAuthority, The Turner Review: A Regulatory Response to the Global Banking Crisis(London,England:UKFinancialServicesAuthority,2009);U .S .TreasuryDepart-ment,Financial Regulatory Reform: A New Foundation, (Washington,DC:U .S .TreasuryDepartment,2009);DavidWalker,A Review of Corporate Governance in UK Banks and Other Financial Industry Entities: Final Recom-mendations (London,England:UKFinancialServices

Authority,2009);FinancialReportingCouncil,2009 Review of the Combined Code (London,England:FinancialReportingCouncil,2009) .

4 See,CommitteeforEconomicDevelopment, Rebuilding Corporate Leadership: How Directors Can Link Long-Term Performance with Public Goal, (Washington,D .C .:CED,2009) .Corporatecitizenshipmaybedefinedashavingthreeelements:sustainedanddurableeconomicperformancewhichbenefitsshareholdersandotherstakeholders;robustadherencetothespiritandletterofformalrules;ethicalactionsandsharedvaluesbeyondwhattheformalrulesrequirethatareinthecorporation’senlightenedself-interest .Thislastelementmayinvolvevoluntaryactionstakenbythecorporationaloneoritmayinvolvepositionstakenonpublicpolicyinconnectionwithotherparties(notnecessar-ilycorporationsalone)tosecurea“socialgood”thatistoocostlyortoodifficultforonecompanyandthatfairlyweighspublicandprivateinterests .

5 See,forexample,HarvardBusinessReviewOn-LineDebate,“HowtoFixBusinessSchools,”Harvard Business Publishing,April-May2009,availableat<http://blogs .harvardbusiness .org/how-to-fix-business-schools/> .See,also,AspenInstitute’sCenterforBusinessEducation(www .aspencbe .org);LaneWallace,“MulticulturalCriti-calTheory .AtB-School?,”New York Times, January10,2010,availableat<http://www .nytimes .com/2010/01/10/business/10mba .html> .

6 Seegenerally,CommitteeforEconomicDevelopment,Built to Last .

7 Ofcourse,aswithallmeasurements,anover-emphasisononemaycauseunwanteddistortions .Forexample,returnonequityhasbeensharplycriticizedinthefinancialservicessectorbecausethatmetricishigherwhendebtishigher .Returnonassetsmaypromptoff-balancesheetactivity .Increasedmarketsharemaycomeatthepriceofmargin .Andevenpeer-to-peercomparisonsmaybemisleadingifwholeindustriesaremakingthesamemistake(e .g .leverageinfinancialservicescompanies) .Thus,articulationandexplanationofkeymetricsisimportantbothforsoundoperationsandforgeneratingthetrustsoimportanttocorporatehealth .

8 Someofthecommoneconomicriskproblems—whichhavebeenhighlightedinthelastyearandapplytoallcorpora-tions,notjustfinancialinstitutions—shouldreceivespecialandcontinuousattention:lackofliquidityifinthinlytradedmarkets;toomuchleverage;assumptionofmarketcertain-ties(housingalwaysgoesup);failuretocontrolsmallunitwithcapabilityofcreatingbigrisk;securitizationthathidesriskandpumpsupprofits;useofbadlydesigned,ill-under-stoodproducts;lackofstress-testingformajordislocations;lackofdisclosureandtransparencytoseniorleadersandtheboard(letalonetothepublic) .

20

Endnotes

9 Companiesaredesigningstructuresandprocessesformanagingeconomic,legal,ethical,reputational,publicpolicy,countryandgeopoliticalrisksindifferentways .Differentspecialists—anddifferentorganizationalentitieswithinthecompany—mayaddressdifferenttypesofrisks .Asnotedinthetext,thisPolicyBrieftakesnopositiononthedesiredwaytoorganizeriskinsidethecompanybeyondtheprinciplesstatedabove .Bestpracticesatamoredetailedlevelwillemergefromexperience .

10 Foramoreextendeddiscussionoftheintegritypracticesandprinciplesthatcanbebuiltintocompensationregimesseegenerally,BenW .Heineman,Jr .,High Performance with High Integrity(Boston,Ma;HarvardBusinessPress,2008) .

11 “Pay,RiskandStewardship:PrivateSectorArchitectureforFutureCapitalMarkets,”MillsteinCenterforCorporateGovernanceandPerformanceatYaleSchoolofManage-ment,PolicyBriefingNo .5ConsultativeDraft,June11,2009,p .10 .availableat<http://millstein .som .yale .edu/PolicyBriefings .shtml> .(“…theultimatecriterioncorpora-tionshaveusedtodefineandmeasureperformance,namely‘short-termstockpricemovement,’isblatantlyinsufficient .”)

12 See,UBS,“CompensationReport:UBS’sNewCom-pensationModel,”UBS,November17,2009,availableat<http://www .ubs .com/1/e/investors/compensationreport>;CreditSuisse,“CreditSuisseAnnouncesitsCompensationStructurefor2009and2010,”CreditSuissePressRelease,October20,2009,availableat<https://www .credit-suisse .com/news/en/media_release .jsp?ns=41331> .Attheendof2009,twomajorAmericaninvestmentbanks—GoldmanSachsandMorganStanley—announcedincreaseddeferralofcompensationfortopleadersaswellasclaw-backsofdeferredpayundercertaincircumstances:LouseStory,“Goldman’sCurbsonBonusesAimtoQuellUproar,”TheNew York Times, December11,2009,availableat<http://www .nytimes .com/2009/12/11/business/11pay .html>;AaronLucchetti,“MorganStanleytoOverhaulPayPlan,”The Wall Street Journal, December30,2009,availableat<http://online .wsj .com/article/SB10001424052748704134104574624680643054584 .html> .

13 Seenotes2and3,supra.

14 Thetotalofvariablecashandvariableequitymaywellbelargerthanfixedannualcash .Theproportionsbetweenvariablecashandvariableequitywilldependoncompanycultureandtheadvantagesofliquidincentives(variablecash)orincentivestiedtostock(variableequitywhichmayriseorfallrelativetostrikepricesforreasonswhichmaynotrelatedirectlytocompanyperformance) .Bothshouldbestronglylinkedtoattainmentofoperationalobjectivesacrossredefinedeconomic,riskandintegritydimensions;bysodoing,bothshouldpromotecreationoflongtermvalue .

