The deadline to submit nominations for the 2013 NACD Directorship 100 has been extended. Take a moment to nominate the most influential individuals in and around the boardroom for 2013 NACD Directorship 100, Director of the Year, and B. Kenneth West Lifetime Achievement honors before nominations close May 10. Submit Nomination.
Tag Archives | NACD
Last year I attended the NACD Directorship 100, proud to be listed again a worthy of being watched. This year, even though so honored, I won’t be able to make this important learning event. Learning event? Aren’t these functions mostly just networking opportunities? They are both. No one should question the value of such functions as networking opportunities. Who better to meet than the Directorship 100 (and even the ones to watch)? But I just noticed the October edition of NACD Directorship provides evidence of learning beyond even what those putting on the event might have expected. Amazingly I may have played a small part in it. Continue Reading →
Boards ranging from small-cap companies to the Fortune 10 are currently working with NACD Board Advisory Services to facilitate confidential and independent evaluations of their boards and directors. Continue Reading →
The National Association of Corporate Directors (NACD) sent a letter to ISS commenting on their recent policy proposal: Board Response to Majority-Supported Shareholder Proposals. Continue Reading →
M&A activity is on the rise, and recent decisions by the Delaware Chancery Court make the stakes for directors higher than ever. The businesspersons and lawyers on this panel offered plenty of insights about the life-cycle of a current M&A transaction from initial market check to consummation and then follow-up litigation, pointing out the all-too-frequent pitfalls for directors. Continue Reading →
Sacramento, CA (Oct. 8, 2012) — James McRitchie download <http://corpgov.net/files/2009/03/resume2012.pdf>, Publisher of Corporate Governance (aka, CorpGov.net) <http://corpgov.net>, has been named to the 2012 National Association of Corporate Directors (NACD) Directorship 100’s “People to Watch” in recognition of his exemplary leadership in influencing corporate boards and for promoting the highest standards of corporate governance. Selected by the NACD Directorship Editorial Advisory Committee and the NACD Board of Directors, the
NACD Directorship 100 recognizes the most influential leaders in the boardroom and corporate governance community. Continue Reading →
National Association of Corporate Directors, Silicon Valley Chapter, Inc. Interview with: Ken Denman, Former President & CEO, Openwave Systems, Inc. Hosted by: Abe Friedman, Managing Partner, CamberView Partners Continue Reading →
BlackRock and the National Association of Corporate Directors (NACD) issued an invitation to undergraduate and graduate students, PhD researchers and university faculty to participate in a 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 →
The National Association of Corporate Directors (NACD) opened nominations for the sixth annual NACD Directorship 100, which includes the Director of the Year and B. Kenneth West Lifetime Achievement Awards. Continue Reading →
Hopefully, it can mostly be attributable to early stage growth but Fenwick & West’s Corporate Governance Practices and Trends: A Comparison of Large Public Companies and Silicon Valley Companies found significant differences between the Continue Reading →
On October 9, 2011, California Governor Jerry Brown signed into law bills that create two new corporate forms in California: Continue Reading →
This is the second of a two part report on the NACD Directorship 100 program in New York on November 8-9. See part one.
Human Capital, Risk and Reward Continue Reading →
China presents enormous opportunities for Silicon Valley companies, but it also offers a very different regulatory, cultural, financial and operational paradigm for boards and executives. What should you know when contemplating investments, operations or acquisitions in China? How should you balance the often conflicting requirements of U.S. and Chinese regulators? What do best practices look like? How can you comply with the Foreign Corrupt Practices Act in a culture where acceptable norms can be very different than in the U.S.? Watch this video from a recent SVNACD event.
NACD’s Directorship 100 Forum will start shortly at the Waldorf Astoria in New York City. If you are unable to attend, you might want to follow the tweets of @adamquinton, @dougchia, @DrRLeblanc, @fayfeeney, @corpgovnet and @UrmiAshar, along with @NACD. Search #NACDD100.
(Elk Grove, CA, September 20, 2011) — CorpGov.net is pleased to announce that Publisher, James McRitchie has been named for the second year in a row to the National Association of Corporate Directors’ (NACD’s) 2011 Directorship 100 list of “People to Watch,” in recognition of his work promoting the highest standards of corporate governance.
