Apple Inc. (NASD:AAPL) is one of the stocks in my portfolio. Their annual meeting is coming up on 2/28/2014. ProxyDemocracy.org was down for maintenance when I checked and voted on 2/19/2014, so no voting advice there. I checked a few other sources such as CalPERS, Florida SBA and OTPP but none had disclosed their votes on their sites as of yesterday. I voted with 89% of the Board’s recommendations. View Apple’s Proxy Statement. Continue Reading →
Tag Archives | board
Below are notes I took during the afternoon sessions at the Corporate Directors Forum 2014, held on the beautiful campus of the University of San Diego, January 26-28, 2014. This year, I was only able to attend on January 27th. The program was subject to the Chatham House Rule, so there will be little in the way of attribution below but I hope to provide some sense of the discussion.
If you are a director or candidate, investor, senior corporate officer, board or management advisor, academic, or are in some way part of the corporate governance industrial complex or want to be, I hope to see you there January 25-27, 2015. If you attended the Forum this year and have ideas for articles you would like to see or to write for CorpGov.net, please email me your ideas or drafts. Part 1. Continue Reading →
Despite the Apple Board’s best effort to obtain a “no-action” letter to exclude my proxy access proposal, it is included among the items to be voted on at or before the annual meeting to be held on February 28 at our Company’s principal executive offices in Cupertino, CA. See Apple’s proxy, Proxy Proposal 11, ‘Proxy Access for Shareholders’ on page 63. (A minor gripe – why doesn’t Apple provide a linked index to our proxy so that shareholders can easily flip to the subject they are looking for? Let’s hope part of their strategy isn’t making it too hard to analyze the issues and vote.)
Here’s the thrust of my argument. We need directors who can address the big money pile – not with short-term buyback strategies that facilitate extraction of value but with long-term strategies that create value. Investing $150B in Treasuries or money markets is not efficient use of our money. The returns of Google Ventures, for example, are far above the industry’s mean. There is no reason why Apple couldn’t also put our money to good use though an Apple Ventures type of vehicle or through a revamped and enhanced Blue Sky program. Continue Reading →
Many of us free ride on actions taken by active, long-term shareholders. These unsung heroes goad managers and boards to reach better decisions, make available desirable employment opportunities and, overall, push them to act like good corporate citizens. These active investors accomplish these things by talking to companies, preparing proxy proposals for all shareholders to consider, and offering recommendations on director elections and company-sponsored proxy measures.
Ralph Ward digs past the standard bullshit in his 2014 Boardroom Insider. Always plenty to chew on in a few short pages. Here’s a tidbit, which I hope will leave you wanting more, which includes more tips than you’ll find in pages and pages of other publications aimed at directors. Continue Reading →
My first effort to record a video on corporate governance is about my proxy access proposal, now being voted on at Reeds Inc. (REED). The video below explains Reeds’ great potential and why I submitted a 2013 shareholder proposal to allow shareholders proxy access for up to two director nominees.
Did you know 40% of our Board members own NO stock in our company or that directors are expected to show up for 10 Board meetings a year (plus various committee meetings) but are paid as little as $750 for their service? For that kind of work, with such little financial reward, what is their motive? Are they really Continue Reading →
In mid-July I e-mailed investor relations at Reeds Inc. $REED (IR@reedsinc.com) asking if REED had a classified board or plurality requirements for director elections. Can shareowners call a special meeting or act by written consent? What supermajority requirements are in place re M&A or other actions? No response. This surprised and disappointed me since they were prompt in answering previous e-mails: Make kombucha; we’re already working on it. Try one with coconut water and ginger; good idea. Where can I find Reeds Kombucha in Sacramento?; here’s a list.
According to FactSet Research Systems, “insider/stake ownership” at REED is 33.5% of the company’s float. Being almost a controlled company, maybe they don’t feel the need to respond to inquiries from ‘outside’ shareowners about the firm’s corporate governance. They not only didn’t answer me, they blocked me from following their Twitter feed. Maybe management and the current board think the less outside shareowners know, the better for them? Continue Reading →
Should boards reexamine stock buybacks? That was the subject addressed by a distinguished panel during a recent SVDX program hosted at Stanford’s Rock Center for Corporate Governance. What follows is the SVDX meeting pitch, with issues and brief bios, followed by a few of my observations at the event. Watch the video wrap-up (below) from WMS media Inc.
Continue Reading →
Major corporations are very good at maximizing revenue capture for their owners — but they do so by externalizing costs to society. This drives many of the fundamental problems we currently face, from environmental degradation to economic inequality. IMD Professor Michael Yaziji discusses limitations to the three current solutions to this root challenge: the free market, regulation and socialization. He also proposes a new fourth solution that deconstructs the concept of capitalism to maximize the benefits of market competition and minimize the societal impact of current systems: changing company ownership and governance structures to internalize the interests, and so create value for all stakeholders. Continue Reading →
Mark Latham came up with a brilliant idea in the late 1980s: Shareowners should use their corporation’s funds to pay for external evaluations of governance and performance of the board and management. Shareowners would vote to choose among competing organizations to provide this service.
