You’d think Raj Gupta had enough to do with his day job.
His career as chief executive and chairman at Rohm and Haas ended with the sale of the Philadelphia chemical company to Dow Chemical for $15 billion four years ago. Since then Gupta’s been building Avantor, a $500 million (yearly sales), privately-held chemical company that has acquired plants in New Jersey, Mexico, Poland and India, and which Gupta says he hopes to sell at a profit “in the next two to three years.”
But minding his own business isn’t enough: Gupta’s resume shows a fascination with helping run other public companies -- and advising fellow CEOs. He's served as a director of Tyco International (since 2005), Delphi Automotive Group and Hewlett-Packard Co. (both since 2009), each of which have gone through major and often wrenching transitions on his watch. And he’s been a director of Malvern-based Vanguard Group since 2001 as it has grown into a $2.2 trillion-asset investment fund giant whose bond, stock and index holdings force public companies around the world to pay attention when it weighs in on corporate issues.
Gupta has also been active at Drexel’s Center for Corporate Governance, an eight-year-old group that counts current and former CEOs of Vanguard, Campell Soup, UGI and other big companies and professional-service firms on its advisory board. They get together a few times a year to share war stories and best practices, peer to peer. Because who else can a CEO go to, if not another CEO?
Gupta spoke to his fellow members at a gathering earlier this year, promising to distill what he’s observed into guidelines for company directors as they wrestle with strategies, CEO selections, Big Data and other existential and operating issues. “We’re trying to raise the bar for corporate governance, so board members can make better decisions, and be sensitive to issues,” said Richard Jaffe, a partner at Duane Morris LLP who chairs the center’s advisory board. Gupta reviewed highlights of his talk recently in Jaffe’s office, alongside Center founder and executive director Ralph Walkling, whose job includes overseeing studies designed to measure whether good governance means higher profits (generally, it does, he says.)
Directors are paid (sometimes handsomely, earning as much for a few meetings as many professionals collect in a year) to grapple with big questions, Gupta noted: “Should the chairman’s job be separate from the CEO's? Are board members being held accountable as management has become accountable? How do you change the board,” for example, as older directors retire? “How do we bring digital intelligence to the board? Those are the topics you talk about with your peers in a group, rather than in a room with hundreds of people asking cursory questions. That’s the value of what Drexel is doing.”
The qualities and actions expected of directors have changed, not just because of tighter federal board liability guidelines, in response to the Enron and Wall Street scandals, but also because the rapid improvements in information technology make more corporate information available, pressuring boards to confront problems that might once have been left to staff or swept under the rug. Gupta says he tries to prioritize “what has changed in business that is forcing changes onto boards; what are four or five things boards should focus on; and what has been the success record of companies that have sustained value over long terms?”
Is there such a thing as too much corporate data? "Information has become a commodity. Everyone has access," Gupta says. "There are new ways to get information from the company to investors.” Yet independent sources of information have proliferated too – including “all the blog stuff that goes on,” which companies have to respond to if it describes material changes to a firm's value. Financial scrutiny from outside has changed: Sell-side brokerage analysts whose pronouncements once moved stocks have “pretty much disappeared,” while “portfolio managers have become extremely important," he said.
“Digitization, globalization, the sheer complexity of rules and regulations companies have to face in different territories, all the different financial regulation standards – that’s a big factor in how boards have to step up. Meanwhlie the tenures of CEOs have really been going down. There are risks to recruiting new CEOs from outside, as opposed to promoting from inside. Succession planning and talent management are things the board should be deeply involved in.
“The shareholder base has changed. Everybody says today there are no long-term shareholders – but fundamentally that’s not true! Between 60 and 70 percent of the top 500 companies are owned by index funds or large long-term institutional shareholders. The press writes all about the activists and the hedge funds who are making a loud noise. They are on the fringe," but can take over a corporate agenda if they get enough attention.
“The proxy advisory firms, Institutional Shareholder Services and Glass-Lewis, have enormous influence on the way boardrooms think. Compensation, proxy access, chairman-CEO separation. So you have to make sure the company has a strategy and the board leadership in place… Internal succession creates long-term value.
“Look at Warren Buffett’s organization. He has Bill Gates, he has Steve Burke from Comcast…
“Look at Ed Breen at Tyco. For 11 years he put governance right up front. He came in there, he changed the entire board. He cleaned out the staff. He recruited the people. And said, ‘This portfolio of businesses doesn’t belong together.’ He worked with the board to prepare them for the split. When he came in the stock price was $8." Including splits and spin-offs, it's now worth several times that. "He's given us a great example of recruiting talented board members, honestly analyzing the business, putting governance front and center in terms of ethics, and building the ethics police out of the people he recruited.
“This whole notion of trust and transparency for all stakeholders, is at the heart of it. The other notions are courage and humility. Courage because you have to make some tough decisions. Humility because you never see Ed Breen (bragging)…
“He recruited me on the board in 2004. He said, “There are some core businesses and we, together, could create value.’ Last week at the board meeting, I mentioned to him that he had changed direction. He said, ‘The reality was that electronics needed a huge investment. Surgical needed cash flow. As a conglomerate you could not show a steady stream of business.’ It was a really good, rational decision. But he also worked with the board. It took courage for him to say, ‘We will have to spend a billion and a half dollars, it will take a year and a half of work.’”
