Corporate Disclosure, Corporate Behavior, and Mirror Image Boards

The heat is on, so to speak, with respect to global warming and corporate behavior. Environmental groups have already petitioned the Commission for improved disclosure requirements. The topic is making increased appearances in the realm of shareholder proposals. On Halloween, the Securities Subcommittee of the Senate Finance Committee held a hearing on the topic. Particularly as the written testimony from Jeff Smith, Partner in Charge of Environmental Practice, Cravath, Swaine, and Moore, indicated, the issue of crafting appropriate disclosure obligations is a complicated one.

We have noted this issue before. In particular, Exxon-Mobile has been under heavy pressure from activists to take steps designed to reduce green house gasses. The Company has apparently fought these efforts, a rational position perhaps but not without its public relation difficulties.  As we discussed in a post here and as the article in the New York Times noted:

• The exception, as Daly notes, is ExxonMobil. For years the company denied that global climate change was occurring. According to a Greenpeace report in May, ExxonMobil funnels more than $2 million a year to groups that dispute the reality of global warming. The company’s current C.E.O., Rex Tillerson, made headlines in February when he admitted that the risks from climate change “could prove to be significant,” but he continues to emphasize the uncertainty of the science. In May he said: “I know people like to boil it down to something very simple — the polar ice caps are melting, the planet is seven-tenths of a degree centigrade warmer. It’s really not that simple of an equation.” And while BP, Shell and ConocoPhillips have joined the United States Climate Action Partnership, which is lobbying for mandatory carbon limits, and are investing in renewable energy sources like wind, solar and biofuels, ExxonMobil remains coy about which, if any, carbon constraints it would support and has stated unequivocally that the company will not be putting money into renewables.

We write not to debate the wisdom of global warming but to wonder whether any of the apparent tone deaf handling of this problem could be explained in part by the board of directors. A CEO can benefit from a smart board that provides alternative view points and asks tough questions.  We are not talking about a board that will substitute its judgment for the CEOs, but one that will help a CEO come to the right conclusion.  A rubber stamp board that parrots back may be easy to handle but will provide little or no actual help to the CEO.  

The board of Exxon Mobile appears entirely undiverse.  There are 12 directors, two from Exxon, including the CEO, Rex W. Tillerson. Tillerson, in the typical US fashion, also serves as the Chairman. What is the likelihood that the board of Exxon will be helpful to the CEO and provide alternative viewpoints?  Of the remaining ten directors, it contains two professors:

• Michael J. Boskin (61), T.M. Friedman Professor of Economics and Senior Fellow, Hoover Institution, Stanford University, who also sits on three other public company boards, Oracle Corporation; Shinsei Bank; Vodafone

• William W. George (64), Professor of Management Practice, Harvard University, and former CEO of Medtronic, who also sits on the board of two public companies, Goldman Sachs; Novartis AG

In addition, the other eight directors include:

• James R. Houghton (71), the Non-Executive Chairman of the Board, Corning Incorporated, and former CEO of Corning, who also sits on the boards of two public companies: Corning Incorporated; MetLife

• William R. Howell (71), Chairman Emeritus, J.C. Penney Company, former CEO of J.C. Penny and on the board of American Electric Power; Halliburton; Pfizer; Williams; Deutsche Bank Trust Corporation and Deutsche Bank Trust Company Americas (non-public, wholly owned subsidiaries of Deutsche Bank AG)

• Reatha Clark King (69), Former Chairman, Board of Trustees, General Mills Foundation, former President and Executive Director, General Mills Foundation, and Vice President, General Mills. She also sits on the board of Lenox Group.

• Philip E. Lippincott (71), retired Chairman of the Board and Chief Executive Officer, Scott Paper Company; and retired Chairman of the Board, Campbell Soup Company. He sits on the board of Campbell Soup Company; Penn Mutual Life Insurance Company.

• Marilyn Carlson Nelson (69), Chairman of the Board and Chief Executive Officer, Carlson Companies, and sits on the board of Carlson Companies.

• Samuel J. Palmisano (55), Chairman of the Board, President, and Chief Executive Officer, IBM Corporation, and sits on the board of IBM Corporation.

• Steven S Reinemund (59), Former chairman and CEO of PepsiCo, and sits on the board of Johnson & Johnson

• Walter V. Shipley (71), former Chairman and CEO of Chase Manhattan and sits on the board of Verizon Communications; Wyeth

Of the ten independent directors, therefore, we have two current CEOs, six former CEOs, one former vice president and a fellow at the Hoover Institute. Moreover, every one of the directors sits on the boards of other public companies. The age range is 55 to 71, with most in their 60s and 70s. Three of the directors have served on the board for more than 15 years. And, for their efforts, they are paid handsomely. Their compensation in 2006 was:

M.J. Boskin														341,126
W.W. George														518,793
J.R. Houghton														349,934
W.R. Howell														372,567
R.C. King														347,839
P.E. Lippincott														337,030
H.A. McKinnell														336,314
M.C. Nelson														337,030
S.J. Palmisano														583,924
W.V. Shipley														344,030

What can we conclude about this?  We impugn none of these directors.  All have obviously had highly successful careers and a wealth of experience.  Mostly we note the utter lack of diverse view points on the board.

The Exxon board is, like most in the public arena, almost entirely men (somewhere around 15% of public company  directors are women) and mostly the same age.  They by and large came directly from (or are still in) the corporate America.  Many ran their company before the era of shareholder activism and at a time when environmental issues received less attention.  All of them sit on other boards, something that might be impaired by a more aggressive stance towards management. 

In other words, the board is largely a mirror image of the CEO.  This suggests that when the CEO of Exxon Mobile consults with his board, he does not get a very diverse viewpoint in response.  When the subject of global warming comes up, one suspects he's more likely to get sympathy than hard questioning.  One can imagine that this is exactly what most CEOs want.  After all, they made it to the top of the company.  They really don't want to be second guessed or grilled.  But in truth, in a complicated and rapidly changing world, they need the different view points. 

Comments

[Stephen "Professor" Bainbridge]

OTOH, I firmly believe that many boards have become more independent and that CEOs today are less likely to “get sympathy than hard questioning.” OTOH, I remain unconvinced that board diversity makes much difference on that score. Interestingly, on the same day I read your post, I also read a new study by Danish business professor Caspar Rose, who reports that:

"Board diversity has become a major issue within corporate governance where a number of studies seek to explore the impact of diversity on firm performance. The debate focuses on questions such as whether a corporations board should reflect the firms stakeholders or be more in line with society in general. This article uses a sample of listed Danish firms during the period of 1998-2001 in a cross sectional analysis. Despite that fact that Denmark has gone very far in the liberalisation of women, Danish board rooms are still to a large extent dominated by men. Contrary to a number of other studies, this article does not find any significant link between firm performance as measured by Tobin’s Q and female board representation. This is also the case for board members’ educational background as well as the proportion of foreigners. It is argued that board members with an unconventional background are socialised unconsciously adopting the ideas of the majority of conventional board members, which entails that a potential performance effect does not materialise"

As the abstract of Rose’s paper acknowledges, there are findings to the contrary. I’m inclined to think Rose’s findings deserve some considerable weight, however. In the first place, his conclusion resonates with my research suggesting that cooperation norms and other socialization factors play a big part in board of director decision making. In the second, his findings are also consistent with evidence (recounted in this article) that diversity makes production teams less effective.

One thing that seems clear is that we need more unbiased research on the impact of diversity on the quality of board decision making.