'Nepotism' - Murdoch sued for buying daughter's business

March 17, 2011 - 11:38AM

The board of News Corp has been sued by shareholders for agreeing to buy a business owned by chairman Rupert Murdoch's daughter for about $US675 million.

A trustee for several retirement funds said the board of News Corp approved the "unfairly" priced deal without questioning or challenging the elder Murdoch, who founded the company and is also chief executive.

News Corp spokeswoman Teri Everett described the suit as "meritless".

The chairman of News Corp said he expected his daughter Elisabeth to join his company's board after buying her Shine Group television production business.

The acquisition still needs approval by News Corp's audit committee and the approval of each companies' respective boards. It also requires an independent fairness opinion.

The deal raised new questions about succession at News Corp, which owns the broadcaster Fox and publishes the Wall Street Journal.

"In short, Murdoch is causing News Corp to pay $US675 million for nepotism," said the lawsuit, which was filed overnight in Delaware's Chancery Court.

"In addition to larding the executive ranks of the company with his offspring, Murdoch constantly engages in transactions designed to benefit family members," said the lawsuit by Amalgamated Bank, a trustee for several investment funds holding more than 1 million News Corp shares.

The lawsuit also was joined by the Central Laborers Pension Fund.

The lawsuit seeks damages and a declaration the board breached their fiduciary duty to shareholders.

The case is Amalgamated Bank et al v K. Rupert Murdoch et al, Delaware Chancery Court, No. 6285.

Reuters

How to determine how much to pay directors?

Friday November 12, 2010

How to determine how much to pay directors?
Whose Business is it anyway - By John Zinkin



IN my last article I wrote about the elements that have to be considered by the remuneration committee when determining the overall remuneration package of an independent non-executive director (INED).

The key factors are complexity; opportunity cost; roles and responsibilities; time spent; and experience, captured in the acronym CORTEX. Today's article will discuss how to structure such a package.

When deciding on the appropriate remuneration structure, two things must be considered: what can the company afford and what is the desired behaviour that the remuneration is designed to reward.

A start-up company may not wish to remunerate its directors on a fixed basis, preferring to keep payments variable and long-term so that the board package does not unduly burden the company when it is still short of cash.

Equally, a well-established company with ample cash flows will not be overly concerned about paying fixed fees to board members.

Any remuneration scheme must achieve the following six objectives:

·It must create a sense of responsibility for the long-term success of the business as opposed to encouraging thinking that all that is needed is for INEDs to merely attend meetings;

·It must reward any extra commitment and time spent during those times when the company is going through intense change or activity requiring a higher degree of involvement than usual – for example during a merger, acquisition or divestiture or a crisis that could destroy the company;

·It must encourage and recognise outstanding performance on the board;

·It must also create a sense of belonging to reinforce the idea that INEDs are stewards of the company and their contribution to the board of a given company really matters (this is particularly important for INEDs that sit on several boards);

·It must attract appropriate talent; and just as important (and often forgotten)

·It must also facilitate the departure of talent, whose presence on the board is no longer required because of changes in strategy or company circumstances.

Remuneration mechanisms

There are eight types of remuneration mechanisms identified in the recent PricewaterhouseCoopers report Performance Pays. Each has its own advantages and drawbacks, discussed below.

Fixed fees: These are paid regardless of the level of risk run by the INED or the number of meetings attended and time spent on the company's business.

They provide a base-load of income, but used in isolation may not adequately reward INEDs for the time they actually spend in meetings and preparing for them.

Moreover, currently in Malaysia, they do not represent a realistic return for the risk INEDs are exposed to.

Meeting fees: These are paid for the number of meetings attended, normally on a fixed rate per meeting.

They reward INEDs for the time and effort spent in preparing for and attending meetings and may encourage the use of too many unnecessary meetings to increase the fees paid.

More seriously, in isolation, attendance fees risk reinforcing the notion that all that matters is INEDs attending meetings.

