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Executiveaction series

No. 292 December 2008

The Role of the Board in Turbulent Times . . .

Overseeing Risk Management and Executive Compensation


Pressure Points for Corporate Directors
by Matteo Tonello, LL.M., S.J.D., Associate Director, Corporate Governance Research, The Conference Board

Over the past year, the exposure of major financial institutions to a rapidly weakening U.S. housing market heightened the aversion to risk in global capital markets. These concerns have cascaded into a full-fledged financial crisis the precise extent and impact of which is still unknown. While some banks and financial intermediaries have filed for bankruptcy or otherwise rushed into rescue deals with competitors or national governments, such loss of confidence escalated in recent weeks to an unprecedented liquidity crisis.

he Conference Boards most recent Leading Economic Indicators and Consumer Confidence Index data show limited access to capital is weighing on consumer spending and employment trends. Ultimately, the deterioration of the credit markets affects many business sectors and the wealth of not only the United States, but the global community as a whole.1 What should the board of directors of a public company do in critical times like these? This report highlights a series of pressure points for boards to consider in addressing these events. Each pressure point includes practical actions that can be followed to help ensure that, even in this turbulent economic environment, directors fully meet their fiduciary responsibilities toward shareholders.
1 For a discussion of the current economic indicators, see Bart van Ark,
Update on the U.S. and Global Economies. Comments on The Conference Board Forecast, October 8, 2008, available at www.conferenceboard.org/pdf_free/economics/2008_10_08.pdf

It is believed thataside from a declining housing market, which remains a somewhat cyclical and unavoidable phenomenonthe problems faced today by some U.S. financial institutions are due to inadequate risk oversight 2 and a broken link between pay and performance.3
2 Recent research conducted by The Conference Board shows that, while
companies report progress in developing an enterprise-wide risk management program, it has yet to become embedded in their strategic thinking and cultures. Most developments have occurred in early stage efforts, such as compiling a risk inventory and selecting a set of assessment metrics. However, there is empirical evidence that corporate boards are still developing an oversight process to tie the information on risk they receive through the program to their strategy-setting activities. See Ellen Hexter, Risky Business. Is Enterprise Risk Management Losing Ground?, The Conference Board, Research Report, 1407, 2007.

3 Over the last two decades, The Conference Board has documented the
expansion of components of compensation packages that do not relate to corporate revenues. See Linda Barrington, Kevin F. Hallock, and Lisa L. Hunter, The 2007 Top Executive Compensation Report, The Conference Board, Research Report 1422, 2008. (The 2008 Top Executive Compensation Report will be published in winter 20082009.)

Electronic copy available at: http://ssrn.com/abstract=1325028

In light of the financial crisis, boards of directors should consider reassessing the adequacy of their companies risk management programs, including the impact of the executive compensation policy on the risk culture of the organization. This report focuses on these important issues. The actionable items described below are not meant to be prescriptive. Instead, they are intended as guidelines for a pragmatic boardroom discussion on how to better align the financial interests and the motivational drivers of executives with the interests of long-term shareholders. As such, they are worth considering for any business corporation, not only those in the financial sector.

that business deliberations are made in light of widely recognized corporate governance standards.5 Clearly, enterprise risk management (ERM) has by now developed into a significant body of organizational practices documented by reputable self-regulatory organizations around the world. 6 As best practices, they do matter and, arguably, could be used as a standard of judicial review of fiduciary liability. Nonetheless, the financial disruptions of the last few weeks reveal that many business organizations were unprepared to effectively assess and manage their risk exposure. Risk management processes did formally exist but were often fragmented and left to the sensitivity of functional managers or the initiative of single business unit risk owners. Most important, since they were not driven and overseen by the board, they were not commensurate with a comprehensive vision of the enterprises long-term goals. The Governance Center recommends that corporate directors, in light of the current financial turmoil, reassess gaps and vulnerabilities in existing risk management solutions implemented by the company. In particular, the board should:

