How would you empower board members to stand up to management?
You need a carrot and a stick. The stick was the year 2002, which scared the heck out of all of them. The carrot is good ratings and pay that reflects board members’ performance. I have always said that boards are like subatomic particles — they behave differently when they are being observed, and knowing they are being observed will make a difference [going forward]. I think too that we’ll see more turnover on boards in the next 2 years than we’ve seen in the last 10. People who are not comfortable asking tough questions are going to leave, and people who are not uncomfortable asking tough questions will be more willing to serve.
How much should directors be paid?
A lot more than they’re getting paid. Pay them more because we have very high expectations: we want them to devote at least two days of background work for every day they spend in a board meeting. If that amounts to three or four weeks out of the year, we should pay them a commensurate rate. That pay should be in stock, and we should require them to hold the stock for three years after leaving the company.
What about their own equity stakes?
The first thing you should do after agreeing to go on a board is to buy a lot of stock. What’s a lot depends on who you are. But the academic studies tend to show that if people have at least $100,000 invested in a company, it seems to affect the stock performance.
And what would you do as far as changing the mechanism of the nominating process for the board?
If I ruled the world, I would allow shareholders to nominate one or two candidates on the management’s proxy slate every year. But understanding that my idea would require some very big changes, my backup is a very independent nominating committee working with a search firm. Obviously, we don’t want anybody the CEO doesn’t feel he can get along with. But there’s a strong human impulse to dance with the one who brung you to the party, and I want the new directors to know that the one who brung them was the nominating committee and not the CEO.
Do you think this might be the year when we actually see shareholders demanding pay cuts for executives in nonperforming companies?
I think so, and I think companies that are out in front announcing pay cuts will get a lot of support from shareholders. I worry that we’re going to see less of a tie between pay and performance, because of the overall market slowdown.
Is there any ideal way of linking performance to pay?
No; it depends on the company — whether you’re talking about an emerging company or an established one. What’s important is for the compensation committee to state very clearly what its goals are and how this compensation is in furtherance of those goals. If they want to say that market share is their number-one goal, then by all means, pay the guy for market share. But if the main goal is increasing the dividend, then pay him for that. Just say what your goals are, and let me judge if that’s something I want to invest in.