What about independence? It seems to be the common denominator among all the reform proposals.
That's gone a little too far. Independence does not guarantee competence or commitment, and those are more important than independence. Moreover, it is hard to judge who is or is not independent from the disclosures that we currently have. I once went to an annual meeting and stood up and said, "You've got five members on the board of directors: the CEO, a full-time employee, the company's investment banker, the company's lawyer, and another guy. Hey, other guy: stand up and tell everybody here what your connection is, because I don't believe that you are independent." We found out afterward that he and the CEO played jazz clarinet together. That's why you can only judge independence by looking at what board members do.
The Corporate Library's Interlock Tool analyzes the interconnectedness of board members. Just how many degrees of separation are there?
It makes the [six degrees of separation from] Kevin Bacon game look like nothing. Out of the 20,000 directors in our database, you can get from any one to almost any other one in no more than two or three steps. We consider first degree to be their corporate connections; second is their noncorporate connections, which include nonprofits, trade associations, and golf clubs; and the third degree is interlockings among them. If you are on two boards with people who are on a third board together, that's a third-degree interlock. So they are all pretty connected.
How would you empower board members to stand up to management?
You need a carrot and a stick. The stick was the year 2002, which scared the heck out of all of them. The carrot is good ratings and pay that reflects board members' performance. I have always said that boards are like subatomic particles — they behave differently when they are being observed, and knowing they are being observed will make a difference [going forward]. I think too that we'll see more turnover on boards in the next 2 years than we've seen in the last 10. People who are not comfortable asking tough questions are going to leave, and people who are not uncomfortable asking tough questions will be more willing to serve.
How much should directors be paid?
A lot more than they're getting paid. Pay them more because we have very high expectations: we want them to devote at least two days of background work for every day they spend in a board meeting. If that amounts to three or four weeks out of the year, we should pay them a commensurate rate. That pay should be in stock, and we should require them to hold the stock for three years after leaving the company.
What about their own equity stakes?
The first thing you should do after agreeing to go on a board is to buy a lot of stock. What's a lot depends on who you are. But the academic studies tend to show that if people have at least $100,000 invested in a company, it seems to affect the stock performance.
And what would you do as far as changing the mechanism of the nominating process for the board?
If I ruled the world, I would allow shareholders to nominate one or two candidates on the management's proxy slate every year. But understanding that my idea would require some very big changes, my backup is a very independent nominating committee working with a search firm. Obviously, we don't want anybody the CEO doesn't feel he can get along with. But there's a strong human impulse to dance with the one who brung you to the party, and I want the new directors to know that the one who brung them was the nominating committee and not the CEO.
Do you think this might be the year when we actually see shareholders demanding pay cuts for executives in nonperforming companies?
I think so, and I think companies that are out in front announcing pay cuts will get a lot of support from shareholders. I worry that we're going to see less of a tie between pay and performance, because of the overall market slowdown.
Is there any ideal way of linking performance to pay?
No; it depends on the company — whether you're talking about an emerging company or an established one. What's important is for the compensation committee to state very clearly what its goals are and how this compensation is in furtherance of those goals. If they want to say that market share is their number-one goal, then by all means, pay the guy for market share. But if the main goal is increasing the dividend, then pay him for that. Just say what your goals are, and let me judge if that's something I want to invest in.
CFOs are understandably concerned about how much they are going to have to invest in all this additional regulation. Is there a point where oversight or regulation adds costs that could undermine shareholder value?
On behalf of the shareholders, for whom I've been working for 16 years, it is an investment we are happy to make. So spend the money, but spend it wisely. Don't spend it for bureaucratic checklist minutiae. Spend it to get the best possible directors, and give them the best possible information.
As The Movie Mom, you warn parents about inappropriate material in movies. Are there any parallels between your day job and your night job?
I once got a question: "Dear Movie Mom, I tell my two-and-a-half-year-old that she shouldn't watch videos, but she knows how to work the VCR, so she watches them anyway. What should I do?" So I wrote back: "OK, somebody has to be the grown-up, and you lose. And if you can't make a rule about videos in your house, I guarantee that you are going to have a much bigger problem than movies." That same day, I went to the office and read this Global Crossing contract, and it was like getting a letter from the board of directors: "Dear Corporate Governance Mom, I tell the CEO that pay and performance should be linked, but he says no. What should I do?" I felt like writing back, "Somebody has to be the grown-up, and you lose."
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