The 24/7 Wall St. Interview With Irv Hockaday

Mr. Irvine Hockaday is on the boards of Ford Motor Company and Estee Lauder. He was the President and CEO of Hallmark from 1986 to 2001.

24/7 Wall St.’s Douglas McIntyre and Michael Sauter sat down with Mr. Hockaday at the NACD Directorship Forum: “Driving Boardroom Innovation” to discuss corporate governance.

24/7 Wall St.: There’s a practice which has been more criticized recently: Say that you are a director of a public company, and I come in and buy a large number of shares. I cut a deal where I get some board seats and the election of these new members is done by the board in mid-year. From a fiduciary standpoint, do you think that there’s anything wrong with breaking the annual nomination cycle that way and saying “we made a deal, we decided that these guys should come on the board.” The reason usually given is because the people who want the directors’ seats have a large piece of the company. The unstated reason is that they’ve forced the issue of control. From your standpoint, from a governance point of view, is that reasonable?

Hockaday: That’s an interesting question. My own view is that it’s not a good precedent to set, and therefore shouldn’t be agreed to unless the circumstances are unusually compelling. Normally what happens is an investor will accumulate shares and then come to you after they’ve been accumulated, is that what you’re talking about?

24/7:  Yes. sometimes it’s an accumulation, sometimes it’s a threat of more accumulation. But in every case it’s leverage.

Hockaday: I would not… I’ve had a situation like that, and I would not acquiesce under threat. Now, one case is when I was on the Sprint board, there’s an investment outfit called Relational Investors. Ralph Whitworth was the top guy there. He accumulated a lot of shares of Sprint stock, and I was a director, We said he would have to go through the normal process with the nominating committee and be vetted, and, frankly, we would have to be satisfied that he wasn’t looking for special treatment. It’s also the case, from the investor point of view, that once this kind of outsider investors get on the board they are more constrained than they are when they are not on the board because they can’t trade on insider information. But, to be blackmailed or greenmailed into putting somebody on the board because they bought stock and therefore think they are entitled to be on the board, I’m not in favor of. One interesting question would be: the UAW owns a lot of GM stock, and so should they go to GM and say, ‘Well, we want more representation on your board, and should GM say ‘well, you’re a big shareholder. That’s OK?  I would say that it is not OK in my opinion.

24/7 : On “Say on pay?”  The government’s made a decision that shareholders have a right to vote on management compensation, For the public two things about the plan are odd. The first one is the fight over whether the shareholders vote on the issue every year or every three years. That seems misplaced because management gets paid every year.  But the other issue is that the compensation vote is not binding. So what’s the point?

Hockaday: Yeah, well my guess is that the point is to give visibility–perhaps in Washington and perhaps with institutional shareholders who then can beat the drum about what they view as excessive pay. It becomes a public’s debate every year or every couple of years that shareholders want to say on executive pay. Typically they wouldn’t want a say unless they felt something was wrong with it. I think the shareholder vote on pay is just to create visibility. I don’t think it is yet a significant factor in compensation committees. I think compensation committees should do the appropriate thing, which is hard to define, regardless of what’s being said. I think there’s a tendency under pressure for boards to become … I don’t want to say “abdicate” … but become vulnerable to influence to get the heat off and less independent in doing what they think is the right thing.

24/7: This is a very basic issue mostly for individual investors. They get an annual report and 10- K, and quite a while later they get a proxy. I’ve never seen anything in a proxy that would prevent a company from getting it out at the same time the 10-K. If they are done together, the shareholders would actually get to look at the company’s financial numbers,  balance sheet, and the pay.. Do you think that its helpful that those two things, in essence, be one document or that they’re filed at the same time?

Hockaday: Yes… It’s a good question, and I’ll educate myself more about why it wasn’t done , there’s so many things going on between the filing and the K and the annual that they’re just busy, and it’s easy to push it back…

24/7: The most written-about thing in regards to public boards here and in Europe in the last year is the under representation of women on public boards. I think in one of the European countries, Norway, they’ve passed a law that says public companies have to have a third of their members be women. In the US, you’ve got so many skilled, smart women and the representation on really big public company boards isn’t there. I mean, do you have an inkling of why that is, or how it gets fixed?

Hockaday:  I think it’s to some extent history and generational. There’s still a lot of white male directors on boards who are of an age where there was an attitude that women, even though they were emerging in the marketplace, really hadn’t developed the skills and sophistication that men had, and I think that’s changing. I also think, and this is purely speculation, that the encouragement, if not pressure, to put women on created a search for women director candidates who were put on boards and weren’t always experienced enough, and understandably so, to function as well as one would hope. And so there was maybe disappointment in some quarters which fueled this bias. However, and my view is that it should be gender neutral, you should pick directors without reference to ethnic or gender factors. As an example of how it works the correct way is that Estee Lauder’s board, I think has a majority of it is mostly women. And that’s the nature of the business. If Hallmark were a public company – most of the people who buy greeting cards are women – it would, I hope, have a majority of women on the board. Is there a woman as qualified in her experience to sit on the Ford board as the last two people we put on the board? One who just retired as the number two guy at Caterpillar and had a global manufacturing background.  So I think it’s a fair question, boards should be alert to it, but I don’t think they should be stampeded into sacrificing their judgment on relative qualifications.

Douglas A. McIntyre