James McRitchie will be among those recognized at a gala dinner on November 8 at 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
Yes, it is an ad… but a good one. Maybe this will help more directors become Continue Reading →
In response to the SEC request for comment on say-on-pay rules, the National Association of Corporate Directors (NACD) issued formal concerns, cautioning against dependency on regular, yes-or-no votes.
NACD’s opinions are grounded in its more than 30 years of proprietary research across a broad range of board leadership and corporate governance topics, insights expressed through confidential peer exchanges with its membership spanning F100 through mid-cap and small cap companies, and best practices detailed in its Blue Ribbon Commission reports. NACD’s comments were reinforced by a national survey that drew 280 responses from its members.
Representing the voice of its more than 10,000 corporate director members, NACD urges the SEC not to issue universal requirements, but to allow companies to determine the most appropriate means of communicating with and seeking feedback from shareholders as a more effective governance practice. Additionally, NACD provided the SEC with specific views on frequency of say-on-pay votes, say on golden parachutes and other matters pertaining to executive compensation on behalf of the director community.
NACD appreciates the symbolic value of say-on-pay. However, we believe it is a poor substitute for dialogue. It is much more valuable to have shareholder communication well in advance of plans or votes on plans. Say-on-pay is a yes-or-no, backward-looking vote that may have little utility except to express a very general shareholder view of a pay plan already in effect,
the Association wrote in a letter signed by Honorable Barbara H. Franklin, chairman of NACD and former U.S. Secretary of Commerce, and Ken Daly, NACD’s president and CEO.
In addition to the survey, NACD cited recent board research indicating that dialogue between companies and institutional investors is increasing. Additionally, say-on-pay votes for early adopters has been substantially positive, calling out the potential for say-on-pay voting to become a meaningless and burdensome ritual for companies and shareholders alike. According to the organization’s letter, “NACD would urge caution in the area of rulemaking. Compensation terms can be interpreted in an overly broad manner, regulating areas that are best left alone.”
Issues also under SEC consideration where NACD offered an opinion include:
- Small company exemption: NACD strongly supports an exemption on say-on-pay for small companies (those with less than $75 million in public float), as the compliance and paperwork requirements are particularly costly for small businesses that can less easily absorb the cost. Notably, 73 percent of respondents in the director survey indicated preference for small business exemption.
- Superclawbacks in financial institutions: NACD encourages the SEC to work alongside it in serving as a “voice of reason” when identifying standards and process for whether directors and officers of a company are in fact “substantially responsible” for insolvency. NACD has concerns of this rule being misused for “witch hunts.”
- SEC disclosure rules regarding compensation consultant conflicts: NACD urges caution that a consultant for an independent board committee should not be considered in conflict just because it performs a significant amount of work. The key point is that the same consultant does not also work for management, a position long-held by NACD and first raised in its 2003 Blue Ribbon Commission report.
- Recovery of executive compensation: NACD has serious concerns that this provision is ripe for abuse, and may unfairly target honest executives whose compensation and bonus was reasonably earned. NACD recommends an exemption for companies that obtain shareholder approval for retention of the originally rewarded compensation.
- Disclosure of pay for performance and pay ratios of CEO to median pay of all other employees: Pay for performance, as detailed in the Report of the NACD Blue Ribbon Commission on Performance Metrics: Understanding the Board’s Role, is a value that has long been championed by NACD and practiced by its members. Boards of directors should be able to express how they link pay to performance. However, NACD cautions that companies should be provided the flexibility to describe their philosophy in their own terms, and disclosures should be allowed to vary. NACD commends the SEC for its decision to postpone implementation of pay ratio rules until after the next proxy season. The median pay figure can be highly misleading for a number of reasons, particularly for a global company.
- Exemption for newly public companies from issuing a say-on-pay vote: With 72 percent of directors indicating preference for exemption, directors believe road shows for IPOs already offer investors ample opportunity to evaluate compensation packages. Furthermore, these requirements place a focus on process during a critical growth phase of a newly public company.
- “Golden parachute” plans during exceptional corporate transactions (e.g., mergers and acquisitions): NACD does not believe it is necessary to require disclosure during M&A periods above and beyond what is required of companies in general. However, NACD strongly supports disclosure requirements for any newly named executive officers of the company following a merger or acquisition, a view supported by 79 percent of directors surveyed. Any senior executive at a target company joining the leadership of an acquiring company is important, and stockholders have the right to know about leadership.