Ensuring Risk Oversight


The problems faced today by some financial institutions result from the inordinate risks taken by engaging in the subprime lending business or by trading mortgagebacked securities packaging those subprime loans, which then defaulted. It is the responsibility of the corporate board to oversee the companys risk exposure. This duty is inherent in the role that boards of directors perform in determining a business strategy that generates long-term shareholder value and particularly central to financial institutions. Research conducted by The Conference Board shows that, even though there is no explicit general legal requirement, the need for boards to oversee the implementation of a topdown and enterprise-wide risk management process may be inferred from the provisions of the Sarbanes-Oxley Act of 2002 on internal controls (which, in fact, are nothing less than procedures to address the risk of inaccuracies in financial disclosure), as well as the rules included in the new Federal Sentencing Guidelines of 2004 promoting the adoption of well functioning and qualifying compliance programs.4 In addition, recent decisions by Delaware courts stress the importance of good faith as part of the directors duty of loyalty and state that directors and officers are expected to fully understand current best practices, as well as ensure
4 See Matteo Tonello, Emerging Governance Practices in Enterprise Risk
Management, The Conference Board, Research Report 1398, 2007, p. 21.

Review and approve an inventory of risks and fundamental risk management parameters (such as risk measurements, risk appetite, and tolerance levels) as part of the annual business plan submitted by senior executives. From a corporate governance standpoint, the important role of the board of directors in the compilation of a risk inventory cannot be overstated. In this phase, board members should oversee the process adopted by senior management to identify and prioritize risks. It should be understood that if a major risk is (accidentally or deliberately) excluded from this analysis, the rest of the ERM program will suffer a major deficiency.
5 See Chancellor Chandlers dicta in In re The Walt Disney Co. Derivative Litig.,
Cons. C.A. No. 15452, 2005 Del. Ch. LEXIS 113 (Del. Ch. Aug. 9, 2005), then upheld by the Delaware Supreme Court (In re Walt Disney Co. Derivative Litig., 906 A.2d 27 (Del. Supr. June 8, 2006)). Also see Stone v. Ritter, 911 A.2d 362 (Del. 2006).

6 See Committee of Sponsoring Organizations of the Treadway Commission


(COSO), Enterprise Risk ManagementIntegrated Framework, September 2004. Other ERM frameworks include the Australian/New Zealand Standard for Risk Management, AS/NZS 4360 (1999), the model embedded in the King Report on Corporate Governance for South Africa (2002), British business standard BS 6079-3Project Management: Guide to the Management of Business: Related Project Risk (2000), and ISO/IEC Guide 73Risk Management Vocabulary: Guidelines for Use in Standards (2005).

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Electronic copy available at: http://ssrn.com/abstract=1325028

Be sensitive to the fact that, in the current economic


climate, the business may be particularly subject to the effects of interrelated events. Specifically, where the company engages in relationships with third parties (e.g., vendors, customers, partners, etc.) in financial distress, events affecting those organizations standing may reverberate on the continuity of the companys business operations. Moreover, the occurrence of major financial risks (such as the limitations in accessing new capital and the exposure to excessive volatility) may undermine the companys ability to fully support internal programs aimed at addressing process risks (e.g., internal audit and disclosure procedures, Six Sigma, and other quality control initiatives; compliance and ethics programs). Corporate boards should ensure that resources continue to be appropriately allocated to risk management so that the companys ERM capacity is not impaired.

H H

regulatory and compliance risks; and other market risk, including the impact of a potentially deep recession (marked by severe declines in consumer spending abilities and production levels) on business operations.

Be persuaded that risk measurements used by senior


executives to monitor those levels of tolerance are adequate and effective. Since the accuracy of the risk assessment process is a precondition to the success of the whole program, the board should ensure that such process is transparent and thorough. The most recent events affecting the financial market showed how important it is for corporate directors to be aware that certain business risks may represent personal opportunities for managers who are ill-intentioned or simply driven by short-term incentives. In such cases, managers may have an interest in avoiding having those categories of potential events brought to the surface and addressed in a systematic and effective way. The board should therefore become familiar with any identification technique or risk metric chosen by senior executives, understand their limitations, and be able to critically analyze their outcomes.

