Multi-Industry Chief Compliance and Ethics Officers

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  The biggest compliance/risk issue -- and the toughestJan 27, 2012 8:09 AMNell Minow
  RE:The biggest compliance/risk issue -- and the toughestJan 27, 2012 10:07 AMDaniel Roach
  RE:The biggest compliance/risk issue -- and the toughestJan 27, 2012 3:18 PMJoseph Murphy
  RE:The biggest compliance/risk issue -- and the toughestJan 27, 2012 10:44 AMAdam Turteltaub
  RE:The biggest compliance/risk issue -- and the toughestJan 30, 2012 2:48 PMScott Killingsworth
 

1.
The biggest compliance/risk issue -- and the toughest
From: Nell Minow
To: Multi-Industry Chief Compliance and Ethics Officers
Posted: Jan 27, 2012 8:09 AM
Subject: The biggest compliance/risk issue -- and the toughest
Message:

I've saved the biggest compliance/risk issue for last because it exemplifies, influences, and even encompasses all the others.  It is not an exaggeration to say that executive compensation is the most significant indicator and the most significant driver of enterprise risk.


CEO compensation is a critical element of our evaluation of board effectiveness at GMI.  If the directors reward poor performance, that is what they will get.  The key factor in the financial meltdown was that everyone at every stage from the mortgage originators to the derivative traders to the regulators was paid passed on the quantity of transactions, not the quality of transactions.  The obvious consequence, as recognized only by the tiny group Michael Lewis wrote about in his brilliant book, The Big Short, was catastrophe. 


We just issued a report on the biggest severance packages of the post-2000 era, with 21 CEOs who received "walkaway" packages in excess of

$100 million. In total, the 21 CEOs received severance of almost $4 billion.  Some of these CEOs had outstanding records of creating shareholder value - for which they were generously rewarded.  Others "resigned" after failures or scandals.  I support golden parachutes in theory, to give executives incentives to pursue business arrangements that are good for shareholders but perhaps not as good for their own careers.  But these payments, including immediate vesting of options, cannot be justified. 


Regulators like the Fed and the FDIC are increasingly looking at the structure of incentive compensation as a risk factor and I believe that it will soon be as routine an element of security analysis as cash flows.  Companies that rely on compensation consultant-developed "peer group analysis" will have a higher cost of capital than those who recognize that every dollar spent on executive compensation must be assessed just like any other asset allocation, in terms of return on investment.  Compensation committee members who are associated with excessive compensation, especially those who are repeat offenders, will be targeted by shareholders.


As we begin the second year of "say on pay" proxy proposals, compensation committees can reduce their exposure to shareholder protest by being careful to avoid some forms of pay that are particularly troubling.  Pay plans that include the following are likely to be opposed by shareholders: a base of more than $1 million in salary, multiple cash incentives, pay that is all upside and little or no downside, too large of a gap between the CEO and the other named officers, gross-ups, corporate jet use, and more "all other" payments and perks, and metrics that are vague or overly discretionary.   



As I bring to a close my week as a guest, I would like to thank Adam Turteltaub and Eric Newman for their encouragement and support and the whole network for your hospitality, comments, and questions.  I hope you will stay in touch via Twitter @gmiratings and contact me any time I can be of help at nminow@gmiratngs.com 





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NellMinow
GMI
McLeanVA
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2.
RE:The biggest compliance/risk issue -- and the toughest
From: Daniel Roach
To: Multi-Industry Chief Compliance and Ethics Officers
Posted: Jan 27, 2012 10:07 AM
Subject: RE:The biggest compliance/risk issue -- and the toughest
Message:
Nell:

I first want to take the opportunity to thank your for your thoughtful comments during the past week.  We appreciate your contribution to this important forum.

I would also like to add that I agree with you on the importance of executive compensation and incentives.  It is my view that the biggest driver of behavior is incentive compensation.  For the past 11 years we have utilized a scorecard with 25 -30 objectively measurable compliance metrics (based on the FSGs and our biggest substantive risks) with our business unit leaders.  These objectives serve as a gate to the annual incentive compensation program.  If your business unit does not get a passing score on our complliance objectives, you as the business unit leader are not eligible for incentive compensation, no matter how you do on the plethora of financial, quality and other metrics that you have.  Since our compensation philosophy was heavily weighted toward performance and incentives, this approach has been a huge driver of behavor.

From a more global point of view, I believe that we could eliminate Sarbanes-Oxley, Dodd-Frank and a host of other laws if we simply enacted a law that required the 5 highest paid people in the organization to forfeit all compensation during the most recent 5 years that is in excess of the average compensation of all employees in the organization; if the organization had to restate its earnings in a negative way.  Senior leaders would be falling all over themselves to ensure that the books and records were accurate and that no one was manipulating earnings or engaged in fraud.  It may create an occasional unfair result, but no more unfair than the current system which places the burden on investors and pensioners who have the least control over what happens.

Thanks again for your comments and perspectives.

Have a great day and a better weekend!

Dan

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DanielRoachJD
VP Compliance & Audit
Dignity Health (formerly Catholic Healthcare West)
San FranciscoCA
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3.
RE:The biggest compliance/risk issue -- and the toughest
From: Joseph Murphy
To: Multi-Industry Chief Compliance and Ethics Officers
Posted: Jan 27, 2012 3:18 PM
Subject: RE:The biggest compliance/risk issue -- and the toughest
Message:
For anyone interested in the incentives issue, including the types of points Dan covered, there is a white paper that I wrote on that topic for SCCE:

Using Incentives in Your Compliance and Ethics Program, 

Cheers,  Joe 
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Joe Murphy CCEP
Of Counsel CSLG
HaddonfieldNJ
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4.
RE:The biggest compliance/risk issue -- and the toughest
From: Adam Turteltaub
To: Multi-Industry Chief Compliance and Ethics Officers
Posted: Jan 27, 2012 10:44 AM
Subject: RE:The biggest compliance/risk issue -- and the toughest
Message:
Nell, first thank you for all of your contributions over the past week, and over many years to the cause of good corporate governance.  You did a great job in furthering the discussion here.

Today's posting by you really resonates, especially given the fact that so many companies struggle with the issue of incentives for compliance and ethics.  The US Sentencing Guidelines call for incentives and penalties, and while companies are good at the latter, many still struggle with the former.  Dan Roach's organization is a notable and rare exception.

Dan, thanks again for sharing how your organization handles incentives.  Anyone else have a model they can share?


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Adam Turteltaub CCEP, CHC
SCCE/HCCA
VP of Membership Development
Encino CA
United States
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5.
RE:The biggest compliance/risk issue -- and the toughest
From: Scott Killingsworth
To: Multi-Industry Chief Compliance and Ethics Officers
Posted: Jan 30, 2012 2:48 PM
Subject: RE:The biggest compliance/risk issue -- and the toughest
Message:
 Anyone who's interested in this topic would benefit by watching this very engaging (but hard to find) video of a talk Ms. Minow gave at the 2011 GEL conference.  It includes some striking specific examples and a lot of common sense.  As a bonus, there are a couple of comments on movies at the end. 

http://gelconference.com/videos/2011/nell_minow/


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Scott Killingsworth
Partner
Bryan Cave LLP
Atlanta, GA
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