This could lead to INEDs forgetting that they still bear the wider responsibilities for the business as a whole on an ongoing basis and to them not taking the time to become properly acquainted with the key people who matter for succession planning.

It could reinforce an aversion to visiting offices, factories or plantations and becoming familiar with the processes in the business that create value.

Performance loading: This is rather rare in Asia so it is not easy to decide what level of payment is appropriate.

Its advantages are that it rewards INEDs for temporary increases in time spent and is simple to administer and easy to stop when it is no longer appropriate.

Ex-post and ex-gratia payments: These are voluntary payments to recognise exceptional or long-standing service.

They send a message to other INEDs that such work is appreciated by the board, but because payment is not normally determined according to clear terms of reference or well-documented key performance indicators being met, they lack transparency and this can create its own problems of corporate governance.

Stock awards: These normally are paid in shares, often with specific conditions having to be met, such as minimum shareholdings and vesting periods.

They are supposed to foster a long-term orientation and have been defended as aligning INEDs' interests with those of shareholders.

They have the great advantage of reducing the immediate cash outlay, though they have been abused in the past by not being expensed.

Some have argued that stock options tie INEDs too closely to the fortunes of the firm and compromise their independence as a result.

They are also notoriously hard to administer and it is critical that they do not become a one-way bet, rewarding holders when options are "in the money" and being reset when they are "underwater".

The issue of options being abused and creating perverse incentives is at its most crucial in the case of executive directors and, in particular, the CEO.

If stock awards are to be given, the remuneration committee must consider very carefully how much is to be granted; the proportion of the total fees to be paid in stock; and the length of the vesting periods in order not to compromise INED independence.

Benefits-in-kind (BIK): These are payments in kind. They are normally medical expenses and insurance, use of company car and driver, secretarial support and discounted staff prices for company products or services.

The attraction of such payments is that they usually cost the company less than they are worth to the recipient, creating a win-win situation. However, if they become too closely identified with the INEDs' status and sense of self-worth, they can undermine independence of thought.

Sign-on and sign-off bonuses: These are one-off fees paid upon acceptance of the position of INED or agreement to leave the board.

The attraction is that they are one-time expenses that can be quite effective in achieving the desired objective, but they are cash payments and lack transparency.

Ninety per cent of the directors interviewed in the PwC study preferred a combination of fixed fees and meeting fees, and as long as the majority of the fees are fixed, this will not lead to a perverse desire to have board meetings for the sake of the fees.

Sixty per cent of INEDs of local banking groups were open to stock awards, though only 40% of directors of other financial firms were interested.

Once again 90% of INEDs were in favour of BIK payments, with medical coverage and insurance being unanimously identified as the benefits that were the most appreciated.

Admittedly these findings were limited to INEDs of financial institutions, but there is no reason to suppose that they do not represent a good guide to how INEDs in other industries would feel.

The point to remember is that the remuneration committee must look at all these tools, while recognising that there is no "one size fits all" solution.

The most appropriate structure for INED remuneration will always depend on the circumstances of the individual firm and the objectives the remuneration package is designed to meet.

The writer is CEO of Securities Industry Development Corp, the training and development arm of the Securities Commission.

http://biz.thestar.com.my/news/story.asp?file=/2010/11/12/business/7394429&sec=business

Obligations of independent directors - Kenmark eye opener

Friday June 11, 2010

Obligations of independent directors - Kenmark eye opener

Whose business is it anyway - by John Zinkin

IN conversations since Sime Darby Bhd and Kenmark Industrial Co (M) Bhd hit the headlines, I was struck forcefully by how often the people I met did not realise fully what the obligations or liabilities of independent directors actually are.

Perhaps it is timely to restate in simple terms what independent directors are supposed to do; and why being an independent director should not be seen as a reward for past services that does not require an active involvement in the deliberations of the board.

