Lisa Palumbo talks about her career and how her current employer has transitioned into the post-Sox environment
For some companies, adjusting to life after Sarbanes-Oxley has been a harrowing experience. However, with the proper amount of planning, an actively involved board and a well-defined set of objectives, EDO Corporation was able to eliminate many of the potential headaches.
Lisa Palumbo, senior vice president, general counsel and secretary at EDO, credits her board and CEO for putting the company a step ahead in the pre-Sox days. ‘The board and our chair and CEO had in place, before Sox and the NYSE requirements, a well-thought-out hotline and ethics policy for all employees,’ she says. ‘When the requirements were released, we had tweaking to do, but we were in good shape, which allowed EDO to make more thoughtful assessments of governance issues and policies.’
Jim Smith was named CEO in mid-2000, following the merger of EDO and AIL Systems, and was elected chairman in 2002. ‘He wanted to improve the company’s governance, and our mandate throughout the firm was to look at and improve everything we could,’ Palumbo notes. ‘The first thing we looked at was the governance structure, which was really very good. As a government contractor, we had well-disciplined and well-thought-out governance practices and procedures in place.’
Palumbo points out that, with the exception of the CEO/chairman, all EDO directors are independent. ‘Thanks to Jim’s focus on governance pre-Sox, we had practices and procedures in place that put us a leg up on the issue,’ she adds.
This progressive governance approach allowed Palumbo in many cases to only memorialize existing practices and procedures to be fully compliant. Governance guidelines were formally adopted that provided for annual self-assessments, board rotation and independence standards. Independence considerations were tweaked when the NYSE issued its final independence standards, but Palumbo feels fortunate that she was, for the most part, formalizing disciplines and best practices that had been thought through by the company – as opposed to practices designed to comply with new regulations.
‘Memorializing practices and procedures was a good discipline for us, and we used it as an opportunity to think through additional ongoing improvements that we might make,’ she says. ‘We had no sticking points on the board. For example, we had a classified board. I received a Harvard study that made a compelling suggestion that staggered boards did not improve shareholder value. Our governance and nominating committee looked at it and said, No, it probably doesn’t. Let’s declassify the board.We had no shareholder proposal compelling us or any pressure to do so. But our board is diligent, supportive, active and open. They took the decision without prompting.’
At EDO, each board committee has a management member as a liaison. Palumbo liaises with the nominating and governance committee, the CFO with the audit and finance committees, and human resources with the compensation and management development committees. ‘Before committee meetings, I discuss with the committee chair what’s up, issues of interest and what presentation should be made. Or he may ask for materials. The governance committee is scheduled to meet twice a year and ad hoc as needed, with the average being three or four times,’ Palumbo explains.
‘For the overall board, I meet with Jim, who is literally steps from my office,’ she adds. ‘Once a year we’ll sit and discuss the broad board agenda for the next year or two,general items that don’t come up through committees. We prepare in advance of each meeting and include both the agenda items we need to cover and issues that committee chairs and board members have raised. We have regularly scheduled executive sessions. Each independent director is assigned to chair a session, in alphabetical order. I make sure that each lead remembers when he or she is up, has information from the last session and circulates the agenda. If they have items they want recorded, they will call me in. They must let me know when there are action items required so that I can memorialize them. I keep tabs on who is in the batting circle and who is on deck. Our outside directors usually like to have our chair and CEO sit in on some of the sessions.
‘We achieve good corporate governance ratings as an outcome, not a goal. We consider our decisions independent of the ratings. Of course, if we had terrible ratings, we might not have the luxury. But we look at issues independent of ratings and think if we can improve, we will. While we aren’t chasing ratings, we are happy to have them. For example, we know we get penalized on ratings for the fact that we don’t separate the chair and CEO, but that is right for us. We don’t have a independent lead director either.’
Palumbo has some extra resources at EDO. ‘Arthur Causin reports to me. His background is in quality control. He is a statistician with an MBA in management, not an attorney, and at AIL he was responsible for quality processes and ISO certification. While ISO is a manufacturing standard, it is also a great framework for compliance, self-auditing, self-reporting and continuous improvement. His background and discipline molded very well with Sox 404 and 303 requirements. We have self-audit processes and procedures for high-risk areas, and these continue to evolve over time. Continuous improvement is built into our system. Almost all of our directors sit on other boards. They are NACD members and take their responsibilities, ongoing education and due diligence very seriously. They enjoy and learn from the self-assessment process, and they use assessments to help in their relationships with each other. They feel free to call management and have wide-open relationships. These are former CEOs, folks from different walks of life. They have a discipline built in.’
