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Pittsburgh Business Times – PPG board’s directors’ cut gives powerful performance

Pittsburgh Business Times

PPG board’s directors’ cut gives powerful performance

By Patty Tascarella

Clout. It’s what gets products sold, drives a corporation’s strategic options and provides it with the wherewithal to navigate the seas that lie ahead.

Having a board of directors with the requisite experience, effectiveness – and clout – can often propel a company to the top of its industry sectors.

A model for all corporate boards is the one at Pittsburgh’s own PPG Industries Inc. (NYSE: PPG), which is ranked as the most powerful in the United States, according to a newly released study of 647 public companies.

PPG’s 12-member board is laden with corporate talent at the highest levels. All are currently or have been presidents, CEOs, chairmen or some combination. Hugh Grant, for example, is the chairman and CEO of Monsanto Co.; David Whitwam is the retired chairman and CEO of Whirlpool Corp., and is the board’s longest-serving director, having been first appointed in 1991.

Then there’s Thomas Usher, the current chairman of the board of Marathon Petroleum Corp., and a past CEO of U.S. Steel Corp. Aside from being on the PPG board, he also serves on PNC Financial Services Group Inc.’s and was a director of H.J. Heinz Co. before it went private earlier this year.

“Each of the directors contributes to the mix of skills, core competencies and qualifications,” said Anne Foulks, PPG assistant general counsel and corporate secretary. “We believe that through their varying backgrounds, our directors bring a wealth of experiences, new ideas and solutions to benefit the company.”

Many have served on PPG’s board for a number of years, Foulks added, “and benefit from an intimate knowledge of our operations and corporate philosophy.”

The board has had little turnover, with individual terms lasting three years. The latest addition, International Paper Co. Chairman and CEO John Faraci, came aboard in October 2012.

Its powerful board helps to give PPG more of a presence on the national level during a time in which the collective corporate stronghold and old-boy network are dissipating. It’s also a glowing example for other companies who may be looking to attract big players to their own boards.

JamesDruryPartners, the Chicago-based executive search firm that authored the study, examined the experience of directors using 2012 proxies and other materials to determine which boards had the most governance strength. The field included the nation’s 500 largest public companies according to revenue and by market capitalization.

The study doesn’t count companies’ own CEOs, but even minus Charles Bunch, PPG has six active corporate CEOs, a partner in a private equity firm, two chairmen and two retired CEOs. Most have held impressive prior posts as well. For example, Robert Mehrabian, chairman, president and CEO of Teledyne Technologies Inc., is a former president of Carnegie Mellon University.

“PPG is proud that its board of directors has been recognized as having the highest overall governance capacity,” Bunch said via email. “The board’s collective business expertise and acumen plays a fundamental role in overseeing PPG’s management performance, safeguarding the long-term health of its business and representing the interests of shareholders.”

When it comes to PPG these days, what’s not to like? Last month, it posted record third quarter sales of $4 billion. It has $2.25 billion in cash on the books. Best of all, its stock has been on a fairly steady upward climb since March 2009. Each new 52-week high is also an all-time high. PPG could conceivably pass $200 per share before the end of 2013.

Names not enough

James Drury III, chairman and CEO of his namesake recruitment firm, launched the study three years ago because he heard so many colleagues talk about the difficulty in recruiting CEOs to corporate boards. A veteran recruiter who started his own firm in 2001 and had counted Heinz among its clients, Drury also founded the annual corporate governance conference at Northwestern University’s Kellogg Graduate School of Management and the Directors’ College at the University of Chicago’s Graduate School of Business.

PPG’s board scored so high, Drury said, in large part due to the number of active or retired CEOs in contains. Its Average Director Weight, he said, is 9.3.

ADW is one of three categories in the study. Drury considers it the most important. Each director is awarded points according to his or her experience, with active CEOs meriting the most at 10.

Total Board Weight is the sum of all of the individual directors’ points. This can be distortive if a company has a large number of directors. ADW is TBW divided by the number of directors.

The third ranking, Composite Weight Rank, is the average of a company’s TBW and ADW ranks. PPG was No. 1 in both ADW and CWR but ninth in TBW.

Ten other Pittsburgh-area companies were included in the study: Heinz, which was acquired earlier this year and no longer is publicly traded; United States Steel Corp.; Wesco International Inc.; PNC Financial Services Group Inc.; Ansys Inc.; Allegheny Technologies Inc.; EQT Corp.; Dick’s Sporting Goods Inc.; Mylan Inc. and Consol Energy Inc.

Drury said he likes to see active CEOs on boards because he believes they are best qualified to ask management direct questions based on their own experiences.

One disturbing trend Drury said he noticed was a gradual “dumbing down” of America’s corporate boards over the past 20 years.

Pressure by large pension funds and activist shareholders, plus scandals like the Enron collapse, were major factors in top executives prioritizing and pruning their outside directorships, he added.