It was a simple concept but SEC rules made subsequent proposals unnecessarily complex and excluded advice on director candidates, often among the most critical decisions on a proxy. Continue Reading →
John Harrington, of Harrington Investments, will present his proposal on proxy access at the upcoming Bank of America (BAC) meeting on May 8th in Charlotte, North Carolina. It will be the first time language modified to provide a floor for retail nominators of at least 1/2% will be voted on.
That modification was made in an attempt to win over proxy advisors who were concerned the previous version could theoretically allow retail shareowners with as little as $100,000 in equity to nominate directors. Under the revised proposal, the minimum threshold for a nominating group under provision 1(a) at BAC is approximately $1.3B and under provision 1(b) is approximately $666M. Under either option, that is a substantial investment. Continue Reading →
The California Constitution provides that the Legislature may, by statute, prohibit retirement board investments if in the public interest and providing the prohibition satisfies specified fiduciary standards. Current law prohibits the boards of CalPERS and CalSTRS from investing public employee retirement funds in a company with active business operations in Sudan and Iran, as specified.
AB 761 (Dickinson) would prohibit the funds from investing in companies which manufacture nonmilitary firearms or ammunition, as specified, and would require the funds to sell such existing investments. Continue Reading →
Climate Change Portfolio Exposure
Boston Common Asset Management has a proposal that will appear on the proxy of PNC Financial Services ($PNC) requesting that it report to shareowners on the greenhouse gas emissions resulting from its lending portfolio and its exposure to climate change risk in its lending, investing, and financing activities. Watch for your proxy. The annual meeting will be held on April 23, 2012. According to the proposal, Continue Reading →
This is the last in my series on the Corporate Directors Forum 2013. See materials, slideshow, Corporate Directors Forum 2013: Bonus Session, and Corporate Directors Forum 2013 – Day 1, Part 1, and Corporate Directors Forum: Day 1, Part 2. The program was subject to the Chatham House Rule, so there will be little in the way of attribution below but I hope to provide some sense of the discussion. I throw in a lot of opinions. Some are those of panelists, some are mine, and some came from the audience. Continue Reading →
(Reuters/PRNewswire) Southeastern Asset Management, Inc. the largest outside shareholder of Dell Inc. (NASDAQ: $DELL), today announced that it has sent a letter to the Board of Directors of Dell noting that it believes Dell’s proposed go-private transaction grossly undervalues the Company, and will not vote in favor of the transaction as currently structured. Southeastern intends to retain and avail itself of all options at its disposal to oppose the announced transaction, including, but not limited to a proxy fight, litigation claims and any available Delaware statutory appraisal rights. Southeastern beneficially owns on behalf of its investment advisor clients approximately 8.5% of Dell’s outstanding shares (including options). Southeastern filed the letter with the SEC in an SC 13D today. Continue Reading →
Goldman Sachs has come under fire for placing its interests above those of clients, lack of transparency and insensitivity regarding its compensation practices. Goldman has been the target of numerous investigations, enforcement actions and private litigation. Key governance flaws include executive compensation and business practices that create financial and reputational risks. Continue Reading →
Netflix Inc. (NFLX), which has lost half its value in the last two years, adopted an antitakeover plan (poison pill) intended to block activist investor Carl Icahn from expanding his nearly 10% stake. They did so without seeking shareowner approval and the pill may make it harder to find a buyer. Writing for the WSJ, Miriam Gottfried notes, Netflix Pill Should Give Shareholders Pause. Let’s hope shareowners do more than just pause; let’s take action! Continue Reading →
A roundup of just a few of many relevant news items worth reading. Continue Reading →
Economic theorists have suggested the possibility that preferences are dynamic and vary with environmental conditions. Are Risk-Preferences Dynamic? Within-Subject Variation in Risk-Taking as a Function of Background Music investigates such preference interactions as a possible explanation to why risk preferences can change. Continue Reading →
June 11 – The Dean of St. John the Divine, Rev. Jim Kowalski, talks to Lucy P. Marcus about why a non-profit board needs diversity and why members need to ask tough questions. Continue Reading →
(Reuters) Chesapeake Energy Corp (CHK) agreed to replace four current board members with new directors chosen by two of its largest shareholders, bowing to shareholder calls to improve corporate governance, just days shy of its annual meeting. Continue Reading →
Dan Siciliano, Associate Dean, Stanford Law School, interviews C. S. Park, Lead Director, Seagate Board. Presented by the Silicon Valley chapter of the National Association of Corporate Directors. Continue Reading →
EMC Corporation (EMC) is one of the stocks in my portfolio. Their annual meeting is coming up on 5/1/2012. Voting ends 4/30 on Moxy Vote’s proxy voting platform, which listed six “good causes,” including two consolidations, when I checked and voted on 4/27. ProxyDemocracy.org had three funds voting. Continue Reading →
See details of upcoming meeting on the DNA of a successful board below. Richard Levy, chairman of Varian Medical Systems, talks with Jim Balassone, executive-in-residence at the Continue Reading →
CalPERS announced on Monday, April 2nd that Anne Simpson, who heads their corporate governance efforts, has been elected to the Board of the Council of Institutional Investors (CII). Continue Reading →
Apple (AAPL) is one of the stocks in my portfolio. Their annual meeting is coming up on February 23, 2012 (Thursday). This is one meeting I’ll be attending in person, both to vote and to move my motion to provide shareowners with a “say on directors pay.”