Former DuPont Co. chairman and chief executive turned turnaround specialist Jack Krol had recruited Breen to scandal-scarred Tyco. Krol had effectively steered Delphi, as well, in its crisis, says Gupta: "He’s an unsung hero in saving hundreds of thousands of jobs. He recruited the board from scratch. In the end we were able to take it public two years before we thought, and create [approx.] $20 billion in market value from zero, as an innovative global supplier.
“Are boards held to the same standards as management? Management is front and center; if something goes wrong it’s the CEO.” But if something goes wrong enough, “100 percent turnover is easier than 20 percent turnover. Also, any board that is more than 10 members strong, is too large.”
(Aren’t university boards at places like Drexel and Penn a lot bigger than that? They typically include a lot of donors, Gupta acknowledges. But “the most important business is usually done by their executive committees.”)
Gupta has a list of “four or five things that boards do well when they discharge their responsibilities:
“One, selection of the CEO. If you get it wrong, the consequences are huge. If you get it right, the results will take awhile, but the results are absolutely outsized. You look at internal and external succession. If a company has to go outside, the board has not done a good job of succession planning. You have to pay particular attention in situations where you have a long-serving successful CEO. Or when you have a CEO who’s larger than life. How many companies lose their independence in transitioning from one of those figures?”
“Two, strategy. The boards usd to just kind of sit through big presentations on corporate strategy. But today’s boards bring an important perspective – if they have the right members – in terms of participating in and evolving that strategy. For them to listen to what management is presenting is probably not sufficient. They have to be willing to bring their own perspective. It’s the question that’s not asked (in management presentations) that boards are good at adding. So much depends on the confidence of the CEO and his sense of support on the board. So the CEO can allow the board to give him their honest feedback and comments, and he doesn’t feel obligated to be defensive, his body language doesn’t have to change.
“At Tyco, when Breen came to us with the idea that we need to break up and with the rationalization, it took a good six months of work by him and his staff to tell us, ‘here’s why.’ Half the board said, ‘Why aren’t we doing more, and growing the whole portfolio, as opposed to breaking up these companies?’ The work, the growing together, became a collective process.
“That’s also the way Bill (McNabb) runs Vanguard.” Which is different, he adds, from the way blunt-speaking Jack Brennan or avuncular founder John Bogle ran Vanguard before him. “What Bogle did, Brennan couldn’t do, what Brennan did Bogle couldn’t. And then Vanguard transitioned from Jack Brennan to Bill McNabb at the time of the financial crisis.” (Brennan has since joined the General Electric board, among others.) “They have a highly focused management team. Their mission was clear. They pursued it with great vigor. They gained market share.” Vanguard’s chief executives aren’t carbon copies. “They have different styles. They all work. No one single style works for everyone.
“Trying to pick the right leader the organization needs going forward is a tricky thing. If you allow the CEOs to guide the process of hiring their own new CEOs, they find someone like themselves. The board has to be very active in getting someone THEY can live with.
“Third, risk mitigation.” Two kinds: “You can think of top-down macro risks which everybody faces. These have different implications for different companies. What is important? What are the consequences? What is the mitigation strategy, the impact of something bad happening, how to capitalize on something big?
“The other kind is bottoms-up risk. I spent most of my life in chemicals. How do you ensure your training and environmental standards are the same all over the world? The cost of getting this wrong is pretty high.
“Fourth, align pay with performance. I’m not talking about how much is too much, I’m talking about getting the right balance between short-term and long-term. You need the right metrics that create value. You have to select the right peers” for comparison purposes. “And there should be some strategic elements to your objectives, rather than just numbers.
“My belief is in targeting compensation at the median of the industry and allowing upside (toward) the top quartile, rather than setting the target in the top quartile. It’s a very important part of the role, setting the bar high.”
How much is too much? Is it the board’s job to worry about divergence between CEO pay and workers’ pay? “That is a darn good question. Some of it is an outcome of unintended consequences,” the old tax cap on million-dollar pay “and outsized options rewards for executives in the 1980s and early 1990s. Companies instead of giving salaries and some incentive cash moved toward making options the huge payoff." Amid the rising stock markets of those years, "the new standard became a bigger number. The escalation in pay has largely been driven by equity." Gupta has no plan to set absolute standards; industry comparisons are practical enough.
“Five, shareholders. Even institutional shareholders nowadays are really willing to go against management’s recommendations. Index funds today own 22 percent of major corporations. They have finally decided they are running someone else’s money, they owe it to investors to speak with their own voice. I see this as a longterm trend: institutional shareholders are becoming much more engaged.
“At Hewlett-Packard and Tyco we have done a tremendous amount of outreach with major investors. Largely in a reactive manner, on proxy issues, and Say on Pay...
