Home » Conversations with the Editor » Don’t Criminalize Business Judgment

Don’t Criminalize Business Judgment

Steve Odland, the 46-year-old CEO of Office Depot, chairs the Business Roundtable’s Corporate Governance Task Force. A survey of Roundtable members undertaken by the Task Force found that CEOs are embracing a number of accountability issues favored by governance advocates, such as creating stronger links between CEO pay and performance and increasing the number of board members who are independent of management. Given that Roundtable companies represent $4.5 trillion in total annual revenues and a third of the combined market capitalization of all U.S. listed firms and employ a total of 10 million people, the attitudes of its member CEOs is fairly representative.

Before he became CEO of the $14 billion Delray Beach, Fla., retailer in March 2005, Odland was chairman and CEO of AutoZone, the $5.6 billion auto parts retailer since 2001. Previously, he was COO of the U.S. arm of Dutch supermarket retailer Ahold. He is also a director of General Mills.

Odland joined the Roundtable’s Task Force in 2002, a year after he became AutoZone CEO, the first chairman and CEO position he held at a public company. Being new to the role, he engaged AutoZone board member Charles Elson, who heads the Weinberg Center for Corporate Governance at the University of Delaware, to help him forge governance guidelines for the company-a year before Sarbanes-Oxley became law. The following is part of an exchange Chief Executive had with Odland when he came to the Northeast.

Why is compensation such a lightening rod?

Some of the shareholder concerns that you read about occur when they are surprised about packages that weren’t disclosed, particularly retirement packages that surface after people leave. This is why the Business Roundtable encourages full disclosure of total compensation packages.

How does the compensation process work at Office Depot?

All our compensation committee members are independent. They talk to an outside consultant who provides them with independent data about various measures on executive compensation, which is validated through public sources.

The committee and members of the board discuss and debate in executive sessions largely without any outside influence, so I’m not exactly certain what goes on. In our case and with many companies, the base salary is set by contract with a specified performance level. Bonus and stock options programs are subject to annual grants as judged by the comp committee and agreed to by the board.

Given that your survey shows that compliance costs for Sarbanes Oxley appear to be easing, with 52 percent of companies expecting a decline in 2006 and only 6 percent projecting an increase in costs, have you or the Roundtable changed your views on SOX?

The Business Roundtable is a strong supporter of Sarbanes Oxley as passed. It’s interesting that considering the corporate misdeeds that were perpetrated, all were violations of preexisting law. In most cases they were violations of basic rules like do not lie, cheat or steal, stuff passed down on stone tablets. So there is a question about whether all the laws in the world can really make a difference. Having said that, a significant number of our members spend over $10 million a year on SOX compliance. But we have argued that these costs are necessary in order to provide trust and foundation for our free market system.

As a CEO, what do you want from your board?

The best governance is where boards and management work together in a collegial fashion in order to set the right plans, right financial goals, the appropriate risk levels and the appropriate deployment of capital in order to optimize shareholder value over the long run. This doesn’t mean there isn’t open debate, but a well-functioning board helps management facilitate debate and come to a consensus.

Are you concerned that, according to a recent survey, one in five board directors in the U.S. say that as a result of SOX their company CEO is more risk adverse?

We play in a world marketplace where every country has its own rules. We must be careful that our market doesn’t put our companies at a disadvantage by enforcing rules that the rest of the world doesn’t have to play by. The Business Roundtable and most reasonable business people support the change in regulations. We think it will take a few more years before these things are fully digested.

Pershing Square Capital has invested $74 million in Office Depot, and has a reputation for trying to use its position to persuade management and the board to see shareholder value creation on its terms. What’s your view of activist institutions and how they operate?

In the past, the emphasis was on the shareholders, those holding the stock for a long period of time-five, six, 10 years. The dynamics were different then. Today, some investors are not so much shareholders as they are traders. Portfolio turnover is 200 or 300 percent in these firms. They may hold a certain stock for three months in order to extract maximum value and then exit. This is why there is debate about proxy access and who gets to define what is short term vs. what is long term.

Carl Icahn’s retort is, what does it matter if I own stock for 10 minutes or 10 years? I am a shareowner.

There is an element of truth in that, but boards and management have accountability to other constituencies other than shareholders such as customers and employees. We have to balance the responsibilities to all three.

 What do you want your task force to accomplish?

As we represent one-third of the market cap of the entire stock market, we hope to be a model of good governance for all American corporations to follow.

How close are you to achieving this aspiration?

We have 164 members and are not a monolith, but all of us are committed to good judgment. However, there is one very important point we didn’t address: We have to be careful that in our quest for good governance we don’t criminalize honest mistakes, because at the end of the day all of us are just human beings. Whether we are board members or managers, we are trying to do the right thing.

About admin