Interview with: Andrea Zulberti, Member of the Board of Directors, Prologis and SYNNEX Corporation. Hosted by: Don Keller, Partner Corporate Governance Practice, PwC.
What elements of corporate risk are not receiving adequate Board oversight: (1) strategic, (2) financial, (3) compliance, (4) operational, (5) technology and/or (6) unknown? Is it Management’s or the Board’s responsibility to provide assurances that enterprise risk are all appropriately addressed and within the company’s agreed-upon risk appetite and tolerances? Is it Management’s or the Board’s responsibility to make a (continuing) assessment of whether the corporation has the right controls and processes in place? Should the Audit Committee undertake the Board’s role or a separate Risk Management Committee? Should the Board oversight of “financial” risk be separated from “business” risk?
See this and other brief podcasts on the Silicon Valley NACD website.
As we reported several days ago in Directors Desk Potentially Compromised, security of board documents and conversations has increased as a concern. Now Directors & Boards offers a free webinar open to public or private board member, senior corporate executive, corporate governance officer, corporate counsel, or board advisor interested in better understanding board portals and their applications for supporting board communications and executive team collaboration.
Register for Secure Board Portals: What Directors Need to Know About Security, Portability and Control, to be held March 16, 2011 at 2 pm Eastern, 11 am Pacific.
Secure board portals for the browser, and now for the iPad, are changing the nature of board work for directors everywhere. And given recent news, security is the critical issue.
Document security and portability contributes to enhanced communication between and among directors and boards, improved corporate governance, and expanded opportunities for dialog linking directors with management as well as with key shareholders.
In this 60 minute free webinar, BoardVantage’s Joe Ruck, along with a senior board member, and Directors & Boards’ Jim Kristie, will engage in a lively look at new developments in board portal and communications technology, including portable access to board communications and corporate collaboration via iPad apps, and a discussion of important data security concerns.
Many leading companies strive to follow best practices in corporate governance, demonstrating responsiveness to investors and protecting shareowner value in the process. Paradoxically these same companies often appear to leave their commitment to good corporate governance at the doorstep when they serve on the board of the U.S. Chamber of Commerce (the Chamber). In so doing, they perpetuate a dismal failure of governance.
How so? Many of these companies demonstrate strong environmental and social policies and urge their suppliers to follow suit. Yet sadly, they are silent at Chamber board meetings despite the association’s aggressive actions to undermine sustainable business practices.
The Chamber has always been a powerful force in Washington, lobbying and influencing elections. In the last two years, led by CEO Tom Donohue, it has attacked a wide range of issues including healthcare, climate change, and financial market reforms. The Chamber announced it would spend $75 million in political campaigns in 2010 with one goal being to unseat all congressional members who voted for health care reform. The funds for this partisan political fight were raised and spent in secret, with no public accounting or transparency.
Similarly, the Chamber, allegedly on behalf of the business community, lobbies, speaks publicly and puts political dollars to work effectively challenging company positions on environmental matters. Recently, the Chamber sued the EPA to block its ability to mitigate climate change through regulation.
The Chamber’s website states:
Directors determine the U.S. Chamber’s policy positions on business issues and advise the U.S. Chamber on appropriate strategies to pursue. Through their participation in meetings and activities held across the nation, Directors help implement and promote U.S. Chamber policies and objectives.
Hence Walden, with other investors, has discussed with dozens of companies how membership on the Chamber board may be perceived as supporting the Chamber’s policies. Sadly, we are learning that Chamber board members rarely speak out publicly, or even privately at Board meetings, to challenge its anti-environmental positions. Nor do they confront the Chamber on its partisan political activities.
Clearly there are multiple contradictions between the environmental policies of Accenture, IBM, Pepsi, Pfizer, and UPS – all board members – and the Chamber’s antagonistic actions against climate change legislation and regulation. Yet, as Board members they set and oversee these very policies and campaigns that undercut their companies’ positions – a perplexing way to spend shareowner dollars.
It is time for Chamber board members to end this pattern of compliant and passive acceptance. It is not acceptable to allow anti-environmental policies to flourish and partisan political campaigns shrouded in secrecy to be the order of the day. A respect for good governance requires companies sitting on the Chamber board to stand up and be counted or head for the exit.