It is a serious duty that requires much more than just being honest and attending the required number of board meetings. As such, directors must continuously upgrade their skills and understanding of the environment in which their companies operate, investing in training to do so.

Directors must act honestly and in good faith in the best interests of the company on whose board they sit. This means that if there is conflict between the interests of the company and the people they represent as nominees, they are required by law to think of the best interests of the company and not of the people who nominated them. This is easy to say, but often difficult to do.

Ethical behaviour does not just require directors to behave ethically personally; it also requires them to see to it that the company conducts its business in accordance with the law and with a high standard of commercial morality.

This raises interesting issues about whether a company should break the law and pay the associated fine because it costs less to do so in the short term than complying with the law. Ethical behaviour would suggest not breaking the law even if it was cheaper to do so.

It is also important to remember that directors’ fiduciary duty means that they must comply with the spirit of the law and not just the letter of the law – which explains why Goldman Sachs looked so bad when they were testifying to Congress, justifying their actions on the grounds that they were legal only. As the cross-examination demonstrated, fiduciary duty of directors is not just to shareholders, but also to customers and clients as well; all the more so, if what is being offered is highly technical, complex and opaque with the potential to lose clients their money.

Directors should remember this and insist on a wider fiduciary duty if they are serious about preserving the company’s “licence to operate” in the long term.

Being diligent

This does not just mean attending the requisite number of board meetings and preparing for each board meeting by reading the board papers. Directors must devote enough time to remain familiar with the changing nature of the company’s business and environment, including mastering the impact on the business and its risk profile of the evolving political, legal, social and competitive context in which the company operates.

At a minimum this means directors must understand the make-up of the revenues and costs in the profit and loss account and be able to ask probing questions when the ratios show signs of changing as these are early warning indicators of eroding profitability.

They also must understand the asset intensity of the business and how it changes over time by being able to relate the balance sheet items to the amount of business they generate: for example, how much working capital is needed to generate a dollar of sales, how does it compare over time and with the competition?

Are there legitimate ways of reducing the asset intensity of the business and improving the return on capital employed, or are the means by which this is being done through the use of off-balance sheet items merely a form of dangerous financial engineering?

It also means that directors must personally know the first- and second-line managers of their company well enough to be able to contribute intelligently to the succession planning process for which they are responsible. They need to know this if they are to undertake that most difficult role of all – terminating the non-performing CEO without causing a major disruption to the business.

One of the most difficult roles is to ensure that minority shareholder rights are respected when there is a controlling shareholder – be it the founding family or the government. There are the obvious issues raised by differing perspectives on strategy caused by different risk appetites and time horizons of majority and minority shareholders.

There is also the issue of related party transactions which need to be vetted carefully to ensure that money invested by public shareholders is not being “upstreamed” or siphoned off to the advantage of the controlling shareholder via a related party transaction.

Directors must avoid all conflicts of interest wherever possible. Should a conflict arise, they must adhere scrupulously to the provisions laid down by the law and the constitution of the company in dealing with such conflicts. Should the conflict be continuous or material, the director involved should consider resigning after taking into account the impact of resignation on the other members of the board.

Directors cannot disclose confidential information without prior agreement from the board even if the people who nominated them require it – this is because their primary duty is to the company on whose board they sit.

It goes without saying that directors cannot abuse their access to confidential information and use such information for “insider trading”.

# The writer is CEO of Securities Industry Development Corp, the training and development arm of the Securities Commission.

Buffett (2002): Guidelines for choosing independent directors who will think for the shareholders and not against them.

We learnt how independent directors at a lot of investment partnerships have put up disastrous performance through Buffett’s 2002 letter to shareholders. Let us further go down the same letter and see what other investment wisdom he has on offer.

