November/December 2024

Chris Clark interviews leading corporate directors and governance experts for Stuart Levine & Associates, a global consulting and leadership development company. The Planet Governance™ interview series features the views of corporate directors, chief executives, and governance experts on issues from succession planning to executive compensation to stakeholder communications. This edition of Planet Governance is based on a series of conversations that took place in October.

Jane Sadowsky has been an independent director on corporate and non-profit boards for over a decade. She is a director of Allied Gold, Nexa Resources, and Scientific Games. She retired from a career as an investment banker as a Senior Managing Director focused on the power & utility space. She is currently a Senior Advisor at Moelis & Co. Sadowsky, a NACD “Directorship 100” recipient, and served as a Commissioner on the NACD’s 2023 BRC report on Corporate Culture.  She is a lifelong learner, published writer, and frequent speaker, moderator, and panelist on a wide variety of governance and adjacent topics.

Chris: Is there anything about your board service that has been unexpected for you?

Jane: Thank you for that question and thank you for the opportunity. I think a lot about the intersection between board independence and the relationships that form with your fellow board members and leadership teams and how I’ve changed as a board member in the decade since I joined my first board. At that point, I was an “outside insider.” I joined the board via a search firm, so I knew nobody, but I had a seat at the table, so I had that voice.

At this point, having served on a few boards for years, I strive to maintain the disposition of an inside outsider, meaning I’m a known quantity to others in the room and value the sense of trust and respect but work hard not to let group think or lazy think interfere with my perspectives. I deliberately work at thinking from an outsider’s perspective to bring that freshness to the board. I don’t want to fall into the trap of collegiality and letting things slide because we know each other well.

On the other hand, I do respect and value the fact that you build relationships. I think it enables you to understand the people and where they’re coming from, so you get a sense of people’s strengths and weaknesses, their hot buttons, what they’re passionate about, and what they want to convey, and having that sense of everybody in the room, can be utilized to make better decisions.

Chris:  Do you think that after a certain number of years, despite someone’s best efforts, it’s almost impossible to be an inside outsider?

Jane: I hate to paint anything with a broad brush and say no director can maintain their independence after, say, what the UK says after nine years. I think everything is very case-dependent, and you have to balance legacy knowledge and history with the company, with its issues, and the why of decisions that were made, not the that. This decision was made, but why? What led up to it? What were the pros and cons? What did we think of after? Having that perspective is important.

I do get that having some guidelines in terms of board refreshment is important, but again, to be very didactic and say nine years and you’re out, I don’t think inures to the benefit of the stakeholders.

Chris: Looking ahead, what is your view on the current state of DEI?

Jane: Interestingly, I get an email called Director Moves every week. Since January 1, 2024, when looking at all boards under $5 billion in market cap, 159 men have been appointed versus 59 women. For greater than $5 billion market cap, that switches. 71 women have been appointed, and 57 men.

For so many reasons, diversity of all types does matter. It’s discouraging to me to see some major brand name U.S. companies backing away from all their commitments to diversity due to, for example, social media campaigns. In these cases, I wonder how the board deliberated on completely backing down instead of, for example, affirmatively stating the importance of diversity to their companies, their business model, and the value that diversity adds to their stakeholders.

At the 2024 Annual NACD Summit (October 6-9, 2024), the E.L.F. Beauty CEO, Tarang Amin, spoke on the topic as his company released a report on diversity called “Changing the Board Game, The Not-So-White Paper,” which takes a fresh and fact-based approach to why diversity in the C-suite and the board matters. ( www.elfbeauty.com/changing-the-board-game/not-so-white-paper )

Chris: I doubt much surprises you, Jane, but is there anything about the CEO succession planning process that you didn’t see coming?

Jane: Nobody gets it right, or very few people get it right. If you look at the number of board members who become interim CEOs and the number of interim CEOs, it seems as if succession planning for the CEO fails more than it succeeds. When I look at the landscape, I focus on examples of, on the one hand, the entrenchment of CEOs and why that happens. You’ve got somebody who has underperformed on many measures for quarter after quarter, year after year, and they’re still there. On the other hand, CEOs just walk away when the going gets tough. The discussions behind all of those things should be top of mind.