Guest post by Timothy Smith, Senior Vice President and Director of ESG Shareowner Engagement at Walden Asset Management, a leader in socially responsive investing since 1975. See also, Resolutions Challenge Chamber Board Members on Political Expenditures, 11/15/2010.
Perhaps it takes the mass media to illustrate the skewed focus of corporate law. Here we have the [at least for now] CEO of Tribune Company, Randy Michaels, under fire for a lot of superficial things, such as an alleged frat house atmosphere in the company, while his role in the company going into and staying in bankruptcy during his three year tenure wasn’t enough to bring about such scrutiny or cause the board concern about its own exposure. It took a misstep by one of his subordinates in circulating an offensive video and public disclosure of a ‘frat house’ atmosphere to bring things to this point. (Tribune Co. CEO Randy Michaels: I have not resigned, Chicago Tribune, 10/19/2010)
But sources said board members were concerned that Michaels had publicly embarrassed an iconic Chicago institution, made many of its employees uncomfortable, and had aggravated an already-tortuous 22-month-old bankruptcy process at a highly delicate stage.
In light of those issues, board members also were becoming concerned that the behavior of Michaels and his management team might open them up to legal action over their fiduciary duty to protect the company, the sources said.
To be clear: the juvenile hijinks are wrong, probably illegal and ill-befitting of an executive of a major public company. However, they and the public embarrassment and employee discomfort are a peripheral matter in the grand scheme of things and have nothing to do with return to shareholders, or in this case, creditors, which should as a matter of law, be the board’s focus. Something is wrong with a scenario where a board is motivated to act in accordance with its fiduciary duty only when raucous behavior comes to light, and had no such motivation in the face of poor financial performance resulting in a protracted bankruptcy, and drastic loss of market share.
Something needs to be done about our corporate law environment when CEO’s who have enough sense to avoid personal indiscretions (or keep them private) get a pass on poor strategy or execution, and their performance is subjected to real scrutiny only when juvenile antics come into public view. Similarly, boards should have at least as much legal exposure when they don’t hold management accountable for a lousy job with their core functions as when they don’t react to personal level foolishness.
It’s a curious legal environment indeed when an HP CEO who presided over a doubling of shareholder value and a Tribune CEO who presided over a bankruptcy filing and deterioration of business value during the process suffer the same fate on account of extracurricular personal indiscretion. It’s also a reflection of a system that needs drastic updating to take substantive performance into account as part of directors’ fiduciary duty.
Toronto’s Globe & Mail ran one of the better articles I have seen on the subject (How to land a seat on a corporate board, 9/7/10). It seems the Institute of Corporate Directors has seen a 25% rise in executives enrolling in its director education program, a series of courses to prepare graduates for serving on a corporate board (see Classes & Research). The article focuses on Sarah Raiss and how she came to serve on two corporate boards.
Raiss began preparing a decade ago, serving for years on boards in schools and hospitals to get experience and contacts. She went through the ICD certification program in 2006 and was recruited two years later. The article goes on to provide advice from Korn/Ferry International on what Board’s are looking for, as well as from a study involving interviews with managers and CEOs of 42 large U.S. industrial and service firms. As kiss-up as they sound, here’s the tactics they identified that lead to success:
- Flattery as advice seeking: Congratulate an influential member about a recent success: “How were you able to close that deal so successfully?”
- Arguing, then agreeing: “At first, I didn’t see your point but it makes total sense now. You’ve convinced me.”
- Sidestream compliments: Praise an influential board member to his or her friends, hoping word gets back to them.
- Get on a wavelength: “I’m the same way. I’m with you 100 per cent.”
- Conform to opinions: Covertly learn of chairman’s opinions from his/her contacts, and then conform with their opinions in conversations with others who can influence the decision.
- Point out connections: Reference religious or political connections the individuals have in common.
Now, with proxy access, there may be another way. I’m sure taking board training, having C-suite and nonprofit board experience are still positives, but maybe a little less kissing up will be involved.
CalPERS and CalSTRS are building a database of potential directors from diverse backgrounds. “The database is a gateway to a broader universe of untapped talent, which can be overlooked as a result of a narrowly focused board profile,” according to Ashley Taylor, who is heading up the project. Individuals have already begun submitting resumes to: DiverseDirectorDatabase@calpers.ca.gov.
Another option for CalTRS and CalPERS might be to explore directors who resigned in dissent from their board. Cassandra D. Marshall’s Are Dissenting Directors Rewarded? (August 28, 2010) used a hand collected sample of 278 boardroom disputes reported in 8-K filings during 1995-2006 and showed that firms which have disputes are small, highly levered, have poor profitability, and have boards dominated by management. For all types of directors across all types of disputes, directors who resign in protest experience a net loss in board seats of 85% over the five year period following the dispute. Although the market, often driven by entrenched managers and boards, don’t reward dissent, maybe funds seeking proxy access candidates will find a gold mine of individuals with backbone.
