Directors&Boards is one of our “stakeholders.” No, that doesn’t mean they own part of us or that we own part of them and it doesn’t mean we always agree with each other. But they are included in our primary reference groups, those who contribute regularly to our “vocabulary of meaning.” The current edition begins to address two topics that need more attention. Continue Reading →
Tag Archives | CEOs
In a recent Stanford “Closer Look” publication (How ISS Dictates Equity Plan Design), Ian D. Gow (Harvard but graduated from Stanford), David F. Larcker, Allan l. Mccall, and Brian Tayan argue ISS dictates pay equity plans. ‘Nonsense,’ was my first reaction. ISS policies generally reflect the will of its customers. The authors have a point but they miss the main problem. Their arguments begin in familiar territory. Continue Reading →
Bob Frisch is the managing partner of Strategic Offsites Group. He has more than 29 years of experience working with executive teams and boards worldwide on their most critical strategic issues. He has published three articles on teams and decision making in the Harvard Business Review: “Who Really Makes the Big Decisions in Your Company” (12/11), “When Teams Can’t Decide” (11/08) and “Off-Sites That Work” (6/06). Bob’s work has been profiled in publications from Fortune to CFO to the Johannesburg Business Report. He is a regular contributor to Bloomberg Business Week and The Wall Street Journal and his blog appears at HBR.org. Continue Reading →
The 400 largest companies headquartered in California, representing almost $3 trillion in shareholder value, still resemble a “boys’ club” with women filling fewer than 10 percent of top executive jobs, a University of California, Davis, study has found. Incremental gains have been pitiful, in my opinion.
The Graduate School of Management’s eighth annual UC Davis Study of California Women Business Leaders — a yearly benchmark for the Golden State’s lack of progress in promoting women business leaders – paints a dismal picture for women in leadership during fiscal year 2011-2012. Some of the best known among these top companies, or the California 400, have no women leaders. Continue Reading →
An increasingly popular trend in recent years has been the adoption by Delaware public companies of an exclusive forum provision in their bylaws. An exclusive forum provision generally provides for the Delaware Court of Chancery to be the exclusive forum for certain disputes (including derivative actions, breach of fiduciary duty claims, claims arising pursuant
to the company’s charter or bylaws and other shareholder litigation) against the company — and prohibiting such suits in other jurisdictions. Expected benefits cited by companies of adopting exclusive forum bylaw provisions include decreased litigation costs, avoiding parallel litigation in multiple jurisdictions and the predictability of Delaware courts. Continue Reading →
Sociologists Richard Zweigenhaft and G. William Domhoff began studying ascendance to the top corporate office 20 years ago and, while the population of CEOs is far from diverse, they report that they have been surprised to see as many women and minorities as they have. Today there are 80 white women, African Americans, Latinos, and Asian Americans at the head of Fortune 500companies. Continue Reading →
The following is a guest post by by Sonia Jaspal from her blog, Sonia Jaspal’s RiskBoard, originally posted on June 12, 2012. I’ve added a few links, a couple of ads and reformatted the post slightly. Continue Reading →
We need to do a better job of evaluating the emotional competency or our leaders. “A fine balance has to be maintained between technical and emotional competency of the individual and organization objectives and culture, wrote Sonia Jaspal back in 11/16/2011. Here is an excerpt from her argument, which deserves wider circulation. Continue Reading →
That’s the title of a new report from ISS on the factors that contributed to significant investor opposition during last year’s say-on-pay votes at U.S. companies. From the summary: Continue Reading →
Republished here with permission, Ralph Ward’s essay was included in his January 2, 2012 publication: Ralph Ward’s Boardroom INSIDER, the best quick read for director tips. In a few brief paragraph’s Ward sets out the folly of our current selection process. After reading it, I hope you will agree with me that Continue Reading →
It is often said that “the most important function of a board is to hire and fire the CEO.” Yet the experience of many is that boards do a pretty good job on the hiring front and a not-so-good job on the “exit.” An exciting SVNACD session in Palo Alto focused on the pitfalls of CEO changes and how to avoid them. The panel couldn’t have been more timely. (Bartz fired at Yahoo…may have violated disparagement clause: Kathleen Peratis, Outten & Golden)
This program, like all SVNACD programs, was subject to the Chatham House Rule: “Participants are free to use the information received, but neither the identity nor the affiliation of the speaker(s), nor that of any other participant, may be revealed.” In this case, the panelists had already been identified publicly.
As with many SVNACD events, the audience was frequently as informative as panelists. My report will give you just a flavor of what went on. To get the whole meal, you’ll have to Continue Reading →
The new 2011 Corporate Board of Directors Survey from Stanford University’s Rock Center for Corporate Governance and Heidrick & Struggles has uncovered surprises about who makes the best board directors: it’s not necessarily the current CEOs that most companies seek out.
“The popular consensus is that active CEOs make the best board members because of their current strategic and leadership experience,” says David Larcker, professor at the Stanford Graduate School of Business. However, when asked about Continue Reading →
It is often said that “the most important function of a board is to hire and fire the CEO.” Yet the experience of many is that boards do a pretty good job on the hiring front and a not-so-good job on the “exit.”
The Silicon Valley Chapter of the National Association of Corporate Directors will hold a session on September 15, 2011 focusing on the pitfalls of CEO changes and how to avoid them. There will be a candid discussion between an experienced CEO and an experienced chairman of a board, facilitated and led by Rich Moran, a member of our board of directors.
7:30-8:00 a.m. Continental Breakfast; 8:00-9:30 a.m. Program
Gary Larkin’s recent post, 2011 CEO Succession Report: Dismissals Up, Outside Hires on the Rise, informs Conference Board readers that Institutional Shareholder Services has launched an executive compensation database service for its client subscribers. Say on Pay rules were the driving force behind the new service.
The database includes historical CEO and NEO (named executive officer) compensation data for more than 4,000 U.S. companies, together with Say on Pay data Continue Reading →
CEOs at the biggest U.S. companies saw their pay jump sharply in 2010, as boards rewarded them for strong profit and share-price growth with bigger bonuses and stock grants.
The median value of salaries, bonuses and long-term incentive awards for CEOs of the 350 biggest companies (that filed proxies between May 1, 2010, and April 30, 2011) surged 11% to $9.3 million, according to a study of proxy statements conducted for The Wall Street Journal by management consultancy Hay Group.
CEO pay was measured as total direct compensation — salary, bonuses and the granted value Continue Reading →
GovernanceMetrics International recently sampled large corporations and found that CEO pay jumped 27% in 2010 to a median of $9 million.
According to William Lazonick, professor at the University of Massachusetts, in 2010 the S&P 500 jumped 12.8%, capping a two-year gain of 39.3%. Companies in the S&P 500 boosted profits by 47% in 2010, not from boosting sales of goods and services, which rose only 7%, but by cost-cutting and layoffs, says Lazonick. (CEO pay soars while workers’ pay stalls, USA Today 4/1/2011) ) Continue Reading →
Excess executive pay can impose substantial costs on companies and shareowners even if manipulation or misconduct isn’t involved. Executive pay is the biggest lightening rod in corporate governance, prompting Dodd-Frank to include clawback requirements, mandatory say on pay, and say when on pay votes, as well as the coming ratio between executive pay and the pay of a company’s median employee.
Jesse Fried and Nitzan Shilon’ s important paper, Excess-Pay Clawbacks, highlights the problem of “excess pay” to executives arising from errors in earnings and compensation-related metrics. Although addressed in part by Dodd-Frank, significant additional measures are still needed.
The paper examines excess-pay clawback policies in S&P 500 firms prior to Dodd-Frank.