15 TheEfficientMarketTheorywhichsomeusedtoarguesharepriceandmarketcapitalizationwerethekeymeasuresofcorporateperformancehas,especiallyaftertheeventsofthepastyear,beensubjecttovariouscritiques,includingtheshort-termismandotherissuescreatedbypre-occupationwithstockpricealone .See,forexample,RakeshKhurana, From Higher Aims to Hired Hand: The Social Transformation of American Business Schools and the Unfulfilled Promise of the Management Profession(Princeton,NJ:PrincetonUniversityPress,2007);RichardA .Posner,A Failure of Capitalism: The Crisis of ’08 and the Descent into Depression (Cambridge,MA:HarvardUniversityPress,2009);GeorgeA .AkerlofandRobertJ .Shiller,Animal Spirits: How Human Psychology Drives the Economy and Why it Matters for Global Capitalism (Princeton,NJ:PrincetonUniversityPress,2009) .Forreadablesummariesofthedebate,seeJustinFox,The Myth of the Rational Market(NewYork,NY:HarperCollins,2009)andJohnCassidy,How Markets Fail: The Logic of Economic Calamities(NewYork,NY:Farrar,StrausandGiroux,2009) .Fora succinctcritiqueoftheEfficientMar-ketTheory,seeUKFinancialServicesAuthority,Turner Review, pp .39-49 .Giventhecomplexityofourpublicmarkets,thisdebatehasbeenjoined,butishardlyresolved .

16 Designinghold-backsandclaw-backs,wherebenefitsarewithheldorpulledbackbecauseofseriousnegligentorintentionalacts(ofcommissionoromission)isacomplexsubject,beyondthescopeofthispolicybrief .Issuesinclude:definingactswhichwillgiverisetoholdbacks/clawbacks(financialmisstatementsorabroaderarrayofmaterialperformance,riskandintegrityissues) .Iftheindividualisanexecutivewhenisheorsheresponsibleforthebadactsofpeopleworkingforthem?Whointheemployeepopulationwillbeaffected?Forhowlongdoestheemployeeremainexposedtohold-back/clawbackprovisions?Whatprocessisduetheemployee;howwilltheprovisionsbeenforced?

17 CommitteeforEconomicDevelopment,Built to Last.

18 Suchasummarystatementmust,ofcourse,complywithlegaldisclosurerequirements .Itmayhavetobeissuedinthefirstquarterofthesubsequentfiscalyearafterissuanceofthe10-K,theProxyStatementandtheAnnualReportand,asappropriate,incorporatebyreference .

19 StatementoftheG-20Leaders,September26,2009 .Withrespecttocompensationatrelevantregulatedfinancialinstitutions,theG-20endorsedimplementationofcertainFinancialStabilityBoardstandards,suchas“requiringasig-nificantportionofvariablecompensationtobedeferred,tiedtoperformanceandsubjecttoappropriateclaw-backandtobevestedintheformofstockorstock-likeinstruments,aslongasthesecreateincentivesalignedwithlong-termvaluecreationandthetimehorizonofrisk .”Inthefinancialsetting,theG-20alsoendorsedthepowerofregulatorsto

21

Endnotes

sethighercapitalrequirementswhenadditionalrisksarecreatedthroughfailuretoimplementsoundcompensationpolicies .SeesectionofStatementon“StrengtheningtheInternationalFinancialRegulatorySystem,”paragraph13 .

20 InastatementfollowingitsMarch,2009meeting,theG-20emphasizedthat,eventhoughnewfinancialregulationwasprimarilyanationalresponsibility,ithadtobeconsistentacrossboarders:“Regulatorsmustensurethattheiractionssupportmarketdiscipline,avoidpotentiallyadverseimpactsonothercountries,includingregulatoryarbitrage… .”See,FrancescoGuerreraandMeganMurphy,“BankersFearTransatlanticPaySplit,”Financial Times,October29,2009,availableat<http://www .ft .com/cms/s/0/6b7688d6-c4c4-11de-8d54-00144feab49a .html>;JeremyGrant,TomBraithwaiteandAlinevanDuyn,“CracksAreEmerginginTransatlanticApproachtoReform,”Financial Times, January6,2010,availableat<http://www .ft .com/cms/s/0/ad574f78-fa62-11de-beed-00144feab49a .html> .

21 Forexample,averageannualturnoverintheNYSEGrouphasbeenover100percentandtheaverageholdingperiodayearorlesssince2005 .NYSEGroupturnoverisbasedonNYSE&NYSEArcaAverageDailyVolume .SeeNYSE Facts & Figures, NYSEGroupTurnover2000–2009,avail-ableat<http://www.nyxdata.com/factbook>.

22 HenryKaufman,The Road to Financial Reformation, (NewYork,NY:JohnWiley&Sons,2009),p .193 .Seealso,LeoE .Strine,“WhyExcessiveRiskTakingisNotUnexpected,”New York Times,DealbookBlog,October10,2009,avail-ableat<http://dealbook .blogs .nytimes .com/2009/10/05/dealbook-dialogue-leo-strine/> .“…totheextentthe[financial]crisisisrelatedtotherelationshipbetweenstock-holdersandboards,therealconcernseemstobethatboardswerewarmlyreceptivetoinvestorcallsforthemtopursuehighreturnsthroughactivitiesinvolvinggreatriskandhighleverage .”Asurveyof208investmentprofessionals,halffromassetmanagementfirmsandathirdfrom“sustainableinvestmentspecialists”foundthat86percentagreedwiththepropositionthatinstitutionalinvestorsshouldsharetheblameforthefinancialcrisis .NetworkforSustainableFinancialMarkets,“CreditCrisis:BusinessAsUsualforIn-stitutionalInvestors?”availableat<http://www .responsible-investor .com/home/article/over_three_quarters_of_insti-tutional_investors_say_they_should_share_blame/P0//> .Seealso,SophiaGrene,“Institutions‘haven’tlearnt’fromtheturmoil,”Financial Times,October25,2009,availableat<http://www .ft .com/cms/s/0/7eb0ff38-bffd-11de-aed2-00144feab49a,_i_email=y .html> .