Ensure that the risk management infrastructure ties


the companys strategy-setting activities to a sound risk-based analysis of the market environment and competitive position in which the firm operates. To survive in todays rapidly changing business world, ERM should be a continuous and uninterrupted process in which strategic objectives are constantly monitored to factor in new uncertainties and capture new opportunities. On its part, the board should regularly determine whether the business strategy is adjusted to the levels of risk tolerance the company can afford, based on indicators such as its capitalization, liquidity, and debt-to-equity ratios, as well as the exposure to environment and geopolitical risks that may be difficult to assess properly. In these turbulent times, the board should ensure that management understands and is effectively managing key financial risks, including:
H H

Determine adequate performance metrics to track


and compensate managerial results in the pursuit of the business strategy to avoid executive compensation policies that may negatively impact the enterprise risk culture. In particular, performance should be assessed based on a combination of financial and extra-financial metrics.7 For example, in addition to short-term results that are measurable in terms of stock price, compensation could also vary based on the quality of long-term institutional investors the company can attract to its stockholder base. Given that it is a fiduciary duty of pension fund advisors to evaluate the risk exposure of any company the fund is considering investing in,8 the increasing presence of large institutional investors in the stock ledger could further assure corporate directors about the sustainability of the business strategy in the long period.

liquidity risks, including cost of capital; interest rate, currency, and commodity price volatility risk; possible asset impairment resulting from fairvalue accounting (e.g., on securities and other marketable investments; on goodwill, patents, and other intangibles; on pension plan assets and other employee benefit programs, etc.); financial reporting risks, especially due to uncertainties regarding the application of accounting principles to securities the company may hold on its balance sheet and whose value is correlated to rapidly weakening underlying assets (e.g., mortgage-backed securities);

7 For a discussion of the need for a diversified set of performance measures,


see Matteo Tonello, Revisiting Stock Market Short-Termism, The Conference Board, Research Report 1405, 2007.

8 Section 404(a) of the Employee Retirement Income Security Act of 1974


(ERISA).

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Electronic copy available at: http://ssrn.com/abstract=1325028

For the purpose of determining the risk oversight


structure at the board level, conduct a preliminary assessment of existing corporate governance practices, including:
1. the independence, professional expertise, and time
availability of each board member;

business unit managers, may voice at the executive and board level any concern expressed by lower organizational levels, as well as provide feedback on the effectiveness of the program. Simultaneously, the board should assess the strength of existing codes of conduct and the anonymity of whistleblowing practices to encourage constructive criticism.

2. the workload of existing board committees; and 3. the quality of the information flow between board
members and management.

Especially in these times of heightened levels of public


scrutiny on business conduct, oversee the process adopted by senior executives to identify, categorize, and prioritize business uncertainties with respect to their reputation effects. Directors should ensure that prioritization criteria and other techniques used in compiling a risk portfolio comprise, among others, a set of reputation metrics. Specifically, the inclusion of a risk event in the portfolio should also be decided based on the likelihood and impact of the event consequences on the companys reputation capital. Likewise, the board should oversee the determination of a proper response strategy to each risk category affecting corporate reputation. Directors should be skeptical of attempts at restoring stakeholder confidence solely through the use of savvy communication tactics and request instead that response strategies fully address the underlying strategic or operational risks. In a well-designed ERM program, communication tactics and better disclosure should be seen as tools to corroborate and complete a business risk-response strategy, not to replace it.

This assessment should be also based on the


reasonable expectation that the business environment emerging from the crisis will raise new challenges and require a heightened level of involvement by the board. In particular, with respect to the need to establish a dedicated risk committee, the Governance Center believes that substance should prevail over form. In fact, some of the financial institutions that found themselves embroiled in todays crisis did have a risk committee, but its involvement in the risk management process was marginal and ultimately proved ineffective.9 While it acknowledges that some companies still assign risk oversight responsibilities to the audit committee,10 the Governance Center is concerned that the current workload of that committee may impair its ability to thoroughly oversee the business exposure to uncertainties.

