Business transparency Featured

8:00pm EDT June 25, 2007

Concerns about excessive executive compensation, backdated stock options and earnings restatements have sent shockwaves of new regulation and compliance requirements, like Sarbanes-Oxley, crashing into companies.

Yet, despite the strong performance of many CEOs in the past two years, the pendulum has swung away from a “let my numbers speak for me” mindset to a new environment where CEOs must play the role of chief corporate communicator.

CEOs may be able to benefit from this new role by delivering truthful, consistent messages to all constituents, a practice that will restore trust in the C suite and bring control back in house, says Rick Beal, managing consultant for Watson Wyatt Worldwide. “Nobody likes surprises,” says Beal. “Communication transparency takes away the surprises and brings control back to the CEO. In fact, there’s a huge opportunity for CEOs to tell the story behind their numbers hidden within the compliance requirements.”

Smart Business spoke with Beal about how CEOs can use transparency in their communications to win back trust and control from stakeholders.

What are the best practices for communicating executive compensation compliance?

The Securities and Exchange Commission (SEC) mandated a new format for disclosing compensation information for public companies. It says that compliance is meeting the letter of the rules but not the spirit of the intent. Although companies have made good-faith attempts to provide data, many company disclosures fail to provide the ‘how’ and the ‘why’ questions and merely articulate the ‘who, what, where and when.’

We recommend that CEOs take the disclosure issues completely off the table by using an executive summary to tell the story of the executive compensation program. This executive summary should include pay strategy, the company’s labor market for executive talent, and pay and performance levels relative to peer companies.

Wherever possible, without making disclosures that would cause true competitive harm, CEOs should disclose incentive plan goals and their link to incentive payments. They should quantitatively evaluate and describe the difficulty of achieving incentive performance goals.

What are the best practices for communicating with investors and shareholders?

In public companies, the primary constituents are major shareholders, but too often CEO communication is limited to presentations to board members and stock analysts rather than building personal relationships with key shareholders. There is ample room for building a shared understanding of business objectives and governing principles with key investors without divulging insider information through one-on-one meetings.

The key is having consistency and accuracy in your message, and not letting your advisers dissuade you by advocating a no-risk position to the point that not enough information is shared. There is a middle ground, and you can utilize a good media relations team to help develop your talking points and messaging that will tell the broader story of your company’s strategy and goals.

Should CEOs be more transparent when communicating with employees?

Yes. There are huge benefits for letting employees know what’s going on in the company. Utilizing internal resources to establish a direct line of communication to employees about the philosophy, business strategy and desired culture is critical to success. More engaged employees who understand their role in achieving organizational objectives drive a 20 percent increase in performance as measured by increases in total shareholder returns.

Senior management needs to communicate at least monthly via messages that are aligned with corporate strategy — and that information should be available in multiple formats, including print, electronic and face-to-face communications.

Are you advising CEOs to increase their transparency in customer communications?

CEOs have a real opportunity to carry their message and to differentiate their brand and their company with customers by letting their customers know what the company’s mission and vision is all about. You can also lead by example by demonstrating the importance of customer commitments, and you can enhance the expectation that all employees carry the organizational messages to the customer.

How does community involvement potentially reduce bureaucratic compliance for CEOs?

A positive company image can be transmitted through a good solid community relations program and through community involvement by CEOs. Getting beyond compliance requirements to build an environment of trust with all stakeholders is critical to reducing bureaucratic costs. The real opportunity begins when the improved conversation yields unexpected opportunities and raises the level of engagement among all of the constituents.

RICK BEAL is the managing consultant for Watson Wyatt Worldwide in San Francisco. Reach him at (415) 733-4100 or rick.beal@watsonwyatt.com.