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erately invites strong-minded men to serve on his Board—who deliberately stimulates them to challenge him, to disagree with him, to make demands upon him. Yet only in this kind of atmosphere and with this type of relationship can be very best leadership and evaluation processes be developed and refined.

A strong Board amplifies in many ways the ability of the Chief Executive to deal with the fundamental business problems which affect company results. The Board's focus on corporate strategy, its interaction with the Chief Executive in performing its review role, the discipline that it encourages in corporate planning and decision making all work to strengthen the performance of the Chief Executive.

And of utmost importance, the Board member himself must insist that he be permitted to play his proper role. The Board member is increasingly accountable for his performance, and he should not be willing to serve on the Board of a company whose Chief Executive does not encourage his full participation in proper Board duties.

QUESTIONS AND ANSWERS-AFTERNOON Q. Mr. Barr, what key types of information should be provided directors so they can adequately perform their jobs ?

A. BARR. That, of course, goes right to the heart of why you have directors. Three companies I'm associated with have a letter from the President or a letter from the Chief Financial Officer which goes through the performance of the company, compares it with the prior year, and against the plan that's been established. Then the letter explains the variances between the prior year and planning. The letter also makes predictions for the balance of the year. This answers the basic questions: where the company is with relation to last year and with relation to planning, what is happening, what is being done about it, and what management sees coming up. In most large corporations, big capital budgets and capital expenditures are approved. Here one needs a close grasp of what the company is planning to do and should get into the question of capital budget, although in many instances big businesses get so technical that it's difficult to make a good input there. Of course, it is important to look closely at acquisitions.

Q. Mr. French, should the Chief Financial Officer be a member of the Board, or should be serve in an ex officio capacity ?

A. FRENCH. I see no reason for the Chief Financial Officer to be a member of the Board. Because he is part of the Chief Executive staff, he should participate in Board meetings whenever it's appropriate. But it's awfully hard for him to participate objectively in deliberations and decisions on matters which he is recommending to the Board.

Q. In your view, Mr. French, what it the director's responsibility to the employees of the company (as opposed to the shareholders)?

A. FRENCH. A company has a number of constituentsits shareholders, its employees, its customers, and so forth. Boards have an obligation to make sure that companies are run as good corporate citizens. No successful company is run long without good employee relations, a good employee benefit program, a good compensation package.

Q. Mr. Lewis, what do you feel is the minimum time commitment an outside director should be prepared to devote to the Board to fulfill his total responsibilities apart from the regular meetings?

A. LEWIS. It depends upon the size and complexity of the company. There's no way to determine whether one should spend six hours, ten hours, or a day, but it is important to satisfy yourself that you have a keen knowledge and understanding of the business and performance of the executives. If you don't have that much time, you ought to get off the Board.

Q. Mr. Barr, what is the difference in function between a “professional director" and an independent consultant employed in problem areas?

A. BARR. There's a vast difference. A consultant reports to the management, whereas a “professional director" is more responsible to shareholders, represents broader constituents, and works in areas that are functions of outside directors. | Q. Realizing that an important function of the Board is to evaluate the performance of the CEO, Mr. Barr, what are your thoughts about the CEO giving a regular performance review of the directors?

A. BARR. I think it's a good idea.

FRENCH. It's not done very often, but I think it's an excellent idea. Pillsbury has a committee where the Chief Executive gives an ongoing evaluation of the

Board's role as we do of his. As a matter of fact, that committee also evaluates what several of us are doing on other committees of the Board.

Q. Mr. Barr, how does one prevent direct lines of communication between second level executives and Board committees from becoming a forum for secondguessing management decisions?

A. BARR. Let's take the audit area. Management lay down policies, accounting standards and procedures; and it's the duty of the audit committee to make sure that those policies are observed and obeyed throughout the company. While the audit committee gets down very low in the management of the company, it is effectively assuring that the management policy is implemented. The one place where Board committees might second-guess management is where people down the line think there's something seriously wrong ... that there is management fraud some place. In that instance, staff needs an avenue open for it to report what it knows and wants to correct without being disciplined.

Q. Mr. Lewis, you have a truly unique Board and your relationship must be quite different than those of other Chief Executive Officers. Would you comment on your relationship with your Board?

A. LEWIS. The U.S. Railway Association is a special planning agency set up to deal in a very complex subject that affects the economy, shippers and consumers, and local communities. Without a Board that was representative of these groups, it could not do an effective job. It has been a good Board, a working Board. Its members have taken their duties and responsibilities very seriously, and they know they are dealing with a complex situation. We have been lucky to be able to keep out conflicts among the members.

BARR. I serve on a public corporation called Student Loan Market. It's an organization formed by the Government, chartered by Congress, to create a secondary market for guaranteed student loans. This is my first experience with a Board on which constituents are represented like they are on Mr. Lewis' Board. It's one of the best Boards I've ever been on, even though the pay is low and it violates all the rules.