As part of the ERM procedure design, consider


establishing an ERM Risk Management Executive Committee led by the chief financial officer or the chief risk officer and whose meetings are regularly attended by at least one dedicated director with risk oversight responsibilities. This executive committee could operate as the arena where functional managers, who have a direct working relationship with

Reinforce crisis management capabilities by identifying,


in collaboration with management, the stakeholder relations that are most important to the companys long-term objectives and on which the organization should allocate its resources in times of crisis. Senior managers should be overseen as they develop simulation exercises for the purpose of preparing various organizational ranks to the functions they would need to perform when the company operates in crisis mode. In particular, board members should be persuaded about the strategy management intends to implement should the firm suffer a liquidity problem and experience difficulties in raising new capital. The board should consider designing a plan for its own operations during a crisis and determine how often meetings should be convened, what financial and human resources the board should have access to, and the most effective way to streamline communication with senior executives.

9 See Joann S. Lublin and Cari Tura, Anticipating Corporate Crisis. Boards
Intensify Efforts to Review Risks and Dodge Disasters, Wall Street Journal, September 22, 2008, reporting that, according to regulatory filings, in 2006 and 2007, when Lehman was amassing mortgage-backed securities and questionable real estate loans, the risk committee of its board met only twice per year.

10 A review of Fortune 100 board committee charters conducted by


The Conference Board showed that, as of January 2006, 66 percent of companies had assigned risk oversight duties to the audit committee. See Carolyn Brancato et al., The Role of the U.S. Corporate Boards of Directors in Enterprise Risk Management, The Conference Board, Research Report 1390, p. 26.

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Verify that ERM is fully integrated with existing


corporate disclosure procedures and be satisfied with the transparency of the reporting process. In particular, the board should be confident that the company can effectively communicate with securities analysts and investors and reassure them about its ability to prevent or promptly respond to business risks.

Moreover, an Equilar study found that, in 2007, while the median value of bonuses tied to performance fell 18.6 percent, overall CEO total pay grew 1.4 percent to a median amount of $1.41 million as a result of compensation components that do not depend on corporate results.13 For these reasons, issues of pay for performance have been drawing attention in shareholder meetings and due to an increased public sensitivity to the apparent causes of the financial turmoilare likely to take center stage in the upcoming proxy seasons. In particular, during the last few years, activist shareholders have been pushing for the adoption of bylaw amendments granting non-binding shareholder ratification of executive compensation (so-called say on pay) and contractual claw back clauses to recoup bonuses and other incentive-based rewards in the event of financial restatements. Legislative reform proposals14 introducing say on pay have been endorsed by President-elect Barack Obama,15 while bonus recapture provisions were included in the relief program signed by President George W. Bush on October 3, 2008, and granting the Treasury Department the necessary funding to purchase troubled assets from financial institutions.16 Finally, as a result of the greater transparency on compensation imposed by new U.S. Securities and Exchange Commission (SEC) rules,17 investors have been increasingly willing to withhold support from board members in uncontested elections in those companies for which pay for performance appears to be a concern.18

Strengthening the Link among Pay, Performance, and Accountability


It is believed that the excessive risk-taking by some financial firms might have been encouraged by improperly designed incentive-based compensation.11 Boards of directors set the compensation of senior executive officers. In performing their duties, directors should be mindful of their responsibility to create sustainable, long-term wealth for all shareholders. It means designing compensation arrangements suitable to:
1. attract and retain key talent in a competitive marketplace; 2. motivate managers in the pursuit of long-term goals; and 3. reward managers financially based on their actual performance.

Because of the variety of interests that should be balanced while negotiating a compensation package, the integrity and independence of the compensation committee of the board is crucial. However, recent studies document that in the last two decades executive compensation has grown substantially faster than corporate earnings and, in some cases, has rewarded decisions that turned out to be detrimental to long-term holders. For example, an analysis published in 2008 by the Wall Street Journal in collaboration with ERI Economic Research Institute shows that the median salary of the top executive of a Standard & Poors 500 company increased 20.5 percent from a year earlier compared to a median corporate revenue growth of only 2.8 percent.12

13 Jeff Nash, CEO Pay, Financial Week, March 28, 2008. 14 See H.R. 1257, which was approved by the U.S. House of Representative on
April 20, 2007. Also see S. 2866.