- Disclosure of previous say-on-pay: Aligned with 79 percent of surveyed directors, NACD recommends that only the most recent say-on-pay vote should be disclosed. In the current proposal, issuers are required to consider “previous” votes on compensation, but the proposal does not offer a specific definition of “previous.”
“NACD represents the collective voice of the director, and we urge the SEC to closely consider these clear messages coming from America’s boardrooms as it continues to implement new regulations,” said Daly.
I was never a big fan of say on pay to begin with but if we’re going to have it, personally I can’t see carving out so many exemptions as NACD recommends. In my experience, small companies are in greater need of corporate governance “guidance” than many large companies. If the paperwork is burdensome, that should be addressed by reducing paperwork requirements, not through exemptions. Sometimes I wonder if NACD represents the needs of the shareowners its members represent or the more parochial interests of its members… operating like a union for directors. Your thoughts?
It had been months since I’d attended an SVNACD breakfast meetings. Top talent was on hand, both among the panelists and in the audience. The facility at Wilson, Sonsini, Goodrich & Rosati was great. Sorry about photo quality… first time working with a new camera that I may not keep.
As usual, my notes are cryptic, without much of an attempt to thread coherent sentences. I’m tempted to say the following is for entertainment purposes only, but that would be too escapist. Corrections, comments and better photos are welcome.
My purpose is to provide readers with a sense of what was discussed and highlight a few areas. It may help you know what to investigate further and you’ll be that much more incentivised to attend in person to get answers to your concerns. Continue Reading →
I’m very honored to have made an NACD Directorship list. No, not the illustrious “Directorship 100,” billed as “the veritable who’s who of the American corporate governance community.” Instead, I’m on a “short list of movers and shakers who merit serious attention as potential boardroom influentials. This new feature of the Directorship 100 recognizes a few outstanding individuals who, by virtue of what they do and how they do it, bear watching.”
Thanks to whoever nominated me. Great to be on a list that includes Vineeta Anand (AFL-CIO) Kenneth Bertch (Morgan Stanley), Francis H. Byrd (The Altman Group), Paul Lapides (Kennesaw State University), Gary Lutin (Shareholder Forum), Frank Partnoy (University of San Diego), Francis G.X. Pileggi (Blogger on DE Courts) and several others, some of whom I have admired and followed many years.
Coming up with the short list or the Directorship 100 would appear to be a tough job. Someone highly influential will always be missing, even if they’ve been there in years past. For example, this year where is Nell Minow? She’s still the queen of quotes and as influential as ever, as far as I’m concerned. And if they are going to consider bloggers like me, where is Broc Romanek? Doesn’t everyone read theCorporateCounsel.net? What about Jay Brown’s theRacetotheBottom.org?
Anyway, thanks NACD… I’m watching you too and honored to be on your short list. NACD does good work. Proxy access offers them an opportunity to provide training on how to be or how to word with “dissident” board members.
While I’m on the topic of lists and watching each other, I also made J.W. Verret’s list of My Favorite Corporate Law Blogs. “Corpgov.net. Always good to keep an eye on what the other side is up to. Jim McRitchie blogs about the latest developments in shareholder activism.”
I feel the same way about Verret. For example, his Defending Against Shareholder Proxy Access: Delaware’s Future Reviewing Company Defenses in the Era of Dodd-Frank feels too much like providing advice on how to circumvent the law to me. I’m not nuts about paying taxes but I certainly see it as a moral duty and don’t look for every possible loophole, especially anything of borderline legality.
Boards that use many of his “defenses” will simply stir unwanted animosity among their shareowners. Better to try to work together. (For example, see Proxy Access: Be Sure Your Board Is Ready by Beverly Behan, BusinessWeek, 8/31/10 and/or 2011 Proxy Season: The First 100 Days—How to Get Ready for the Brave New World of Say on Pay and Proxy Access, BoardMember.com)
However, from “the other side,” it is good to know what loopholes may need plugged. Verret’s on my blogroll too, under Truth on the Market.
President Obama just signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Time/CNN coverage). The Act contains a number of governance-related provisions that will affect all U.S. public companies—and their boards, and is likely to increase the influence of shareowners in corporate governance matters almost immediately. The NACD and Weil, Gotshal & Manges are putting on a complimentary webinar to help you understand the bill’s likely impact. Although focused on boards, I’m sure it will be very informative to shareowners as well. Registration. Overview of the act. Friday, July 30, 2PM-3:15PM (Eastern time)
On June 29th the Northern California Chapter of the National Association for Corporate Directors held a low-cost high-quality lunch-time meeting at the headquarters of the California Chamber of Commerce. Now that we have wrapped up the 2010 Proxy Season with issues this year like executive compensation, risk management and high profile withhold campaigns for some Directors, how did it go? What lessons did we learn?