“Jack Brennan at Vanguard instituted this idea that boards should consider having a shareholder committee where voices are actively sought. Wouldn’t you want to listen to what shareholders think of your management or strategy? These guys are smart as hell. Though of course, with shareholders, some have a two-month point of view, some have a permanent point of view.
“Finally, ensure a culture of integrity and compliance throughout their organization. It’s one of the highest priorities I see. Every company has a compliance and ethics officer. Every complaint that comes in is followed. There is a vigorous reporting of open items and what decisions were taking. There is reputational risk, and compliance risk. Fraud, bad behavior, bribery, really are not taken lightly. There were senior managers I had to ask to leave at Rohm and Haas for bad behaviors and bad practice.”
Do we risk going too far? Should it matter to shareholders or anyone else if a boss is caught paying for prostitutes, as long as he makes his numbers? Are you throwing out productive people for what amount to cultural concerns? “I’ve never heard this. Certain types of people work for large corporations. They know the rules. Others will be entrepreneurs and work for small companies; it’s a free world. People make their own choices.
"Are large corporations as a result less innovative? I can’t answer that. But if you have a large organization with hundreds of thousands of people, and if you don’t have any consequences for right and wrong, you can’t function. We all know what’s right and wrong. Once you go on the slippery slide, you don’t know where the line is. Will the big companies lose out on wild-guy entrepreneurs? Possibly. But the possibility they’d go on to do something realy bad is worse. There’s room for all models, all stages.”
In the 2000s there was a reaction against public-company regulation, a suggestion more companies would stay private to avoid the added burden of pleasing Wall Street and the SEC.
“The whole notion of having a public company is when the capital requirements become so big that no single individual or entity could own them, you end up with dispersed ownership," Gupta says. "If you have an industry or company or business that needs a restructuring, like Dell, it’s better done in a private mode so you’re not dealing with quarterly pressures from shareholders.
“But my guess is there’s room for all different versions. There are very large oil companies, larger than Exxon, which are state-owned. There’s room to coexist.”
He’s now running a private company, Avantor, based in Center Valley north of Philadelphia. “We have half a billion dollars in revenues, 2,500 employees, a plant in New Jersey, a plant in Mexico, two in Europe, one in India. We are building a reallyunique company that basically supplies high-purity materials for the laboratories, electronics and pharmaceutical industry. It’s built on a 140-year-old company that changed hands half a dozen times in 15 years. It was under-led, under-invested. We saw this opportunity to globalize, to put some technology in it, and some talent. That required a private framework, to do it very quickly. That’s one of the big differences between a private and a public company: a private company can make decisions very quickly.”
Public or private? Philadelphia companies like Aramark, which has been public twice and private three times, and Wawa, which cancelled a 2000s public offering and has moved toward employee ownership, have wrestled with the question for years, Gupta noted.
“With a public company, the metric by which you measure value creation is very clear. Nobody talks about earnings gaps in private companies; we only talk about cash flow and what you can get in and out of. The board helps the company build its business, whether it’s customer contact or acquisition opportunities. It’s a working board. Not an oversight board.
“The biggest change in public-company boards is moving from oversight to partnership and management. To talk about strategy, risk, talent. And in certain things the board has to lead – in succession planning, for sure.
“Boards need their own executives who are doing value-added work.” Should the board chairman’s job be separate from the CEO's, since their roles and intersests are different? “There is no data that says in companies where the jobs are separated there is more value creation. If you have an externally-hired CEO it makes sense at least in a transitional period. Or if you have a monumental taks in hand and you want the CEO to be totally focused on running the company. As long as the other individual, the chairman of the board, has a chemistry and working relationship” with the CEO.
“For all intents and purposes, Jack Krol acted as chairman" at Delphi, "even when his title was ‘lead director’. “A true partnership is based on trust, and the ability to be a resource whenever you are needed.”
Gupta's goal, and the Drexel center's, is helping CEOs and boards operate more smoothly. Who does this help? Wealthy shareholders, certainly; the elite class of corporate officials like Gupta who are paid mostly with stock options, for sure.
But does this value do anything for society? Does it extend to customers, to employees who are paid less and less relative to CEOs, and other members of the public that supports the society that allows corporations to prosper?
“We are all improved by better governance,” argues Drexel’s Walkling. “To the extent businesses and services are more efficient, they can better deliver the needs of consumers and invididuals, from healthcare innovations that improve our lives, to the food we eat. It’s improved when business is improved.”
He recognizes that many people in post-recessionary America don’t see it this way; even some of his Drexel colleagues have "shocked" Walkling by telling him they’re sad so many students want to go into business.
“There are so many people who think business is evil,” Walkling lamented. “The issue of CEO pay has been around a long time – in the 1920s newpspaers wrote about the gap between the presidents of the railroads and the workers getting wider.
"People don’t realize that when business profits – yes, that can be misused – but it raises the level for all of us. The invisible hand of the market helps us all. We’ve got to be sure markets are free and open and there’s competition.
"Corporate governance is a lot better today than it was in the 1980s. Maybe a little of it is regulation. A lot is that we have so much more information to operate with. And the rise of institutional owners willing to speak up, and independent directors. Let’s align owners with managers and maximize shareholder wealth."