We find that nearly 50% of S&P 500 firms had no excess clawback policy whatsoever. Of those firms with clear policies, 81% did not require directors to recoup excess pay but rather gave directors discretion to let executives keep excess pay. Of the remaining Continue Reading →
In remarks before the National Press Club, the CEO of Broadridge, the nation’s largest shareholder communications company, called on all CEOs to encourage individual shareholders, including employee shareholders, to vote their proxies.
In 2010, just one in 20 individual retail investors voiced their opinions about the companies they invested in by exercising their fundamental shareholder right. That compares to recent historical levels four to five times as high. Public companies need to understand the seriousness of this issue and act to reverse this troubling decline to get each of their individual investors — and all individual investors generally — engaged with their companies.
Richard J. Daly went on to explain that as an initial step in an overall strategy to increase individual shareholder voting, he is calling on CEOs of American businesses to
join with us in launching a nationwide effort to encourage their employees — numbering in the tens of millions — to exercise a fundamental shareholder right — and need — to vote their proxy ballots, whether it be proxies relating to their employer or proxies relating to other companies in which they invest
As part of the effort, he is contacting the chief executives of America’s top 1,000 public companies to encourage them to motivate their employee shareholders to vote their shares. Broadridge will inform shareholders —- within the constraints of regulatory boundaries —- that they have the ability to take action online, eliminate the paper, have all information stored in any format they want, have access to it anywhere they want and vote at any time they want, even on such new devices as Android™ phones and the iPad®.
A relatively small increase in voting participation by employees could meaningfully increase individual investor voting participation from 5% per year to 20% or more per year. Companies that can distinguish their investors’ opinions from others’ will more easily have the strength and confidence to stay on course and create value. There is no greater show of support than the ballot, or in this case, the proxy.
While I certainly agree with Daly that steps need to be taken to ensure more retail shareowners vote, I didn’t like the thrust of his remarks, which appeared to assume that more retail votes would mean more votes for management… or am I reading too much in when he says:
Better to hear from actual owners — whose interests are likely aligned with the company — than from outsiders whose agendas may be in conflict with shareholders’ long-term interests.
Additionally, it would have been nice if he would have emphasized the usefulness of sites that help inform shareowners on the issues.
- Mutual funds & proxy voting: Proxy Democracy.
- ESG issues: Social Investment Forum.
- Vote proxies: MoxyVote.com.
- Rate information providers: VoterMedia.org.
- Network & Lobby: Shareowners.org & US Proxy Exchange (USPX).
- Keep up on the latest issues: CorpGov.net.
If it is a public relations move that Daly is after, he might recommend that companies take a page from Prudential Financial. They’re rewarding their voting shareowners with totebags or by planting a tree. Last year, the company got an additional 68,000 shareowners to vote, mailed 120,000 bags and planted more than 112,000 trees.
This year, Prudential added information in its proxy materials on sustainability, corporate citizenship and shareowner engagement. Shareowners who cast their proxies online can view the directors’ bios and the supporting statements for shareowner proposals. More importantly, Prudential’s board supported a shareowner proposal from John Chevedden to eliminate the company’s supermajority voting provision.
In response to growing concerns on the spread of the financial crisis, the Yale School of Management, in partnership with the Wall Street Journal and CNBC, organized a roundtable discussion in New York on September 23, 2010 that brought together business leaders and scholars from Yale, Wharton, NYU, and the Columbia and Harvard business schools to discuss the unfolding situation in the markets and the economy more broadly, as well as the proposed federal bailout plan. Click Here. Hat tip to Simoleon Sense; I didn’t realize it had been posted.
For a completely different take on the financial crisis, Arthur Benjamin asks, what if we put probability and statistics at the top of the pyramid instead of calculus?
On This Week in the Boardroom (TWIB), co-hosts TK Kerstetter, President, Corporate Board Member, and Scott Cutler, Executive Vice President, NYSE Euronext review what nominating/governance committees should know about including the CEO in the board recruitment process. Additionally, hear why Hewlett Packard’s new CEO and nominating committee are under fire by proxy advisory firms. For our take on these issues, see The Appearance of Legitimacy: Board Elections and HP Nomination Committee Under Fire.
The number of U.S. companies that separate the chairman and CEO roles is at a historic high: 40% of the S&P 500 now separate the roles, up from 23% a decade ago, according to Spencer Stuart. Of the 40%, 19% may be classified as independent Chairs, up from 9% five years ago. A new report published by the Millstein Center for Corporate Governance and Performance at the Yale School of Management is among the first to outline how chairs and CEOs work effectively together in these interdependent roles, providing useful guidance as the chair-CEO leadership structure becomes more prevalent.
The Effective Chair-CEO Relationship: Insight from the Boardroom, authored by management expert Elise Walton, is based on interviews with 35 chairs, CEOs, and stakeholders. Participants identified key factors that contribute to a successful working relationship between the chair and CEO: good chemistry, a clear framework for the relationship, and having effective people and practices in place.
“Separate board leadership is still emerging in North America,” said Walton. “There is no Continue Reading →
I recently got this from an anonymous member (here are related thoughts from Cydney Posner and Marty Lipton):
You may have seen the stories regarding ISS’ recommendation that shareholders withhold against the entire Hewlett-Packard nominating committee for the way new directors were selected. I haven’t seen the ISS report, but the news stories (eg. WSJ article) probably describe it pretty well.
At issue seems to be the fact that five new directors of H-P were identified by an ad hoc committee, which according to H-P’s proxy statement “consisted of the CEO and three non-employee directors, which was formed in November 2010 to assist in identification of new director candidates and to facilitate the process of evaluating those candidates as potential directors.”
ISS and Glass Lewis criticize the addition of the CEO to this committee, since only the independent directors of the Nominating and Governance Committee are supposed to responsible for director nominations. While CEOs play a role in nominations, it does seem unusual to formally include the CEO on the search committee. It likely also didn’t help that, as according to this Bloomberg article, many of the new directors had connections to the CEO. None of those relationships are disclosed in the proxy, as much of it relates to the CEO’s former company.
In additional soliciting materials filed on Friday, H-P responds to ISS’s recommendation. (How You Find New Directors: “True Independence” Under the Microscope – TheCorporateCounsel.net Blog, 3/14/2011)
Go to theCorporateCounsel.net/Blog article to read the links. I highly recommend the one by Cydney Posner. Personally, I come down on the side of ISS on this one, although their action might have been better with some warning. At least now other companies have it. Don’t involve your CEO in a search committee pre-screening candidates. And some people wonder why shareowners favor split chair/CEO positions and proxy access.
Taking a quick glance at CII corporate governance policies, the action at H-P appears to be at least an attempt to circumvent:
2.5 All-independent Board Committees: Companies should have audit, nominating and compensation committees, and all members of these committees should be independent. The board (not the CEO) should appoint the committee chairs and members…
7.2 Basic Definition of an Independent Director: An independent director is someone whose only nontrivial professional, familial or financial connection to the corporation, its chairman, CEO or any other executive officer is his or her directorship. Stated most simply, an independent director is a person whose directorship constitutes his or her only connection to the corporation.
Much more from J. Robert Brown Jr. on this subject at theRacetotheBottom.org under “The Myth of an Independent System for Nominating Directors” in several posts.
Male CEOs in Denmark who have a daughter are more apt to close the gender pay gap at their companies, reports the Wall Street Journal. Overall in Denmark, there is a gender wage gap of 21.5 percent. But the birth of a daughter to a male CEO caused that gap to close by 0.5 percentage points. Moreover, the birth of a first daughter caused the gap to close by 0.8 percentage points, and if that daughter was also the first child, the gap closed by 2.8 percentage points. Women with college degrees benefited from the births more than women with high-school or primary educations.
