Board of Directors
Board of Directors
The Value of Great Pit Crew
The ESOP Association The ESOP Association Eighth Annual ESOP U Conference Eighth Annual ESOP U Conference
August 13 August 13--14, 201514, 2015 Charlotte, North Carolina Charlotte, North Carolina
Presented by
Mike Willard Salem Distributing Company
5901 Gun Club Road Winston-Salem, NC 27103
(336) 201-5372 MWillard@salemdist.com
Marc L. Hansberger Argent Trust Company 1100 Abernathy Road, Suite 550
Atlanta, GA 30328 (678) 397-1970 mhansberger@argenttrust.com Fred Engelfried
Lewis Tree Service, Inc 85 Ferguson Road Pinehurst, NC 28374-9257 910-235-45222 ACE-I@outlook.com .
Introduction
Introduction
What is “Corporate Governance”? What is “Corporate Governance”?
••
Method by which the relationships among shareholders, Method by which the relationships among shareholders, directors and management are affirmed and carried out directors and management are affirmed and carried out••
Method by which management and the corporation’s business Method by which management and the corporation’s businessare overseen are overseen Wh A th M i P ti i t i C t G ? Wh A th M i P ti i t i C t G ? 2 2
Who Are the Main Participants in Corporate Governance? Who Are the Main Participants in Corporate Governance?
••
ESOP Trustee and advisorsESOP Trustee and advisors••
Board of Directors and advisorsBoard of Directors and advisors••
ManagementManagement••
In cases of “passIn cases of “pass--through” voting, ESOP participantsthrough” voting, ESOP participantsCorporate Governance Structure and Participants
Corporate Governance Structure and Participants
Elect Directors (Subject to Committee Direction) ESOP Trustee (Shareholder) “Functional Fiduciary” Board of Directors ESOP Advisors - Financial Advisor -Counsel Advisors - Counsel -Accountants Appoint Trustee Management “Appointing Fiduciaries” ESOP Committee “Functional Fiduciaries”
Appoint ESOP Committee
ESOP Advisors - Recordkeeper
The Board of Directors
The Board of Directors
Overall responsibility – appoint senior management, plan for CEO succession and provide guidance and direction to management on strategy
Monitor performance vs. operating, financial and long-range plans and objectives and approve changes
Appoint and establish goals for CEO; establish and evaluate CEO compensation
Develop CEO succession plan
U d t d fi i l t t t d it d f t l
4 4
Understand financial statements and monitor adequacy of controls
Establish and monitor compliance with ethics policy
Understand risk profile and establish/review risk management programs
Accountable under state law primarily to shareholder(s) Accountable under state law primarily to shareholder(s) Can consider other constituencies, including employees and local Can consider other constituencies, including employees and local community
community
Normally covered by “D&O” and ERISA fiduciary liability insurance Normally covered by “D&O” and ERISA fiduciary liability insurance
Individual director responsibilities – understand corporation and its industry
Business
Factors driving profitability (earnings)
Financial goals and strategies
Financial and competitive risks
The Board of Directors
The Board of Directors
5 5
Performance vs. competitors
Business objectives/strategic plans
Business and industry risk and contingent liabilities
Directors’ Duties
Care (i.e., being well informed)
Commitment of time and attendance
Well prepared for meetings
Right to rely, in good faith, on information provided by management and board committees, legal counsel, accountants and other advisors
Make inquiries when appropriate (where circumstances warrant)
Disclosure to other directors and management
The Board of Directors
The Board of Directors
Disclosure to other directors and management
Loyalty Loyalty –– act in good faith and in interests of corporationact in good faith and in interests of corporation
Example of disloyalty: Personal financial interests conflict with Example of disloyalty: Personal financial interests conflict with corporation’s interests
corporation’s interests
Believe in good faith that actions are in corporation’s best interestBelieve in good faith that actions are in corporation’s best interest
Fairness of transactions Fairness of transactions
Whether terms are at least as favorable to corporation and Whether terms are at least as favorable to corporation and shareholder(s) as might be available from unrelated persons shareholder(s) as might be available from unrelated persons
Whether transaction will further corporation’s interestWhether transaction will further corporation’s interest
Whether approval process is fairWhether approval process is fair