Of practicing and preaching

Ok, we have heard a lot about the failings of independent directors and their apathy towards shareholders. However, preaching is one thing and practicing and offering a solution is completely another. Since Buffett himself runs a company, it will be fascinating to understand the guidelines he has set forth for choosing independent directors on his company's board as well as the compensation he pays them. He has the following views to offer on the kind of 'independent' directors he would like to have on his company's board:

Buffett says, "We will select directors who have huge and true ownership interests (that is, stock that they or their family have purchased, not been given by Berkshire or received via options), expecting those interests to influence their actions to a degree that dwarfs other considerations such as prestige and board fees."

Interesting, isn't it? If a person derives most of his livelihood from a firm and if he is made a director of the firm, he is quite likely to take decisions that result in maximum value creation. While this approach may not be completely foolproof, it is indeed lot better than approaches at other firms where such a criteria is not set forth while looking for independent directors.

Furthermore, on the compensation issue, Buffett has the following to say:

"At Berkshire, wanting our fees to be meaningless to our directors, we pay them only a pittance. Additionally, not wanting to insulate our directors from any corporate disaster we might have, we don't provide them with officers' and directors' liability insurance (an unorthodoxy that, not so incidentally, has saved our shareholders many millions of dollars over the years). Basically, we want the behavior of our directors to be driven by the effect their decisions will have on their family's net worth, not by their compensation. That's the equation for Charlie and me as managers, and we think it's the right one for Berkshire directors as well."

Buffett's superb understanding of human psychology is on full display here. If a person is not behaving rationally, force him to behave rationally by smothering his options.

• First, choose those people that have a large and true ownership in a firm so that they really think of what is good and what is bad for the firm in the long run. 
• Secondly, pay them a pittance so that like other shareholders, they too derive greater portion of their income from the firm's profits and not take a higher proportion of its expense. This is also likely to pressurise them further to take decisions that are in the shareholders' interest. 

Indeed, some great lessons on how an independent director should be chosen and to ensure that he continues to think for the shareholders and not against them.

http://www.equitymaster.com/detail.asp?date=8/6/2008&story=1

Buffett (2002): "Independent" directors: How independent are they?

Warren Buffett complained about failings of independent directors in his letter to shareholders for the year 2002. Let us go further down the same letter and see what other investment wisdom he has on offer.

'Independent' directors: How independent are they?


It is a known fact that Buffett pays a great deal of attention to the management of companies before investing in them. And the reasons behind this obsession may not be difficult to find. Since it is the management that is responsible for making most of the capital allocation decisions in a business, which in turn are central for creating long-term shareholder value, it is imperative that a management allocates capital in the most rational manner possible.

However, as we saw in the last article, the list of managers or CEOs with a 'quick rich' syndrome is swelling to dangerous proportions, thus forcing shareholders to pin all their hopes on the board of a company or more importantly on the independent directors for a bail out. But as mentioned by Buffett, most independent directors (including him) on several occasions have failed in their attempt to protect the interest of shareholders owing to a variety of reasons.

After narrating his experience as an independent director, the master moves on and gives one more example where independent directors have failed miserably to protect shareholder interest. The companies under consideration are investment companies (mutual funds). The master says that directors in these companies have only two major roles, 

• that of hiring the best possible manager and 
• negotiating with him for the best possible fee. 

However, even while performing these basic duties, the independent directors have failed their shareholders and he goes on to cite a 62-year case study from which he has derived his findings.

Even in an era where shareholdings have gotten concentrated, some institutions find it difficult to make management changes necessary to create long-term shareholder value because these very institutions have been found to be sailing in the same boat i.e., neglecting shareholder value so that only a handful of people benefit. Buffett goes on to add that thankfully there have been some people at some institutions that by virtue of their voting power have forced CEOs to take rational decisions.

Let us hear in Buffett's own words, his take on the issue:

Master's golden words


Buffett says, "So that we may further see the failings of 'independence', let's look at a 62-year case study covering thousands of companies. Since 1940, federal law has mandated that a large proportion of the directors of investment companies (most of these mutual funds) be independent. The requirement was originally 40% and now it is 50%. In any case, the typical fund has long operated with a majority of directors who qualify as independent. These directors and the entire board have many perfunctory duties, but in actuality have only two important responsibilities:

• obtaining the best possible investment manager and 
• negotiating with that manager for the lowest possible fee. 