Regarding CEO pay, Nell Minow recently wrote, “there is a little flicker of light at the end of the long, dark tunnel of outrageous pay.” Her signs of hope:
- Required advisory “say on pay” (SOP) vote. Last year after a “no” vote, Occidental Petroleum’s board reduced the pay package for CEO Ray Irani and announced his retirement. Shareowners have voted down pay plans at several companies already. Additionally, “Some companies are adjusting their pay plans in anticipation of a new level of scrutiny by shareholders, tightening pay-performance links and getting rid of especially unpopular compensation components like “gross-ups” (paying the executive’s taxes).”
- Shareowners at four of seven companies proposing a triennial say when on pay (SWOP) vote instead voted for an annual vote.
- The UK may soon require new additional disclosures.
- “Groups like Public Citizen are working to remove further legislative and regulatory obstacles to shareholder oversight on pay and disseminating information on the bonuses of bailout-company executives.”
- The FDIC is moving forward with rules to requiring pay-performance links in bank executive compensation as part of insurance risk assessment.
“These are all welcome signs that compensation is finally being seen as an essential element of securities analysis and risk management, and that’s what markets are all about.” (The Days of Outrageous CEO Pay May Be Ending | BNET, 2/14/2011).
High CEO pay is symptomatic of a host of issues. An important one for me is income inequality. It seems to me that a disappearing middle class is not good for America. This seems to be a concern of many, but we still seem to be heading in the wrong direction. For some interesting research on American opinion in this area, see The Return of Dan Ariely: The Survey Results Are In (ChrisMartenson.com, 2/7/2011). His conclusion:
Taken as a whole, the results suggest to us that there is much more agreement than disagreement about wealth inequality. Across differences in wealth, income, education, political affiliation and fiscal conservatism, the vast majority of people (89%) preferred distributions of wealth significantly more equal than the current wealth spread in the United States. In fact, only 12 people out of 849 favored the US distribution. The media portrays huge policy divisions about redistribution and inequality – no doubt differences in ideology exist, but we think there may be more of a consensus on what’s fair than people realize.
From Eagle Rock Proxy Advisors, most companies are generally recommending that shareholders vote for say-on-pay votes once every three years. Here is a snapshot of overall board recommendations/ intentions for recommendation at the beginning of the season:
As we previously reported, shareowners are pushing for the annual option, so I expect many more rejections of triennial proposals. See “Say on Pay” to be Annual. Timothy Smith, Senior Vice President, Director of ESG Shareower Engagement at Walden Asset Management recently sent out an e-mail noting he is among many strongly opposed to the triennial proposals by management and is “frustrated that we even had to have a frequency vote (thanks to Idaho Senator Crapo’s midnight amendment).” But the surge of votes for annual say when on pay SWOP is “helping investors pay more attention to the value and use of SOP votes. In the end this frequency vote may help solidify the importance of SOP to investors vindicating the initiative AFSCME, Walden and others started 6 years ago.”
Yes, with SOP and SWOP votes this year and companies reporting the ratio of executive pay to the average of all employees for the first time, the topic of CEO pay may come into focus more this year than in the past and shareowners will now at least have the power to voice their opinion.
However, I see little evidence that any of the current measures address the “Lake Woebegone” effect documented by Rachel M. Hayes and Scott Schaefer. According to those researchers, “no ﬁrm wants to admit to having a CEO who is below average, and so no ﬁrm allows its CEO’s pay package to lag market expectations.” (CEO Pay and the Lake Wobegon Effect, December 11, 2008, Journal of Financial Economics (JFE) Their analysis suggests SOP votes might be counterproductive. Before SOP was required by Dodd-Frank, many voices warned it would simply provide boards and managements with cover for a continued upward spiral. Hayes and Schaefer offer up a “potential solution to the problem of shareholder myopia.” Delegate pay decisions to directors and motivate them through contracts “to take a longer-term view.” But isn’t that what we’ve been trying all along? Clearly, something more is needed.
India’s Sonia Jaspal does a good job of citing some of the more more relevant papers and issues that have received too little attention to date. (The Negative Impact of CEO Pay & Power on Corporate Culture and Governance, 2/15/2011) Jaspal’s concern was apparently set off by a recent study conducted by Economic Times of India, which showed that in 2009-2010 CEOs of top companies earned 68 times the average pay of employees, up from 59 times their prior year. To Americans facing a pay disparity of 264 (with a high point of 558 in the year 2000), the differences in India may seem paltry. (Mind the Compensation Gap, Portfolio.com, 1/26/2011)
Many of us “feel” an injustice when CEOs earn so much more than average workers, but Jaspal points to academic studies that show the potential impacts are more harmful to society than simply hurt feelings.
When Executives Rake in Millions: Meanness in Organizations. ”Higher income inequality between executives and ordinary workers results in executives perceiving themselves as being all-powerful and this perception of power leads them to maltreat rank and file workers.” Some powerful executives perceive those with lesser power as sub-human. They demonstrate reduced empathy, being inclined to objectify and dehumanize others through behaviors such as sexual harassment and an increase likelihood of unethical and corrupt behavior.
Jaspal also points to another real impact of this dehumanization, “the fact that CEOs who fired the maximum number of employees during recession in US, received the biggest pay packets.” They apparently felt little remorse in benefitting from the tragedy they impose on others. “The social and psychological consequences of income disparity are borne by the society” and the consequences may be greater in the United States than it is in India because of the much larger average disparities.
An article published by The Economist titled The psychology of power: Absolutely looks at experiments that appear to confirm Lord Acton’s dictum that “Power tends to corrupt, and absolute power corrupts absolutely.” According to the studies, “The powerful do indeed behave hypocritically, condemning the transgressions of others more than they condemn their own… It is not just that they abuse the system; they also seem to feel entitled to abuse it.” Researchers conclude that “people with power that they think is justified break rules not only because they can get away with it, but also because they feel at some intuitive level that they are entitled to take what they want.”
Of course The Economist comes to a different conclusion than many of us would: “Perhaps the lesson, then, is that corruption and hypocrisy are the price that societies pay for being led by alpha males (and, in some cases, alpha females). The alternative, though cleaner, is leadership by wimps.” I’d say the lesson, instead, highlights the need to ensure leaders remain accountable, knowing corruption and hypocrisy will not be tolerated.
We keep Searching for a Corporate Savior in our CEOs but ending up with charismatic narcissists, with too many focused on short-term profits when we know we should be promoting CEOs from within to move from Good to Great.
Fraudulent Financial Reporting 1998-2007- An Analysis of U.S. Public Companies by the Committee of Sponsoring Organizations of the Treadway Commission found that CEOs were involved in 72% of the 347 alleged cases of fraudulent financial reporting listed with SEC during 1998-2007 period. The average period of fraud was 31.4 months. Why Do CFOs Become Involved in Material Accounting Manipulations? shows that 46.15% of CEOs involved in fraudulent activity benefitted financially from accounting manipulations. “CFOs are involved in material accounting manipulations because they succumb to pressure from CEOs, rather than because they seek immediate personal financial benefit from their equity incentives.” Since CEO performance and benefits are measured by financial numbers submitted to the stock market, CEOs rationalize the need to report fraudulent financial numbers to protect their own positions.
Based on this analysis, Jaspal makes the following recommendations (I’ve taken liberty to reword some slightly.):
- The law should place a limit on the number of times CEO pay can excede the pay of average workers. This will ensure some balance is maintained.
- Because studies show that some powerful people tend to dehumanize their underlings and studies on emotional intelligence indicate that emotionally intelligent people are aware of their own and others emotions and drivers, we should explore methods to keep CEOs emotionally connected.
