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BOARDS OF DIRECTORS
IF RIP VAN WINKLE AWOKE TODAY – PART 3

We have been discussing changes that have occurred in our practice areas over the last two decades to commemorate Wilkening & Company's 20^th anniversary. Last month we talked about executive pay and long-term incentives. In the third of this series, let's talk about trends in corporate governance and Boards of Directors.

A few years ago I was contacted by a producer at a local Chicago news-oriented television station. It was immediately following the Enron and WorldCom incidents and she wanted someone to appear on one of their television shows to discuss what had happened and why. It appeared that her "spin" was clearly to establish that all or most corporations and their top executives were irresponsible or borderline criminal.

I explained to her that what we had actually seen was a failure of the Boards of Directors of two major corporations to fulfill their duties to shareholders and exercise reasonable controls and oversight over management's questionable actions. Further, I told her that I knew many CEOs and members of Boards of Directors and found them generally to be quite honest and hardworking in pursuit of shareholder interests. I said that the Enron and WorldCom episodes were aberrations and volunteered to gladly appear on-air and state these opinions. Apparently, this was not what she wanted to hear, and I never heard from her again.

This story, in some ways, says a lot about how I feel about the state of corporate governance & management twenty years ago and today: committed people doing a tough job. But, the job has been getting tougher and more challenging every day.

Let me summarize below what I have seen change for Boards of Directors in the last ten to twenty years. My focus is on private-company Boards, but there are similarities between private and public Boards of Directors.

1. Smaller-private companies are now much bigger users of Boards in the decision-making or decision-support process. Generally, private-company Board members are often advisors to the CEO and management, and do not vote on decisions, but provide advice and expertise on such matters as: strategy, industry marketing, key executive selection or mentoring. They also frequently provide counsel regarding issues of succession planning between generations.
   
2. The typical Board member today is more qualified to provide the experience, wisdom and counsel required to management. The Board member of 2009 must have credentials and resumes that provide the bona fides to comment and advise on key corporate issues and policy.
   
3. The rulebook impacting Board member actions and behavior is thicker than ever in the public-company arena. The "regulators" have been very active in the last decade writing regulations for public corporations designed to avoid the "Enrons" of the future. But, we have found that these public-company regulations also can impact private enterprises. In one instance, I am aware of one non-public company that has chosen to voluntarily comply with Sarbanes-Oxley guidelines even though they are not required to do so.
   
4. The risk to individual Board members has increased as some stakeholders put Board decisions (that affect them) under a microscope and are quick to litigate—with or without just cause. No informed Board member in a decision-making or advisory role should consider serving without appropriate insurance coverage in 2009. If not provided, be ready to walk away. I have.
   
5. The role of the Board today is more clearly prescribed than ever before. Committee and Board "charters" have become common and are now considered best practices. If you serve on a Board or Board committee and do not have a charter to outline your responsibilities, ask why. Of course in a small private company, the role of the Board may be what the majority owner says it is. Just be sure that the other stakeholders agree.
   
6. As Board-member risk increases, fees and incentives also continue to increase in public companies. We generally believe that in private companies Board fees are not increasing as rapidly. This is likely a reflection on a lower perceived risk for private company Board members and/or a different role in the corporation's decision-making process.
   

In short, the environment in which a Board member lives has become much more challenging, prescribed and risky. But in the end, it remains committed people doing a tough job.

Reflecting on the last year, how could so many Boards of publicly-held banks and other financial institutions collectively make such egregiously bad and destructive decisions? The jury remains out on this matter, but I guess it suggests that increased regulation isn't the answer to all problems.

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WHAT WE HEAR ON THE STREET
WHAT IS THE SALES MANAGER'S JOB, ANYWAY?

I recently saw a survey that showed the mix of pay for both sales representatives and sales managers. The companies represented had a historical tendency to be in the technology market space, but not exclusively. We have used this survey source (Culpepper^®) before in earlier E-Note discussions and consider it reliable. The results were interesting but a bit unexpected. They are shown in the table below.

We were not surprised to see to see sales representatives (in the Culpepper^® survey) paid larger incentives (65% of salary). This is not in any way unusual and may reflect the background industry and the sample of responses, in general. But, we were surprised to see sales managers (in the same survey) with similarly-high incentives (55% of salary). As noted, we would expect to see sales managers paid incentives more in line with 25%+ of salary—but more importantly, having much lower incentives than their sales representatives. This does not mean they earn less. It just means salary is the driving force of their pay.

We can spend a lot words and time trying to explain why we see these variations between this survey data and those of more general and historical practices, but that is potentially an open-ended and pointless exercise. However, we have historically found that unusually-high incentives for sales managers can be indicative of a more compelling job-design problem—that may or may not exist here.

The job-design problem we allude to is confusion over the required role of a sales manager. Let me outline below what I believe a sales manager must (and is paid to) do.

1. Evaluate, mentor and train the sales force;
2. Plan sales activities and deploy sales resources; and
3. Recruit next year's sales force.

Nowhere in the above description did I say "sell." This is true because, we believe that sales managers are being paid to maximize the quality and productivity of their sales force. They are primarily managing and directing resources, seldom engaged in direct selling.

This description (if you buy it) requires that we recognize the manager's unique and developed skill and pay them incentives based on the achievements of their sales force. This typically results in sales-manager pay plans with a higher salary and lower incentive mix than a sales rep.

If your sales manager is spending more than 20% their time (I will give them that) selling and/or you are encouraging them to spend most of their time as a sales rep, then who is managing the sales force? Are you? Well, someone needs to!

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CONVERTING YOUR LEGACY SALES-COMMISSION PLAN TO THE NEW AND IMPROVED GROWTH MODEL

NEXT
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On the lighter Side: Changes in the celebration of Christmas Over the Last 20 Years at the Office