15 The President-Elect Wants a Say on Pay, Financial Times, November 13,


2008.

16 Emergency Economic Stabilization Act of 2008 (Pub. L. 110-343): Section


111(b)(2)(A) prohibits participating companies from providing compensation

11 See, for example, Steve Lohr, In Bailout Furor, Wall Street Pay Becomes a
Target, New York Times, September 23, 2008.

incentives to senior executive officers to take unnecessary and excessive risks that threaten the value of the financial institution.

12 Compensation Indices, Economic Research Institute/ Wall Street Journal


(Career Journal), February 15, 2008, available at www.erieri.com/ index.cfm?FuseAction=NewsRoom.Dsp_Release & Press ReleaseID=149

17 SEC Releases 33-8732 and 34-54302 (available at www.sec.gov).


Also see, Item 402 of Regulation S-K.

18 2008 Postseason Report, RiskMetrics Group, October 2008, p. 17 and p. 31.

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The Governance Center recommends that compensation committees review their companies compensation policy to reinforce, where necessary, the notion that compensation reflects performance as well as to introduce forms of accountability for any risk-taking that is unjustified based on the approved long-term business strategy. However, the boards ultimate responsibility is to weigh principles of pay for performance against the need to participate effectively in the market for human capital. In particular, compensation programs should be designed to address: How to establish a strong link between the variable
portions of total compensation and the economic objectives of the corporation. Motivational drivers, managerial culture, and behavioral incentives should be central topics of discussion. Committee members should fully understand the effects of each single component of the pay package (i.e., base, bonuses, equity-based incentives, benefits and perquisites, deferred compensation, and severance) on the whole compensation arrangements and be persuaded that: (1) the balance between the base salary and the other components is appropriate, and (2) the intended effects of the variable components cannot be distorted by managers to pursue opportunistic behaviors.

should guard against using financial metrics that are heavily dependent on the chosen method of accounting or that lend themselves to other types of machinations. Experience shows that, in most circumstances, CFROI and OCF are preferable to traditional metrics, such as return on equity (ROE) and earnings per share (EPS), which can be affected by revenue and expense recognition or manipulated through stock buybacks at the end of the period.

The compensation committee should also discuss


disclosing performance targets to shareholders, especially if such targets are necessary to understand the material terms of the companys compensation program. However, directors should be sensitive to the potential loss of competitive advantage value that may result from disclosure and therefore weigh transparency against strategic needs.

What tools should be used to avoid the distortions


and pitfalls of certain equity-based incentive programs. Companies should consider moving away from traditional stock options that vest based on continued service since they are proven to encourage an excessive focus on short-term stock price results to the detriment of longterm, sustainable business goals. Other solutions include:
1. adopting stock retention policies (or post-vesting
holding periods), including possibly the requirement for top executives to hold a substantial portion of equity after ending their service for the company and until their retirement;

How to measure corporate performance to ensure


that it is properly rewarded and that assessment periods are long enough to determine whether management decisions were, in fact, successful in creating sustainable shareholder value. Depending on the business strategy and the key performance objectives on which the company should focus, in designing the compensation policy, the board should consider a wide array of financial and extra-financial performance metrics and targets. Financial metrics may include operating cash-flow (OCF), cash-flow return on investment (CFROI), and other measures of economic value added. Non-financial or operational metrics include compliance standards, product quality improvements, customer satisfaction data, and other reputation measures. A more diversified set of metrics would stimulate management to deploy all of the companys assets (including valuable intangible assets) in the pursuit of its strategic goals.

2. granting restricted stock (which is forfeited unless


earned out over a stipulated period of continued employment); and

3. designing stock option plans in which the options vest


only upon meeting certain long-term performance goals uncorrelated to the current stock price.