Moderator: Anne Sheehan is Director of Corporate Governance of the California State Teachers’ Retirement System (CalSTRS). Prior to that, she served as Chief Deputy Director for Policy at the California Department of Finance, serving on more than 80 boards, commissions, and authorities on behalf of the Director of Finance. She also served as the Executive Director of the Governor’s Public Employee Post-Employment Benefits. Anne Sheehan was appointed to the CalPERS Board in December 2007 as the designated representative of the State Personnel Board. She was named one of the 100 most influential people on corporate governance by Directorship Magazine in 2008 and 2009.
Panelists: Lydia Beebe, Corporate Secretary and Chief Governance Officer, Chevron Corporation, a position she assumed in 1995. She serves on the board of directors of the Council of Institutional Investors and the Society of Corporate Secretaries and Governance Professionals where she was past chairman. In her remarks, Ms. Beebe initially focused on corporate disclosures required by the SEC. In that context, the proxy season was “predictable,” given new disclosures for compensation. Such disclosures take up an increasing amount of space.
Beebe pondered the idea that perhaps some thought should be given to getting rid of some parts that may be less informative than others. Perhaps by example, she noted that with regard to director qualifications, companies aren’t likely to use that disclosure requirement to tip their hat concerning which directors, if any should be voted out.
Given the BP spill and new disclosure requirements, risk analysis is getting increased attention at Chevron. Like many of us, she thought the industry was well beyond such accidents. The Gulf spill will have repercussions for many years to come. Boardroom discussions around risk have increased. What is the right balance regarding board involvement? How can we be sure our processes are being followed on the ground? Careful auditing is essential. Compared crisis of management vs crisis of lack of oversight. Boards have a thirst to know and to weigh risks from the geopolitical to the geological.
She also noted what might be an increased trend of plaintiffs or their allies using shareowner proposals to further their lawsuits. She also expressed some regret and frustration over increased security requirements around annual meetings. (Activists rally at Chevron’s Houston offices during shareholders’ meeting, Houston Business Journal, 5/26/10)
Abe Friedman, Director of Corporate Governance, BlackRock. BlackRock is one of the world’s preeminent asset management firms and a premier provider of global investment management, risk management and advisory services to institutional, intermediary and individual investors around the world. As of March 31, 2010, BlackRock’s assets under management total US $3.36 trillion. Friedman
is responsible for the firms proxy voting efforts worldwide. The biggest surprise of this year’s season was how boring it was with regard to substance and new issues. Companies appear more willing than ever to engage. As evidence of that, CalPERS had no focus list this year because they were able to negotiate changes with potential targets. He thinks the trend is engagement and there are more opportunities for shareowner voices to be heard. However, he did caution that willingness to engage with shareowners may reduce if the economy improves substantially.
Friedman reiterated his opinion, that I have heard and covered at many other venues, that “say on pay” is a bad idea for investors and will likely provide insulation to boards that can point back to shareowner approval. Shareholders aren’t equipped to set pay or determine compensation in advance. Voting out compensation committees is a better strategy. He speculated that a few high profile cases could do more for adjusting compensation to risk that say on pay.
Bob McCormick, Chief Policy Officer, Glass Lewis & Co. manages the analysis and drafting of 18,000 Proxy Paper research reports on shareholder meetings of public companies in 80 countries. Previously, McCormick was the Director of Investment Proxy Research at Fidelity Management & Research Co. He serves on the International Corporate Governance Network’s Cross-Border Voting Practices and
Securities Lending committees. McCormick was named one of the 100 most influential people on corporate governance by Directorship magazine in 2008 and 2009. McCormick sees global convergence across borders as one trend that continued this year. Trends to influence election of directors, obtain more information, increased use of voting rights.
There seems to be a private ordering around issues like majority voting requirements.He also sees more engagement with shareowners. Perhaps there was a learning phase or trust building required. BP and Massey drove the focus on risk. Asked about the need to a separate board risk committee, McCormick, like the others, said it depended on a number of factors. If the board has never really managed risk, then a separate risk committee or manager reporting to the board will guarantee at least a discussion. On the other hand, compensation committees need to be aware of risk and how it relates to incentives. The audit committee also needs to be aware, so companies shouldn’t shunt risk off to one committee.
