Pass-Fail: Grading Corporate Directors By Stock Price

As News Corp plunges into yet another week of questions about its ethics and oversight, one of the issues being raised is why its board of directors did not act when the allegations of phone hacking and other improprieties first surfaced.

The answer, one surmises, is that the board was chosen precisely because it would not ask such uncomfortable questions.

Joann Lublin reports in the Wall Street Journal - News Corp newspaper - on research that demonstrates how causal statistical linkages can be established between certain directors and superlative financial results, especially those related to stock price. The implication is that if a board wants to add new members and improve its performance, there is a means for doing so. What it does require is that management not be afraid to accept the consequences of admitting board members who will not always support management's view - and who can be quite determined in doing so. The power of the 'get-along-go-along' culture on boards is well-established - but so is the pursuit of profits and the compensation tied to it. JL :

Faced with increasing pressure from shareholders to recruit higher caliber directors amid an uneven recovery, many corporate boards are asking: How do you identify the best candidates?

While there is no widely accepted and objective measure of director performance, one metric sometimes used reflects the idea that directors—like chief executives—should be evaluated on the stock performance of their companies. With that in mind, The Wall Street Journal asked GovernanceMetrics International to find the directors serving on the boards of at least two companies with the highest total shareholder return among the S&P 500 for the past five years.
The research and ratings firm turned up a dozen outside directors, mainly low-profile, retired executives with powerful board roles and reputations for challenging management. Three are former CEOs of public companies, such as Orin C. Smith, a prior head of Starbucks Corp., who is currently a director at Walt Disney Co. and Nike Inc.

Those who believe in the metric say directors can affect a company's shareholder return by playing critical roles in shaping strategy and management succession. A recent study of Fortune 500 directors by JamesDruryPartners LLC, which handles board and executive searches, uncovered a strong link "between the quality of business acumen in the boardroom and the stock performance of the company," says Jim Drury, who heads the firm.

On the strategy front, Mr. Smith played a key role in shaping Disney's new approach to its retail stores, according to John C. Pepper, Disney's lead independent director. In 2008, CEO Robert Iger sought directors' advice about whether to buy back the North American chain of Disney Stores from Children's Place Retail Stores Inc., spruce up sick outlets or maintain the status quo.

Mr. Smith had visited several rundown stores with weak product mixes. "I saw nothing but a downward spiral," he says. "We needed to get control."

Disney soon acquired about 220 Disney Stores and decided to close 100 others. In 2010, Disney Stores saw "a significant year-to-year increase in sales," a company spokeswoman says. The entertainment giant doesn't disclose revenue figures for its North American stores.

Mr. Smith commands Disney's audit committee. Nine of the other dozen directors also run key committees. Two also serve as a lead independent director. Those positions are "where boards put their best and brightest," says Stephen Davis, executive director of the Millstein Center for Corporate Governance and Performance at Yale School of Management.

Determining the Best
GovernanceMetrics looked for directors at companies that outperformed their rivals and the S&P 500 during the five years ended Dec. 31, a period that included the financial downturn. The list was limited to directors serving on the boards of at least two such companies.

At Becton, Dickinson & Co., director Alfred Sommer's overhaul of his board committee helped improve product development for the medical technology concern. The professor and former dean at Johns Hopkins University's school of public health is an epidemiologist and ophthalmologist.

In 2007, Dr. Sommer became head of Becton's corporate affairs panel, which monitored issues such as investor relations. He pushed hard to also oversee research because "the future of the company depended on R&D," he remembers. "I was being a pain in the neck."

Dr. Sommer succeeded in making research his panel's sole focus and renaming it the science, innovation and technology committee early last year. He requires the top brass to give panel members detailed updates six times a year about their most promising products under development. Becton CEO Ed Ludwig agrees, saying Dr. Sommer has made senior management "more innovative."

Since the revamped board committee began holding upper management more accountable, Becton has introduced several innovative modifications of existing products, according to Dr. Sommer

Some of the dozen directors have affected shareholder value without a committee chairmanship. H. Jay Sarles, a retired vice chairman Bank of America Corp. and banking-industry veteran, was a relatively new director of AvalonBay Communities Inc. in summer 2007 when he sounded the alarm about the looming slump.

Mr. Sarles says he repeatedly urged the real-estate investment trust to conserve cash. Other board members argued "there are still good opportunities in the real estate market," he recollects.

Chief Executive Bryce Blair says he heeded Mr. Sarles by "focusing on maintaining and even enhancing our liquidity." As a result, "we had the financial strength" to resume apartment construction in 2009 -- ahead of competitors. Mr. Sarles later became audit committee chairman.

Another director on the list is retired Coca-Cola Co. executive Carl Ware, who is on the board of Cummins Inc. Mr. Ware spent seven years running Coke's Africa operation, an experience that helped him open doors in the region for the maker of truck and machinery engines.

After pushing Cummins to expand its tiny presence in Africa, Mr. Ware accompanied executives on a 2005 trip there. "We met a lot of people in Nigeria and Angola"—including an ex-Coke bottler who became a joint venture partner, says Tom Linebarger, Cummins's president.

Mr. Ware helped Cummins executives realize some African countries were "really starting to boom,'' Mr. Linebarger says. In 2010, Africa accounted for about $264 million of its sales, compared with $13.2 billion world-wide. CEO Tim Solso has said he plans to quadruple sales in Africa to about $1 billion within five years. The company recently installed an executive in South Africa to oversee Africa operations, previously supervised from Europe and Indiana.

Not everyone agrees that returns are the best way to evaluate director performance. Because so many factors beyond directors' control drive shareholder value, some recruiters find the metric carries little weight in their board assignments. "There's more focus on getting people with strategic knowledge about the company" based on their business experience elsewhere, says Dennis Carey, a vice chairman of search firm Korn/Ferry International.

Naomi O. Seligman, a senior partner at an information-technology think-tank, is the only one on the list serving three concerns with top shareholder returns: Oracle Corp., Akamai Technologies Inc. and Dun & Bradstreet Corp. Ms. Seligman says she is often wooed to join additional boards. But no one asks whether her focus on corporate strategy contributed to shareholder value.

Shareholder value does sometimes come into play, according to Thomas G. Stemberg, a former CEO of Staples Inc. with five corporate directorships, including PetSmart Inc. and CarMax Inc. In seeking new directors, he says, those companies prefer individuals who have served on boards of businesses "that have been winners in terms of total shareholder return."

Not all of the 12 enjoy unblemished records. Vincent S. Tese and Frederick V. Salerno, directors at InterContinentalExchange Inc., have faced criticism for previously being board members of Bear Stearns Cos. The collapsed Wall Street powerhouse was sold in 2008.

Mr. Tese, who is also on the board of Cablevision Systems Corp., and Mr. Salerno encountered significant investor opposition to their 2011 and 2010 re-election at IntercontinentalExchange, where they lead committees. Proxy advisers Glass Lewis & Co. recommended their defeat over their Bear Stearns tenure. In proxy statements, the exchange operator says that experience enhanced their ICE qualifications.

"It's pretty difficult to blame [Bear Stearns] on the directors," says Mr. Tese, executive chairman of Bond Street Holdings Inc.

Mr. Salerno, a retired Verizon Communications Inc. executive with five public-company directorships including Akamai, believes boards keep him because he adds shareholder value. Bear Stearns "shouldn't be a scarlet letter for other boards."