23 IraMillsteinandGeorgeVotja,“FinancialDisasterRecovery:APrivateSectorAgendaforRiskManagement,”Directorship,December2008/January2009,p .25 .“Theproliferationofnewownersputsthemodelofshareholderactivism,whichwasenvisionedinthe1980sand1990s,underseverestrain .Institutionalinvestorswereonce

presumedtoshareacommongoalwhenexertingpressureonboardstomonitormanagementandeffectivelyguidefirmstrategy .Thatassumedhomogeneitynowseemslonggone,andheterogeneityiseverontherise .Thisdiversityofshareownershasbroughtawholenewhostofagendas,strategiesandvaluestothetable .Someoftheseownershavelimitedinvestmenthorizonsandareonlyinterestedinrealizingashort-termprofit,andothershavehedgedorshortedtheirpositionsandconsequentlyhaveafinancialinterestinthefailureoftheenterprise .”

24 Themulti-nationalFinancialStabilityBoardandtheUK’sFinancialServicesAuthority,intheirlengthypost-mortemsonthefinancialcrisis,haveanalyzedtheharmfuleffectsofinvestorshort-termism .And,whentheFederalReserveBoardrecentlyannouncedthatitwouldsuperviseandifnecessaryregulateexecutivecompensationatthenation’sbanks,itsproposedrulenotedthatshareholderviewsonpaywereinadequate:“Thusareviewofincentivecompensationarrangementsandrelatedcorporategovernancepractices[asthrough“sayonpay”votes]toensurethattheyareeffectivefromtheperspectiveofshareholdersisnotsufficienttoensurethattheyadequatelyprotectthesafetyandsoundnessoftheorganization .”SeeFederalReserve,“2009BankingandConsumerRegulatoryPolicy,”BoardofGovernorsoftheFederalReservePressRelease,October22,2009,avail-ableat<http://www .federalreserve .gov/newsevents/press/bcreg/20091022a .htm>andtheFederalRegisternotice,p .55228,availableat<http://edocket .access .gpo .gov/2009/pdf/E9-25766 .pdf> .

25 TheMillsteinCenterforCorporateGovernanceandPerformanceattheYaleSchoolofManagementhasaprogramon“PrivateSectorArchitectureForFutureCapitalMarkets”whichraisesquestionslikegovernance,paystructure,incentives,politicalinfluence—androleofbothexecutivesandfundmanagers—inmajortypesofinvestors/financialintermediaries .SeeMilsteinCenterforCorporateGovernanceandPerformance,YaleSchoolofManagement,“Pay,RiskandStewardship .”

26 SeeAspenInstituteBusinessandSocietyProgram,Overcoming Short-termism: A Call for a More Responsible Approach to Investment and Business Management.Thisanalysisarguesthatadverseimpactofshort-termisminthestockmarketisserious:“Intheabsenceofrealchangeinthefocusofinstitutionalinvestorsandrelatedintermediaries,thevariouscorporategovernancereformsareunlikelytoreducethelikelihoodofboardsandmanagersrespondingtoshort-termpressures .”Thepaperrecommends,forexample,creatingagreaterdifferentialontaxesforshortandlong-termcapitalgainsorremovingthe$3,000caponcapitallossdeductibilityfromincomeforlonger-termholdings .

22

Endnotes

27 DavidWalker,A Review of Corporate Governance in UK Banks and Other Financial Industry Entities: Final Recom-mendations, note3,supra,atpp .68-88andAppendix8;FinancialReportingCouncil,2009 Review of the Combined Code, note3, supra,atpp .33-35 .

28 Thisconcludingsectionfocusesonthefour“accountability”mechanisms:themarket,shareholdersaspartofagover-nancestructure(notjustasinvestorstradinginequities),governmentregulationandcorporateleadership(boardsofdirectorsandseniorbusinessexecutives) .Onecould,ofcourse,unpacktheconceptof“accountability”andidentifymanymoreissues:themanydifferenttypesofgovernmentregulationandenforcement,themanydifferenttypesofprivatelitigation,theaccountingrules,thecreditors,thecreditratingagenciesandthemarketsnotjustforthedailytradingofequities,butforinitialpublicofferingsandfortheultimateshareholder-as-investoraccountabilitymechanism,thebattleforcorporatecontrol(obviouslyhedgedinbyvari-ouslawsandregulations) .Thepointofthissectionisthat,whateverthepurposesandeffectivenessofthesevariousaccountabilitymechanisms,onlytheboardofdirectorsandtopcorporateleadershipcan,attheendoftheday,buildandsustainacorporationthatproperlybalancesperformanceandriskmanagementinacultureofintegrity .

29 See,note15,supra .

23

CED Trustees

Co-Chairmen

JOSEPH E. KASPUTYSFounder and ChairmanIHSGlobalInsight


(Retired)AvayaInc .

Executive Committee

IAN ARNOFChairmanArnofFamilyFoundation

PETER A. BENOLIELChairman EmeritusQuakerChemicalCorporation

ROY J. BOSTOCKChairmanYahoo! Vice-ChairmanDelta Air Lines, Inc.ChairmanSealedgeInvestments,LLC

W. BOWMAN CUTTERManaging DirectorTheCedarsCapitalPartnersandSenior FellowTheRooseveltInstitute

FRANK P. DOYLEExecutive Vice President (Retired)GeneralElectricCompany

EDMUND B. FITZGERALDManaging DirectorWoodmontAssociates


JOSEPH GANTZManaging Director & COOPineBrookRoadPartnersLLC


STEVEN GUNBYChairman, The Americas, and

Senior Vice PresidentTheBostonConsultingGroup,Inc .

RODERICK M. HILLSChairmanHillsStern&MorleyLLP

CHARLES E.M. KOLBPresidentCommitteeforEconomicDevelopment

WILLIAM W. LEWISDirector Emeritus, McKinsey Global

InstituteMcKinsey&Company,Inc .

BRUCE K. MACLAURYPresident EmeritusTheBrookingsInstitution

STEFFEN E. PALKOPresident and Vice Chairman (Retired)XTOEnergyInc .

