board of directors

A company’s board of directors makes its strategic deci­sions, including hiring and terminating executives, direct­ing company policy, and considering proposals from outside investors or other companies to purchase or be purchased by the company. In the United States, a CORPORATION must have a board of directors elected by its SHAREHOLDERS, whose best interests the board of direc­tors is charged to represent. (Many nonprofit organiza­tions also have boards of directors providing similar functions to the organization but without responsibility to shareholders.)

A typical corporate board of directors creates at least three oversight committees: nominating, compensation, and audit. The nominating committee selects new candi­dates to be reviewed for positions on the board. The com­pensation committee determines the executive’ pay. The audit committee reviews reports from independent audit firms and internal audits. In addition, some boards of directors create a finance committee to oversee CAPITAL investment decisions.

A board of directors can be large or small. Most corpo­rate management specialists recommend that boards con­tain no more than 10 members. Larger boards allow for greater diversity but also slow decision making. Histori­cally most U.S. corporate board of directors did not aggres­sively assert the interests of shareholders but instead generally accepted the recommendations of management. In the 1990s critics, especially giant pension-fund man­agers TIAA-CREF and CALPERS challenged the status-quo “rubber stamping” by corporate boards.

The Council of Institutional Investors (CII), created in 1985, developed a set of standards for board accountabil­ity and has acted as a “watch dog” group that oversees practices by boards. The CII developed a detailed set of recommendations, including core policies, general princi­ples (shareholder rights, shareholder meeting rights, board accountability, and director and management compensa­tion for board of directors), and positions.

CORE POLICIES

Confidential ballots counted by independent tabulators should elect all directors annually.

At least two-thirds of a corporation’s directors should be independent. A director is deemed independent if his or her only non-trivial professional, familial or financial connection to the corporation, its chairman, CEO or any other executive officer is his or her directorship.

A corporation should disclose information necessary for shareholders to determine whether each director qualifies as independent.

Companies should have audit, nominating and com­pensation committees. All members of these commit­tees should be independent. The board (rather than the CEO) should appoint committee chairs and members. Committees should have the opportunity to select their own service providers.

A majority vote of common shares outstanding should be required to approve major corporate decisions con­cerning the sale or pledge of corporate assets, which would have a material effect on shareholder value.

GENERAL PRINCIPALS

A. SHAREHOLDER VOTING RIGHTS

1. Each share of COMMON STOCK, regardless of class, should have one vote. Corporations should not have classes of common stock with disparate voting rights.

2. Shareholders should be allowed to vote on unrelated issues individually. Individual voting issues, particu­larly those amending a company’s charter, BYLAWS,or anti-takeover provisions, should not be bundled.

3. A majority vote of common shares outstanding should be sufficient to amend company bylaws or take other action requiring or receiving a shareholder vote.

4. Broker non-votes and abstentions should be counted only for purposes of a quorum.

5. A majority vote of common shares outstanding should be required to approve major corporate decisions including:

a. the corporation’s acquiring, other than by TENDER OFFER to all shareholders, 5 percent or more of its common shares at above-market prices;

b. provisions commonly known as shareholder rights plans, or poison pills;

c. abridging or limiting the rights of common shares;

d. permitting or granting any executive or employee of the corporation upon termination of EMPLOYMENT, any amount in excess of two times that person’s average annual compensation for the previous three years; and

e. provisions resulting in the issuance of debt to a degree that would excessively LEVERAGE the company and imperil the long-term viability of the corporation.

6. Shareholders should have the opportunity to vote on all equity-based compensation plans that include any director or executive officer of the company.

B. SHAREHOLDER MEETING RIGHTS

Corporations should make shareholders’ expense and convenience primary criteria when selecting the time and location of shareholder meetings.

Appropriate notice of shareholder meetings, including notice concerning any change in meeting date, time, place or shareholder action, should be given to share­holders in a manner and within time frames that will ensure that shareholders have a reasonable opportunity to exercise their franchise.

