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is to emphasize that, while the board headed by its chairman, is responsible for company policies and performance, it has delegated to the company's executives, headed by the chief executive officer, responsibility for the detailed management of the corporation.
Most board members will be general directors. They are not employees of TI—although they may have been in the past--and must assume board duties—including membership on committees, chairmanship of committees, and optional additional activities in TI's interests—with a minimum time commitment of approximately 30 days per year.
While the basic time commitment for a general director is a minimum of approximately 30 days, depending upon need, availability, and interest, it could be 40, 60, 80, or in unusual circumstances, even more days. Compensation will vary accordingly.
Currently, there are nine general directors. Three were previously officers of the board and TI employees. They, as well as our former chairman, Pat Haggerty, retired as active employees under the retirement policy I will describe later, and were then elected general directors. One general director, Erik Jonsson, was a founder of TI in 1930 and retired as chairman of the board in 1966. The remaining four are outsiders in the conventional sense.
Officer of the board was formerly the title for general directors, but now it is reserved for a board member who is an employee other than chairman or president and who also devotes principal amounts of time to his duties as a director.
The other category is director. Ordinarily, there will not be more than two or three persons serving in this category. They are available for scheduled board meetings and activities and for limited committee duties. Such directors could be individuals with little or no previous TI association, but usually already will have an intimate knowledge from prior TI association. Directors in this category are expected to spend 15 days per year on TI business. This might be the case for a new director for a period of time long enough for him to arrange personal time commitments so he might later serve as a general director or during a period when a general director finds it necessary to reduce temporarily his time commitment. In other cases, a person might serve as a director in anticipation of his retirement from the board.
A primary consideration in selecting an individual as a general director, director, or officer of the board is his ability to bring to the board a dispassionate point of view. An individual whose working experience has been entirely outside of TI normally would have such a viewpoint toward TI and its operation. Although the general director, director, or officer of the board whose working experience has been largely within TI may be an objective individual, it is only reasonable to expect that his long experience in the TI culture, where personal commitment to goals is strongly emphasized-particularly goals he himself has helped to establish-would tend to develop some strong personal bias.
To assist such a board member to develop and maintain a more dispassionate perspective toward TI, the selection of an individual as a board member and his acceptance anticipate that he will enter into activities outside of TI which will supplement his experience in
TI in a meaningful way. Such activities should expose him to environments in which a diversity of viewpoints would be expressed, where the performance of individuals in quite different endeavors from TI's may require evaluation, and possibly where some of the approaches developed in TI might be tried and further evaluated.
A written statement of policy describes the functioning of the board and its committees. Among other things, it states that it is a basic policy of our board to organize the use of directors' time to insure that they are always adequately knowledgeable about TI plans, operations, and performance.
The activities of the board include attendance at monthly and special board meetings, attendance at corporation planning meetings, and occasional visits to TI plant and office locations. However, in determining the appropriate amount of time to be spent in such activities, careful organization is required.
TI's typical monthly board meeting lasts for a full day and begins with a discussion of the financial operations of major entities within the corporation compared to the plans which had been established for them and approved by the board.
In the period between board meetings, to assure a desired coupling, and flow of information between the board and the operating organization, TI expects most board members to attend at least some of the quarterly financial reviews. These are reviews of activities in and performance of product groups and are held quarterly by the appropriate operating organization. Attendance by directors at such reviews provides primarily the opportunity to become acquainted with TI key personnel, their operations, and the environments in which they must succeed. It also serves as a way for the board members who are members of committees to fulfill their responsibilities by asking that subjects be added to the quarterly financial review agenda where appropriate, such as reviewing results of capital expenditures authorized in a prior period.
An additional activity in which a general director may participate is serving as a director of one or more TI subsidiary corporations. Such service expresses the TI board's interest in the affairs of its subsidiaries and its concern about how subsidiary corporation activities may be viewed by various publics, including governments often in countries other than the United States-to which those subsidiaries are exposed.