Focus on effect on shareholder(s)Focus on effect on shareholder(s) Obtain independent advice Obtain independent advice “Corporate opportunity” issues “Corporate opportunity” issues
The Board of Directors
The Board of Directors
7 7
“Business judgment rule”
“Business judgment rule” –– applied by courts in analyzing directors’ actionsapplied by courts in analyzing directors’ actions
Composition Composition
SizeSize
Corporation’s needs and circumstancesCorporation’s needs and circumstances
Need to maintain relations with ESOP as shareholder (or other Need to maintain relations with ESOP as shareholder (or other large shareholders)
large shareholders)
Ability of Board to function effectivelyAbility of Board to function effectively
“Outside” Directors“Outside” Directors
The Board of Directors
The Board of Directors
8 8 QualificationsQualifications IndependenceIndependence
Employee directorsEmployee directors
Director compensationDirector compensation
Director indemnification and insuranceDirector indemnification and insurance
Board Committees Board Committees
AuditAudit
CompensationCompensation
Nominating/Corporate GovernanceNominating/Corporate Governance
Issues applicable to all CommitteesIssues applicable to all Committees
Membership/compositionMembership/composition
CompensationCompensation
The Board of Directors
The Board of Directors
CompensationCompensation
Overlapping responsibilities of Trustee, Directors and management
Excessive share price
Fairness in complex transactions Senior management compensation Due diligence
Fiduciary Pitfalls
Fiduciary Pitfalls
10 10 Due diligenceSelecting and using advisors Selection of ESOP Trustee Selection of ESOP Trustee
As “appointing fiduciaries,” Board has a duty under As “appointing fiduciaries,” Board has a duty under ERISA to monitor the actions of the ESOP Trustee and, ERISA to monitor the actions of the ESOP Trustee and, if necessary, take corrective action
if necessary, take corrective action
THE EVOLUTION OF AN EXTERNAL
THE EVOLUTION OF AN EXTERNAL
DIRECTOR AND AN EXTERNAL BOARD
DIRECTOR AND AN EXTERNAL BOARD
Lewis
Lewis Tree Service, IncTree Service, Inc.. 100% S ESOP/3 000+ employees 100% S ESOP/3 000+ employees 100% S ESOP/3,000+ employees 100% S ESOP/3,000+ employees First
First external director while the company was still external director while the company was still privately privately held and
held and a a director ever since.director ever since.
Evolution of a board
Evolution of a board
Privately held
Privately held –– Board was made up of the owner, the Board was made up of the owner, the executive team, the family attorney and one outside executive team, the family attorney and one outside director (me).
director (me). Meetings were operations focused Meetings were operations focused Company
Company was sold was sold and repurchased a number of times and repurchased a number of times –– increasing risk that the executive team would become increasing risk that the executive team would become iiinsecure
insecure
ESOP became an option and 30% of the stock was ESOP became an option and 30% of the stock was transacted; no change
transacted; no change was made to was made to the board and the board and meetings still focused
Evolution of
Evolution of a Board
a Board
After
After about three years the Board voted to ‘bet the about three years the Board voted to ‘bet the company’ and elected 100%
company’ and elected 100% ESOPESOP
Board of Trustees were all internal participants Board of Trustees were all internal participants Board of Trustees were
Board of Trustees were selfoa d ooa d o ustees e eustees e e seself--electingse e ect gelectinge ect g Board
Board of Directors was expanded of Directors was expanded to include to include five external five external and four internal directors with the goal of transitioning and four internal directors with the goal of transitioning to
to six/threesix/three
Terms for all were three years,
Terms for all were three years, staggered; no term staggered; no term limits
limits
Evolution of
Evolution of a Board
a Board
An
An Audit and Finance Committee was formed Audit and Finance Committee was formed A
A year later, a Leadership Development Committee year later, a Leadership Development Committee (which became
(which became the Succession the Succession Committee) Committee) was formedwas formed And
And a few years after that, a Governance a few years after that, a Governance Committee Committee was created and then,
was created and then, A new
A new CEO CEO was elected was elected as part of succession planning as part of succession planning and
and within a year or so after, within a year or so after, a new a new Chair (me) was Chair (me) was elected.
elected.
