Mr. Irvine Hockaday is on the boards of Ford Motor Company and Estee Lauder. He was the President and CEO of Hallmark from 1986 to 2001.
24/7 Wall St.’s Douglas McIntyre and Michael Sauter sat down with Mr. Hockaday at the NACD Directorship Forum: “Driving Boardroom Innovation” to discuss corporate governance.
24/7 Wall St.: There’s a practice which has been more criticized recently: Say that you are a director of a public company, and I come in and buy a large number of shares. I cut a deal where I get some board seats and the election of these new members is done by the board in mid-year. From a fiduciary standpoint, do you think that there’s anything wrong with breaking the annual nomination cycle that way and saying “we made a deal, we decided that these guys should come on the board.” The reason usually given is because the people who want the directors’ seats have a large piece of the company. The unstated reason is that they’ve forced the issue of control. From your standpoint, from a governance point of view, is that reasonable?
Hockaday: That’s an interesting question. My own view is that it’s not a good precedent to set, and therefore shouldn’t be agreed to unless the circumstances are unusually compelling. Normally what happens is an investor will accumulate shares and then come to you after they’ve been accumulated, is that what you’re talking about?
24/7: Yes. sometimes it’s an accumulation, sometimes it’s a threat of more accumulation. But in every case it’s leverage.
Hockaday: I would not… I’ve had a situation like that, and I would not acquiesce under threat. Now, one case is when I was on the Sprint board, there’s an investment outfit called Relational Investors. Ralph Whitworth was the top guy there. He accumulated a lot of shares of Sprint stock, and I was a director, We said he would have to go through the normal process with the nominating committee and be vetted, and, frankly, we would have to be satisfied that he wasn’t looking for special treatment. It’s also the case, from the investor point of view, that once this kind of outsider investors get on the board they are more constrained than they are when they are not on the board because they can’t trade on insider information. But, to be blackmailed or greenmailed into putting somebody on the board because they bought stock and therefore think they are entitled to be on the board, I’m not in favor of. One interesting question would be: the UAW owns a lot of GM stock, and so should they go to GM and say, ‘Well, we want more representation on your board, and should GM say ‘well, you’re a big shareholder. That’s OK? I would say that it is not OK in my opinion.
24/7 : On “Say on pay?” The government’s made a decision that shareholders have a right to vote on management compensation, For the public two things about the plan are odd. The first one is the fight over whether the shareholders vote on the issue every year or every three years. That seems misplaced because management gets paid every year. But the other issue is that the compensation vote is not binding. So what’s the point?
Hockaday: Yeah, well my guess is that the point is to give visibility–perhaps in Washington and perhaps with institutional shareholders who then can beat the drum about what they view as excessive pay. It becomes a public’s debate every year or every couple of years that shareholders want to say on executive pay. Typically they wouldn’t want a say unless they felt something was wrong with it. I think the shareholder vote on pay is just to create visibility. I don’t think it is yet a significant factor in compensation committees. I think compensation committees should do the appropriate thing, which is hard to define, regardless of what’s being said. I think there’s a tendency under pressure for boards to become … I don’t want to say “abdicate” … but become vulnerable to influence to get the heat off and less independent in doing what they think is the right thing.