All directors should attend the annual shareholders’ meeting and be available, when requested by the chair, to answer shareholder questions.

Polls should remain open at shareholder meetings until all agenda items have been discussed and shareholders have had an opportunity to ask and receive answers to questions concerning them.

Companies should not adjourn a meeting for the pur­pose of soliciting more votes to enable management to prevail on a voting item.

Companies should hold shareholder meetings by remote communication (so-called electronic or “cyber” meetings) only as a supplement to traditional in-person shareholder meetings, not as a substitute.

Shareholders’ rights to call a special meeting or act by written consent should not be eliminated or abridged without the approval of the shareholders.

Corporations should not deny shareholders the right to call a special meeting if such a right is guaranteed or permitted by state law and the corporation’s articles of INCORPORATION.

C. BOARD ACCOUNTABILITY TO SHAREHOLDERS

Corporations and/or states should not give former directors who have left office (so-called “continuing directors”) the power to take action on behalf of the corporation.

Boards should review the performance and qualifica­tions of any director from whom at least 10 percent of the votes cast are withheld.

Boards should take actions recommended in share­holder proposals that receive a majority of votes cast for and against.

Directors should respond to communications from share­holders and should seek shareholder views on important governance, management and performance matters.

Companies should disclose individual director atten­dance figures for board and committee meetings.

D. DIRECTOR AND MANAGEMENT COMPENSATION

1. Annual approval of at least a majority of a corporation’s independent directors should be required for the CEO’s compensation, including any bonus, severance, equity-based, and/or extraordinary payment.

2. Absent unusual and compelling circumstances, all directors should own company common stock, in addi­tion to any OPTIONS and unvested shares granted by the company.

3. Directors should be compensated only in cash or stock, with the majority of the compensation in stock.

4. Boards should award CHIEF EXECUTIVE OFFICERs no more than one form of equity-based compensation.

5. Unless submitted to shareholders for approval, no “underwater” options should be re-priced or replaced, and no discount options should be awarded. (Under­water means option prices below the current market price of the company’s stock.)

6. Change-in-control provisions in compensation plans and compensation agreements should be “double-triggered,” stipulating that compensation is payable only

(1) after a control change actually takes place and

(2) if a covered executive’s job is terminated as a result of the control change.

7. Companies should disclose in the annual PROXY state­ment whether they have rescinded and re-granted options exercised by executive officers during the prior year or if executive officers have hedged (by buying puts and selling calls or employing other risk-minimizing techniques) shares awarded as stock-based incentive or acquired through options granted by the company.

COUNCIL OF INSTITUTIONAL INVESTORS POSITIONS

A. BOARD SHAREHOLDER ACCOUNTABILITY

Shareholders’ right to vote is inviolate and should not be abridged.

CORPORATE GOVERNANCE structures and practices should protect and enhance accountability to, and equal finan­cial treatment of, shareholders.

Shareholders should have meaningful ability to partici­pate in the major fundamental decisions that affect cor­porate viability.

Shareholders should have meaningful opportunities to suggest or nominate director candidates.

Shareholders should have meaningful opportunities to suggest processes and criteria for director selection and evaluation.

Directors should own a meaningful position in company common stock, appropriate to their personal circumstances.

Absent compelling and stated reasons, directors who attend fewer than 75 percent of board and board-committee meetings for two consecutive years should not be renominated.

Boards should evaluate themselves and their individual members on a regular basis.

B. BOARD SIZE AND SERVICE

A board should neither be too small to maintain the needed expertise and independence, nor too large to be efficiently functional. Absent compelling, unusual cir­cumstances, a board should have no fewer than 5 and no more than 15 members.

Companies should set and publish guidelines specify­ing on how many other boards their directors may serve. Absent unusual or specified circumstances, directors with full-time jobs should not serve on more than two other boards.