- Since research found that women are less likely to feel a sense of entitlement or power we should appoint more women CEOs to maintain a balance and keep senior management grounded.
- Independent board members should be included on compensation committees. “This will ensure that a realistic view is taken of CEO and other top executives’ salary. Basing salary structures on performance rather than favorable circumstances is required.” (This is already the norm in the United States; unfortunately, it doesn’t appear to “ensure a realistic view.”
- Employees may be empowered by forming trade unions and using whistle blowing lines inside and outside the organization. (Again, we have this in the United States and the whistle blowing tools are improved under Dodd-Frank.)
- Last but not the least, the public should play an active role in curtailing income disparities. The issues should be brought to government and media attention. (Name and shame seems to have little impact but perhaps heightened awareness of the issues will lead to real sanctions.)
It is a nice list. I certainly agree with the idea of keeping CEOs emotionally connected, appointing more women CEOs, and getting the government involved in reducing income gaps. However, for the most part Jaspal’s recommendations don’t provide much guidance for shareowners entering the proxy voting booth. The one exception is placing a limit on the number of times CEO pay can exceed the pay of average workers.
Institutional investors have developed a plethora of guidelines and scorecards for voting down CEO pay. For example, section 3 of the CalPERS Global Principles of Accountable Corporate Governance, which contains too much to cover in this brief post but here are a few examples:
- To ensure the alignment of interest with long-term shareowners, executive compensation programs are to be designed, implemented, and disclosed to shareowners by the board, through an independent compensation committee.
- Executive contracts be fully disclosed, with adequate information to judge the “drivers” of incentive components of compensation packages.
- A significant portion of executive compensation should be comprised of “at risk” pay linked to optimizing the company’s operating performance and profitability that results in sustainable long-term shareowner value creation.
- Companies should recapture incentive payments that were made to executives on the basis of having met or exceeded performance targets during a period of fraudulent activity or a material negative restatement of financial results for which executives are found personally responsible.
- Executive equity ownership should be required through the attainment and continuous ownership of a significant equity investment in the company.
- Equity grant repricing without shareowner approval should be prohibited.
- “Evergreen” or “Reload” provisions for grants of stocks and options should be prohibited.
We can find many more lists, but again they don’t seen to be too helpful for the average investor who isn’t going to hire a proxy advisor or put a lot of time into analyzing the proxy. Last year, the Council of Institutional Investors issued a brief paper, Top 10 Red Flags to Watch for When Casting an Advisory Vote on Executive Pay aimed at addressing this issue. “Many investors, however, lack the time and resources to do deep dives on compensation at each of the hundreds of companies in their portfolios. They need rules of thumb to identify executive pay programs that are ticking time bombs.” That statement might even ring truer for retail investors holding a dozen or fewer companies. Again, even CII’s ”top 10″ are too extensive to list here because many items are broken into multiple items. Here are the top 10 with much of that elaboration stripped away:
- Do top executives have paltry holdings in the company’s common stock and can they sell most of their company stock before they leave?
- Does the company lack provisions for recapturing unearned bonus and incentive payments to senior executives?
- Is only a small portion of the CEO’s pay performance-based or is the basis a single metric?
- Are executive perks excessive or unrelated to legitimate business purposes?
- Is there a wide pay chasm between the CEO and those just below?
- Stock options should be indexed to a peer group or should have an exercise price higher than the market price of common stock on the grant date.
- Did the CEO get a bonus even though the company’s performance was below that of peers?
- Does the company guarantee severance or change-in-control payments not in the best interest of shareowners?
- Does the disclosure fail to explain how the overall pay program ties compensation to strategic goals and the creation of long term shareowner value?
- Does the firm advising the compensation committee earn much more from services provided to the company’s management than from work done for the committee?
Key to the the usefulness of CII’s advice is how easily answers can be obtained by individual retail shareowners. A second major concern is even if all this advice is followed, how will we ratchet down the Lake Woebegone effect and decrease the growing disparity between the rich and the rest of us? That seems important if we are to move from a culture of narcism, where many of the rich feel entitled to break the law and treat underlings with disrespect.
Members of the United States Proxy Exchange will soon begin working on a paper to address the issue of CEO pay. I think it is likely to revolve around the issue of what pay packages to vote down. Most retail shareowners don’t subscribe to ISS, Glass Lewis or other services that can rapidly assess pay packages. We need simple metrics so that we can gather all the information we need to vote in just a few minutes. Three possible examples:
- Pay that is over 100 times average pay.
- Pay that takes more than 5% of a company’s net profit.
- Majority of those disclosing votes in advance on ProxyDemocracy.org recommend against.
For less than $4 a month, your voice can be heard by joining in this important effort.
Boards still prefer active CEOs as directors. The difference now is that boards are finding it difficult to recruit active CEOs for director spots. More than 50 percent of CEOs in the S&P 500 serve on no outside boards. Only 26 percent of new directors in 2010 are active CEOs, vs. 53 percent a decade ago. Boards are having to look elsewhere for talent and are recruiting more retired CEOs, more divisional presidents, and more functional leaders. Boards also say they are searching for women and minorities, who remain insufficiently represented.
In my experience, the biggest change has been the fading influence of CEOs on the choice of directors. Whereas twenty-five years ago, many hand-picked their own monitors. Today, they typically only have veto power. Still, even with all the changes noted by Spencer Stuart, directors still seem to identify much more closely with management than with shareowners. They have also been very slow to recognize it doesn’t take a CEO or former CEO to make an excellent board member.
Disclaimer: Given Dodd-Frank, proxy plumbing and all those comments I want to provide the SEC, the report below doesn’t do the ICGN Mid-Year Conference justice. I wrote this up more than a week later with poor notes and memory. Comments, corrections and substitute photos are solicited.
The Financial Crisis Inquiry Commission will report in December to give an unbiased historical accounting of the causes of financial crisis. It will be out in book form but will also be available through download.
$11 trillion in wealth was wiped away. The market took until 1954 to get back to the levels of 1929. Let’s hope this one doesn’t take as long but, more importantly will we learn the lessons necessary to prevent or minimizes future bubbles?
It was a failure of accounting and deregulation. Too many were rewarded based on volume not on performance and their was no continuity in risk (they thought) after all the slicing, dicing and creative complexity.
Rewards can’t be asymmetric and function properly. This was not a natural storm; the clouds were seeded. Signs were there, such as a 2004 warning from the FBI about a housing fraud epidemic, but they were glossed over. Now, our remaining investment banks are largely trading banks, not focused on generating capital but on gaming the markets. The betting market is much larger than the real economy… with more than 85% of transactions being synthetic.
Dodd-Frank requires the investment banks to hold 5% of the securities they sell but I’m not sure what good that does since that portion of their business is now minor. We need to rethink the role of finance in our economy. Continue Reading →
Back in July I posted a question on Compiled Audio/Video Files of Conference Calls: Does anyone know of a resource that contains video and audio files for company conference calls, annual meetings, etc.? I was following up on the potential next phase Stanford University researchers could take in their study of lying CEOs, Detecting Deceptive Discussions in Conference Calls by David F. Larcker and Anastasia A. Zakolyukina. Readers came through and I added a short subsection called “Earnings/Conference Call Research” to the Wall Street Research section on the Links Page.
Earnings/Conference Call Research
- BestCalls.com – earnings call transcripts and audio
- FactSet – see CallStreet Reports for transcripts
- Xignite – earnings call transcripts
- Yahoo! Finance – earnings calls audio
Thanks for your responses. Since then, the WSJ picked up on the research with the cleverly titled, How Can You Tell If A CEO Is Lying? (8/11/10), which of course, elicited comments like
- He is employed?