It’s ironic that the same week Jim McRitchie reports on lingering opposition to and attempts to circumvent the new proxy access rules Funds Preparing Candidate Pool and Proxy Access Avoidance: Subversive or Accelerating Preemption?, in part because of concerns that directors elected in this manner will focus on extraneous matters and private agendas, we see the HP board – having no significant minority shareholder representation – force out its CEO, Mark Hurd, over matters having little to do with the results of his stewardship. All of this illustrates the need for a sharpening of the focus of corporate law and corporate governance efforts to ensure they serve the purpose of incenting management to emphasize maximization of bona fide shareholder value.
I don’t deny the HP board had little choice under existing law. If they had left Hurd in place amid the scandalous revelations, they would have faced criticism and litigation at every turn on a multitude of theories. That’s the problem: as I have argued on this site and elsewhere, existing law places too much emphasis on process and matters having nothing to do with corporate performance (Require Affirmative Proof in Specified Circumstances of “Too Big to Fail Companies” in Order to Meet the Business Judgment Rule). We need changes in the legal regimen to force boards to evaluate management on its business strategy and performance, as well as corporate compliance with legal obligations.
I’m not condoning what Hurd did, and the board could not and should not ignore it under any legal regimen without compromising the company’s compliance posture, but it appears that by any overall metric he was a good CEO who, following the tumultuous, unfocused reign of Carly Fiorina, delivered excellent financial performance (H-P Chief Quits in Scandal, WSJ, 8/7/10) and created substantial shareholder value with the stock doubling during his tenure.
He was removed for what was ultimately a fairly minor personal indiscretion and de minimus problem with his expense reporting, which may have been handled by his assistant. I’m not sure what was accomplished through his removal other than an eight figure severance payout; the market cap of HP dropped by 8% (perhaps temporarily) when the news broke. One wonders if all concerned wouldn’t have been better off with a stern, private admonition from a board member to ‘knock off the garbage!’
Based upon what we have seen in the financial sector and the Delaware holding in the Citigroup case, it is doubtful if the board would have removed him this quickly if he had been pursuing a questionable business strategy resulting in poor results or heavy debt, encouraging aggressive accounting or overseeing activities resulting in legal claims by suppliers or customers. Witness the litany of cases where boards did nothing in the face of ever-more dubious strategy and results: AIG, Citigroup, WaMu, Merrill Lynch, Fannie/Freddie, Lehman, Bear Stearns, …. Need I ask which approach was better for society?
Indeed the board did not even remove him in the wake of the 2006 pretexting scandal, which in my estimation had more to do with the company’s integrity than the most recent episode.
As we move forward in the proxy access era, we all need to keep our eyes on the ball of corporate governance, namely, ensuring that firms are run for the benefit of shareholders. Of course, this means proper oversight of management compensation and ethical compliance. However, it also means keeping things in perspective when management is performing competently, in pertinent areas. There is no question that this will require changes in law to incorporate a more substantive perspective. With the new focus on governance as a key tool of social policy, one hopes that doctrine will evolve to change the emphasis to where it needs to be for the field to drive beneficial social change.
Publisher’s Note: Thanks for guest post from Martin B. Robins, an adjunct professor in the Law School of Northwestern University. He is presently, and for the past 10 years has been, the principal of the Law Office of Martin B. Robins where his practice emphasizes acquisitions and financings, technology procurement and licensing, executive employment and business start-ups. The firm represents clients of all sizes, from multinational corporations to medium sized businesses to start-ups and individuals.
According to the above cited WSJ article, Charles Elson, head of the Weinberg Center for Corporate Governance, praised HP directors for forcing out Hurd rather than simply allowing him to repay the disputed expense money. By falsifying expense accounts, he “committed a serious, career-ending error and there should be some financial consequences,” said Nell Minow, of The Corporate Library. (Mark Hurd Neglected to Follow H-P Code, WSJ, 8/8/10) Minow also posted the following and much more (The Real Mark Hurd Scandal at HP, TCL Blog, 8/9/10):
In order to do any business with the government (including eligibility for certain licenses to do business abroad), companies need to be able to demonstrate that they have ‘tone at the top’ ethics and compliance in place. In the post-Enron, post-meltdown world, the government is not impressed with color brochures and fat books of guidelines. They insist on seeing how violators are treated. And if a middle manager would be fired for fiddling with his reimbursements, then the guy who’s been paid more than $100 million has to be fired, too… While most CEO contracts exempt poor performance as a reason for “termination for cause,” there is no reason to permit a departure following an ethics violation to be characterized as a resignation – when the result is a $50 million payout that would otherwise stay in the corporate bank account.
Minow later Tweeted: “HP settled a $50 million fraud claim with the government last week. http://www.wtop.com/?nid=111&sid=2017563. Why isn’t that the news story?” Activist John Chevedden says, “The conduct of Hurd was compounded by the HP board giving him a humongous going-away present.” In my own opinion, “termination for cause” is currently defined much too narrowly.
