Shift Happens

An Interview With James Kristie On Corporate Governance Trends

James Kristie is the longtime editor and associate publisher of Directors & Boards, a quarterly journal that describes itself as “Thought leadership in corporate governance since 1976.” The journal was founded that year by publishing entrepreneur Stanley Foster Reed amidst the turmoil of the Congressional hearings that resulted in passage in 1977 of the Foreign Corrupt Practices Act. In the following interview with The Shareholder Service Optimizer Kristie reflects on the early days of corporate governance, the changes he has seen over the past three decades, and the current state of shareholder activism.

You have been a board observer for a long time. How long exactly?

Believe it or not, I am now in my 34th year as editor of Directors & Boards. I came here in 1981 when the journal was acquired by The Hay Group and moved from Washington DC, where it was founded, to Philadelphia, where Hay’s headquarters were and where I was serving as a senior editor of a weekly business magazine for the city and region. I actually turned the job down when first approached about joining it because “corporate governance” was not even a common term in the popular business lexicon at the time. I had been writing business stories for five years and had never written one word about a board of directors. With the exception of a big scandal like the foreign payoffs in the mid-1970s, a board was so far removed from public awareness that it was not even a factor in most news coverage of business at that time. That, of course, was soon to change, so in retrospect it was excellent timing to become editor of this publication.

What are your early remembrances?

Let me share two with you. Shortly after I was hired the new owner of Directors & Boards, Milton Rock, chairman of Hay Group, sat me down and said, “You know, Jim, most CEOs really don’t want a board of directors.” He was dead serious (and, I think, dead right). I thought to myself, “Holy cow, this is the guy who just hired me to put out this publication for board members and he doesn’t even think CEOs want or need boards.” But to his credit, Milt believed that CEOs do need a board — not just any board but a board that is an effective adviser to management and an effective representative of the shareholder — and that Directors & Boards would be helpful in professionalizing the membership and functioning of corporate boards. He and his son Robert, who now serves as publisher, still own Directors & Boards and have never waivered in their backing of the journal as a force for making boards as effective as they can be.

My second big remembrance is this. For one of my first major CEO interviews I flew to Pittsburgh to talk with Tony O’Reilly, then the CEO of H.J. Heinz Co. and a preeminent chief executive of that period in American business. He was a big, strapping Irishman, very charismatic — truly a “rock star CEO,” a term that later came into dubious fashion. The interview itself was fairly inconsequential, but what I remember most is the makeup at that time of the Heinz board: 18 members, half of whom were inside officers of the company. Can you believe that today? This was obviously a board in O’Reilly’s back pocket. But looking back it was not that unusual for the era. This was 1983. When Heinz was sold to a Brazilian private equity firm in 2013, 30 years later, the only insider on the much smaller board was the CEO. I am probably anticipating a question of what other changes I have seen over my tenure.

What other notable changes in the boardroom have you recorded?

In essence, there really has been no change in the fundamental mission of a board: to oversee management and to protect the enterprise for the shareholders and stakeholders. It’s the way the board has organized itself to do that is where we have seen significant changes. I facetiously refer to this evolution in the board’s composition and conduct as “shift happens”.

And there have been other worthy enhancements of corporate governance over the past three decades. What continues to worry me and keep me engaged as editor of Directors & Boards is whether these process shifts are matched by attitudinal shifts by board members. Borrowing an observation used by Vanguard Chairman Emeritus John Brennan in an article we published a few years ago, we need to see “a great attitudinal shift in corporate boards away from what is right for the insiders to what is right for the shareholders.”

Do you have some top lessons learned?

I have a few, but perhaps the biggest is that there are no blacks and whites in governance. Said another way, it is a question of “best practices” versus “right practices.” For example, separating the chairman and CEO positions may be considered a governance best practice, but for some leadership situations it may not be the right thing to do. Much of board effectiveness is situational in nature, so while we can applaud the adoption of many of the process shifts that I identified, a prudent move by boards is to embrace the best practices that are right for their governance. Of course, this is good for me as an editor — to stimulate debate by giving voice to proponents and opponents of “best” practices!

Activism — is it really new what is going on?

I can’t say it is. The curse of being around a long time is that you have seen it all before. Back in the early 1990s, as you may recall, we saw a big push by the institutional investor community for “relational investing”: the forming by investors of more stable, longer-lasting ties to their invested corporations. Relational investing was actually described, and I quote right from the pages of Directors & Boards, as the “next wave in the activist shareholder movement.” I published Felix Rohatyn in 1993 making this statement: “A different version of this [relational investing] concept is the purchase of a large interest in an underperforming company for the express purpose of changing management and improving its performance.” If anything, I guess the modern-day tweak is that hedge funds, which you did not hear much about 20 years ago, have wholeheartedly embraced the role of relational investors.

Will activism ease up? or, get more activist?

Here is how I am thinking of it. When we were living though the hostile takeover wave of the mid-1980s — some days you would open up your Wall Street Journal and half the items in the front page “What’s New” column would be hostile deal developments — it was hard to imagine that this trend would ever end. But it did. I suppose activism could go either way, and it will be up to what boards do that will largely determine that. The hostile takeover mania ended for many reasons, but board reaction was certainly one that brought it to a close. I think of how the 1985 Van Gorkom decision, when the Delaware Supreme Court called the board of Trans Union Corp. to account for its seemingly lackadaisical approval of the sale of the company (during the intermission of an opera performance!), as being a wake-up call for boards to take their role more seriously and be more dutiful in their oversight. That had great effect on the M&A mania of the day, tamping down the “wild west” nature of the takeover artists. Today’s activists are doing the same in making boards more dutiful in their oversight, and by that I mean in the board’s evaluation of corporate strategy, management capability, and enterprise value. Boards can put the activists out of business, just as they all but killed off the hostile takeover artists.

How best to cope with activists?

Remember the great line from the movie “Cool Hand Luke”: “What we have here is a failure to communicate”? I have often thought that shareholders may have as good or better ideas of what’s best for the corporation as the management and board. Why not go all out to hear them out? If the ideas are misguided, at least you know what the shareholders are thinking and can mount a more effective countervailing strategic and valuation case. Open the lines of communication and see what happens. But at the same time, do the hard work of determining whether you — the board and management — are up to the demands of leading the company in the year(s) ahead. Look around the board table and see if anyone is “missing” — i.e., what expertise is not represented and should be added for vital perspective on the industry and global business and economic environment. And look around the executive suite to make sure the team is the right one to get the company where it needs to go while delivering appropriate returns for the investors.

Final thoughts?

In my earliest days as editor of Directors & Boards, a very senior board member said to me, “The only real job of a director is to make sure the right CEO is running the company.” I was appalled. Surely there is more to the director’s job than that, I thought.

And, yes, there is. But as that comment has percolated with me all these years, I have come around a bit to the wisdom of it. If you have the right CEO running the company, everything else is likely to fall into place. The right CEO will do the right things — crafting a smart strategy, executing it well, recruiting a good board, doing smart deals, having productive relations with investors and the activist community, creating worthy value for shareholders, et al. That’s a tall order for a CEO — and for the board that must ensure it has the right person running the operation.

James Kristie
Editor & Associate Publisher
Directors & Boards