- His lips are moving?
- he is still breathing!
Humor aside, the researchers found that answers of deceptive executives during conference calls:
have more references to general knowledge, fewer non-extreme positive emotions, and fewer references to shareholders value and value creation. In addition, deceptive CEOs use significantly fewer self- references, more third person plural and impersonal pronouns, more extreme positive emotions, fewer extreme negative emotions, and fewer certainty and hesitation words…
We find that our linguistic classification models based on CEO or CFO narratives per- form significantly better than a random classifier by 4% – 6% with the overall accuracy of 50% – 65%…
In terms of future research, it would be useful to refine general categories to business communication. It would also be desirable to adapt natural language processing approaches to capture the context of word usage for identifying deceptive executive behaviors. Finally, it would be interesting to determine whether portfolios formed on the basis of our word-based measure of deception generate future excess returns (alpha) and/or help eliminate extreme losers from a portfolio selection.
Soon after the WSJ article appeared, John Palizza posted Using Computers to Predict if a CEO is Lying at Investor Relations Musings, 8/12/10.
It will be interesting to see if investors pick up on any of this while parsing conference call answers. The Q & A session is already the portion of the call that gets the most scrutiny, and this research will only help to bring more focus to the area.
Then Dominic Jones posted a very informative How hedge funds analyze your earnings calls on his IR Web Report (8/13/19). Seems the CIA and Goldman Sachs are out ahead:
And that’s exactly what firms like Goldman Sachs and S.A.C. Capital Advisors have done for years, using experts trained in CIA-style deception detection techniques and advanced software developed in Israel that analyzes executives’ voices for signs of stress.
Jones goes on to note that Broker, Trader, Lawyer, Spy: The Secret World of Corporate Espionage, by CNBC reporter Eamon Javers, explains how Business Intelligence Advisors get hired for as much as $800,000 a year by some of the biggest names on Wall Street. BIA claims that since 2001, they have analyzed over 50,000 Q&As, over 4,000 earnings calls across more than 1,500 companies in more than 30 countries using their model, which also takes tone into account, something you can’t get in a transcript.
Jones goes on to cite an earlier study, The Power of Voice: Managerial Affective States and Future Firm Performance by William J. Mayew and Mohan Venkatachalam, which found that negative emotions detected in executive’s voices predict that companies are more likely to miss consensus forecasts during the next three quarters than they did in the previous three.
In a somewhat related post, CEO’s online video mea culpa boosts investment — study (8/16/10), Jones cites another study that found when CEOs take responsibility for financial restatements via online video, investors’ trust in management rises and they recommend larger investments in the firm. (Using Online Video to Announce a Restatement: Influences on Investor Trust and Investment Decisions by professors Brooke Elliott, Frank Hodge, and Lisa Sedor)
I’m hoping all this will be fodder for a couple of young linguistic students I know, one studying in Sweden and the other in Canada. Maybe if they apply themselves during the next decade or so I can visit them in their future mansions… or at least they might be able to pay off those college loans they’re accumulating.
Businesses have intensified their efforts to kill the “proxy access” provision of the Senate’s financial regulation bill. Forty CEOs lobbied in Washington, DC last week alone. ”This is our highest priority,” said John Castellani, president of the Business Roundtable, which represents 170 chief executives. Last week alone, Castellani said, 40 chief executives were in town visiting Capitol Hill about proxy access, since they see it eroding their power.
“This hinges on senators recognizing the fact that boards in too many companies like Citigroup or AIG really failed in their responsibilities here,” said Daniel Pedrotty, director of the AFL-CIO Office of Investment. With proxy access, shareholders would be able to send a strong message to management if they weren’t happy with a company’s strategy, for instance, in managing risk or charting growth.
Currently, shareowners must pay thousands, sometimes millions, of dollars to run candidates that aren’t selected by current CEOs and boards. Proxy access would force companies to add shareowner nominees to the corporate proxy, at minimal cost, allowing them to comprise up to 25% of boards… if a majority of other shareowners agree with their picks. That still leaves current boards in control but the mere idea that some directors could be replaced has CEOs worried.
Senators Thomas R. Carper (D-Del.) and Bob Corker (R-Tenn.) have introduced amendments that would cut proxy access from the bill, but there are more than 250 other proposed amendments as well. It is hard to know which will get heard. Castellani said the BRT has gotten a sympathetic hearing from several Senators.
Jeff Mahoney, general counsel at the Council of Institutional Investors, said fears are overblown. “Just because you put someone on the proxy card doesn’t mean they’ll be elected,” he said. “At the end of the day, no one is going to get on the board unless most of the owners of that company want that.” (CEOs from far and wide band against financial bill provision, The Washington Post, 5/14/10.
Robert Sprague and Aaron J. Lyttle analyze the development of current corporate governance standards and examine whether the current financial crisis can provide an avenue for change. They find that a “significant shortcoming of the shareholder primacy norm, as supported by the business judgment rule, is that corporate directors and officers have a plain incentive to maximize short-term profits, possibly, as in the case with Citigroup, at the expense of the overall viability of the firm.”
There is one critical assumption underlying the discretion provided to corporate directors and officers under the business judgment rule—if shareholders are displeased with directors, and the officers they hire and supervise, the shareholders can elect new directors. This replacement power is especially important when director decisions are insulated from judicial review due to the business judgment rule.
Unfortunately, that ability is largely an illusion. Shareowners have very little input into electing directors, since in most cases all they can do is vote for or withhold their vote from management’s candidates. Sprague and Lyttle conclude, “The most viable possible revision to corporate governance in the United States is to allow shareholders access to proxies to nominate alternative directors.” (Sprague, Robert and Lyttle, Aaron J., Financial Crisis: Impetus for Restoring Corporate Democracy (January 26, 2010). Midwest Academy of Legal Studies in Business Conference Proceedings, 2010. Available at SSRN: http://ssrn.com/abstract=1529733)
Martin B. Robins would take a complimentary but different approach, reversing the present burden of proof placed on plaintiffs in actions alleging breach of a directors’ duty of care under certain circumstances. (Require Affirmative Proof in Specified Circumstances of “Too Big to Fail Companies” in Order to Meet the Business Judgment Rule)
We need a legal regimen which forces directors at systemically important firms to familiarize themselves with what management is doing, and ask the tough questions of management before policies are implemented, to see if the downside risk of those policies is understood (or has been considered at all) and to change course when even an originally well conceived strategy is no longer suitable. Ultimately, we need to force directors to consider on an ongoing basis whether their firms’ managements should be in their positions at all, in order to screen out dishonest, reckless or incompetent persons.
Elsewhere, Robins argues, “pending bills only divert the focus from holding responsible those making the decisions requiring resolution and encourage more bad decisions.” (ROBINS: Financial regulations miss the target, The Washington Times, 5/13/10)
Although far from the recommendation of Robins, thecorporatecounsel.net/Blog reports on two amendments to the Dodd bill that “would significantly expand the disclosure obligations of ’34 Act companies – principally because they contain no meaningful disclosure thresholds (i.e. materiality), and in the case of the Byrd Amendment, would significantly expand the bases upon which directors and officers may be found personally liable for failures to disclose.” (Drilling Down Into the Dodd Bill Amendments: Personal Liability for Directors and Officers!, 5/14/10)
Despite all the talk of restraint and cost cutting, there were actually more CEOs with club membership fee benefits in 2008/2009 than in 2007/2008, according to a study just released by The Corporate Library. (2010 Proxy Season Foresights #7: Club Membership Benefits Holding Steady) Key findings:
- Club memberships were provided to 382 CEOs in 2008/9 and 372 CEOs in 2007/8.