The compensation committee should consider adopting and motivating formal guidelines on incentive-based compensation for disclosure to shareholders.

The overall fairness of any compensation grant, including


benefits and perquisites (e.g., housing and relocation allowances, use of corporate jets or limousines, etc.). To examine this aspect, the committee may develop internal analytical tools, such as wealth accumulation analyses and studies on the correlation between top

The compensation committee should plan on using


the selected metrics during the annual performance evaluation of each executive. To avoid possible distortions to the evaluation process, the committee

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executive compensation and the salary levels of other employees. Specifically, wealth analyses may prove useful in determining the need for severance and retirement benefits, whereas equity indicators help ensure that resources are not gravitating to the top, thereby creating a retentionand possibly a succession problem. The compensation committee should also report on compensation fairness to the full board so that all directors have an understanding of the magnitude of total potential payouts to executives, particularly to the CEO, in such unique or unusual circumstances as an extreme increase or drop in the companys share price or in the event of a merger, acquisition, or going-private transaction.

knowledge of the challenges of the job market and possibly induce directors to act conservatively in the search for new talent.

Whether the compensation program should introduce


accountability devices to avoid situations in which senior executives are financially insulated from the consequences of acts contrary to the best long-term interests of the company. These devices may include contractual claw-back provisions to recoup bonuses or other incentive-based rewards in case of financial restatements or when the company determines that the executivewithout informing the board and submitting the issue to the review and approval of the compensation committeewillingly made a business decision that is inconsistent with the board-approved business strategy. Factors to consider in determining whether such accountability devices are appropriate for a specific company are the corporate culture, the size of the organization, its performance history, its employee retention rate, and the degree of competition in attracting the best managers. Should the compensation committee or the full board conclude that such accountability devices would impair the ability of the enterprise to create long-term shareholder value, the company should consider disclosing the rationale for such a decision in the compensation discussion and analysis (CD&A) section of annual reports to shareholders. At a minimum, compensation arrangements should require that, in all cases of failed performance, executives forfeit severance payments and accelerated vesting benefits.

Whether the companys compensation levels should


match or exceed those of a peer company and, if so, to what extent. Benchmarking is a common practice that can offer helpful guidance in determining appropriate compensation figures. Nonetheless, the compensation committee should reiterate an independent judgment and not be constrained by or captive to industry averages or the companys own past practices. While using industry benchmarks to set senior executive compensation levels, the committee should again be mindful of the differences in compensation levels within the organization and among different ranks of employees.19

Whether the compensation of executives, as disclosed


under the SEC rules, should be submitted to shareholders for an advisory, non-binding vote, and whether such precatory ratification should also be required for any compensation arrangement between the executives and third parties soliciting the shareholder approval of a plan of merger, acquisition, or business consolidation (so-called golden parachute). Advocates of say on pay clai that, where adopted, the practice has promoted a less adversarial dialogue between managers and corporate owners on issues of compensation while encouraging boards and executives to make a convincing case for the pay program they propose. In particular, the voting process would require board members to be more specific and analytical in motivating their decisions in disclosure documents and, in turn, to fully comprehend the effects that certain compensation devices may have on the behavior of executives. However, those who oppose such advisory votes fear that the fiduciaries decisions might be second-guessed by shareholding groups with limited

The explicit prohibition of any arrangement that could


be interpreted as an attempt to circumvent either the requirements or the spirit of the law, accounting rules, or stock exchange listing standards. In particular, the committee should remain vigilant and demand specific approval of any contract involving a senior executive and a subsidiary, a special purpose vehicle, or other affiliates of the company. Because of the significant potential for conflicts of interest, these compensation arrangements should be permitted only in very special circumstances and upon full disclosure to the SEC. When these arrangements are approved, the committee or the full board should closely monitor their execution.20

19 Also see Commission on Public Trust and Private Enterprise, Findings and
Recommendations, The Conference Board, Special Report 4, 2003, p. 10.