A director’s role is to govern by providing counsel.

“So when you have an operations issue like succession, M&A, a major investment or expansion, you’re going to get a lot of insight from executives who made those decisions for their own companies,” Drury said. “You will get composite insight across a breadth of issues they’ve had to balance in other industries and at other companies.”

But just having heavy hitters (and, by extension, a high score) doesn’t necessarily point to a company’s success.

“Just because they’ve got heavy governance capabilities doesn’t mean the board will be effective; it has the capacity to be effective,” Drury emphasized. “That has to be combined with effective boardroom leadership. That’s why you have chairs of the board and of its committees. These people have a job to do, and someone has to make sure they’re focusing on the right things and that independent viewpoints are represented.”

Jeffrey Stafford, a financial analyst who follows PPG for Morningstar, looks at a company’s track record for allocating capital to gauge management and stewardship.

“That’s one of the most important drivers and that starts at the board of directors,” Stafford said. “You have current CEOs, a few retired CEOs, and these people have a lot of experience making capital allocation decisions for their own companies and that experience can transfer over well to the board at PPG. We think PPG has done a pretty good job at allocating capital since Chuck Bunch became CEO in 2005 – the company has done well to focus more on coatings, and specialty material customer relationships are very important to PPG. They ingrain themselves in their customers’ production process and become part of the development process. Some of those directives start at the board level. PPG has done well in strategic focus, and I’d say the vast amount of experience (on the board) can do nothing but help in that area.”

Compensation revelations

In 2012, PPG paid its directors – except for Faraci, who was aboard for just a few months – an annual retainer of $115,000, plus $115,033 in stock awards. Committee chairs were paid additional fees, ranging from $12,500 to $20,000. Stock options were last awarded in 2005. There is also a charitable awards program and a donor-match program for directors.

A national study released last month by Mercer said the median cash retainer for board members of S&P 500 companies was $75,000 in 2012, up 3 percent from 2011. It was the smallest percentage hike in years, the study said, attributing prior, higher jumps to boards’ reaction to increased demands due to regulatory shifts such as the Dodd-Frank Wall Street Reform and Consumer Protection Act and mandatory say-on-pay voting.

“Compensation continues to go up,” observed Thomas Flannery, managing director and board services practice leader, Boyden Global executive search. “There’s a trend toward more stock participation, but compensation is also increasing. The problem is, if you want to get someone on your board, you’ve got to make it worth their while. The expense may seem excessive, but CEOs are expensive.”

About 95 percent of public companies pay equity compensation, and the median was $135,000 in 2012, up from $130,000 the previous year, according to Mercer. And while the granting of stock options to directors has steadily decreased over the past three years, more companies are granting full-value shares, which means that directors would experience value changes similar to those of a common shareholder.

Good-bye, old boys

The decades-long tradition of a high-stakes board in which local executives filled the director ranks of other local companies no longer prevails. It could be personal preferences. It may be driven by regulations, company policy or even board-mandated. But it’s a sign of erosion of the good-old-boy network, something that defined the region’s power grid.

“I think the old-boy network is slowly disappearing,” Flannery noted. “Boards are under pressure from several angles, including their shareholders and Sarbanes-Oxley legislation to choose directors for the value they bring, and they’re being scrutinized more heavily for these choices.”

Through the 1980s, the Business Times ran a list titled Most Popular Corporate Directors that cited the executives who served on the most corporate boards. In 1987, the list included 22 executives, nine of whom served on at least four boards. The remaining 13 each served on three.

“There was a massive trend in the 1990s where the average number of boards a CEO served on was 2.3,” Drury said. “Today, it’s 1.1.”

PNC Financial Services Group Inc. CEO Bill Demchak serves on two corporate boards – his own and BlackRock Inc.’s. PNC owns 21 percent of BlackRock, the New York-based investment giant.

“I suspect that will be the extent,” Demchak said back in February, when PNC announced he would become CEO in two months. “I have enough to do here.”

Pittsburgh’s not alone; in fact, it was comparatively late to the trend, Drury said.

“CEOs don’t serve on four or five (boards) like they used to,” he said. “They’re not over-extended. I would say today, only about half of America’s Fortune 500 CEOs serve on an outside board.”

This has made active CEOs a very hot commodity nationwide for boards, Drury said. It’s also prompted companies to look at alternatives.

“Everybody wants a sitting CEO on his or her board,” Flannery said. “The next best thing is a recently retired CEO. They’re not always available. Then you do your skills matrix and ask, ‘What do we really need?’ It could be someone with financial expertise, ties into the marketplace the company is selling into, regulatory knowledge or a strong compensation background.”

What sells someone on joining a board? Most, Drury said, want to add value. Some are even attracted to a turnaround situation.

But it’s also true that money’s involved. So ultimately, it’s a matter of dollars and sense.