- Median and average increases in cost of club memberships were 3.71 percent and 65.85 percent, respectively.
- Median and average costs of club membership perks in 2008/9 were $6,399 and $10,653, respectively.
- Only 43 CEOs in the S&P 500 (8.6 percent) received club memberships, representing only just over 10 percent of all CEOs receiving the perk.
- Although financial services companies account for only 12.6 percent of the study sample, CEOs at these companies make up over a quarter of the group receiving this benefit, some 97 of them.
- Club membership perks show no sign of decline, though provision is shifting.
- Best practice would dictate either that executives reimburse the company for personal use of country clubs or cover the cost of membership themselves and seek reimbursement as for ordinary business expenses. Numerous examples of this best practice exist.
- Shareholders should be wary of boards that continue to pay for club memberships, particularly if this is part of a wider pattern of excessive perquisite provision.
- Shareholders should be particularly wary of the provision of club memberships at financial services companies that must comply with TARP pay regulations while in debt to the Treasury.
Money for Nothing: How the Failure of Corporate Boards Is Ruining American Business and Costing Us Trillions by John Gillespie and David Zweig begins with a story familiar to just about everyone on the globe — corporate and economic collapse brought on by greedy CEOs. The authors look behind the headlines to reveal and document the systematic failure of corporate boards who are supposed to look out for shareowner interests but are still too often picked by the very ones they are supposed to advise and monitor… the CEOs.
They discuss how companies spend enormous sums of shareholder money to fight off reforms, either directly or through organizations like the US Chamber of Commerce or the Business Roundtable. According to the authors, “corporate boards remain the weakest link in our free enterprise system.”
A brief overview is provided on how we got here and what it means for shareowners and society. Much of the book is given over to example after example of conflicts of interest, overlapping boards, and a world driven by the greed and status needs of CEOs. Studies have shown that 80% of acquisitions fail to deliver and many fail outright. Too often they are driven by incentives that reward empire building over the generation of profits.
Jennifer Lerner, the only psychologist on the faculty of Harvard’s Kennedy School of Government, finds that “Americans tend to exhibit anger more readily than those in many other cultures, and the effects of being in power closely resemble those of being angry.” CEOs and other executives, it turns out, have substantially larger appetites for risk and are more optimistic about outcomes. Changing the context can improve outcomes, especially where the environment demands “predecisional accountability to an audience with unknown views.” In the case of corporations, that would be a diverse independent board, not predictable lapdogs of management.
Later chapters review “The Myth of Shareholders’ Rights” and other issues, including proxy mechanics that allow moving shares to be voted multiple times based on the “day of record,” when large blocks of stocks may be most likely to have several different owners. They document that not only do shareowners have little power, the gatekeepers and guardians paid to protect shareowner interests are almost always conflicted, leading to de facto control by management. At the same time, laws like the “business judgment rule” make it nearly impossible to hold fiduciaries accountable. Pension assets that are turned over to plan managers who provide kickbacks back to corporations earned 29% lower returns, according to a cited 2009 GAO report. The failures documented by Gillespie and Zweig cost investors and the public trillions, bringing the world economy to its knees.
It is time boards stopped being the CEOs friend and instead took on the role of the CEO’s boss. After a thorough examination of the issues, documented with an abundance of real-life examples, Gillespie and Zweig close with a list of recommendations that could go far in changing the culture of the boardroom, strengthening accountability, reducing conflicts of interest, and getting shareowners involved. In a very abbreviated form:
- Create a new class of public directors and a training consortium
- Insist of gender, ethnic, and perceptual diversity
- Limit directors to three or fewer boards and require substantial “skin in the game”
- Initiate more communication between directors and shareowners
- Split chair/CEO roles & learn lessons from nonprofits
- Allow 10% of shareowners to call an extraordinary general meeting
- Add clout to say-on-pay, reform executive compensation, and shareholder approval of golden parachutes
- Ban staggered boards and require majority votes elections
- Proxy access for shareowners, daylight nominating & election processes, & require real board evaluations
- Require board risk committees & empower boards to gather independent information
- End conflict of interest in mutual fund voting by allowing third party voters per Investor Suffrage Movement
- Reform voting mechanics to end manipulation by management
- Reform auditor business model & Fix “up the ladder” provision of SOX
- Reform rating agency model, fully disclose lobbyist expenses, provide real funding for SEC enforcement
- Federalize corporate law
- Better coverage of governance issues by the financial media
- Better financial education, including how corporate governance works
Gillespie and Zweig hit all the bases for a solid home run. They tell us how the game is fixed and how the rules can be changed to play fair. After all, shareowners own the “ball” and all the other equipment. Will we listen? Even more importantly, will we act?
The Political Economy of Global Finance Capital by Richard Deeg and Mary O’Sullivan review 6 influential books on the topic in light of the recent financial crisis.
The most important developments highlighted:
- the move from a predominant focus on state-centered patterns of regulation to a more comprehensive understanding of the role of states and private actors in building a transnational governance regime that mixes public and private regulation;
- the intensified effort to understand the causal forces that shape the political economy of global finance based on more complex models that allow for an interaction among interests, institutions and ideas; and
- increased attention to new sources of systemic risk in the global financial system, as well as a greater consideration of the consequences for domestic politics of interactions with the global financial system.
They argue that we must do more to understand the behavior of actors who enact the rules of global finance, not just those who generate the rules. More must be done to assess the costs and benefits of financialization at the global and national levels.
Some interesting points highlighted:
- The financial crisis emanated not from the periphery but from the very core of the system.
- Facilitated flows from poor countries to rich countries, rather than the historically opposite direction.
- Coordinated market economies that rely on welfare production regimes for promoting and protecting the investment by firms in skill sets and specific assets may have a competitive advantage with financial globalization, the opposite of conventional thinking.
- These protections inhibit convergence in corporate governance.
- Financialization, where maximization of short-term shareowner value through dashboard metrics, has compromised the interests of other stakeholders and corrodes the coordinated system of capitalism.
- Extraordinary incentives contributed to willingness to pursue aggressive strategies without due attention to risks.
How is it that false illusions were conferred sufficient legitimacy to deafen alternative views and stymie reform? In our thinking, a lot may come down to the power held by CEOs and their organizations like the Business Roundtable and the Chamber of Commerce. They can spend shareowner money like there is no tomorrow in defending a system that still gives CEOs virtually dictatorial power. On the other side, institutional investors are held to fiduciary duties that limit such lobbying efforts, even by the few that don’t have direct conflicts of interests, such as in trying to attract those 401(k) accounts from CEOs.
Happy Holidays: More, More, More: Gifts For the CEO Who Has Everything (clip from Nightly Business Report via The Corporate Library Blog, 12/24/09)
One book on corporate governance made Ralph Nader’s list of Nine Books That Make a Difference: A Reading List for the Holidays. Here’s his brief review:
Corpocracy by Robert A.G. Monks (Wiley Publishers) summarizes its main theme on the book’s cover-”How CEOs and the Business Roundtable Hijacked the World’s Greatest Wealth Machine-and How to Get it Back.” Corporate lawyer, venture capitalist and bold shareholder activist, Monks gives us his inside knowledge about how corporations seized control from any adequate government regulations and especially from their owners, their shareholders, and institutional shareholders like mutual funds and pension trusts. This is a very readable journey through the pits and peaks of corporate greed and power that shows the light at the end of the tunnel.