DONNA E. SHALALAPresidentUniversityofMiami

FREDERICK W. TELLINGVice President, Corporate Policy & Strategic

Management (Retired)PfizerInc

JOSH S. WESTONHonorary ChairmanAutomaticDataProcessing,Inc .

JOHN P. WHITERobert & Renee Belfer Lecturer,

Kennedy School of GovernmentHarvardUniversity

RONALD L. ZARRELLAChairman EmeritusBausch&LombIncorporated

CED Trustees

PAUL A. ALLAIREChairman (Retired)XeroxCorporation

MARIA BEATRICE ARCOChairAmericanAssetCorporation

MORTEN AMTZENPresident and Chief Executive OfficerOverseasShipholdingGroup,Inc .

DEBORAH HICKS BAILEYChairman and CEOSolonGroup,Inc .

EDWARD N. BASHAChief Executive OfficerBashaGroceryStores

NADINE BASHAChair of Arizona Early Childhood

Development and Health BoardBashaGroceryStores

ALAN BELZERPresident & Chief Operating Officer

(Retired)AlliedSignal

DEREK C. BOKProfessor of Law & President EmeritusHarvardUniversity

LEE C. BOLLINGERPresidentColumbiaUniversity

STEPHEN W. BOSWORTHDean, Fletcher School of Law and

DiplomacyTuftsUniversity

JACK O. BOVENDERChairman and CEOHCA-HealthCareofAmerica

JOHN BRADEMASPresident EmeritusNewYorkUniversity

RANDY J. BRAUDU.S. Country ControllerShellOilCompany

WILLIAM E. BROCKFounder and Senior PartnerTheBrockGroup



Ernst&YoungLLP

ROBERT H. BRUININKSPresidentUniversityofMinnesota

DONALD R. CALDWELLChairman & Chief Executive OfficerCrossAtlanticCapitalPartners

CARL T. CAMDENPresident and Chief Executive OfficerKellyServices,Inc .

24

CED Trustees

DAVID A. CAPUTOPresident EmeritusPaceUniversity

GERHARD CASPERPresident Emeritus and ProfessorStanfordUniversity

RAYMOND G. CHAMBERSSpecial Envoy of the Secretary-General

for MalariaUnitedNations

ROBERT B. CHESSChairmanNektarTherapeutics

MICHAEL CHESSERChairman & CEOGreatPlainsEnergy

CAROLYN CHINChairman and Chief Executive OfficerCebiz/Singlepoint

RANJANA B. CLARKExecutive Vice President, Global Payments

and Global StrategyWesternUnion

JOHN L. CLENDENINChairman (Retired)BellSouthCorporation

MARTIN COHENManaging DirectorMorganStanley

ELIZABETH COLEMANPresidentBenningtonCollege

FERDINAND COLLOREDO-MANSFELD

PartnerCabotProperties,LLC


GEORGE H. CONRADESChairman and Chief Executive OfficerAkamaiTechnologiesInc .

KATHLEEN B. COOPERSenior FellowSouthernMethodistUniversity

EDWARD F. COXOf CounselPattersonBelknapWebb&Tyler

STEPHEN A. CRANEChairmanInsuranceandReinsuranceStrategies

KENNETH W. DAMMax Pam Professor Emeritus of American

& Foreign Law & Senior LecturerTheUniversityofChicago

PAUL DANOSDean, The Amos Tuck School of BusinessDartmouthCollege

RONALD R. DAVENPORTChairman EmeritusSheridanBroadcastingCorporation

RICHARD J. DAVISSenior PartnerWeil,Gotshal&MangesLLP

RICHARD H. DAVISPartnerDavisManafort,Inc .

JOHN J. DEGIOIAPresidentGeorgetownUniversity

MICHELLE DENNEDYChief Governance OfficerSunMicrosystems

RENATO A. DIPENTIMAPresident and CEO (Retired)SRAInternational,Inc .

SAMUEL A. DIPIAZZAGlobal Chief Executive OfficerPricewaterhouseCoopersLLP

LINDA M. DISTLERATHSenior Vice PresidentAPCOWorldwide

WILLIAM H. DONALDSONChairmanDonaldsonEnterprises

IRWIN DORROSPresidentDorrosAssociates

ROBERT H. DUGGERManaging DirectorTudorInvestmentCorporation

T. J. DERMOT DUNPHYChairmanKildareEnterprises,LLC

CHRISTOPHER D. EARLPresident and CEOBIOVenturesforGlobalHealth

STUART E. EIZENSTATPartnerCovington&BurlingLLP

TIMOTHY ELDERDirector of Corporate Public AffairsCaterpillarInc .

ROBERT A. ESSNERExecutive in Residence, Columbia

Business SchoolColumbiaUniversity

WILLIAM F. EZZELLNational Managing Partner - Legislative

& Regulatory RelationsDeloitteLLP

KATHLEEN FELDSTEINPresidentEconomicsStudies,Inc .

ROGER W. FERGUSONPresident and Chief Executive OfficerTIAA-CREF

TREVOR FETTERPresident and CEOTenetHealthcareCorporation

MATTHEW FINKPresident (Retired)InvestmentCompanyInstitute

HOWARD FLUHRChairmanTheSegalCompany

MARGARET FORANExecutive Vice President, General Counsel

and Corporate SecretarySaraLeeCorporation

BARBARA HACKMAN FRANKLINPresident & CEO and former US Secretary

of CommerceBarbaraFranklinEnterprises

HARRY FREEMANChairmanTheMarkTwainInstitute

25

CED Trustees

MITCHELL S. FROMSTEINChairman EmeritusManpowerInc .


PAMELA B. GANNPresidentClaremontMcKennaCollege

E. GORDON GEEPresidentTheOhioStateUniversity

THOMAS P. GERRITYJoseph J. Aresty Professor of ManagementTheWhartonSchooloftheUniversityof

Pennsylvania

STUART M. GERSONPartnerEpsteinBecker&Green,PC

ALAN B. GILMANformer ChairmanTheSteaknShakeCompany

CAROL R. GOLDBERGTrusteeTheGoldbergFamilyFoundation

ALFRED G. GOLDSTEINPresident and CEO - AGAssociatesAlfredG&HopeP .GoldsteinFund

JOSEPH T. GORMANChairman and CEOMoxahelaEnterprisesLLC

EARL G. GRAVES, SR.Chairman and PublisherEarlG .GravesPublishingCo .,Inc .