C. BOARD MEETINGS AND OPERATIONS

Directors should be provided meaningful information in a timely manner prior to board meetings. Directors should be allowed reasonable access to management to discuss board issues.

Directors should be allowed to place items on board agendas.

Directors should receive training from independent sources on their fiduciary responsibilities and liabilities.

The board should hold regularly scheduled executive sessions without the CEO or staff present.

If the CEO is chairman, a contact director should be specified for directors wishing to discuss issues or add agenda items that are not appropriately or best for­warded to the chair/CEO.

The board should approve and maintain a CEO succes­sion plan.

D. COMPENSATION

Pay for directors and managers should be indexed to peer or market groups, absent unusual and specified reasons for not doing so.

An important issue in governance of a board of directors is whether the board member is independent or not. The CII defines an independent director as someone whose only nontrivial professional, familial, or financial connection to

the corporation, its chairman, CEO, or any other executive officer is his or her directorship. The CII’s position on inde­pendent directors is based on the problems of conflicts of interest for board members who are also managers; and interlocking directorships, where board members represent the interests of shareholders for different corporations.

Baldrige Award

The Baldrige Award—formally known as Malcolm Baldrige National Quality Award—is an annual award designed to recognize quality management. It was created in 1987 and named after former Secretary of Commerce Malcolm Baldrige, who had died in a rodeo accident that year. Dur­ing the 1980s the United States was perceived as not hav­ing products that could compete in world markets. U.S. products, symbolized by U.S. automobiles, were consid­ered to be not “world class.” As Secretary of Commerce, Malcolm Baldrige had led efforts to improve quality and productivity in U.S. industries.

The National Institute of Standards and Technology (NIST), part of the Department of Commerce, manages the Baldrige Award, criteria for which include

leadership STRATEGIC PLANNING

customer and market focus

information and analysis

human resource focus

process management

business results

Companies submit applications for the award and are evaluated by an independent Board of Examiners. Early recipients of the Baldrige Award have included Motorola Inc., Westinghouse Electric, Xerox, and Milliken & Co. Because of the public recognition associated with the Baldrige Award, some companies hire consultants and spend considerable sums attempting to win this symbol of quality. Winners often use the fact that their company won the award as part of their ADVERTISING efforts.

Winners are expected to share their organization’s per­formance strategies and methods. Some state and local organizations have also created Baldrige Award competi­tions. The award is in some ways similar to Japan’s Dem­ing Award, named after American statistician W. Edwards Deming, who led in the development of TOTAL QUALITY MANAGEMENT (TQM) strategies in Japan during the 1950s and 1960s.

Business cycles

Business cycles are the patterns of increase and decreases in GROSS DOMESTIC PRODUCT (GDP) that occur in an econ­omy. Most countries’ economies have tended to grow over time, but within the trend of overall growth there have been periods of expansion, peaks, contractions, and troughs, followed again by expansion. The movement of an economy through periods of expansion and contraction is called a business cycle.

In the United States the longest period of economic expansion began with a trough in the first quarter of 1991 and continued until 2001. Since 1929 there have been 12 RECESSIONs, or periods of economic contraction. During the 1930 election, President Herbert Hoover claimed the country was not in a recession, just a mild depression. Since then a severe and prolonged recession has been called a depression. The longest period of recession in U.S. history, the GREAT DEPRESSION, lasted from 1929 to 1934. One saying suggested the distinction between a recession and a depression was that “in a recession your neighbor is unemployed; in a depression, you are too!”

During the Great Depression, GDP declined by one-third and UNEMPLOYMENT rose to 25 percent. Economists continue to analyze and debate the causes of the Great Depression and the causes of business cycles. Changes from economic expansion to contraction are caused by shifts in aggregate DEMAND, aggregate SUPPLY, or combina­tions of both. Changes in business INVESTMENT, CONSUMP­TION spending, government purchases, fluctuations in EXPORTING, and IMPORTS, and changes in a country’s MONEY SUPPLY all impact overall demand and supply in an econ­omy. Discovery of new resources, wars, political upheavals, technological innovation, immigration, and population growth have all been suggested as factors contributing to business cycles. In the 19th century, sunspot cycles were suggested to have been similar to business cycles.