I’ll close with the following from my friend Dan Boxer who assembled a few talking points for his U.Maine School of Law, Fall 2010 Governance, Ethics and Corporate Responsibility Seminar. DBoxer, Aug. 9, 2010.
And then there is the sad, and very recent, tale of HP and its now departed CEO and Chair, Mark Hurd, who resigned abruptly in early August of 2010. The governance and ethics experts are still sorting out the facts and the decisions which were made, or should have been made differently, by the Board. We will deal more with this in the ethics part of our class, but since we have already touched on required codes of conduct, some facts and commentary, followed by questions to ponder in class are appropriate at this point. Simply put:
- Mr. Hurd was viewed as wildly successful by the investment community and had done wonders for the stock price through tough financial discipline and new business efforts. He was also viewed as a non imperious, low ego kind of guy who stayed out of trouble and tolerated no inappropriate behavior.
- HP, and Mr. Hurd in particular, implemented, promoted and supposedly enforced with zero tolerance for violation, a model code of business conduct and ethics.
- A company contractor, through her attorney, sent a letter to Mr. Hurd alleging sexual harassment. He immediately turned the letter over to the General Counsel who sent it to the Board which began an investigation.
- The investigation found that Mr. Hurd did not harass the contractor, but that he had violated the code by having a nonsexual, non harassing dalliance (my word) with a female contractor and hiding the costs of dinner and travel in expense accounts (which he said were not prepared by him).
- The board immediately forced his resignation and he left with huge severance compensation. Here is a relevant excerpt from an HP official statement:
The H-P board asked for Mr. Hurd’s resignation in large part because of the conflict between his actions and the code of conduct, which he publicly championed in 2006 following a boardroom scandal, H-P said.
Mr. Hurd’s statement included a confession of sorts:
As the investigation progressed, I realized there were instances in which I did not live up to the standards and principles of trust, respect and integrity that I have espoused at H.P.
6. The company stock lost $10Billion in value the next day and a lot more today.
This situation could be a course in itself and there are many more interesting facts not laid out above, or which remain to be learned. Nevertheless, the whole mess raises some interesting questions and teaches some good lessons which we will discuss. Here are a few:
- Codes of conduct and tough ethical standards don’t mean much if they are not followed or equally applied. However—should they be equally applied if the result is a massive loss of shareholder income? But if they aren’t equally applied, does the ensuing reputation for unfair and arbitrary application of company standards ultimately undermine the integrity of the company and create a rogue mentality which is worse for the shareholders in the long run?
- Human frailty, weakness, greed, lust, etc. cannot be contained by laws (SOX, etc.) or rules. So are we wasting our time enacting them?
- The Board knew that the stock would take a big hit, but showed real courage in confirming a zero tolerance culture and demanding Hurd’s immediate resignation. This is refreshing since we have seen so many examples of CEOs hanging onto their jobs when they have demonstrated questionable conduct.
- It would have been interesting to be a fly on the wall and hear the Board discuss whether its duty was to protect/maximize shareholder wealth (e.g.,stock price) vs. the obligation to other stakeholders, vs. the obligation to the company as an institution to be preserved for the long term, vs. balancing responsibilities to shareholders (among which there are long and short term interests) for both the short and long term?
- Was this actually a fire-able offense? In similar situations employees might well be required to go through sensitivity training, reimburse the company for questionable expenses or be placed on some sort of probation. Would Hurd have been treated less harshly if he were a top performer but not the public persona of the company? A lower level employee? Did the Board overreact? Should the top person who can affect the future of the company be cut more, or less, slack since he can affect so many careers and pocketbooks?
- What would the public disclosure requirements have been had the board sought to deal with this as an internal matter?
- Cynically, was the Board only “cutting its losses,” since it looks like it concluded it could have a public relations disaster and an unmanageable work situation with an ineffective and distracted CEO under various scenarios of keeping Mr. Hurd in place and then having the facts come out? Very recent information seems to indicate that the contractor was a former “soft porn” actress appearing in R-rated films. In other words, was the decision a purely business/economics one, not an ethical one? Did the board do the right thing for the wrong reason?
- Would things have been different if HP had split the roles of CEO and Chair?
- Did the board show a lack of courage and send the wrong signal when it agreed to pay massive severance (recognizing that this is a contract issue depending on the terms and they may have had little choice)?
- Ms. Fisher, the contractor, is a case study all her own in disingenuous and unethical behavior. According to today’s reports (Aug, 9, 2010) Ms. Foster put out a statement: “I was surprised and saddened that Mark Hurd lost his job over this,” Fisher said in a statement. “That was never my intention.” What did she think could be a likely outcome when she put the whole thing in motion, she hires a lawyer with a reputation for tough, no holds barred, aggressive attacks on powerful people in order to get money for her client?
