Who really is worthy of alignment?

• Author: Franklin, Barbara Hackman
• Position: Corporate director compensation - Response to Hoffer Kaback, Directors & Boards, Winter 1996

Hoffer Kaback has written a thoughtful and well-reasoned article, and I agree with many of his points. That may seem strange since I also served on the NACD Commission. But the fact is that the Commission deliberations were far from unanimous. In fact, I nearly withdrew my name from the list of participants when I saw the final draft, but was able to get enough modifications in the language so that I felt I could sign it.

My major concern was that the "Best Practices" enumerated in the report - if too-rigidly applied - simply did not make good sense. American businesses today are too diverse, in too many different stages of growth and development, have too many dissimilar needs and distinct cultures to apply a "cookie cutter" approach to all director compensation practices.

In particular, there were real differences of opinion about how much of directors' compensation would be in stock. There were strong voices arguing for 100% payment in stock - the point around which Kaback's article centers and which he calls Stock Comp.

I disagreed, and so did others, with this proposition as it pertains to larger public companies. (Start-ups and small, growing companies are another matter.) There are two key reasons:

* First, "stock only" payment would cause boards to become more "elitist." Only those who are independently wealthy and/or who have high paying jobs elsewhere, most likely in other corporations, could afford to serve. This effectively excludes certain categories of people - who may need cash flow - such as some academics, executives of nonprofit institutions, self-employed or small business people, and former government officials. Today's large public enterprises need and are expected to have the diversity of experience and viewpoint such people can bring.

The author, in further underscoring the concern about cash flow, makes this point: "Pure Stock Comp creates negative cash flow because there is compensation income but no cash to pay the tax thereon." He is right. It was one of the points I argued during the Commission's deliberations. The "stock only" advocates respond that the director can borrow, using the stock as collateral. That idea should be rejected. Why should board service be a cause for mounting debt?

* Secondly, there needs to be allowances for special circumstances. For example: Company X is in a turnaround situation, and its stock is selling at below book value. It has new management and desires to recruit new good...