Recent terms and conditions that CEOs are requesting to become the CEO would have been unthinkable just a few years ago and unthinkable today for anybody but the CEO. If you read recent articles in the business sections of national papers, they’ve spotlighted this. There’s one CEO who was disappointed with his $38 million payday because somebody else got more, and another who required the ability to work remotely entirely before accepting the job to be CEO when he had a workforce that had to show up in the office.

The tendency and the increasing thought that we have this system of star CEOs for whom the world is not enough may impact performance, morale, and corporate culture.

Chris: The succession planning process had better be continuous and constant.

Jane: Yes, that’s an excellent point. The tenure of a U.S. CEO has been trending downward over the years. Now, it is about five to seven years. The tenure of a board member in the U.S. has been trending upward. It’s now about 8 to 10 years. Every board member is going to have to deal with this succession challenge.

James Gorman who recently left as CEO of Morgan Stanley and led the CEO search for Disney also spoke at the NACD Summit. One of the things that he said that resonated with me per this question is that he got to Morgan Stanley, and at his first board meeting, he put the question of CEO succession and who would succeed him on the table. From the first day, he was thinking about what would happen after his departure, which I think is unique.

Chris: It’s wonderfully unique. Again, the CEO can be leaving for greener pastures or because they’re not performing. There’s that constant push and pull. That being said, as we look out a year or two, what trends do you see taking shape that compensation committees should be aware of?

Jane: I love this question, and I think it fits so well with the CEO succession question. I think each company’s compensation committee will continue to refine its assessment of its matrices, rework its short and long-term comp, determine the PSUs, RSUs, cash, and other grants, debate TSR and the next level, degree, and timing appropriate to applying discretion for all of the above. In my mind, not much will change yet there are important issues that could be added to the agenda.

At the end of the 2023 proxy season, the Economic Policy Institute determined that the average U.S. CEO pay was 399 times that of the company’s median worker pay, up from 344 times in the ’22 proxy season and 21 times in 1965. Income inequality has become a front-page and political issue with increasing levels of strikes and unionization attempts while more, not less, effort has been put toward continuing to lower worker pay.

We’re constantly seeing the use of layoffs. Google, a $2-plus trillion company, is laying off large portions of its workforce. For the new CEO of Boeing, one of the first things that he chose to do was lay off 17,000 people. We’re continuously seeing senior leadership targeting the people they hired, who could be delivering the best results.

NACD CEO Peter Gleason advocated for the second consecutive year that boards and directors must demonstrate courage. Independent board members occupy a unique position in the U.S. economy and should take the time, when necessary, to collectively assess whether their decisions benefit not only shareholders but the entire country as well.

In the short run, I think compensation committees could be charged with considering company-wide compensation and ask questions of the leadership teams, such as what percent of employees are paid a living wage? What percent are paid minimum wage? What percent work just below the hourly threshold to gain benefits? In the long run, I wish what compensation committees would do collectively is to pause, take a look around, and assess how we got to where we are, for this is predominantly a U.S. issue.

A common and critical flaw is that every CEO seems to be deemed to be above average. Institutional investors have become inured to the stratospheric level of CEO pay and focus more on what share of a CEO’s pay is tied with the firm’s performance and on how much they earn relative to other bosses. I do wish, using Peter’s words, that independent board members collectively would have the courage to think about the collective impact of the decisions that they’re making on the country and society.

Chris: The backdrop is that courage, at least for corporate directors, could entail the loss of their board seat.

Jane: I serve on compensation committees, and when I look at the information provided, the information is accurate, timely, and well-presented, it just doesn’t pose questions. It provides data that leads to what you’re going to pay, not, does this make sense? Does it make sense for any individual to be upset with their $38 million pay stub?

An additional point to consider is that boards compensated with company stock that performs exceptionally well are now facing scrutiny regarding “board independence” from the Delaware Chancery Court. You mentioned board entrenchment; members may be reluctant to challenge the status quo because it is such a prestigious position. Furthermore, if I have been a board member of Company X for 10 years and hold at least $250 million in stock, this creates a significant conflict regarding independence, as it represents a life-changing amount of compensation.

