By David Liss
War, SARS, and other current events have pushed corporate-governance issues off the front page but they remain critical to the success of all publicly traded companies, believes David Daberko, chairman and CEO of National City Corp. (NCC ). The Cleveland-based bank-holding company had revenues of $6.8 billion in 2002.
Statistics support Daberko's assertion: Federal securities-fraud lawsuits grew by 31%, to 224 filings in 2002 from 2001, according to a report by Stanford Law School and Cornerstone Research, a financial-and-legal research outfit in Boston. The companies sued in 2002 lost $1.9 trillion in stock market value during the "class periods" -- the time frame for shareholders to be covered by the class actions. So far this year, 101 class actions have been filed.
For the last article in a three-part series on corporate governance, I asked Daberko to share his strategies and best practices (see previous "Ask the CEO" columns on BW Online: 5/6/03, "A Board's Top Job: Watching the CEO", and 5/16/03, "AutoZone's "40-Headed CEO"). Here are edited excerpts of our conversation:
Q: How do you define successful corporate governance?
A:Corporate governance is about protecting the shareholders -- and implementing a structure to ensure disclosure and accuracy of financial reporting purposes. Good governance rests on the issue of transparency. A corporation's objective isn't to hide anything or to be obtuse. You have to guarantee that shareholders are given as much information as is useful for them to understand the positioning of company without publicly revealing competitive positions.
Thanks to increased Congressional scrutiny and the passage of new regulations, I believe that we're at the tail end of the trend for corporate scandals, and that we're moving closer directors actually overseeing management's actions. To be effective, board members have to be willing to rock the boat and possibly lose the friendship of the chairman or CEO.
Q: What are the top five elements for strong, effective corporate governance?
A:In my view, there's one element, not five: a strong, independent board. A board that demands accountability of management, keeps shareholder issues in focus, and advocates the upholding of the company's code of ethics. I'm the only member of the executive team serving on our board. Our board members can serve on no more than five separate directorships, or two audit committees, including ours. The audit committee meets 10 times year, but the whole board approves financial reporting. Hewitt and Associates, an outside compensation consultant, and the compensation committee together determine executive pay levels. Compensation committee meetings are held without the presence of senior management.
At places like Enron, where enormous stock options were given, there was huge incentive to drive the price of the stock up in the short term. We have more of a long-term approach. Top officers in the company are required to own shares of stock as a defined multiple of their salary and hold these shares for at least a year. When they exercise options they must hold the stock for at least a year to avoid speculative selling. Loans are prohibited from the corporation for executives and board members and we don't believe in offering stock options for board members.
Also, within three years of appointment, company directors must own 12,000 shares of company stock. These shares aren't given in compensation for being a director -- they must be purchased.
Q: How do you know you've successfully addressed governance issues?
A:We use Institutional Shareholder Services for measuring our performance in this area. A key measure is being recognized in independent surveys as having good corporate governance. Positive feedback from financial analysts who applaud us for open and clear reporting is another way.
The ultimate measure of our success, though, is the confidence that our shareholders, especially the largest and most sophisticated ones, demonstrate in support of our management decisions.
Q: What failings have you seen in how other CEOs and or corporations have addressed such issues?
A:The biggest failing is when CEOs make decisions or take stands that primarily protect their own interests or those of management rather than shareholders'. Another problem is when CEOs only tell the board of the company's achievements and don't share bad news or concerns about the corporation.
Q: What's the most important consideration for a CEO who has to address corporate-governance issues?
A:You have to have a clear philosophy. Also, you need to remember that shareholders own the company and the board and executive management exist to represent and serve them.
For more on National City Corporation's standards and practices please see: Institutional Shareholder Services
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Edited by Patricia O'Connell