Khurana: There were two contributing institutional changes that we have to look at. One is the shift from defined-benefit pension plans to defined-contribution plans, which made a significant portion of the population participate in this great sport of stock picking. Less than 10 percent of the American population owned any form of stock in the 1950s. Because of 401(k)s and mutual funds, it’s now in excess of 50 percent.
I think a second significant institutional shift has to do with regulatory changes that allow institutional investors, such as CalPERs, to coordinate their efforts more closely, in terms of voting proxies, than they were allowed to in the past. They come up with a list every year — the “10 Worst Boards” or the “10 Best Boards” — and it makes the cover of Business Week.
Neff: The other reason that the business sections of newspapers are bigger is excessive compensation. Whatever compensation is, there’ll be criticism of it. Years ago, it was too much cash compensation, so boards changed the mix and put more stock in there. We had a bull market and that created millionaires all over the place, and there’s huge criticism about that. Now, obviously some boards and CEOs got carried away with that. But excessive compensation remains an issue that clearly needs to be addressed. How a board or compensation committee can increase compensation of a CEO when their performance relative to peers or the S&P is going the other way is — I mean, it’s suicidal.
S+B: Is there any turning back the clock on that?
Neff: I think it’s happening in compensation committees now. To what degree we’ll see it in the proxies that come out this year remains to be seen. But governance is certainly being applied to the value of compensation.
Pasternack: But, Tom, if you’re looking for the star, the person that the board really feels is the most important person they could possibly hire, the best person, aren’t you still experiencing pressure to entice that person away with money?
Neff: Yes, it’s supply and demand. It’s a free market. It’s not that boards are looking for charisma and marquee value. That’s not what my clients are looking for. They are looking for the person they think can best get the job done.
A search should start with: “Where does this company want to be in five or 10 years?” It’s not, “Who’s the best CEO today?” It’s, “Who’s the best CEO to get you where you want to be in five years?” So, you’ve got to define where you want to be five years down the road. How is the company going to be different, and what are the skills and experiences needed to get you from here to there?
S+B: Bruce, you and University of Southern California professor Jim O’Toole published research in s+b indicating that “visionary leadership” is being bypassed in favor of something you termed yellow-light leadership — more analytical, more by-the-numbers, more old-fashioned.
Pasternack: When we wrote that, we didn’t mean that it was only numbers. It’s getting the right people in the right place. It’s trust. It’s a lot of other things that we seem to have gotten away from in the last 10 years.
Neff: But when we hit another bull market, if we do, the light will turn green again.
Pasternack: Oh, no doubt.
Roman: Let me give you a different word instead of “old-fashioned.” I see — and I don’t know if Tom or others see it — a trend toward people who are good operators. They can come in and assess the situation and get things done, and that’s highly respected. They want to make sure you’re on the right strategy, but the ability of people to execute is very important. And you don’t have to be charismatic to do it.