The year in governance: and what a year it was--Dodd-Frank became the law of the land, say on pay gained traction, proxy access lurched forward, and board-shareholder engagement ramped to new levels. A month-by-month recap of the highlights and low points, the who's new and what's new, the successes and setbacks that shaped the boardroom in 2010.

Author:Kristie, James
Position:Interview
 
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JANUARY

While we know now that 2010 turned out very favorably for stock market returns, it is not at all clear that would be the case as the year starts off. Managements, boards, and investors are still visibly scarred by the financial crisis--the Great Recession--of the previous two years. A fitting tone for the year ahead is set by Vanguard Group founder and longtime shareholder advocate John Bogle in a Wall Street Journal (WSJ) op-ed commentary: "As the new year and the new decade begin, it is time to restore the faith of investors in our interlinked corporate and financial systems. This is not a task for the fainthearted, or for the impatient."

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The Citigroup board, a big target for the bank's devastated shareholders, comes under early attack. Two unions, the AFL-CIO and AFSCME, lodge their disapproval of C. Michael Armstrong remaining on the board. The former AT&T chairman headed Citigroup's audit and risk management committee and has been one of the bank's longest-serving directors. Another long-serving board member, former CIA Director John M. Deutch, announces he will not stand for reelection at the annual meeting in April. He "threw in the towel" as the WSJ characterizes his move, and even Deutch admits in the interview with the paper that "Directors that served on Citi's board during the financial crisis should rotate off in an orderly manner."

General Motors Chairman Ed Whitacre Jr. sheds the interim CEO title and announces that he will become permanent CEO of the automaker. No surprise there: He famously said at his first meeting with management upon being named GM chairman in 2009, "I don't know how to be a chairman and not a CEO."

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The Associated Press (AP) reports he seems "impatient to spur the plodding culture of GM."

A big thumbs up from CalPERS on say on pay: The state fund is among some 30 investors signing an open letter to 17 financial institutions asking them to follow other financial services industry companies to enact a shareholder advisory vote on executive compensation. "We applaud Goldman Sachs, State Street and Bank of New York Mellon for leading the way to enact this important corporate governance reform,'" says Joseph Dear, CalPERS chief investment officer. While not "a panacea," he adds that "companies that adopt the policy will significantly advance sound governance goals of improved accountability to investors and the creation of long-term share value."

He didn't blame the board: On the 10th anniversary of the AOL-Time Warner merger, former Time Warner CEO Jerry Levin fesses up to the Financial Times (FT), "I presided over the worst deal of the century, apparently, and I guess it's time for those who are involved in companies to stand up and say: you know what, I'm solely responsible for it. I was in charge." Reacting to this confession, Yale School of Management professor Jeff Sonnenfeld writes in the New York Times (NYT): "Jerry Levin reminds us that our leaders need to stop blaming TARP, Sarbanes-Oxley, Congress, the other political party, the other side of the world, their competitors, their boards, their predecessors and their parents.... Leaders should welcome the problems before them and take ownership, since it is those problems that give them a job."

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No credit: RiskMetrics Group notifies providers of director education programs that the governance ratings firm will no longer be accrediting such programs. And it is reported that the firm, which bought Institutional Shareholder Services in 2007, has put itself up for sale.

Carl Icahn rings in a new year of activism by stating his intention to nominate three directors to Biogen Idec's board. He had nominated a slate of directors over the previous two years and won two seats on the board in 2009.

"This is a potential game-changer for the Division of Enforcement," says Robert Khuzami, director of the SEC's Division of Enforcement, in announcing new incentives for individuals and companies to cooperate and assist with SEC investigations. A game changer of a different kind happens when the SEC votes to encourage companies to disclose the effects of climate change on their businesses. In an editorial titled "Insecurity and Change Commission," the WSJ warns, "While it does not explicitly carry the force of law, this new SEC guidance can have only one result: more corporate disclosures about global warming risk. This advances the White House goal of making a carbon-capped economy a fait accompli, harassing energy-intensive industries by making them publish negative information about themselves, and, as a side benefit, creating new litigation raw material for the plaintiffs bar." Ceres, the largest coalition of investors, environmental organizations, and public-interest groups in the U.S., issues a report concluding that a vast majority of the world's largest investment managers are not factoring climate-related trends into their short- and long-term investment decision making--"which could result in significant hidden risks in the trillions of dollars of investment portfolios they are managing."