When you are seeking investment help yourself, these two goals are the only ones that count, and directors acting for other investors should have exactly the same priorities. Yet when it comes to independent directors pursuing either goal, their record has been absolutely pathetic."

On the increased ownership concentration and how certain people are forcing managers to act rational, Buffett has the following to say - "Getting rid of mediocre CEOs and eliminating overreaching by the able ones requires action by owners - big owners. The logistics aren't that tough: The ownership of stock has grown increasingly concentrated in recent decades, and today it would be easy for institutional managers to exert their will on problem situations. Twenty, or even fewer, of the largest institutions, acting together, could effectively reform corporate governance at a given company, simply by withholding their votes for directors who were tolerating odious behavior."

He goes on, in my view, this kind of concerted action is the only way that corporate stewardship can be meaningfully improved. Unfortunately, certain major investing institutions have 'glass house' problems in arguing for better governance elsewhere; they would shudder, for example, at the thought of their own performance and fees being closely inspected by their own boards. But Jack Bogle of Vanguard fame, Chris Davis of Davis Advisors, and Bill Miller of Legg Mason are now offering leadership in getting CEOs to treat their owners properly. Pension funds, as well as other fiduciaries, will reap better investment returns in the future if they support these men."

Buffett (2002): "Independent" directors must be business-savvy, interested and shareholder oriented, and who think and speak "independently".

In Warren Buffett's 2002 letter to shareholders, we got to know the master's views on derivatives and the huge risks associated with them. Let us go further down the same letter and see what other investment wisdom the master has to offer.

The demise of the good CEO?

The great bull run of the 1980s-1990s in the US also brought with it a host of corporate scandals. A lot many CEOs, in their attempt to amass wealth quickly did not think twice to do so at the expense of their shareholders. It is fine for a CEO to take home a hefty pay package if the company he heads has put up an impressive performance. But to rake in millions when the shareholders i.e., the real owners of the business get nothing or only a tiny percentage of what the CEOs earn, amounts to nothing but daylight robbery. This is of course impossible without the complicity of the board of directors, whether voluntary or forced. Sadly, these people are increasingly failing to rise to the responsibilities entrusted to them by the shareholders, allowing CEOs to get away scot-free. It is this very issue of corporate governance that the master has talked about at length in his 2002 letter to shareholders. Alarmed by the rising incidents of CEO misconduct, Buffett argues that in a room filled with well-mannered and intelligent people, it will be 'socially awkward' for any director to stand up and speak against a CEO's policies and hence he fully endorses board meetings without the presence of the CEO. Furthermore, he is also in favour of 'independent' directors provided they have three essential qualities. What are these essential qualities and why he deems them to be so important? Let us find out in the master's own words.

The master's golden words
On the nature of directors, Buffett said, "The current cry is for ‘independent’ directors. It is certainly true that it is desirable to have directors who think and speak independently - but they must also be business-savvy, interested and shareholder oriented."

He goes on to add, "In my 1993 commentary, those are the three qualities I described as essential. Over a span of 40 years, I have been on 19 public-company boards (excluding Berkshire's) and have interacted with perhaps 250 directors. Most of them were ‘independent’ as defined by today's rules. But the great majority of these directors lacked at least one of the three qualities I value. As a result, their contribution to shareholder well-being was minimal at best and, too often, negative. These people, decent and intelligent though they were, simply did not know enough about business and/or care enough about shareholders to question foolish acquisitions or egregious compensation. My own behavior, I must ruefully add, frequently fell short as well: Too often I was silent when management made proposals that I judged to be counter to the interests of shareholders. In those cases, collegiality trumped independence."