Here is just a sample of some articles with the facts as known to date and some speculation about facts and ethics:
- Boss’s Stumble May Also Trip Hewlett-Packard, New York Times, Aug. 8, 2010.
- Mark Hurd’s Leadership Failure, Business Ethics Magazine, Aug. 7, 2010
- Division of Roles Could Help HP, New York Times, Aug. 8, 2010
- The Shot ‘Hurd’ Round the Boardroom, Jeffrey M. Cunningham, NACD, Aug. 10, 2010
And here is the actual HP code of conduct.
Quotes – The Business Case for Sustainability & CSR Reporting: Selected Quotes from the Business Community July 2010. Tim Smith of Walden Asset Management, offered up a helpful resource providing a selected set of quotes from CEO’s and company CSR reports on the business case for Sustainability and CSR reporting highlighting how they contribute to shareowner value. Business leaders explain in their own words why their companies are stepping up on Sustainability issues and how they contribute to the business and its bottom line. The research was done by Carly Greenberg, a Summer Associate at Walden and a student at Brandeis University. You can download it from the Socially Responsible Business/Investments section of our Links page.
Sullivan & Worcester recently announced a free resource for law and corporate librarians, researchers and reporters. The Financial Crisis Timeline is a full chronological directory of the Federal Government’s actions relating to the financial crisis since March 2008. Links take the user to government press releases or government web pages. You can also find on our Links page in the History section, for future reference. (Hat tip to Dan Boxer, University of Maine School of Law)
Keith Bishop, a partner in Allen Matkins, recently started a blog devoted to California corporate and securities law issues. For future reference, you can find it on our Links page in the Law section. As I recall, Bishop first came to my attention after 1991, when the Rules Committee of the California Senate appointed him the Senate Commission on Corporate Governance Shareholder Rights and Securities Transactions.
In Selectica, summarized by Pileggi here, the Court held valid a poison pill with a 4.99% trigger. At first glance this seems to be a great twist for those of us who remain skeptical of the federal government’s intrusion into this foundational issue of state law. Boards could just lower the pill trigger to 4.99%. Then even to the extent shareholders could afford to obtain a 5% interest in a company, those who did not already own a 5% interest at the time of the pill’s adoption would not be able to obtain an interest sufficient to nominate onto the corporate proxy.
Even after enactment of Dodd-Frank, Verret speculates this tactic might work at most companies, since the threshold being considered by the SEC for small companies is 5%. The latest strategy offered up by Verret in Proxy Access Defense #2 is even more insidious:
The Delaware General Corporation Law gives the board and the shareholders the co-extensive authority to adopt bylaws setting the qualification requirements necessary to become a director. There is very little case law interpreting this provision, other than the general rule from Schnell v. Chris-Craft that powers granted to the corporation may not be used in an inequitable manner. Qualification requirements based on experience, education, and other background-like variables would likely survive scrutiny, particularly where they are adopted well in advance of a threatened proxy fight.
The key element in such a bylaw would be that the Board would serve as the ultimate interpreter of the provisions. For example, a qualification provision could require directors to have 20 years of experience at a comparable company in the same line of business. The Board, then, would determine whether that requirement has been met, and only after the proxy contest has actually happened. Under the holding in Bebchuk v. CA, a shareholder challenge to such a facially neutral bylaw would likely not even be justiciable until a shareholder nominee actually won the contest. And yet, the prospect that the Board will invalidate the director may discourage nominees in the first instance.
I wonder if Professor Verret also offers advice on how to circumvent tax codes, the Occupational Safety and Health Act, or the Americans With Disabilities Act. Harvard must be pleased to have such a distinguished scholar. Hopefully, most companies will seek to work with their shareowners but I suppose there will always be companies like Apache that may find Verret’s strategies appealing. No, I’m not adding these posts to our Links page. Hopefully, they will fall under the category of fantasy.
In “Rethinking the Board’s Duty to Monitor: A Critical Assessment of the Delaware Doctrine,” to be published in 2011 in the Florida State University Law Review (current version available ssrn.com), Prof. Eric Pan of the Cardozo Law School substantially advances the discussion of how corporate governance needs to be improved in order to minimize the macroeconomic impact of poor decision-making at the firm level and the need for costly bailouts. Moving beyond the recent “hot” topics of maximizing director independence, enhancing minority shareholder proxy access and improving the executive compensation process, he focuses on considerations directly impacting the outcome of board deliberations.
This is an essential complement to such topics in that it addresses actual board performance in consideration of issues of business policy – that is, once directors are installed, we need to ensure that they do a good job in addressing company business. Prof. Pan recognizes that the problem of board performance is not solved once we get the “right” people in place.