GERALD GREENWALDChairmanGreenbriarEquityGroup

BARBARA B. GROGANChairman EmeritusWesternIndustrialContractors

RONALD GRZYWINSKIChairmanShoreBankCorporation

ADAM J. GUTSTEINChief Executive Officer and PresidentDiamondManagement&Technology

Consultants,Inc .

JUDITH H. HAMILTONPresident and Chief Executive Officer

(Retired)ClassroomConnect

HOLLIS W. HARTDirector of International OperationsCiti

WILLIAM HASELTINEPresidentHaseltineAssociates



HEATHER R. HIGGINSPresidentRandolphFoundation

JOHN HILLENChief Executive Officer GlobalDefenseTechnology&

Systems,Inc .

G. PENN HOLSENBECKVice President and Corporate SecretaryPhilipMorrisInternational

PAUL M. HORNSenior Vice President (Retired)IBMCorporation

PHILIP K. HOWARDPartnerCovington&BurlingLLP

SHIRLEY ANN JACKSONPresidentRensselaerPolytechnicInstitute

CHARLENE DREW JARVISPresidentSoutheasternUniversity

JEFFREY A. JOERRESChairman and CEOManpowerInc .

JAMES A. JOHNSONVice ChairmanPerseus,LLC

L. OAKLEY JOHNSONSenior Vice President, Corporate AffairsAmericanInternationalGroup,Inc .

ROBERT L. JOSSDean, Graduate School of BusinessStanfordUniversity

PRES KABACOFFCo-Chairman of the Board of Directors &

Chief Executive OfficerHRIProperties

ROBERT KAHNSenior Adviser, Financial Systems, Financial

& Private Sector Vice PresidencyTheWorldBankGroup

EDWARD A. KANGASChairman and Chief Executive Officer

(Retired)DeloitteToucheTohmatsu

MIKE KELLEYVice President, Government RelationsYRCWorldwideInc .

WILLIAM E. “BRIT” KIRWANChancellorUniversitySystemofMaryland

KAKUTARO KITASHIROChairmanIBMJapan

YOTARO KOBAYASHIformer Chief Corporate AdvisorFujiXeroxCo .,Ltd .

THOMAS F. LAMBSenior Vice President, Government AffairsPNCFinancialServicesGroup,Inc .

KURT M. LANDGRAFPresident & CEOEducationalTestingService

DAVID H. LANGSTAFFFormer President & CEO, Veridian Corp.;

Chairman, Wildheart GroupVeridianCorporation

W. MARK LANIERPartnerTheLanierLawFirmP .C .

ROBERT G. LIBERATORESenior Transatlantic FellowGermanMarshallFundoftheU .S .

JOHN LIFTINGeneral CounselD .E .Shaw&Co .,L .P .

26

CED Trustees

IRA A. LIPMANFounder and ChairmanGuardsmark,LLC

JOHN C. LOOMISVice President, Human ResourcesGeneralElectricCompany

LI LUPresidentHimalayaManagementLLC

EUGENE A. LUDWIGFounder & CEOPromontoryFinancialGroup

COLETTE MAHONEYPresident EmeritusMarymountManhattanCollege

ELLEN R. MARRAMPresidentBarnegatGroupLLC

CECILIA I. MARTINEZExecutive DirectorReformInstituteInc .

MARGERY W. MAYERPresident, Scholastic EducationScholasticInc .

T. ALLAN MCARTORChairmanAirbusofNorthAmerica,Inc .

ALONZO L. MCDONALDChairman and Chief Executive OfficerAvenirGroup,Inc .

WILLIAM J. MCDONOUGHVice ChairmanBankofAmericaMerrillLynch

DAVID E. MCKINNEYVice ChairThomasJ .WatsonFoundation

CAROL A. MELTONExecutive Vice President, Global Public

PolicyTimeWarnerInc .

LENNY MENDONCAChairman, McKinsey Global InstituteMcKinsey&Company,Inc .

ALAN G. MERTENPresidentGeorgeMasonUniversity

HARVEY R. MILLERPartnerWeil,Gotshal&MangesLLP

ALFRED T. MOCKETTChairman & CEOCorinthianCapitalLLC

AVID MODJTABAIExecutive Vice President, Technology

and OperationsWellsFargo&Co .

G. MUSTAFA MOHATAREMChief EconomistGeneralMotorsCorporation

JAMES P. MOODYSenior Financial AdvisorBankofAmericaMerrillLynch

NICHOLAS G. MOOREDirectorBechtelGroup,Inc .

DONNA S. MOREAPresident, U.S. Operations & IndiaCGI

MICHAEL G. MORRISChairman, President and Chief

Executive OfficerAmericanElectricPowerCompany

JAMES C. MULLENPresident and CEOBiogenIdecInc .

DAVID R. NACHBARChief Human Resources OfficerGrahamPackagingCompany

DIANA S. NATALICIOPresidentTheUniversityofTexasatElPaso

DEAN R. O’HAREChairman and CEO (Retired)TheChubbCorporation

NELS OLSONManaging Director, Eastern Region;

Sr. Client Partner, CEO & Board Services Practice

Kom/FerryInternational,Inc .

RONALD L. OLSONSenior PartnerMunger,Tolles&OlsonLLP


Management

CAROL J. PARRYPresidentCorporateSocialResponsibility

Associates

VICTOR A. PELSONSenior AdvisorUBSSecuritiesLLC

DEBRA PERRYManaging MemberPerryConsultingLLC

GREGG PETERSMEYERChairman and CEOPersonalPathway,LLC

PETER G. PETERSONFounder and ChairmanPeterG .PetersonFoundation

TODD E. PETZELManaging Director and Chief Investment

OfficerOffitCapitalAdvisorsLLC

MARK PREISINGERVice President, World Wide Public Affairs

& CommunicationsTheCoca-ColaCompany

DOUG PRICEPresident and CEORockyMountainPBS

LOIS E. QUAMPresident and Chief Executive OfficerTysvar

GEORGE A. RANNEYPresident and CEOChicagoMetropolis2020


JAMES E. ROHRChairman and CEOPNCFinancialServicesGroup,Inc .