20 Ibid.

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Ensuring that the compensation policy is coherent


with the companys succession plan for top executives. Management succession is one of most critical strategic risks a business faces and a favorite topic of discussion on the role of the board in business crises. Nonetheless, research shows that short-term profit pressures have rapidly curtailed the tenure of sitting CEOs,21 increasing the likelihood of succession risk as well as its potential impact on long-term business prospects. NYSE listing standards require boards to explicitly address CEO succession plans in corporate governance guidelines, including succession in the event of an emergency or retirement.22 It is the responsibility of the compensation committee to design a compensation program that is aimed at both: (1) opposing this trend of declining executive tenures by counterbalancing short-term inclinations with a set of long-term behavioral incentives, and (2) developing talent pools throughout the managerial ranks of the organization so that the business can promptly respond to the unexpected. With respect to the latter, the role of the compensation committee is also to ensure that the companys compensation policy does not encourage a horse race mentality that may lead to the loss of key officers when the new CEO is chosen.

The Governance Center believes that the board of directors, as part of its effort to strengthen the integrity of the negotiation process, should also: Regularly assess independence standards and
performance of compensation committee members.

Adopt additional safeguards when the chairman/CEO


positions are not separated. When the same person serves as both chairman and chief executive officer, it becomes more difficult to objectively monitor the executives own performance.

Understand the nature and scope of compensation


consulting services engaged by the company and, where necessary because of actual or perceived conflicts of interests, retain a different consulting firm than the one used by management.

The compensation committee should be prepared to discuss these issues on an annual basis as part of the periodic review of the effectiveness of the compensation program.

The foregoing list of issues is not intended to be an exhaustive list of risks and other considerations resulting from current market conditions. In particular, companies facing financial difficulties will have a range of other issues to consider, which are beyond the scope of this report. Regulated entities will have additional issues, which also are beyond the scope of this report. This report is not intended to provide legal advice with respect to any particular situation and no legal or business decision should be based solely on its content.

21 Board Practices. The Structure of Boards of Directors at S&P1500 Companies,


RiskMetrics Group, 2008, p. 41.

22 NYSE Listed Company Manual, Section 303A(9).


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About the Author


Matteo Tonello, LL.M., S.J.D., is a corporate governance and regulatory compliance expert and the Associate Director of research of The Conference Board Governance Center in New York City. A corporate lawyer by background, Matteo has conducted for The Conference Board corporate law and risk management analyses and research in collaboration with leading corporations, institutional investors and professional firms. Also, he has participated as a speaker and moderator in educational programs on governance best practices. Before joining The Conference Board, Matteo Tonello practiced corporate law at Davis Polk & Wardwell. He received a Master of Laws degree from Harvard Law School and a J.D. from the University of Bologna. He also earned a S.J.D. from the St. Anna Graduate School of the University of Pisa (Italy) and was a Visiting Scholar at Yale Law School.

About The Conference Board


The Conference Board is the worlds preeminent business membership and research organization. Best known for the Consumer Confidence Index and the Leading Economic Indicators, The Conference Board has, for more than 90 years, equipped the worlds leading corporations with practical knowledge through issues-oriented research and senior executive peer-to-peer meetings. The Governance Center at The Conference Board brings together senior executives from leading world-class organizations and institutional investors in a non-adversarial setting to debate and develop innovative governance practices.

Acknowledgement
The author would like to thank The Conference Board Governance Center Advisory Board members for their contribution to the discussion of these issues. In addition, the author is grateful to Tony Galban, Alan Rudnick, and Yale Tauber for their comments and suggestions.

For more information on The Confernce Board Governance Center, please contact: Paul DeNicola, Ph.D., Associate Director, Governance Center, at 212 339 0221 For more information on this memorandum please contact: Frank Tortorici, Director, Public and Media Relations, at 212 339 0231

The Conference Board, Inc., 845 Third Avenue, New York, NY 10022-6600 Tel 212 759 0900 Fax 212 980 7014 www.conference-board.org Copyright 2008 by The Conference Board, Inc. All rights reserved. The Conference Board and the torch logo are registered trademarks of The Conference Board, Inc.

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