Economists try to predict business cycles. If businesses can anticipate changes in the economy, they can prepare for expansion and contractions in economic activity. If governments can anticipate changes in the economy, they can intervene with fiscal and MONETARY POLICY changes to reduce the severity of business cycle troughs and to sustain periods of economic expansion.

Economists use leading INDICATORS to predict changes in business cycles. Leading indicators, as the term suggests, shift in advance of changes in the economy. Changes in unemployment claims, stock prices, new plant and equip­ment expenditures, new building permits, and consumer expectations all tend to precede changes in economic out­put. Leading indicators are less than perfect predictors of business cycles, leaving business managers and policy makers uncertain about future changes in the economy.

boycotts

Boycotts are organized attempts to influence a company, organization, or government through refusal to patronize a business or other group. Boycotts are frequently used to affect business practices. Sometimes boycotts are organ­ized to challenge labor or environmental issues; other times they are used to sway social practices or policies.

In the United States, possibly the most famous boycott was organized by the United Farm Workers (UFW). Dur­ing the 1960s, 1970s, and 1980s, led by charismatic UFW President Cesar Chavez, the UFW asked American con­sumers to not purchase table grapes, claiming unfair labor practices and poor working conditions by grape farmers. By 1975 an estimated 17 million Americans had stopped buying grapes. In another agricultural boycott, the UFW used a DIRECT MAIL campaign asking consumers to boycott Lucky Supermarkets because they were buying nonunion lettuce. The campaign targeted ethnic neighborhoods, areas with high agricultural EMPLOYMENT, and liberal, mid­dle and high-income groups. After nine months Lucky agreed to stop buying nonunion lettuce but claimed the decision had nothing to do with the boycott.

Peace and environmental groups have often attempted to use boycotts to influence government policy. In 1990 Neighbor to Neighbor initiated a boycott of Folgers coffee, a Proctor and Gamble product, accusing P&G of prolong­ing the El Salvadoran civil war by buying Salvadoran coffee beans. The campaign brought attention to the plight of El Salvadorans but was actively opposed by the Bush Administration. (The war ended when the Clinton Admin­istration withdrew financial support for the El Salvadoran military.) Similarly, American and other activists have long supported a boycott of Burma (now called Myanmar) because of its military rule and abuse of human rights. In 1995 U.S. environmental groups organized a short-lived protest of French products in reaction to France’s nuclear tests in the South Pacific.

Boycotts are also used to influence social and political policies. The Boston Tea Party was one of America’s first boycotts. Similarly, one of the hallmarks of the civil rights era was the 1950s boycott of buses in Montgomery, Alabama. The boycott of South Africa in the 1980s dis­played the power of economic sanctions to influence social policies. As one author states, “Boycott. It’s not blackmail. It’s not censorship. What it is is capitalism. A boycott, after all, is merely a way to vote with our wallets.”

In 1994 the National Organization of Women organized a boycott against orange juice when the Florida Citrus Commission decided to advertise on conservative Rush Limbaugh’s talk show. Limbaugh supporters countered by increasing their purchases of orange juice. In 1996 Jesse Jackson threatened a boycott of Texaco stores in an effort to pressure Texaco to settle a racial discrimination suit. The next year Southern Baptists attempted to dissuade the Disney corporation from its gay-friendly employment poli­cies by declaring a boycott against the company. In 1999 the NAACP organized a boycott of tourism in South Car­olina because the state continued to fly the Confederate flag over its state capital. The National Collegiate Athletic Association (NCAA) joined the boycott, refusing to bring collegiate athletic events to the state. Removal of the flag from the capital to a place on the capital grounds appeased some groups, but others continue to boycott the state.