He correctly observes that to the extent that present Delaware law addresses director performance in its management oversight role at all, it does so by focusing on failure to “monitor” management in order to prevent major legal violations, and almost entirely absolves directors from any responsibility for adverse business outcomes, no matter how disastrous for the single firm or for the economy, so long as appropriate process was utilized. The implications of the Caremark and Citigroup decisions for the former and latter propositions, respectively, are well described. The implications of poor oversight by the Citigroup board for that firm and our economy need no further description. Prof. Pan argues quite persuasively that we need to expand the board’s duty to monitor created in Caremark to encompass management decisions leading to poor business outcomes, even if no laws are violated, irrespective of the process which is utilized.
Rather, boards should be held responsible for business as well as legal outcomes. Courts should shift the burden onto directors to show they made an effort to be informed and to respond to developments leading to such outcomes.
This reviewer has argued in “Dawn Following Darkness: An Outcome-Oriented Model for Corporate Governance,” 48 Duquesne Law Review 33, reviewed on this site in an April 22, 2010 post, that fixing this gap in corporate law with such burden shifting in order to avoid disastrous decisions by our largest firms is a fundamental but overlooked step in the financial reform overhaul currently in process.
Like this reviewer, Prof. Pan argues for a regimen where directors have some – in his view, seemingly undefined – financial responsibility when their firms suffer major losses as a result of management decisions which are not meaningfully challenged by the board, even where there is no legal violation. Presumably, this would apply to situations requiring public bailouts such as the recent financial industry debacles. Prof. Pan would enhance his case by attempting to enumerate specific circumstances, such as a need for governmental assistance, in which such responsibility should attach.
As contemplated in Prof. Pan’s article, the new responsibilities would apply to all firms (or at least to all publicly traded ones). This reviewer strongly disagrees with such breadth.
In that all concerned, including Prof. Pan, agree that such a change would likely reduce business risk-taking, we need to apply it only in cases involving companies of sufficient size and interconnectedness and events of sufficient magnitude, where poor decisions can have significant external effects for the broader economy.
A third concern is that the duty to monitor as advocated in this paper, will usurp the board’s discretion in determining the appropriate degree of monitoring and inhibit risk-taking. We do not want the duty to monitor to prevent corporations from conducting certain activities which may actually be beneficial to the company and its shareholders. In other words, the board may conclude that it is in the best interest of the corporation for it to expose itself to extreme amounts of business risk.
The Citigroup court correctly notes that the present business judgment rule is intended to permit entrepreneurial activity – i.e. risk-taking. While it obviously worked too well for Citigroup, especially today when we face a nascent economic recovery, we should not inhibit risk-taking – and often employment – any more than necessary. There are many large public (and private) companies where the consequences of a poor decision will be limited to that firm and its shareholders without any material ramifications for the economy.
The situation addressed by the Delaware Supreme Court in upholding under the business judgment rule, the actions of Disney’s directors despite their signing off on a wasteful compensation and severance package for a former President illustrate where the current regimen of deference to director business judgment is working effectively. Even though this decision turned out to be a very poor one for Disney, it had no implications elsewhere.
In any event, as Prof. Pan notes in his discussion of how as a result of resistance at the state level, recent innovations in corporate law have largely been under the guise of the federal securities laws, it will be difficult to implement any of the changes he suggests. As such, what is proposed should be as narrow as possible in order to increase the likelihood of its enactment.
Prof. Pan makes a major contribution to the corporate governance discussion by focusing on actual governance issues as opposed to process, compensation and board composition issues, and his ideas should be heeded by those considering changes in this area. However, it is preferable for those ideas to be refined to ensure that they are properly targeted (by firm and event) so as to cause as little disruption to business risk-taking as is possible.
Publisher’s Note: Thanks to guest reviewer Martin B. Robins, an adjunct professor in the Law School of Northwestern University. He is presently, and for the past 10 years has been, the principal of the Law Office of Martin B. Robins where his practice emphasizes acquisitions and financings, technology procurement and licensing, executive employment and business start-ups. The firm represents clients of all sizes, from multinational corporations to medium sized businesses to start-ups and individuals.
The Rising Tension between Shareholder and Director Power in the Common Law World by Jennifer G. Hill, available at SSRN, explores the rising tension between shareholder and director power in the common law world. First the article analyzes key arguments in the shareholder empowerment debate, and current US reform proposals to grant shareholders stronger rights, from a comparative corporate law perspective, examining how traditional US legal rules diverge from other common law jurisdictions. Secondly, the article discusses power shifts in the opposite direction – namely toward the board – in some parts of the common law world.
The article shows that US shareholders have traditionally possessed significantly fewer participatory rights than their counterparts in other common law jurisdictions, and examines particular legal rules that contribute to this divergence. Indeed, the current reform proposals to enhance shareholder rights, despite being the subject of great controversy in the US, fall far short of rights already held by shareholders in other common law jurisdictions, such as the UK and Australia.
The article also identifies an important tension between legal rules designed to enhance shareholder power, and commercial practices designed to subvert it. It shows how strategic commercial responses to regulation can affect the operation of legal rules. The existence of commercial pushback of this kind suggests that, even if US shareholder powers are significantly strengthened, that will by no means be the end of the story.