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Advice to the Boss --  On Boards
A corporate-governance expert discusses how far directors have come -- and how far they still have to go
By Phred Dvorak
Monday, April 16, 2007

When it comes to corporate governance, Richard Koppes has seen the issue from all sides.

The 60-year-old earned a reputation as a shareholder activist during the late 1980s and early 1990s, when he served as general counsel to the California Public Employees' Retirement System, the biggest public-pension fund in the U.S.  Mr. Koppes helped the fund push for more independence on boards, more respect for shareholders and curbs on executive pay -- at one time publishing a "target list" of overpaid, underperforming chief executives.

After leaving Calpers in 1996, he got a look at the challenges of good governance from the inside, as a director at Apria Healthcare Group Inc. and Valeant Pharmaceuticals International.

At Valeant, formerly ICN Pharmaceuticals, Mr. Koppes and fellow directors took former CEO Milan Panic to court in 2003 to recoup a $33 million bonus he'd paid himself after spinning off a unit.  They won the suit last year.

Now, as a lawyer and governance specialist at Jones Day in San Francisco, Mr. Koppes helps boards and management of companies like Pfizer Inc., Eastman Kodak Co., McDonald's Corp. and International Business Machines Corp. navigate a complex thicket of shareholder-rights issues.  Some recent ones:  "say on pay," where shareholders get an advisory vote on executive pay;  "majority voting," where directors are elected by a majority of votes cast, rather than a plurality;  and "proxy access," which would let shareholders put their own director candidates on the proxy ballot.

Mr. Koppes talked to The Wall Street Journal about what boards are doing right, what they still need work on, and the hot-button issue of executive pay.  Some excerpts follow:

Good News/Bad News

THE WALL STREET JOURNAL:  Where are we now in the struggle to make boards more responsive to shareholders?

MR. KOPPES:  The good news is that we've made a lot of progress in the 20 years that I've been involved with this.  Boards have become quite empowered in the past few years.  By and large, directors understand their roles, and are trying to do the right thing.  I think U.S. boards are, in some regards, ahead of many other boards in the world.

But as far as best practices in corporate governance, we're beginning to slip [behind some European countries].  The corporate-governance triangle is basically the board at the top, management on one side and shareholders on the other.  For many years [the relationship was] lopsided.  Ten years ago, management had pretty much all the power.  The dramatic change has been the empowerment of the board.  But as far as giving equal power or weight or respect to the third part of the triangle, which is the shareholders, we still have a ways to go.  We're still defining what the role and power of the shareholder will be, particularly the large, long-term owners.

WSJ: Why have boards become empowered?

MR. KOPPES:  I think it's a variety of factors.  Our country expects directors to do a better job.  At the same time, people who are on boards today understand that this is a job.  It's more than an honor.

That's why boards have complained about finding directors, because people say, "Well, it takes time.  I want to do a good job.  My reputation's at stake."  You get a lot more "no's."  But frankly it's a good challenge:  boards have to broaden their net [for candidates].  One thing that has kept a lot of people out of boards, including women and minorities, is prior board service.  It's a term I hate:  "Does the person have prior board service?  Have they been through the club?"  Well, the club needs to be expanded.

WSJ:  Can a board get too independent?

MR. KOPPES:  I think that it could go off on its own.  I'm not a fan of boards with large, independent staff.  I think that creates another bureaucracy that might war with the management bureaucracy.  But you should have good independent advisers and maybe some independent consultants.  "Too independent" might also mean that boards wander into micromanagement.  They start doing the job of management;  the audit committee chair starts doing the CFO's work.

WSJ:  It sounds like a tough balancing act:  Directors have to be more independent and assertive but shouldn't interfere with management of the company.

MR. KOPPES:  The strong, independent board, how it operates, and how it functions, is a fairly recent phenomenon that all sides are still [wrestling with].  Meanwhile, you've got the shareholders out there -- they want to run their own candidates, they want to have their own views;  they want to meet with the directors.  And the directors are going, "Oh my God."

WSJ:  Do you think the chairman of the board should be separate from the CEO?

MR. KOPPES:  I'm a strong supporter of independent chairs.  But more and more today, with the independence of boards and their empowerent, it almost doesn't make a difference.  One of the most powerful reforms has been the executive session [where independent directors meet] without the CEO.  The conversations are so different.

WSJ:  What are the burning governance issues?