From a review of the same book, Philip L. Levine writes “Robert A.G. Monks has pulled away the covers, revealing who is in bed with whom, and very clearly articulating how we got to the unbalanced and unhealthy state we find ourselves in.” Nell Minow also sings the book’s praises:
Robert Monks is a true visionary, and this assessment of corporate control of every institution set up to provide oversight or assure accountability will provoke a series of “aha” moments from anyone who has wondered why we permit corporations to determine everything from pollution levels to the outcome of elections. With mastery of the languages of finance, economics, business, politics, culture, and values (in all senses of the word), Monks ties together the Babel of vocabularies with analysis that is utterly clear-eyed and recommendations that are creative but utterly rational.
Sir Adrian Cadbury, most noted for the Cadbury Code, a code of best practice which served as a basis for reform of corporate governance around the world, wrote a lengthily review posted at Amazon.com. (Or course, it wasn’t nearly as long as my rambling review.) Below are a few bits:
The balance of power between boards and CEOs in the United States remains a paradox, given the country’s regulatory history of preventing accretions of power in relation to trusts and to banking. Nowhere else would it be possible to elect a director on a single vote, nowhere else could shareholder votes be invalidated by “ballot stuffing”, nowhere else are shareholders so limited in their ability to raise issues at AGMs, which some directors may not even bother to attend. The prevailing concept of CEO/chairmen selecting their outside board members, thus compromising their independence, strengthens the hand of the CEO at the expense of that of the board.
In spite of setbacks, he believes that this essential accountability can be restored. He sees no cause for new laws, agencies or fiscal measures, though the existing statutory and regulatory framework should be effectively enforced. He argues that it is the major investing institutions that carry the obligation to themselves and to society to restore trust in the capitalistic system… The obligation, however, of the great foundations, among the investing institutions, to play their part in bringing about reform goes beyond the calculus of financial gain. It lies at the heart of their creation. They directly assist their chosen causes, but that is within the wider context of a market system which provides them with the ability to do this. They have a responsibility to maintain the means by which they fulfil the aims for which they were founded.
I was lucky enough to get a pre-print, which I read in a couple of sittings within a few days of its arrival. Corpocracy: How CEOs and the Business Roundtable Hijacked the World’s Greatest Wealth Machine — And How to Get It Back both delights and informs in a way only Bob Monks can, because he has been at the center of so many of the important battles to make corporations more accountable. His lifework has been delineating the underlying dynamics of corporate power to devise a system that combines wealth creation with societal interest. No one else can write as well about “How CEOs and the Business Roundtable Hijacked the World’s Greatest Wealth Machine” because no one else has been as engaged as Bob Monks from so many angles.
His insights into pivotal points of view and decisions are enlightening. For example, he points to the role of Douglas Ginsburg, a leader in the field of law and economics, in instilling a belief that it is okay for corporations to violate environmental laws, as long as they account for possible sanctions in their budget. Under Ginsburg’s view, according to Monks, people aren’t motivated by moral or social obligation but by simple desire and cost-benefit analysis. Then there is Bob analysis of Lewis Powell’s court decisions. His finding of a constitutionally protected right to “corporate speech” provided the judicial framework for management “to commit untold corporate resources to influence public opinion and public votes – resources so huge and unmatchable that individual contributions are now all but meaningless in state and nationals elections.” And, of course, the Business Roundtable hold a special place in Bob’s heart. The “BRT has come to function in significant part as an agent for the CEOs…who have established themselves as a new and separate class in the governance of American corporations, answerable to virtually no one, accountable only to themselves.”
Monks appears to be a believer in the forces of markets but regulated to ensure a level playing field. Without that, the overall effect has been to turn the stock market into “a gigantic, round-the-clock casino that runs the biggest game the world has ever seen.” Market values and goals have become national goals. Corpocracy is another top-notch effort from the individual who continues to have greater lasting impact on the field than anyone else. Still, I would have placed a different emphasis in the “How to Get it Back” portion of the book..
Monks may be A Traitor to His Class, but he is also a gentleman, reluctant to force change. Through many books, Monks repeated what became almost a mantra that “no new laws” are necessary. I don’t recall seeing that in Corpocracy, although Cadbury repeats the phrase in his review. I think Bob is weakening on this point. However, he still seems too confident in the power of persuading elite leaders of the need for change. I’m with John Edwards, when he said recently, “It is unrealistic to think that you can sit at a table with drug companies, insurance companies and oil companies and they are going to negotiate their power away.”
When Les Greenberg, of the Committee of Concerned Shareholders, and I started preparing our petition on proxy access in July of 2002, I remember e-mailing Bob, asking if he would sign on with us. It was late in the week when Bob e-mailed back that he had a meeting scheduled with then SEC chairman Harvey Pitt on Monday. If we could get him the proposal over the weekend, he might be able to discuss it at his meeting. We did. My impression is that Bob’s primary focus was on Pitt’s 2/12/02 response to a letter Ram Trust Services had sent 13 years earlier where Pitt clarified the SEC’s stance that proxy voting is in fact an investment adviser’s fiduciary responsibility, generally governed by state law. I think Monks was asking Pitt for regulations to enforce that duty through required disclosures. Pitt was apparently won over by Monks, Amy Domini, and others.
My little story has two points. First, most of us don’t routinely meet with SEC chairmen. Bob’s history of involvement in corporate governance has been as one member of the elite meeting with other members of the elite. Like the fictional character, Forrest Gump, Monks met with many historical figures and has influenced important development. Unlike Gump, Monks has done so with candid intelligence and a deep awareness of the significance of his actions. Second, like the earlier Avon letter, the Ram Trust letter and follow-up eventually led to regulations. Monks may espouse “no new laws or regulations are needed” but several of his most important actions have led down that path.
Perhaps Monks is correct, as Cadbury points out in his review, that foundations have a special obligation to reform the market system which sustains their existence. That’s where Monks places much of his emphasis in the “How to Get it Back” portion of the book. In his flights of fantasy, Bob dreams of a president who will use his/her powers to end conflicts of interest and compel good governance in contractors. “The framework is in place. The laws exist,” he insists.
Yet, two pages later he notes the need for legal changes. He reminds us the First Amendment “was not meant to protect the Church from government intrusion, but rather to protect the government… We need similar protection today from the dominant institution of our own time, the corporation.” He defines corpocracy as “government by the corporations; that form of government in which the sovereign power resides in corporations, and is exercised either directly by them or by elected and appointed officials acting on their behalf.” I can’t help but believe that the tide won’t turn until the rabble of individual investors demands change. Individual investors have a vote in electing government representatives — the sovereign power; institutional investors don’t.
Lucian Bebchuk and Zvika Neeman, in a recent paper entitled Investor Protection and Interest Group Politics, also proceed on the assumption “that individual investors, who invest in publicly traded firms either directly or indirectly through institutional investors, are too dispersed to become part of an effective organized interest group with respect to investor protection.” Yet, their own model contains the following hypotheses.
Therefore, educated individual investors are critical if we have any hope of electing public officials who will protect politics from corporate influence and who will revise the legal framework so that it better combines wealth creation with societal interest. Roger Headrick’s “win” last year at CVS/Caremark, based on a margin decided by broker votes, lead to additional calls for the SEC to approve NYSE’s proposal to bar brokers from casting uninstructed investor votes in board elections.
According to Broadridge Financial, broker votes on average account for about 19% of the votes cast at US corporate meetings. However, the elimination of broker voting, if the SEC ever gets around to approving it, just takes 60-70% of retail shareowners out of the picture. It doesn’t address the more fundamental issues. How can we get shareowners to think of themselves as long-term owners rather than as betters at what Bob calls the biggest casino the world has ever seen? If they know they are owners, what tools can we make available so that voting is not only easier but also more intelligent? There are dozens of possible reforms. Here are seven worthy of further attention:
1. Proxy Assignment
Drawing from the other six, this may be the easiest to implement with a relatively large possible impact. That’s why I’m working on it. We need system(s) or perhaps just instructions, so that lazy but somewhat conscientious shareowners can assign their votes to others based on reputation, rather than tossing their proxies in the shredder. I surveyed brokers and determined that making such assignments will not be a problem at most. Now I simply need to find an institution or two willing to take the proxies. Of course there are lots of technical and legal details but they don’t appear insurmountable.