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CEO Succession--Inside vs. Outside: A study out of Rice University's Jones Graduate School of Business finds that when a company wants to appoint a new CEO for strategic changes, it would be better off in the long term by promoting someone from inside the company rather than hiring someone from the outside. The study looked at the tenure and performance history of 193 CEOs in the industrial sector between 1993 and 1998. The researchers found that in the first few years of tenure, there is very little difference between the performances of CEOs promoted from within a company and CEOs hired from the outside. However, in later years, internally promoted CEOs outperformed externally hired CEOs.

Shareholder backlash prompts Intel Corp. to scrap plans to hold its annual meeting this coming year exclusively online. In 2009 it was one of the first companies to provide online access to its annual meeting.

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Global governance: A study by the Asian Corporate Governance Association concludes that investor protections still remain weak in India a year after a massive fraud at Satyam Computer Services. Governance for Owners USA Chairman Peter Clapman is honored with a lifetime achievement award by Corporate Secretary magazine. The former SVP and chief investment officer of TIAA-CREF "was thinking and talking about good governance long before almost anyone else had even heard of the term," according to one member of the judging panel.

FEBRUARY

Proxy disclosure enhancements: The rules that the SEC adopted in December 2009 to broaden the scope of required executive compensation and corporate governance disclosures go into effect on Feb. 28. The enhanced disclosures focus on six specific issues: 1) director and director nominee qualifications, background, and diversity; 2) board leadership structure; 3) board risk oversight; 4) use of, and potential conflicts of interest with, compensation consultants; 5) material risk in pay policies and practices; and 6) tabular disclosure of the value of equity and option awards. "The new 'proxy disclosure enhancements' present an opportunity to showcase the positive functioning of the board," counsels Eleanor Bloxham, CEO of board adviser The Value Alliance. Also taking a positive view is the Institute of Internal Auditors (IIA), the internal audit profession's guiding body and standard setter, which suggests that the new proxy disclosure rules "present chief audit executives with opportunities to demonstrate internal auditing's vital role in supporting effective governance and risk management practices."

More on the SEC front: the SEC votes to wait until 2011 to decide whether U.S. companies should move to international financial reporting standards. The SBC's chief accountant, Jim Kroeker, says more time is needed to understand the cost to U.S. companies and whether the changes would affect the quality of U.S. reporting.

Citigroup continues a board makeover--"the third major overhaul in three years," the NYTcalls it--announcing that three members of its audit committee, former AT&T Chair C. Michael Armstrong, Xerox Chair Anne Mulcahy, and former CIA Director John Deutch, will not stand for reelection (see January). Joining the board is Ernesto Zedillo, former president of Mexico and now the director of the Yale Center for the Study of Globalization. The company also decides to reduce the size of the board from 17 members to 15.

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Social media in the C-suite: Jonathan Schwartz announces his resignation as CEO of Sun Microsystems in a novel way--on Twitter. Not only that, as the New York Post (NYP) reports, he makes his tweet a haiku: "Financial crisis/Stalled too many customers/CEO no more." The resignation comes days after the completion of Sun's merger with Oracle. The NYP notes that Schwartz was at one point hailed as the only Fortune 500 CEO to maintain a blog.

Bank of America is still generating ugly headlines: After rejecting a previous settlement by the bank with the SEC over disclosures related to BofA's December 2008 acquisition of Merrill Lynch, Federal Judge Jed Rakoff finally agrees to BofA paying $150 million as punishment for hiding billions in losses and executive bonuses in that deal. Rakoff admits to not being happy with the settlement circumstances, since victimized BofA shareholders are in essence fining themselves. That's not the end of the company's legal battles. New York Attorney General Andrew Cuomo goes after BofA's former CEO, Ken Lewis, fil ing a civil complaint for failure to disclose Merrill's mounting losses, accusing Lewis of "massive fraud and manipulation." And it is reported that Lewis's retirement benefits total approximately $83 million. BofA CEO Brian Moynihan assumed office on Jan. 1.

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