There are a number of sacred cows that most corporate governance activists would never kick: paying members of the boards of directors in stock; having directors not serve on too many boards; having directors attend the majority of a board's meetings; and the importance of directors' independence.
But Hoffer Kaback, a professional trader and writer, is kicking all of them.
The president of Gloucester Capital Corp., New York, thinks paying directors only in company stock makes no sense; he says how many boards a person serves on or how many board meetings a director attends aren't of crucial importance; and while he's concerned about independence, he views it differently than the standard way most corporate governance activists do.
"These issues are a mechanical checklist, but the items don't relate to the basic issues of what you want in a director, which is someone who has character and ability," he said. "The proalignment (paying directors in stock) people think how someone is paid affects the advice he gives. But it's not true."
Alignment "can create personal financial complexities for directors," he said. Stock compensation "creates negative cash flow because it produces taxable income without cash," and requiring directors to make substantial investment in company stock "requires the purchase of stock with after-tax dollars."
This "can result in a multimillion-dollar after-tax outlay for a director on four or five major boards," he said.
"Professionals are not generally thought to be in need of 'financial motivation' or alignment to induce them to perform their professional obligations properly."
He argues that "alignment advocates present no convincing justification for treating directors differently from professionals such as lawyers and accountants, who are generally paid in cash."
Requiring directors to own stock may also keep some qualified candidates from going on boards, because it prevents them from making their own investment decisions, Mr. Kaback said. As an example, he points to a company that may face imminent bankruptcy, in which a director -- who would be wanted for his business expertise -- could end up with stock worth practically nothing.
Corporate governance activist Richard Koppes, of counsel to Jones Day Reavis & Pogue, who teaches a corporate governance course at Stanford University, disagrees with Mr. Kaback's overall theory.
"My experience is that it keeps directors more focused to have payments in stock," he said.
The Business Roundtable's Statement on Corporate Governance, published in September 1997, also states that directors should get at least some of their compensation in stock, although it leaves room for companies to design programs that fit their particular circumstances and the circumstances of their directors.
Mr. Kaback thinks a director's attendance at board meetings should not be an important issue. "The lack of having a perfect attendance record doesn't prove anything," he said. "There are directors who attend every meeting, take copious notes, who never say anything and contribute nothing."
But some disagree. "Any thinking human being would want directors to show up at board meetings," said Sarah Teslik, founder and executive director of the Council of Institutional Investors, Washington. "The difficulty for shareholders is since they can't attend the board meetings they are dependent upon the board (to be there)."
The National Association of Corporate Directors guidelines say that a full-time worker should serve on no more than two boards; that a part-time worker could serve on up to four boards and that a retired person could serve on six boards.
Mr. Kaback takes issue with this as well. "You can't measure an individual's capabilities like that. Some directors can handle four, five or six boards and some can't handle one."
He returns to his basic premise: directors should have character and ability. He proposes two ideas he thinks would help measure them.
First, he would have a candidate write an essay explaining his basic beliefs and values and why he wants to serve on the board. This would go into the company's proxy statement.
The second test would require all board candidates to participate in a conference call with analysts and shareholders. Candidates would have to field questions from anyone about anything that is thought to be relevant to their ability to serve on the board.
"It allows you to see how a guy handles himself," Mr. Kaback said.
On the question of independence, Mr. Kaback, who has written about his ideas in Directors & Boards magazine, has views that are as strict as those proposed by corporate governance activists.
Any and all types of relationships existing between directors and the company's chief executive officer and other senior executives on a board should be disclosed, not just business relationships, he believes.