That’s the working name for a project Andy Eggers started. Andy is working on a PhD in political science at Harvard. The project is now housed within a nonprofit, Proxy Democracy, which Andy also founded. Here’s part of what he has posted as a brief description:
Before each voting deadline, we find out how respected institutional investors with a variety of voting philosophies have chosen to vote their shares. We’ll help you figure out which funds have similar voting philosophies to yours. When a fund you agree with makes a decision on a stock you own, we’ll send you a free alert. You’ll have a week or two to look at their decisions and cast your own ballot.
The system appears to depend on funds posting how they voted or intend to vote prior to the shareholder’s meeting…with Andy’s software crawling the internet to gather the information. This may work well in high profile cases. However, we’ll need more institutions to routinely post votes in advance.
Glyn Holton outlined how a “proxy exchange” could allow shareowners to transfer voting rights among themselves or to trusted institutions to increase voter effectiveness (see Investor Suffrage Movement). His proposal lays out a fairly complex system involving four classes of participants:
4. A US Shareholder’s Association
Shareholders in Europe “are gaining the upper hand, nudging up share prices and sometimes forcing out an executive or forcing the sale of the company. Most recently, the Children’s Investment Fund turned dissatisfaction into deal-making at ABN Amro, leading to rival bids for the bank, the largest in the Netherlands, reports the New York Times. (Boards Feel the Heat as Investor Activists Speak Up, 5/23/07)
The Times goes on to discuss the costs of such activist campaigns that appeal to shareholders through newspaper ads. Antonio Borges, chairman of the European Corporate Governance Institute and a vice chairman at Goldman Sachs in London, says sacrifices for short-term gain would remain exceptions because short-term investors could only sell their shares at a profit if they find new investors who believe in the long-term potential of the revamped company.
In reading the article, what struck me is the growing assemblage of activist funds and shareholder associations in Europe. Where is the US equivalent of the VEB (Vereniging van Effectenbezitters or Dutch Investors’ Association) or the UK Shareholders’ Association? In the US, BetterInvesting is the largest nonprofit organization dedicated to investment education.
Although their goals include helping their members to “learn, share, grow and more fully experience the rewards of investing success,” I find no mention on their site equivalent to the UK Shareholders’ Association’s vow to “protect your rights as a shareholder in public companies and promote improved standards of corporate governance.” It might make for more interesting investment clubs in the US if members acted as owners, instead of just stock pickers at the casino.
The US hasn’t had an effective advocate for retail shareholders since United Shareholders Association. Deon Strickland , Kenneth Wiles and Marc Zenner documented that USA’s 53 negotiated agreements are associated with a mean abnormal return of 0.9 percent, a $54 million shareholder wealth gain. Although Peter Kinder, President, KLD Research & Analytics, Inc., tells me USA “was a significant factor in turning ‘good governance’ into a checklist of factors that made easy or easier ‘maximizing shareholder value’, i.e., flipping or extorting the corporation” — something we obviously have to guard against in any new iteration. I’ve repeatedly contacted the National Association of Investors Corporation (NAIC) but they do not appear interested in governance issues. As I recall, USA was originally funded by a shareholder’s lawsuit. Maybe we need another.
Richard Macary’s AVI Shareholder Advocacy Trust presents an innovative mechanism to combine small shareowners to advocate changes in corporate governance. The Trust sets out its goals, makes its case to shareholders, and then is dependent on contributions. The Trust depends on a monitoring/activist agent who is so compelling that shareholders freely pony up contributions to support work that might pay off. Free rider issues abound.
The Trust is not a “for profit” vehicle nor can any contributor expect to get any kind of return on their contribution. In a way, it’s similar to contributing to a campaign or political action committee where you agree with their platform or want to see a specific candidate elected, so you contribute. Your only upside in that scenario is that if your candidate wins, you believe it will be good for you or your position, be it lower taxes, a cleaner environment, less regulation, etc. The trust is also set up to compensate the managing trustee, who is essentially the coordinator, director and general contractor of the effort. The trustee is very much like a general contractor in that he, she or they will essentially hire and direct all of the professional and advisors needed to execute upon the trust’s goals.
6. Collectively Paid Proxy Research
Because of the expense and free rider issues, the only reason most institutions vote are the federal regulations Bob Monks helped to create that require pension and mutual funds to vote stock in their beneficiaries’ interests. Of course another of Bob’s important contributions was founding Institutional Shareholder Services, increasing the research done on proxy issues and its availability. The biggest obstacle to voting now is not the time it takes to vote but the research needed to make an informed vote. Most people realize that just going along with the board of directors for lack of an easy alternative is not a meaningful vote. But understanding the proxy issues requires too much time and expertise, especially for individuals.
On that front, the Corporate Monitoring Project and VoterMedia.org, both initiated by Mark Latham, have shown the way to empower voters with better information. Latham’s system allows shareholders to allocate collective corporate funds to hire a monitoring firm to advise them on the issues and how to vote. Latham’s system would eliminated free rider issues and creates an incentive to pay for much more research.
“Comprehensive analyses of proxy issues and complete vote recommendations for more than 10,000 U.S. companies are delivered by ISS’s seasoned U.S. research team consisting of more than 20 analysts.” We can thus estimate about four hours of analysis per proxy, costing perhaps $2000 including ISS infrastructure costs. Considering the amount of money we shareowners pay CEOs and boards of directors who are elected and compensated based on our voting, and the amount of capital at stake in the typical company they manage for us, we should be spending more than $2000 to guide our voting.
Mark proposes use of shareowner resolutions to choose an advisor from among competitors. Any proxy advisor could offer its services, specify its fee, and have its name and fee appear in the ballot. The winner would give proxy advice to all shareowners in that company for the coming year. The advice would be published on a website and in the next year’s proxy. The company would pay the specified fee to that advisor. The voting could even be designed to hire more than one advisor, with a separate yes/no vote on each candidate. Advisor name brand reputation can make these voting decisions feasible without another level of paid voting advice. (see Proxy Voting Brand Competition, Journal of Investment Management, Vol. 5, No. 1, (2007).
7. Provide Full Public Disclosure of Votes as Tabulated
This is more of a technical fix, rather than a monumental reform that will bring in more individual investors but I thought I’d just stick it in here at the end of “how to’s” Bob might have discussed. Yair Listokin’s Management Always Wins the Close Ones highlights the need for open ballot counting.
Informational asymmetries between management and potential opponents should be mitigated by allowing anyone to obtain a real-time update of the voting. The status quo allows management to obtain frequent vote updates, while shareholder opponents of management often have no comparable knowledge. This allows management to win votes when underlying shareholder preferences are against a proposal because management can tailor its expenditures as needed; if management sees that it is well behind, it can undertake an extraordinary effort, while its opponents have no obvious way of responding. If all parties had the same knowledge about the likely outcome of the vote, then managerial opponents could respond and potentially neutralize management’s efforts to push the vote in a particular direction.
Obviously, anything we can do to make corporate elections less rigged will also help to bring shareowners out to vote. Why bother if the fix is in? My hope is that once shareowners get used to voting in their best interests in corporate elections, that behavior will also carry over to civic elections. Activists in either social institution will likely carry over to the other.