ROY ROMERSenior AdvisorTheCollegeBoard

27

DANIEL ROSEChairmanRoseAssociates,Inc .

ANDREW S. ROSENChairman and Chief Executive OfficerKaplan,Inc .


NEIL L. RUDENSTINEChair, ArtStor Advisory BoardAndrewW .MellonFoundation

GEORGE E. RUPPPresidentInternationalRescueCommittee

KENNETH P. RUSCIOPresidentWashington&LeeUniversity

EDWARD B. RUSTChairman and CEO StateFarmInsuranceCompanies

BERTRAM L. SCOTTExecutive Vice President and Chief

Institutional Development and Sales Officer

TIAA-CREF

WILLIAM S. SESSIONSPartnerHolland&KnightLLP

JOHN E. SEXTONPresidentNewYorkUniversity

CHRIS SHAYSFormer Member of Congress

GEORGE P. SHULTZThomas W. and Susan B. Ford

Distinguished FellowHooverInstitution


Investment BoutiquesNewYorkLifeInvestmentManagement

FREDERICK W. SMITHChairman, President and CEOFedExCorporation

PETER P. SMITHSenior Vice President, Academic

Strategies and DevelopmentKaplan,Inc .

SARAH G. SMITHChief Accounting OfficerGoldmanSachsGroupInc .

ALAN G. SPOONManaging General PartnerPolarisVenturePartners

JON STELLMACHERExecutive Vice PresidentThriventFinancialforLutherans

PAULA STERNChairwomanTheSternGroup,Inc .

ROGER W. STONEChairman and CEOKapStonePaperandPackagingCorp .

MATTHEW J. STOVERChairmanLKMVentures,LLC

HENRY S. TANGManaging PartnerCommitteeof100

DAVIA B. TEMINPresident and Chief Executive OfficerTeminandCompanyIncorporated

SARAH B. TESLIKSr. Vice President, Policy and GovernanceApacheCorporation

LARRY D. THOMPSONSenior Vice President, Government Affairs,

General Counsel and SecretaryPepsiCo,Inc .

JAMES A. THOMSONPresident and Chief Executive OfficerRAND

PATRICK TOOLEVice President & Chief Information OfficerIBMCorporation

STEPHEN JOEL TRACHTENBERGPresident Emeritus & University Professor of

Public ServiceGeorgeWashingtonUniversity

TALLMAN TRASKExecutive Vice PresidentDukeUniversity

VAUGHN O. VENNERBERGSenior Executive Vice President and

Chief of StaffXTOEnergyInc .

JORGEN VIG KNUDSTORPChief Executive OfficerLEGOGroup

JAMES L. VINCENTChairman (Retired)BiogenIdecInc .

FRANK VOGLPresidentVoglCommunications

DONALD C. WAITEDirectorMcKinsey&Company,Inc .

JERRY D. WEASTSuperintendent of SchoolsMontgomeryCountyPublicSchools

JOHN C. WILCOXChairmanSodaliLtd .

HAROLD M. WILLIAMSPresident EmeritusGettyTrust

LINDA SMITH WILSONPresident EmeritaRadcliffeCollege

MARGARET S. WILSONChairman and CEOScarbroughs

H. LAKE WISEExecutive Vice President and

Chief Legal OfficerDaiwaSecuritiesAmericaInc .

JACOB J. WORENKLEINChairman and Chief Executive Officer,

(Retired)USPowerGeneratingCo .

KURT E. YEAGERPresident EmeritusElectricPowerResearchInstitute

STEVEN ZATKINSenior Vice President, Government RelationsKaiserFoundationHealthPlan,Inc .

CED Trustees

28

CED Honorary Trustees

RAY C. ADAMRetired ChairmanNLIndustries

ROY L. ASHChairman (Retired)LittonIndustries

ROBERT H. BALDWINRetired ChairmanMorganStanley

GEORGE F. BENNETTChairman EmeritusStateStreetInvestmentTrust

JACK F. BENNETTRetired Senior Vice PresidentExxonMobilCorporation

HOWARD BLAUVELTRetired President & CEOConocoPhillips

ALAN S. BOYDRetired Vice ChairmanAirbusofNorthAmerica,Inc .

ANDREW F. BRIMMERPresidentBrimmer&Company,Inc .

FLETCHER L. BYROMPresident & Chief Executive OfficerMICASUCorporation

PHILIP CALDWELLRetired ChairmanFordMotorCompany

HUGH M. CHAPMANRetired ChairmanNationsBankofGeorgia

E. H. CLARKChairman and Chief Executive OfficerTheFriendshipGroup

A. W. CLAUSENRetired Chairman and Chief Executive

OfficerBankofAmericaCorporation

DOUGLAS D. DANFORTHExecutive Associates

JOHN H. DANIELSRetired Chairman and CEOArcherDanielsMidlandCompany

RALPH P. DAVIDSONRetired ChairmanTimeInc .

ALFRED C. DECRANE, JR.Retired ChairmanTexacoCorporation

ROBERT R. DOCKSONChairman EmeritusCalFed,Inc .

LYLE J. EVERINGHAMRetired ChairmanTheKrogerCo .

DON C. FRISBEEChairman EmeritusPacifiCorp

W. H. KROME GEORGERetired ChairmanALCOA

WALTER B. GERKENRetired Chairman & Chief Executive OfficerPacificInvestmentManagementCo .

LINCOLN GORDONformer PresidentJohnsHopkinsUniversity

JOHN D. GRAYChairman EmeritusHartmarxCorporation

JOHN R. HALLRetired ChairmanAshlandInc .

RICHARD W. HANSELMANformer ChairmanHealthNetInc .

ROBERT S. HATFIELDRetired ChairmanTheContinentalCorporation

PHILIP M. HAWLEYRetired Chairman of the BoardCarterHawleyHaleStores,Inc .