LEWIS. One difference betwen our Board and the average Board is that we also get paid a nominal figure, three hundred dollars a meeting, but our Board meetings have been starting at 8:30 in the morning and going until 6:00, and they've been two and three days long.

Q. Mr. French, where serious moral, legal or business judgment conflicts arise in CEO-Board relationships, the simple solution is for the individual director to resign. This solution, however, is an abdication of the responsibility of the Board member to the stockholder. What other practical solution is there?

A. FRENCH. The only real solution is for the directors to discuss the problem among themselves. Usually there's a committee which could do this.

Q. How much should professional directors be paid?
A. FRENCH. Never enough.

HARMAN. Myles Mace isn't here, but he said most directors are paid too much for what they do, and not enough for the responsibilities they carry.

BARR. I think it's wrong to compensate these men on a per diem basis ; then you put them in the consultant category. I think they should be paid on an availability basis rather than a per diem basis.

LEWIB. It has to be some relationship to time. On an annual basis, you should be talking about compensation that would cause people who are quite senior and in business to be willing to go into the job. This would be talking about compensation that would run, if you were fully employed, well in excess of two-hundred thousand dollars.

HARMAN. It seems to me that a director who makes a contribution and who is experienced and as intelligent as the Chief Executive Officer ought to at least be paid the equivalent of the Chief Executive Officer on the day-to-day basis. So if the income of the Chief Executive Officer is roughly two hundred thousand dollars a year base, then why shouldn't the director be paid on the basis of two hundred days a year, a thousand dollars for the day.

BARR. I think that's high ; I don't think I'm worth that much.

FRENCH. Well, it's not a subject on which one can generalize. Of course, it depends on the size of the company. But one of the most significant ways to signify to people the importance attached to their being a director is the amount offered, I'd be inclined to agree with Mr. Harman as to the amount.

Q. This question is addressed to the panel. Outside of on-the job experience, how can today's director prepare to do a more effective job in the future?

A. FRENCH. There is not any way to prepare to be a director per se. But in structuring the makeup of its Board, a corporation should think seriously about the kinds of experience and talents it needs in the directors. Then, when those directors get to know the company, they can apply their frames of reference. The value of their input comes from knowledge of the company and their experience rather than anything they have done specifically to learn how to be a director.

LEWIS. You must have a degree of experience in business that qualifies you to make business judgments. I think it's desirable to have a good, critical, analytical mind and to have had the kind of experience in business that enables that mind to work out problems. The selection process should find people who are qualified to be directors. The most important thing directors do is to have the guts, but the sensitivity too, to handle themselves correctly so they won't be rubber stamps.

At the same time they shouldn't be oddballs and create more disturbance than they provide help in solving problems. It's important for Board members to get their minds above the operating level and at the Board level of policy. There are many things they can do; foremost, they can read about what corporate policy should be at the highest level. They can and should spend considerable time on strategy.

[Whereupon, a 2:02 p.m. the committee adjourned, to reconvene at the call of the Chair.]


MONDAY, JUNE 21, 1976


Washington, D.C. The committee met at 10:30 a.m., pursuant to recess, in room 6202, Dirksen Senate Office Building, Hon. Vance Hartke presiding.


Senator HARTKE. The committee will come to order.

Good morning. This is the fourth day in a series of hearings to explore the proper relationship between the Government and the corporation. These hearings are, in part, the result of recent revelations of improper corporate activities, including the well-publicized disclosures of questionable and illegal payments at home and abroad by U.S. corporations.

Thus, it is appropriate that we have three witnesses with us today who are very familiar with the control mechanisms available for preventing illegal or antisocial behavior by the major corporations. These witnesses will be addressing the primary question before the committee: What is the proper relationship between the Government and the corporation and how do we promote efficient economic production while curtailing illegal and antisocial activities?

Our second witness this morning, the Chairman of the SEC, is especially qualified to address this issue. The SEC has been instrumental in disclosing many of the questionable and illegal corporate practices that have focused so much attention upon the issues before us today, and Chairman Hills has not hesitated to pursue these inquiries or to seek additional remedies where existing laws are inadequate.

Our first witness this morning will be Prof. Christopher D. Stone, of the University of Southern California School of Law. STATEMENT OF CHRISTOPHER D. STONE, UNIVERSITY OF

SOUTHERN CALIFORNIA SCHOOL OF LAW Mr. STONE. I have already provided the staff with a copy of my prepared statement and I would just as soon hand those in.

Senator HARTKE. Your entire statement will appear in the record, sir.

Mr. STONE. I would like to make a few general statements and then make myself available for questioning.

First, I would like to make a few remarks placing these hearings in a very broad social and historical perspective. I am aware, from what

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