A study cited in the Sutherland and The Altman Group webinar discussed below found that 8% of surveyed companies have primary responsibility for risk management resting with the board. 34% is with 1 or more committees and 52% said both board and various committees have responsibility for risk oversight.
Great questions from the audience… need to validate subcontractor skills and performance. Discussion around perhaps higher need for risk committees at insurance companies. Ideally best nominations come from nominating committees because they know the strengths and weaknesses of the existing board. However, when they fail, proxy access will be useful as long as it is used judicially. Interesting stories from insiders, as well as international examples of rights and problems that may be coming our way.
It was close to a full house, a great little buffet, wonderful discussion and when I got the last question I asked about how funds decided to withhold votes on directors. Leading factors seem to be:
- Compensation committee members where there were large gaps relative to performance.
- Audit committee members and others when there is a crisis.
- Poor performance, coupled with poor governance.
- When directors repeatedly ignore the will of shareowners by not enacting proposals that have passed twice.
For another perspective on the 2010 proxy season, see Ted Allen’s The ISS Preliminary U.S. Postseason Report, available to subscribers of theCorporateCounsel.net and probably available somewhere at RiskMetrics.com, although I can’t seem to find it. A few highlights:
- Despite warnings from some corporate advisers that the end of broker voting in uncontested board elections would unleash a surge of withhold votes this year, the number of directors who failed to receive majority support remained about the same.
- One of the most notable developments this season occurred at Motorola, when the electronics company became the first-ever U.S. issuer to fail to win majority support during a management-sponsored advisory vote on compensation.
- After reaching a record high in 2009, fewer governance proposals filed by shareholders obtained majority support this season. As of June 15, 117 (30.2 percent) of the 388 proposals that went to a vote garnered majority approval, down from 150 (or 35.2 percent) of the 426 proposals on the ballot during the same period in 2009.
- “Say on pay” resolutions were averaging 44.1 percent support at 47 companies.
- Resolutions seeking to rescind supermajority voting rules were averaging 69.6 percent approval at 32 firms.
- For declassification proposals, there was 60.2 percent average support at 55 companies.
- Right of a majority of investors to act by written consent averaged 54.7 percent approval at 16 firms this season.
- Special meeting resolutions were averaging 43 percent support at 43 firms, down from 51.8 percent in 2009, as companies increasingly adopt 25% or higher standards to avoid the 10% demanded by shareowners.
- Independent board chair resolutions were averaging 28.9 percent support at 36 annual meetings, down from 38.8 percent during the same period in 2009.
- Majority voting proposals averaged 57.6 percent approval at 29 companies, up from 51.3 percent in 2009.
From a review by Sutherland and The Altman Group. (I presume it will be posted to the Articles portion of the The Altman Group site. If not, contact Cynthia M. Krus at Sutherland or Francis H. Byrd at The Altman Group.)
There was no huge perfect storm that many expected with loss of broker vote. ISS clamped down on compensation committee members in 2009. No further ratcheting in 2010 but companies deserve credit for taking a more proactive stance in 2010.
Some discussion of Dodd-Frank bill. Non-binding Say on Pay at least twice every six years, with variability 1, 2, or 3 years. Many institutions that advocated annual SoP aren’t prepared to vote annually because too much work to look through thousands and thousands of proxies. Management SoP didn’t pass at Occidental, Motorola and KeyCorp. ISS didn’t support management’s recommendation at any of these companies for a variety of reasons.
Issuers can no longer exclude risk assessment or CEO succession planning proposals based on ordinary business exclusion. Presentation went into more detail as to why votes may have turned out as they did in 2010. See Staff Legal Bulletin 14E.
Their webinar focused much more on proxy disclosure rules and how to please both the SEC and RiskMetrics Group. I would think the slides would be useful to all involved in compiling such disclosures for companies. Additionally, a proxy plumbing draft will be released by the SEC soon. See Modernizing the Proxy Voting System: Setting Priorities and Practical Solutions To Improve The Proxy Voting System at The Altman Group.
See also RiskMetrics 2010 Policy Updates: Test of Pay for Performance and List of Problematic Pay Practices Fine-Tuned, Peal Meyer Client Alert from December 2009 and Pay Czar Feinberg’s Best Practice Principles, The Corporate Library, 7/1/10.