MR. KOPPES:  Executive pay.  It's the biggest issue for boards right now:  how to get ahold of it properly, and how to deal with it in a responsible manner.  I also think that more and more boards and management understand that if they don't get ahold of this, then Congress will step in.  And no one wants that.

WSJ:  What makes executive pay so hard to deal with?

MR. KOPPES:  One, to get your arms around it in a responsible manner, and then to bring it under control if it needs to be brought under control, and to say "no" sometimes.

The boards I'm aware of are beginning to get their arms around it.  [The new SEC disclosure rule] is helping, because it's about laying out a tally sheet [that shows total compensation].  It's allowing boards to say, "We can't be embarrassed."  There's nothing like a little sunshine.

But as for saying "no" -- I'd say the jury's out.  It's so hard to withdraw certain things.  You can certainly prune back some of the perks and some of the things that are added.

It's hard because boards don't want to screw it up.  [If they're too strict on pay] they may have people leave.  And what happens if good managers leave and a company goes down?  That doesn't excuse directors from not acting.  But they want to do the right thing to retain, to recruit, to motivate.  Because in the end, you've got to have good management to run these companies.

The other thing is, frankly, we're still dealing with the old culture of not asking critical questions, of being too nice in the boardroom.  That is fading fairly fast, but it's still there.

WSJ:  What do you think of the move to let shareholders have an advisory vote on executive pay?

MR. KOPPES:  The issue is:  How do shareholders responsibly vote on that?  That's the key question, and that's what troubles me.  I know "say on pay" is very fashionable.  I know the U.K. does it.  I know a lot of my shareholder friends are in love with it.  But it makes me pause, because I'm not sure what kind of information and resources shareholders have.

The big shareholders like Calpers will have people that will [study companies' pay policies].  But there are a whole lot of institutions that just don't want to spend the money.  So they will default to [proxy advisers].  Or the smaller shareholders will just vote "no" because they don't like big salaries.  People say, "Well, it's only advisory."  But any board that gets over a 50% "no" vote [on their pay proposals] -- it'd be very difficult for them to ignore that.

WSJ:  So what is the appropriate role of shareholders in executive pay?

MR. KOPPES:  Electing good, independent directors and having an input in that.  I do support some kind of proxy access [for shareholders in nominating directors].  Or consultation with the shareholders on who should be on the board.  But beyond that, I think they ought to get out of the way.

There can be shareholder proposals saying, "We want pay to have a performance link."  That's fair.  But if shareholders start drawing up the plans or start indicating specific plans, I'm not sure that's their role.  If they don't like [what's going on], they should change the board.

In the U.K. and a number of countries overseas, [a minority of] shareholders can call a special meeting to throw the board out, or throw certain board members off.  That's a right that ought to exist here.

WSJ:  Do you think shareholders should push boards on social-responsibility issues?

MR. KOPPES:  Yes.  Environmental issues affect the bottom line, and how you're perceived as an employer.  You're going to see more and more boards moving into that area.  There are already companies that have public-policy committees or corporate-responsibility committees.  I see that as a growing role for the board, to hear the concerns of the shareholders, and then to work with management on these issues from the outside.

WSJ:  How can the board work better with shareholders on these things?

MR. KOPPES:  By not treating them as your enemy.  By talking to them, treating them as equals.  There's this view that anyone that asks a question or challenges is a bad guy.  There are a fair number of advisers to boards and management that are either the, "Let's go to war," type, or the Chicken Littles:  "The world is coming to an end if we let those people in."

No Hiding

WSJ:  What would you advise boards to do to reach out to shareholders?

MR. KOPPES:  Ask the larger shareholders, "Do you have any issues that you would like to talk to the board about?"  Stop hiding the director.

WSJ:  Any other advice?

MR. KOPPES:  Boards need to get comfortable on accepting differences of opinion in the boardroom.  Everything doesn't have to be a consensus.  Sometimes you'll have one or two votes against [the majority], and there's nothing wrong with that.  Obviously, if you've got a large minority of "no" votes, you've got to think about what you're doing.

WSJ:  How will boards know when they've gotten governance right?

MR. KOPPES:  When will this issue go away?  [Laughs.]  I'm sure many of my friends in corporate America think that they've had enough, and they want a breather.

It's a little Pollyannaish, but maybe when all three sides of the corporate-governance triangle are truly equal.  I think the board's there, management's really never had that problem of power.  I'm not sure we're there yet with the shareholders.  There's still work to be done.

--Ms. Dvorak is a staff reporter in The Wall Street Journal's San Francisco bureau.

Write to Phred Dvorak at