Knowledge Center

Issue 17 : Performance Issue

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Raymond J. Milchovich

Raymond J. Milchovich currently serves on the Board of Directors of the Dow Chemical Company. He also serves on the board of NTS, the world’s largest independent provider of environmental simulation testing, and is the Lead Director of the Nucor Corporation board. Raymond was Chairman, President, and CEO of Foster Wheeler AG from 2001 to 2007, and continued working for the company as Chairman and CEO until 2010. From 2010 to 2011, he served as a non-executive Chairman and consultant for Foster Wheeler.

In his time at Foster Wheeler, Raymond led the company through an out-of-court restructuring of the balance sheet by convincing the company’s creditors to support a series of equity for debt exchanges while maintaining a modest level of value for the existing equity. In 2005, which was the first year after completion of the restructuring, Foster Wheeler achieved $62 million of adjusted net income. In 2006 through 2008, the company achieved three consecutive years of record earnings, which peaked in 2008 at $533 million of adjusted net income.

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Ray, you recently joined the Board of Directors at Dow Chemical. Interestingly, you were put forth as a nominee by the activist investor, Third Point. What was the process like for you when joining the board?

Raymond Milchovich: Once an agreement was reached between Dow and Third Point, to Dow’s credit, they ran a very professional governance process. They put forth a slate of new directors and brought them onto the board as they would have in any other circumstance.

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"Management should be able to credibly engage and satisfy most, if not all, shareholder needs."

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How should a newly elected director approach getting up-to-speed in the role?

Milchovich: : I think a newly elected director has the responsibility to come down the learning curve as rapidly as possible and to do so, you can’t be shy. I have found it very beneficial to do extensive reading and then to meet with members of management to get acquainted and to gain an understanding of the business, how it operates, and strategically what management is trying to accomplish. It is a must to meet with other members of the board to benefit from their experience and to gain their perspective.

As part of this knowledge-gathering process, when is it appropriate for a new board member to begin engaging with shareholders?

Milchovich: One of my guiding principles is that the board must be a highly functional independent governing body and that management must run the company. Management should be able to credibly engage and satisfy most, if not all, shareholder needs. However, in today’s governance world, there can be a role for directors with shareholders, but I believe that must be carefully coordinated with management.

What would you do if a shareholder reached out to you as a member of the board?

Milchovich: The first thing I would do is listen and ask questions to learn as much as possible about the shareholder needs. Second, I would discuss my perception of the shareholder need with management. Finally, I would collaborate with management and expect to develop a plan of action to address the shareholder need.

As we discussed earlier, you were nominated to the board of Dow Chemical by Third Point. It’s not the traditional route to joining a board. Does that change the responsibility of a director in terms of shareholder engagement?

Milchovich: On January 1, 2015, my relationship with Third Point changed because my tenure as a Dow director began and as such I am legally obligated to behave consistent with a very specific set of disclosure requirements. Dow, Third Point, and I thoroughly understand this.

The theme of this issue is performance. You have been involved in a number of companies that rely on natural resources that may be vulnerable to external price volatility, causing large fluctuations in revenue and profitability. As a director and an executive, how do you assess a company’s performance with that sort of uncertainty?

Milchovich: I haven’t seen a business yet that doesn’t have some form of cyclicality that it must be managed. When I hear people talk about the new normal, sometimes I chuckle because I’ve never seen a business situation that didn’t present us with some level of surprise. We must plan, however, any good business plan includes scenario planning. We have to do that so that we don’t overextend ourselves and get into trouble because we acted on the wrong scenario.

What does scenario planning look like?

Milchovich: For example, the oil business has been a boom/bust business for as long as I can remember, and I think it’s probably likely that it’s going to continue that way. At Foster Wheeler, we served that industry. We looked at our business plans, and we always did scenario planning with the most-likely case, the upside case, and a downside case. Thinking about those cases impacted the choices we made.

How do you view performance in light of uncertain external factors?

Milchovich: : I think the best you can do is pick a set of metrics that compare against the most representative peer group. That’s what we’ve always tried to do. It’s what we try to do in the businesses that I’m involved with today. It’s an imperfect science, but in my view, it needs to be done.

How does that play into compensating executives for their performance?

Milchovich: When we are setting compensation structure for management, we must always keep in mind how shareholders are likely to be doing at various points in the business cycle. If management is doing well in terms of compensation and shareholders aren’t in terms of returns regardless of the reasons, my experience would suggest that we are asking for trouble.

Shifting focus from executives to directors, there’s been a lot of talk about how to evaluate a board and the performance of the individual directors. What can boards do to ensure each director is contributing? What would you say is the best way to gauge whether a director is performing well?

Milchovich: When I think back over all my board experience, the relative quality of all board members has always been known and understood. If the situation is such that the performance of one or more directors needs to be addressed, then that needs to be dealt with candidly and respectfully with the annual evaluations, direct counseling from the lead director, or some other process that the full board thinks is appropriate. Boards must have the willingness to deal with performance.

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"Our duty is to become an excellent governing body and doing so is not always comfortable or easy."

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What would you say are some of the characteristics of an “additive” director?

Milchovich: Directors today must have a strong work ethic, very sound judgment, and courage. To expand on the characteristic of courage, directors must be willing to ask the difficult questions, the courage to say no when it may not be easy to do so, and courage to challenge management when it may be awkward to do so. Our duty is to become an excellent governing body and doing so is not always comfortable or easy.

There is continued pressure by certain shareholders about splitting the roles of CEO and chairman. As former CEO/ chairman of Foster Wheeler, and considering your current role as lead director of Nucor, which also has a CEO/chair, what are your opinions on splitting these roles?

Milchovich: Today this issue is getting a tremendous amount of attention in terms of governance and I don’t happen to agree with the focus. In my opinion, the focus needs to be on behavior much more than structure. In other words, I have seen both structures work very well and not work so well because of the behavior of the Chairman, the CEO, the Lead Director, and/or the other board members.

As the lead director at Nucor, you experience that relationship differently than as chairman. How have you seen that dynamic work?

Milchovich: In the situation at Nucor today, we have a combined CEO/chair role. We have an outstanding chairman and CEO in John Ferriola. John behaves exactly the way shareholders would want to see him behave, and I believe that I’m behaving as lead director exactly the way a lead director should behave. What it comes down to is behavior more than structure. I think you can have separate roles, but if you have a different chairman than the CEO and the behavior of the chairman and CEO is not what it needs to be, you’ll still not have the kind of governance that you want.

Any final words of wisdom for us?

Milchovich: I believe that we are experiencing tremendous change in the public company governance environment today mainly if not exclusively due to the dramatic increase in shareholder activism. While I think this has created a high degree of anxiety in many board rooms and while I’m sure some situations can be questioned in terms of the long-term value that is being created, I think the aggregate impact is positive in terms of “raising the bar” regarding performance standards. In my view, the only way to establish and maintain autonomy is to perform and that is where our focus should be.