In addition to the expected attendance at the strategic planning conference, which is held in the spring of each year and lasts 3 to 4 days, the directors are encouraged, and have received the full cooperation of the management, to discuss informality, outside the normal board or committee meeting, specific items of interest, such as product development, marketing or financial matters. Obviously, if this is carried to extremes, it can have a disrupting effect on the management, but it has been found in experimenting with the policy for the last 2 years that we have been able to achieve an appropriate balance from both sides which in turn has been a very useful and constructive interchange.
These techniques have been favorably utilized, particularly by two of our outside directors, who have characterized the techniques as the incentive to achieve a more detailed understanding of the company's business and its people.
Mr. SMITH. What I have been trying to say is that before, as you say, setbacks have taken place, there has been a lot of activity, a lot of evaluation, self-evaluation by individual boards, board members, that has been going on for some time.
These things move rather slowly. But my experience indicates that they are moving gradually toward improvement. And I am very hopeful that the voluntary effort will be successful.
I am also impressed in that context by the effort of the SEC starting in 1973 to promulgate guidelines for directors, and the abandonment of that effort during the chairmanship of Ray Garrett.
As he said at the time, in slightly paraphrased fashion, he said we are not trying to tell directors what to do in every circumstance in which he finds himself, but we are eager to tell them to take seriously what the law has in fact long required of them.
And I think this is the kind of spirit which I am hopeful is going to prevail.
Mr. CUNNINGHAM. You think the promulgation of rules or legislation in that spirit, general direction to the boards, rather than something very specific, is appropriate !
Mr. SMITH. I am sorry, I am not sure I understood your question.
Mr. CUNNINGHAM. You seem to be endorsing the SEC's efforts in this area.
Mr. SMITH. No; quite the contrary.
Mr. SMITH. I think that the effort to promulgate the guidelines failed because it was very difficult to specify each and every situation in which a director was going to find himself, and not being able to cover that, they felt that the individual director or the board should be correspondingly governed by the laws as they exist, and his own code of conduct.
Mr. CUNNINGHAM. Go ahead and continue with your testimony.
Mr. SMITH. In another context, one of the other outside directors said:
In other words, the full board of Texas Instruments becomes as deeply involved in all the affairs of the corporation as the normal corporate executive committee does. This is not a matter only of the time spent on corporate affairs, but in fact that the time is spent traversing all activities of the corporation,
The psychological rewards derived from the in-depth involvement permitted by service on the board are correspondingly great. Such rewards are quite apart from monetary compensation or professional enlightenment, but derive very directly from the feeling that one is a genuine part of the team and that one's comments and opinions are not merely respected but are sought out as essential ingredients in the formation of policy.
A very important aspect of board practices at Texas Instruments is the determination of the committees of the board and their staffing. Current committees are the objectives and policies committee, the compensation committee, the audit and finance committee, the shareholder relations committee, and by the administrative committee. Also, the board has appointed the trust review committee, which has both directors and nondirector management members.
The administrative committee, for example, was established to undertake those administrative activities deemed to be too time consuming for handling by the full board. It is, however, not in
One of these outside directors, commenting on his board experience, said: “I have always felt that my ideas were not only welcome but were continuously solicited. TI has changed the 'board's right to know into the directors' duty to know.”
The other said: “Perhaps the outstanding feature is that the main thrust of the board's work is not carried on through an executive committee, but through the work of the board itself.”
Senator HARTKE. That is a 5-minute warning on a vote which I have to go to the floor on. And I have some questions which I would ask counsel to ask you while I am gone. But basically what you are saying is that reformation is a reality here. Ultimately, the question is, Did that reformation occur on a voluntary basis, or did it occur because of recent revelations?
And how are we going to make sure that the corporations which are not so concerned with the public interest will make these same reforms and reflect greater public concern!
