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Open Communication Can Help Restore Trust

Corporations have an opportunity to begin restoring trust and confidence lost in the financial crisis by instituting the cutting edge governance practice of direct dialogue between directors and investors, according to a new policy briefing by the Millstein Center for Corporate Governance and Performance at the Yale School of Management.

The briefing, “Talking Governance: Board Shareowner Communications on Executive Compensation,” coauthored by Stephen Davis, senior fellow at the Millstein Center, and Stephen Alogna, senior manager of Deloitte & Touche LLP Corporate Governance Services, finds dialogue can enhance board authority, especially during crises, as well as boost shareowners’ trust in their quest for optimal performance. In addition, the paper finds that

u2022 sustained, two-way dialogue between boards and shareowners on executive compensation and other governance topics is, thus far, rare in the U.S.

u2022 Regulation Fair Disclosure (Reg FD), a rule passed by the SEC to prevent selective disclosure of information, is not a barrier to communication between directors and investors on executive pay policies and other governance matters.

u2022 the SEC should develop a marketwide, safe harbor for board/shareowner communications on corporate governance issues to help save corporations unnecessary legal fees and reduce the risk of sanction under Reg FD.

u2022 Investors and corporate officials should identify concrete and significant advantages from board/shareowner communications that outweigh the potential risks and costs.

“The financial crisis makes routine dialogue between boards and significant investors a ‘must have’ reform,” asserts Ira Millstein, senior associate dean for corporate governance at the Yale School of Management. “Boards gain from opportunities to listen for best ideas and explain corporate policies so that they can retain investor confidence in times of important challenge.”

Companies to Curb Executive Bonuses, Stock Awards

Companies expect annual bonus and stock-based awards for executives to decline in response to the troubled economy, according to a new survey of more than 400 board members, executives, and human resources professionals.

Nearly nine out of 10 respondents said market turmoil will affect their decisions about executive compensation during the next six months, with nearly one in five predicting the impact will be “significant,” according to Executive Pay in the New Economy, an online survey conducted by independent compensation consultancy Pearl Meyer & Partners in early November.

Survey participants were asked to comment on their year-end pay decisions-the awards provided for performance in 2008-and provide insight into their compensation planning for 2009. In addition to the declines in performance-based pay, half of respondents expect salary growth to be lower in 2009, with nearly 18% saying their companies are “strongly considering” a salary freeze.

“It’s appropriate that variable components of pay such as annual bonus awards and stock grants are being put at risk in executive pay programs-that is how pay for performance is supposed to work,” said David Swinford, president and CEO of Pearl Meyer & Partners. “The open question is whether the reductions will be in line with the expectations of shareholders who are feeling the pain in their own portfolios.”

The survey also found that 36% of respondents said they might consider paying a year-end bonus below formula-in other words, exercising their discretion to provide a payout that is less than what the executive would have “earned” based on the plan’s stated objectives.

“What’s interesting is that while bonuses normally are smaller when performance targets are missed, the strong interest in exercising negative discretion in this problematic year suggests companies may want to correct a disconnect in their goal-setting process and better align rewards with market performance,” Swinford noted.