ROBERT C. HOLLANDSenior FellowTheWhartonSchooloftheUniversityof

Pennsylvania

LEON C. HOLT, JR.Vice Chairman and Chief Administrative

Officer (Retired) Air Products and Chemicals, Inc.

HoltFamilyFoundation

SOL HURWITZRetired PresidentCommitteeforEconomicDevelopment

GEORGE F. JAMES

DAVID T. KEARNSChairman EmeritusNewAmericanSchoolsDevelopment

Corporation

GEORGE M. KELLERRetired Chairman of the BoardChevronCorporation

FRANKLIN A. LINDSAYRetired ChairmanItekCorporation

ROBERT W. LUNDEENRetired CharimanTheDowChemicalCompany

RICHARD B. MADDENRetired Chairman and Chief Executive

OfficerPotlatchCorporation

WILLIAM F. MAYformer Chairman and CEOStatueofLiberty-EllisIslandFoundation

OSCAR G. MAYERRetired CharimanOscarMayer&Co .

JAMES W. MCKEE, JR.Retired ChairmanCPCInternational,Inc .

CHAMPNEY A. MCNAIRRetired Vice ChairmanTrustCompanyofGeorgia

J. W. MCSWINEYRetired Chairman of the BoardMeadWestvacoCorporation

29

ROBERT E. MERCERRetired ChairmanTheGoodyearTire&RubberCompany

LEE L. MORGANformer Chairman of the BoardCaterpillarInc .

ROBERT R. NATHANChairmanNathanAssociates

JAMES J. O’CONNORRetired Chairman and Chief Executive

OfficerExelonCorporation

LEIF H. OLSENChairmanLHOGroup

NORMA PACEPresidentPaperAnalyticsAssociates

CHARLES W. PARRYRetired ChairmanALCOA

WILLIAM R. PEARCEDirectorAmericanExpressMutualFunds

JOHN H. PERKINSformer PresidentContinentalIllinoisNationalBankand

TrustCompany

DEAN P. PHYPERSformer Chief Financial OfficerIBMCorporation

ROBERT M. PRICERetired Chairman and Chief Executive

OfficerControlDataCorporation

JAMES J. RENIERRetired Chairman and CEOHoneywellInternationalInc .

JAMES Q. RIORDANChairmanQuentinPartnersCo .

IAN M. ROLLANDChairmanNiSourceInc .

WILLIAM M. ROTHformer United States Trade Representative

THE HONORABLE WILLIAM RUDER

former US Assistant Secretary of Commerce

RALPH S. SAULRetired Chairman of the BoardCIGNACorporation

GEORGE A. SCHAEFERRetired Chairman of the BoardCaterpillarInc .

ROBERT G. SCHWARTZ

MARK SHEPHERD, JR.Retired ChairmanTexasInstrumentsIncorporated

ROCCO C. SICILIANOChairman, Dwight D. Eisenhower

Memorial Commission

ELMER B. STAATSformer Controller General of the United

States

FRANK STANTONRetired PresidentCBSCorporation

EDGER B. STERN, JR.Chairman of the BoardRoyalStreetCorporation

ALAXANDER L. STOTTRetired President & COOGTECorporation

WAYNE E. THOMPSONRetired ChairmanMerrittPeraltaMedicalCenter

THOMAS A. VANDERSLICERetired President and Chief Operating

OfficerGTECorporation

SIDNEY J. WEINBERG, JR.Senior DirectorGoldmanSachsGroupInc .

CLIFTON R. WHARTON, JR.former Chairman and CEOTIAA-CREF

DOLORES D. WHARTONformer Chariman and CEOTheFundforCorporateInitiatives

ROBERT C. WINTERSChairman EmeritusPrudentialFinancial

RICHARD D. WOODRetired Chief Executive OfficerEliLillyandCompany

CHARLES J. ZWICKRetired ChairmanSouthernBankingCorporation

CED Honorary Trustees

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Chair:

JOHN L. PALMERUniversity Professor and Dean EmeritusTheMaxwellSchoolofCitizenship&PublicAffairs,Syracuse

University

Members:

ANTHONY J. CORRADOCharles A. Dana Professor of GovernmentColbyCollege

ALAIN C. ENTHOVENMarriner S. Eccles Professor of Public & Private MangementStanfordUniversity

BENJAMIN M. FRIEDMANWilliam J. Maier Professor of Political EconomyHarvardUniversity

ROBERT W. HAHNResident Scholar & Executive Director, AEI-Brookings Joint Center

for Regulatory StudiesAmericanEnterpriseInstituteforPublicPolicyResearch

CED Research Advisory Board

DOUGLAS HOLTZ-EAKINPresidentDHEConsulting,LLC

HELEN F. LADDEdgar Thompson Professor of Public Policy Studies and Professor of

EconomicsDukeUniversity

ROBERT E. LITANVice President, Research & PolicyEwingMarionKauffmanFoundation

ZANNY MINTON-BEDDOESWashington Economics EditorTheEconomist

WILLIAM D. NORDHAUSSterling Professor of EconomicsYaleUniversity

RUDOLPH G. PENNERArjay and Frances Miller Chair in Public PolicyTheUrbanInstitute

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CHARLES E.M. KOLBPresident

LONE BRYANDirector of Trustee Relations and Secretary of

The Research and Policy

AMANDA TURNERExecutive Assistant to the PresidentDirector of Administration

Research

JOSEPH J. MINARIKSenior Vice President and Director of Research

JANET HANSENVice President and Director of Education Studies

ELLIOT SCHWARTZVice President and Director of Economic Studies

STUART KOTTLEResearch Associate

MANUEL TRUJILLOResearch Associate

DONALD C. “BUFF” MACKENZIESenior Fellow

Communications/Government Relations

MICHAEL J. PETROVice President and Director of Business andGovernment Relations and Chief of Staff

MORGAN BROMANDirector of Communications

AMY MORSECommunications and Outreach Associate

MEREDITH HANLEYDirector of Foundation Relations

LAURA OLDANIEProgram Manager

EEVA MOOREOutreach & Online Communications Associate

RACHEL GORMANOutreach Associate

Development

MARTHA E. HOULEVice President for Development and Secretary of the Board of Trustees