Retirements and resignations
Retirements and resignations shrunk shrunk the Board the Board to four to four external and two internal, where we are today. external and two internal, where we are today.
Today
Today
ESOP
ESOP Trustees Trustees have appointed a have appointed a sole external Trustee sole external Trustee and by
and by--laws laws changed back changed back to to the more the more traditional traditional standoff
standoff balance of power balance of power
Today, Audit and Finance and Compensation Today, Audit and Finance and Compensation Committees survive,
Committees survive, both made up of voting external both made up of voting external
di d NV i l
di d NV i l didi
directors and NV internal directors and NV internal directorsdirectors Governance
Governance and Succession and Succession responsibilities are now responsibilities are now integrated
Mistakes we’ve made
Mistakes we’ve made
SelfSelf--electing trustees electing trustees –– how do you attract and how do you attract and hold quality directors when they don’t have hold quality directors when they don’t have evaluation rights over the Trustee(s) evaluation rights over the Trustee(s) Overwhelming size of
Overwhelming size of the of the Boardthe of the Board: : competition to be heard and ‘earn’ the fee, competition to be heard and ‘earn’ the fee, make make--work
work suggestions to get involved suggestions to get involved –– 5 to 7 5 to 7 idealideal Being over
Being over committee’dcommittee’d
Adding people directly to the Board based on what Adding people directly to the Board based on what you think you know, not what you’ve experienced you think you know, not what you’ve experienced with them (advisor concept)
with them (advisor concept)
Adding more than two directors to the board at a Adding more than two directors to the board at a time
time
‘Shoulding’ on the executive team ‘Shoulding’ on the executive team
Why hire external directors?
Why hire external directors?
Changing needs/condition of the company Quest for continuous improvement
What is the right time?
What is the right time?
When you realize your bandwidth can reach no farther
When you have challenges beyond your tribal knowledge
What to look for
What to look for -- general
general
Noted for high standards of personal and professional ethics, integrity and values
An independent thinker willing to express contra opinions
Shirtsleeve – not dependent on administrative support Proven leadership qualities – line and matrix Transformational skills
What to look for
What to look for –
– board specific
board specific
Passion
Passion for good governancefor good governance
Been
Been there/done that mentor (v. shadow effect)there/done that mentor (v. shadow effect)
Open
Open minded when considering matters affecting interests of minded when considering matters affecting interests of the Company and its constituents
the Company and its constituentsp yp y
W
Willing illing to devote the to devote the time required and to serve for multiple time required and to serve for multiple terms, if nominated and elected
terms, if nominated and elected
Service
Service on other on other boards and past boards and past committee experiences and committee experiences and leadership
leadership
What to look for
What to look for –
– professional profiles
professional profiles
Corporate
Corporate leadership as CEO, COO or Presidentleadership as CEO, COO or President ESOP
ESOP leadership/experienceleadership/experience Mergers and acquisitions Mergers and acquisitions Mergers and acquisitions Mergers and acquisitions
Strategy development/implementation Strategy development/implementation Leadership development/succession planning Leadership development/succession planning
Overarching responsibilities
Overarching responsibilities
GOVERNANCE
GOVERNANCE
SUCCESSION
SUCCESSION
SUCCESSION
SUCCESSION
STRATEGY
STRATEGY
Nose in
Nose in
Nose in
Nose in
Fingers out!
Fingers out!
22 22QUESTIONS?
QUESTIONS?