Advice to the Boss --
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
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
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
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
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
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
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
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
WSJ: What would you advise boards to do to reach out
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
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