RICHARD M. RODERODirector of Development

LINDSAY HOFFMANDevelopment Associate

Finance and Administration

LAURA LEEChief Financial Officer and Vice President of Finance and

Administration

ANDRINE COLEMANController

HARRY SURJADIREDJADirector, Database Operations and Business Analysis

JILL MITOKOOffice Manager

CED Staff

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Statements On National Policy Issued By The Committee For Economic Development

Selected Recent Publications:HarnessingOpennesstoImproveResearch,Teachingand

LearninginHigherEducation(2009)

TeacherCompensationandTeacherQuality(2009)

RebuildingCorporateLeadership:HowDirectorsCanLinkLong-TermPerformancewithPublicGoals(2009)

LeadershipandSharedPurposeforAmerica’sFuture(2008)

HarnessingOpennesstoTransformAmericanHealthcare(2008)

BuilttoLast:FocusingCorporationsonLong-TermPerformance(2007)

TheEmployer-basedHealth-InsuranceSystem(EBI)IsAtRisk:WhatWeMustDoAboutIt(2007)

TheEconomicPromiseofInvestinginHigh-QualityPreschool:UsingEarlyEducationtoImproveEconomicGrowthandtheFiscalSustainabilityofStatesandtheNation(2006)

OpenStandards,OpenSource,andOpenInnovation:HarnessingtheBenefitsofOpenness(2006)

PrivateEnterprise,PublicTrust:TheStateofCorporateAmericaAfterSarbanes-Oxley(2006)

TheEconomicBenefitsofHigh-QualityEarlyChildhoodPrograms:WhatMakestheDifference?(2006)

EducationforGlobalLeadership:TheImportanceofInternationalStudiesandforeignLanguageEducationforU .S .EconomicandNationalSecurity(2006)

ANewTaxFramework:ABlueprintforAvertingaFiscalCrisis(2005)

CracksintheEducationPipeline:ABusinessLeader’sGuidetoHigherEducationReform(2005)

TheEmergingBudgetCrisis:UrgentFiscalChoices(2005)

MakingTradeWork:StraightTalkonJobs,Trade,andAdjustments(2005)

BuildingonReform:ABusinessProposaltoStrengthenElectionFinance(2005)

DevelopmentalEducation:TheValueofHighQualityPreschoolInvestmentsasEconomicTools(2004)

ANewFrameworkforAssessingtheBenefitsofEarlyEducation(2004)

PromotingInnovationandEconomicGrowth:TheSpecialProblemofDigitalIntellectualProperty(2004)

InvestinginLearning:SchoolFundingPoliciestoFosterHighPerformance(2004)

PromotingU .S .EconomicGrowthandSecurityThroughExpandingWorldTrade:ACallforBoldAmericanLeadership(2003)

ReducingGlobalPoverty:EngagingtheGlobalEnterprise(2003)

ReducingGlobalPoverty:TheRoleofWomeninDevelopment(2003)

HowEconomiesGrow:TheCEDPerspectiveonRaisingtheLong-TermStandardofLiving(2003)

LearningfortheFuture:ChangingtheCultureofMathandScienceEducationtoEnsureaCompetitiveWorkforce(2003)

ExplodingDeficits,DecliningGrowth:TheFederalBudgetandtheAgingofAmerica(2003)

JusticeforHire:ImprovingJudicialSelection(2002)

ASharedFuture:ReducingGlobalPoverty(2002)

ANewVisionforHealthCare:ALeadershipRoleforBusiness(2002)

PreschoolforAll:InvestingInaProductiveandJustSociety(2002)

FromProtesttoProgress:AddressingLaborandEnvironmentalConditionsThroughFreerTrade(2001)

TheDigitalEconomy:PromotingCompetition,Innovation,andOpportunity(2001)

ReformingImmigration:HelpingMeetAmerica’sNeedforaSkilledWorkforce(2001)

MeasuringWhatMatters:UsingAssessmentandAccountabilitytoImproveStudentLearning(2001)

ImprovingGlobalFinancialStability(2000)

TheCaseforPermanentNormalTradeRelationswithChina(2000)

WelfareReformandBeyond:MakingWorkWork(2000)

BreakingtheLitigationHabit:EconomicIncentivesforLegalReform(2000)

NewOpportunitiesforOlderWorkers(1999)

InvestinginthePeople’sBusiness:ABusinessProposalforCampaignFinanceReform(1999)

TheEmployer’sRoleinLinkingSchoolandWork(1998)

EmployerRolesinLinkingSchoolandWork:LessonsfromFourUrbanCommunities(1998)

America’sBasicResearch:ProsperityThroughDiscovery(1998)

CE Circulo de Empresarios Madrid, Spain

CEAL Consejo Empresario de America Latina Buenos Aires, Argentina

CEDA Committee for Economic Development of Australia Sydney, Australia

CIRD China Institute for Reform and Development Hainan, People’s Republic of China

EVA Centre for Finnish Business and Policy Studies Helsinki, Finland

FAE Forum de Administradores de Empresas Lisbon, Portugal

IDEP Institut de l’Entreprise Paris, France

Keizai Doyukai Tokyo, Japan

NBI National Business Initiative Johannesburg, South Africa

SMO Stichting Maatschappij en Onderneming The Netherlands

CED Counterpart Organizations

CloserelationsexistbetweentheCommitteeforEconomicDevelopmentandindependent,nonpoliticalresearchorganizationsinothercountries .SuchcounterpartgroupsarecomposedofbusinessexecutivesandscholarsandhaveobjectivessimilartothoseofCED,whichtheypursuebysimilarlyobjectivemethods .CEDcooperateswiththeseorganizationsonresearchandstudyprojectsofcommoninteresttothevariouscountriesconcerned .Thisprogramhasresultedinanumberofjointpolicystatementsinvolvingsuchinternationalmattersasenergy,assistancetodevelopingcountries,andthereductionofnontariffbarrierstotrade .

Committee forEconomic Development

2000 L Street N.W.Suite 700

Washington, D.C. 20036202-296-5860 Main Number

202-223-0776 Fax1-800-676-7353

www.ced.org

restoring trust in corporate governance: the six essential tasks

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