November 2022

I recently had an enlightening long distance conversation with Charles M. Elson, Lecturer in Law at Penn Carey Law, and the retired Edgar S. Woolard, Jr. Chair in Corporate Governance and the Founding Director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. Professor Elson has served as a director of Circon Corporation, Sunbeam Corporation, Nuevo Energy Company, the Investor Responsibility Center, Alderwoods Group, AutoZone, Bob Evans Farms, and Encompass Health.

He is presently a member of the Board of Directors of Enhabit Home Health and Hospice Corporation, and Blue Bell Creameries Inc.

Chris: Charles, you were a pioneer in the 1990’s for corporate directors having “skin in the game”. You practiced what you preached from your very first directorship to now. That said, do you have any refinements to your original thinking or to your best practices in terms of director engagement?

Charles: Well, I still think skin in the game is essential. Frankly, boards have changed dramatically in the last 30 years. Some of it is legal, obviously, some of it is societal… and I believe directors having an equity stake played a big role. I think when those are forced to invest their own funds and are paid significantly in company stock, they tend to align themselves better with the company. Overall, it makes you a better director.

Regarding my philosophy started in the 1990’s — I liked it then, and I like it today. When I first suggested it, I said that you ought to pay 100% in stock, I did not take into account the tax implications. Today, you see boards balancing it out, usually about 60% equity, 40% cash. The cash is there to pay the tax due on the equity. I do not want to see someone cash poor because they took equity. In other words, the goal is to get equity to them as their fee for being on a board and requiring that they invest their own equity in the company itself.

The goal at the end of the day is to have directors with significant equity positions in the company.

Chris: Charles, when a committee chair is at odds with the board chair, can you think of mechanisms or ways of achieving a closer collaboration between the two?

Charles: That’s an interesting question. Whether it is a committee chair or simply a member of the board who is having a difficulty with the chair — the board must work as a collaborative group. When you have a dysfunction, you need to resolve it one way or the other. Either you reach a compromise that everyone is happy with, or someone may choose to exit the board.

Chris: It is clearly one of the most difficult board issues to tackle whether it pertains to a disagreement or to an underperforming director. According to a myriad of well-known governance experts, it is not a quick process, and the fix is arduous.

Charles: Remember that only shareholders can remove directors. To me, the only thing you can do when a compromise can’t be achieved… you basically just do not renominate them. At some point, if it isn’t going to work, the relationship has to end. A board seat is not forever. It’s a fiduciary obligation and if you cannot deliver that obligation appropriately, then it’s time to do something else.

Chris: What skill sets does the next generation of directors need to bring to their boards?

Charles: A board is comprised of numerous individuals who each bring something different to the table. The advantaged board is one that has diversity, expertise, and talent. Companies are made up of lots of issues whether it’s marketing, finance, disclosure, et cetera. It’s always good to have board members with expertise in those different areas. To effectively evaluate the manager, you must have a number of skills represented on a board. I think that’s where we are evolving. Big picture, you’ve got to have wisdom and integrity, that never changes.

The Report of the NACD Blue Ribbon Commission on Director Professionalism in 1996 really laid it out quite well. That is, it detailed the skills that everyone should have and then the specialty skills. We said financial literacy is a skill that everyone should have — all board members should be able to look at a balance sheet, period, but there are different areas when you monitor management that you are going to need some substantive expertise. For example, IT has become obviously very big, which dovetails into how a board responds to cyber threats and technology disruptions, and how a board provides pertinent strategic insights in a highly electronic culture. Someone who understands that area and can also properly evaluate it — is a real catch.

Chris: From your vantage point, Charles, do you agree that the CEO today is more of a coach than steward?

Charles: That’s a tough one. I think it is a combination. That said, I think because of the governance movement that stewardship is more on the CEO’s mind than it would have been 40 years ago… and I mean stewardship of shareholder value. There was no accountability, single accountability back then. By the way, I think ESG is here to stay. 

ESG is here to stay, more or less, with a caveat for the need to keep focused on the bottom line. I have always disliked the term ESG. It ought to be GES. I think governance comes first, but governance comes last in today’s formulation. If you can get governance right, the other stuff falls into place. You may lose sight in the current environment of the fundamental point of the company, which in fact, is to produce a superior product at a fair price and to deliver a solid return for your investors. Stewardship is more important because of shareholder value. Ultimately, it is of great importance that you focus on your investors. You are a steward for their money. It is an incredible balancing act to be an effective coach and staunch steward of shareholder value.

Chris: What’s left on your governance bucket list?

Charles: I think there is one burning concern, and it has to do with dual-class stock. Dual-class stock must go the way of the dinosaur. The difficulty with it is that when you are voting, and your control is unrelated to your economic investment, bad things happen. You lose accountability. I think the growth of the dual-class company, particularly in the tech world, leads to really bad decision-making. The law must change to reflect that problem. The danger for the system is really going to be dual-class stock and the destruction of accountability. Again, the courts are going to have to recognize this problem. I believe you have to rule out dual-class stock for publicly held companies. For private companies, you can do anything you want. For a public company, it creates such an accountability problem that in the end, everyone suffers.

I mean there is a theory “let the genius do what the genius needs to do” but the genius will make mistakes just like anybody else. You need to have a good monitoring board, which you do not have in dual-class companies because the genius appoints them or sends them away or pays them a fortune so that they are really not monitors at all. We hopefully bang the drum against dual-class stock long & loud enough, and then you have the requisite disasters in the arena that you force the rethinking of it, certainly, on the legal side. In a dual-class company, there is no way to let the shareholder vote make any difference because it’s always controlled by the holder of the dual-class. If a shareholder does like the judgement of the holder, they can’t remove them. They are stuck. The holder’s control is so disproportionate to their economic power that all of the accountability factors are missing.

Ultimately and ideally, the courts are going to have to say — this form of stock should not exist in the public company arena.

Chris: Charles, are the courts getting close to your opinion on dual class stock?

Charles: I don’t know. The more times you have a dual-class failure, the more likely I think it will happen. It’s going to happen eventually… the institutions will get burned enough on these companies, and they will finally exert their will. In due course, it will come to the Delaware courts, the SEC, or Congress actually prohibiting those kinds of companies from trading on public exchanges.

Chris: Charles, thank you for always being so thoughtful and prescient.

 Charles M. Elson is Lecturer in Law at Penn Carey Law and is the retired Edgar S. Woolard, Jr. Chair in Corporate Governance and the Founding Director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. He is also of counsel to the law firm of Holland & Knight, and executive editor-at-large of Directors & Boards.

 Christopher Clark joined Stuart Levine & Associates as a senior consultant after a distinguished career at the National Association of Corporate Directors (NACD). He has over 30 years of entrepreneurial & corporate business experience. His expertise ranges across a broad variety of disciplines including corporate governance with board assessments as a cornerstone, leadership development, strategic communications, and digital content creation.