Chris: If it sounds like a duck, walks like a duck, it’s a duck. In your experience, what is the most significant red flag that identifies an underperforming director?

Jane: I think that’s a great question. Let’s take out of the answer somebody who may have a statutory framework for independence but isn’t independent is conflicted in some way. Can you perform as well as possible if you have some type of conflict? Let’s push that aside. As we discussed, board seats are valuable real estate and should be utilized by people who contribute on many levels. I’d characterize underperformance as either being benign or metastatic.

Benign underperformance is the director who can’t keep up or doesn’t want to keep up any longer, who may fall asleep during meetings, who doesn’t contribute. While it’s frustrating, they marginalize themselves and in doing so, decrease the acumen of the board’s decision-making. It’s easy to work around a benign underperformer. I think boards take the view, “Well, we can get around so-and-so,” and fail to look at the other side, “If we had a great performer in that seat, what more could we do?”

Chris: It’s a burden for the other directors.

Jane: Sure. What if we replace this person with somebody who could perform and wanted to perform? By contrast, the metastatic underperformer makes working around them in a collaborative way impossible. He or she is the board member who talks over, won’t listen, re-litigates decisions that have been put to bed, and is caustic and bullying. I’ve witnessed this type of board member push a senior leader aside while that leader was presenting to voice his own opinion, “I don’t think you’re right. Let me tell you what’s right.”

He or she’s the board member nobody wants to sit next to, that everybody has something to say about, but seems to hang around far longer than healthy for group dynamics. It’s that person where people feel unable to contribute meaningfully to the board discussion because that person is negative, bullying, and just very, very difficult to be around.

Chris: To play devil’s advocate, that person could be brilliant, and have great ideas but has that negativity that you talked about that makes it impossible for the board to succeed.

Jane: Brilliant people listen way more than they talk.

Chris: What is your forward-looking advice for building and maintaining strong stakeholder relationships?

Jane: First and foremost, you have to prioritize among your stakeholders. Everybody has many stakeholders, but there are some whose impact and voices have a greater impact on your company. It’s easier to maintain stakeholder relationships in a buoyant capital market environment, assuming a company isn’t underperforming. During boom times, the habits that a company and a board can use to maintain and build strong stakeholder relationships will enable the company to withstand more difficult times, whether those times impact the company, the industry, or the economy as a whole.

These habits include transparency, honest and timely disclosure, accountability, access, appropriate levels of access to people, et cetera. I’ve heard several people say that, in particular, institutional investors want to know individual board members on an ad hominem basis. They look at the board, but they wanted to know more about individual contributions. That’s hard, right? There are thousands and thousands of board members. Some of the major institutions own securities in all of them. How can you help stakeholders gain a clear understanding of who the board members are?

In a board that I was on, we ended up selling the company, the board members each did short little videos that were put on the company’s website about their approach to governance and how they felt about things. Other things that can be done is enabling board members to have access to employees, either during board meetings or not, through mentoring or lunches or presentations so that there is access with the institutional investors, and the stakeholders everywhere.

The big, bold circle around this is having a firm understanding of who gets to speak for the company and when, not taking the random call from the activist and saying, “You have no idea how bad it is.” It’s paramount that protocols and measures are in place so that the company truly understands its position and has one voice.

Chris: Planet Governance is a better place because of you, Jane. Thank you for sharing your insights.

Jane: I just want to say thank you very much to Planet Governance for giving me this opportunity and for everything that you do to uplift the level of governance in the United States.

Chris Clark joined Stuart Levine & Associates as a senior consultant after distinguished tenures at Texas Monthly – The National Magazine of Texas, Capital Cities/ABC, Forbes, and the National Association of Corporate Directors (“NACD”).

He is known for his prominent role in the creation of NACD’s “The Power of Difference”, “The Leading Minds of Compensation,” and “The Leading Minds of Governance” conference series, “The Directorship 100”, and NACD Private Company Directorship.

Chris specializes in corporate governance, including board assessments, brand evaluations, and strategic communications. www.stuartlevine.com