From the November 2007 issue of Treasury & Risk magazine

The 2007 Corporate Governance Award Winner

In the world of corporate governance, slow and steady goes a lot further than flash. Take Colgate-Palmolive. For two decades, without much fanfare, the $12.2 billion maker of household, oral hygiene and personal products, has been evolving its governance practices, constantly making changes and updating policies in response to shareholder wishes and current trends. "Good governance is not static," says Andy Hendry, Colgate's senior vice president, general counsel and secretary. "It involves a systematic process, a long-term focus and a commitment to continuous improvement."

Those practices have helped the New York-based company grow at a steady clip, launch an ambitious restructuring plan and arrange for the smooth transfer of power from a CEO with more than 20 years in that position to a successor. Another payoff: a share price that has consistently trended upward over the past decade, with particular success since the end of 2004.

For governance experts, Colgate's tenacious belief in corporate citizenship makes it almost unique in the pantheon of good governance practitioners. Their ratings tell the tale. Institutional Shareholder Services Inc. gives Colgate a grade of 97.3 based on best-practices criteria. Since 2002, the company has never received less than a 90. GovernanceMetrics International has given it their highest rating of 10 every year since 2003. "We've seen the slow, steady progression of best practices," says Patrick McGurn, executive vice president of ISS. Agrees John Jarrett, research director for GMI, "It's the difference between the sprinter and the long-distance runner. They've been very consistent."

That unique combination--a dogged determination to make corporate governance a part of the fabric of the company, along with solid business results--is what led Treasury & Risk to select Colgate as its 2007 winner of the Alexander Hamilton Award for excellence in corporate governance.
Perhaps the single most noteworthy hallmark of Colgate's governance practices may be what Hendry calls its "strong board culture." For one thing, with 10 directors, the board is small--a factor that creates a more cohesive bond and the potential for greater leadership. "It allows directors to participate to a larger extent than they would with a board of, say, 20," says Francis Byrd, vice president of the corporate governance specialist team at Moody's Investors Services.

The board includes many illustrious names from the business world, including three former CEOs of Fortune 500 companies. But even more noteworthy from a governance perspective is the preponderance of independent members--eight, to be exact--with backgrounds that ensure true autonomy. Colgate also meets another best practices standard of having at least one active chief executive--Stephen Sadove, CEO and chairman of Saks Inc. The inside directors are newly appointed CEO Ian Cook and Chairman Reuben Mark, who stepped down as CEO after 23 years in the job.

There's also an emphasis on being open, on a variety of fronts. The board encourages the sharing of information among directors and managers. For example, all committees invite other board members to meetings--and attendance is high. Managers are also often in attendance at regular board meetings. However, this is more than simply an effort to be transparent; the board is open to constructive criticism as well. Three years ago, the board introduced a regular performance review process for themselves, with feedback from peers gathered by an impartial third party.

The board played an active role in another key area: planning an uncommonly systematic transition from one CEO to the next last July--a particularly tough job thanks to Mark's long, distin- guished 23-year tenure. In characteristic form, the decision to give the position to Cook, formerly COO, was announced in 2006, a year ahead of Mark's actual retirement--an unusual move to help guarantee an uneventful handoff and adequate preparation of the successor.

Until he retired, Mark held both CEO and chairman titles--a practice discouraged by governance experts because of fears that one individual would become too powerful. Sensitive to that, Colgate introduced the role of presiding director four years ago to be filled on a rotating basis by one of the board's independent members. It also began separate board gatherings just for independent directors. "The lead director position serves as a counterbalance," says McGurn "It's a progressive governance practice."

Colgate has also taken consistent steps to advance shareholder rights. The board, for example, has never been classified, meaning shareholders vote on the full board each year. In addition, majority voting was approved last year, requiring nominees to the board who receive more "no" votes than "yes" to tender their resignation. It is up to the full board whether to accept it. This year, it was put into the company bylaws, another rare gesture, according to GMI's Jarrett. At the same time, shareholders were given the right to call a special meeting with a 25% threshold, again not the norm for U.S. companies.

As for compliance, the company is stepping up efforts to become state-of-the-art in that arena, as well. "We want to see an increasing emphasis on compliance in the day-to-day business life of the company," says Hendry. "People expect purity in this area and we want to give it to them." For one thing, the office of ethics and compliance will report to the CEO, instead of the CFO or general counsel. In addition, Colgate already sends about 5,000 managers through a training course covering regulatory compliance, called Business Integrity: Colgate Values at Work. It includes such topics as the proper gathering of competitive information, ensuring proper accounting practices, and the giving and receiving of gifts. Now, the company is launching a two-day training program for the sales force.
Since the mid 1990s, Colgate has had a unit in place to promote ethical behavior. That has included implementing a system that allows employees to report misconduct--anonymously if they wish--over a hotline; complaints are directed to the appropriate department.

There have been a few glitches recently. Most notable: Swiss and French subsidiaries are currently being investigated for potential anti-competitive practices. For its part, Colgate says it is working with the authorities and, "where appropriate, we'll make changes to meet their concerns," says Hendry. As for other weaknesses, corporate governance watchdogs don't see many. "One of their strengths is they have so few weaknesses," says Jarrett.

It all adds up to a powerful engine for fueling continual corporate governance advances and the introduction of best practices. "Internal controls, governance and tone at the top are all very strong at Colgate," says Colgate CFO Steve Patrick. "Together, they strengthen the integrity of everything we do." The bottom line: In corporate governance, at least, slow and steady seems to win the race.


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