It is the old story again where you permit rotten apples to accumulate. We have gotten rid of most of the worms, but occasionally we get a bad one.
I will let you answer that for the record here. I have to go and vote. Mr. CUNNINGHAM. Why don't you proceed with an answer to that, Mr. Smith ?
Mr. SMITH. Shall I wait for the Senator to return?
Mr. CUNNINGHAM. He asked that you go ahead, because they are going to cut the hearings off at noon, unfortunately, and we have other witnesses.
Mr. SMITH. In the first place, the experience I have just described began, as I mentioned, in 1966, which was 10 years ago, and long before any of the revelations that have become public information in the last several months were even suspected.
Also on the basis of my own experience, and I think it represents a very valid cross section as a result of the participation that I described in various conferences and meetings and in individual meetings with representatives of other corporations who have been interested in the kind of thing that we have done, that there is a very strong move to reexamine critically the role of boards of directors in individual companies.
I think this is a very constructive thing, and I am very optimistic that out of it indeed will come some voluntary actions to improve individual boards and the Harvard study that I also mentioned, which is going to come out in various parts over the course of the next couple of years, I feel is going to make an important contribution to the learning on this subject, which will be helpful for all people who are involved in it.
Mr. CUNNINGHAM. As you know, there has been a tremendous conflict as to the role of the board as a political aspect of our society. I think the thrust of the Senator's question was what are we going to do about those companies who don't seek to reform themselves?
Texas Instruments obviously is taking significant steps to reevaluate and continually evaluate the role of its board of directors.
Gulf Oil, following the calamitous revelations that recently came forth, is also taking steps like that.
Do we have to wait for other companies to suffer setbacks before they will begin this reevaluation process ?
tended to be an executive committee in any sense of the term, and will not in any way act for the board. In fact, it has been decided that the conventional executive committee is not appropriate for Texas Instruments. Membership on the administrative committee includes the chairman of the board and those directors whose time commitments to board activities normally are in the 50-day-and-above category. While this normally will mean that most of the members will be those whose previous experience has been from within the company, it does not preclude the service by others whose experience has been with other organizations. A director serving in a category involving fewer days' service but whose interest or expertise is in the development of board concepts and administrative activities might also become a member of the committee. The existence of such a working group has been vitally important in the development of the statements of policy and guidelines for board operations such as those mentioned.
The charters of the individual committees are spelled out in detail, in writing, and approved by the full board before they are implemented.
The specific activities have three basic characteristics: (1) Those actions the committee would take for the board without specific prior approval of the board in an area prescribed for the committee or as approved by stockholders. A typical example is the granting of incentive awards and stock options by the compensation committee.
(2) Those areas in which the committee would review and study and then recommend action by the board. This could be one of a number of things, such as changes in dividend policy or major financing steps.
(3) Those areas in which the committee would act as the eyes of the board and, following a review or study, would inform the board. An example would be a review of changes in accounting policy proposed or adopted by organizations such as the FASB or the SEC.
Committee assignments and the functions of the individual committees are reviewed at least annually and provide an opportunity for change, if desirable. It also provides a review of the time which board members spend on board matters, and, in turn, the basis for determining their individual compensation. Currently, among the directors who are not officers of Texas Instruments, two have a commitment of 30 days; four of 40 days; one of 60 days; and two of 65 days.
One of the things which has attracted a great deal of attention recently has been the amount of staff support which is necessary or desirable for board members. I am sure that most of you are familiar with the proposals which have been made by Arthur Goldberg for setting up a separate, independent staff for board members presumably to permit the board to have an independent check on management. We have carefully reviewed the pros and cons of this whole subject, and feel that a very important principle is that adversary-type conditions should not be generated. We do not feel, therefore, that a separate staff for the board is at all necessary and have concluded that the only full-time staff available will be those individuals providing secretarial services. Recognizing that the greater expertise on most subjects concerning Texas Instruments is within the operating