Also of interest to NACD members, “Who Watches the Watchers? Why an External Board Evaluation is Most Likely to Result in a Higher-Performing Board.” This article, available from Deloitte, discusses the involvement of a third-party in assisting with the board evaluation process and explores the benefits of having an independent party involved.
First, a precautionary note about this post. These are strictly my impressions. There is no intention here to present juicy findings with regard to any corporation, fund, individual etc. My purpose is simply to help facilitate dialogue and understanding. Keep this in mind as you read my notes, as well as the following. One of the panelists from a government agency began with the standard disclaimers about how what he said was his opinion alone and did not necessarily reflect the views of his agency. Ted Mirvis, a partner with Wachtell, Lipton, Rosen & Katz interrupted, as I recall, saying something to the effect that he not only disavows the applicability of any of his statements to his firm, he also disavows their applicability to himself. That got a laugh, but says it all. The conference was the perfect venue for throwing out ideas and seeing what sticks… what resonates with those attending. We can learn a lot from that. Of course, there were also plenty of hard facts.
Your comments and especially your corrections are welcome. To comment directly on the blog, you’ll need to register first. Just press the “No comments” button and it wil step you through registration, if you aren’t already registered. (This process cuts down on spam.) If you don’t want to bother registering, you can always e-mail your comments directly to email@example.com. Your feedback on my coverage, the topics and the conference itself are important to me.
Prior to the dinner, there was a networking reception held outside the Joan B. Kroc Institute for Peace & Justice… a wonderful facility in a beautiful setting overlooking the northern part of San Diego. My little point and shoot camera can’t do the place justice. I’m sure the Forum will have much better photos on their site, perhaps on the Conference Materials page where you will find a wealth of studies, books and other resources.
Keynote: The Honorable Leo E. Strine, Jr., vice chancellor, Delaware Court of Chancery.
At the dinner to kick off Directors Forum 2010, Strine’s main point seemed to be that we can’t expect corporations to act in the long-term interest of shareowners if most investors are rewarding short-term performance. He looks at corporations as republics, rather than direct democracies. Regarding proxy access, he appears to favor the opt-in option to encourage innovation without imposing a government mandate. Shareowners who propose changes should have long-term holdings, whereas most activists hold only a short time. They should have a substantial positive interest and disclosure should be required so we know they aren’t shorting.
Adolph Berle discussed separation of ownership from management and control but now we have separation of ownership from ownership. Too many fund managers are looking out for their own interests, rather than those of beneficial owners. Hedge funds are turning over their shares three times a year. Active mutual funds are holding only for a year on average. At the NYSE turnover was 130% in 2008 and 250% in 2009. Owning Intel 14 times in 10 years isn’t being a long-term owner by Strine’s measure. Institutional investors have been too little concerned with risk management and utilizing leverage. Too many are focused on getting rid of takeover defenses, stock buy-backs and replacing CEOs who don’t yield the highest short-term returns. We’ve been driven to the point that 280 out of the S&P 500 spent more on stock buy-backs than on investments.
Strine ended by quickly throwing out some reform ideas to consider. I didn’t get them all down but here are a few:
- Pricing and tax to discourage short-termism.
- Build fundamental risk analysis into corporate governance measures.
- Compensation of investment managers based on the horizons of beneficiaries and beneficial owners.
- 401(k) and college plans consistent with those time horizons.
- Indexes should act and vote consistent with long-term
- Limitations on leveraging and disclosure by hedge funds
- Fixing the definition of “sophisticated investors.” Many trustees are sophisticated investors and shouldn’t be able to take their funds into unregulated pools. If pools dry up, that may lead hedge funds to disclose, since they need that capital.
- We need to know more about hedge funds – your positions, your voting policies, etc.
- Investors should focus less on leverage and gimmicks, more on real cash flow and perfecting business strategies. Let’s get away from checklist proposals.
See also Overcoming Short-termism: A Call for a More Responsible Approach to Investment and Business Management, The Aspen Institute. Also of note is Governance at Fortune’s 100 Best Companies to Work For, The Corporate Library Blog, 2/5/10. Most of the companies which excel in the employee satisfaction are privately held. Among those that are public, company founders or families have a disproportionate ownership stake. These firms feel less pressure to meet quarterly expectations and can take more of a long-term perspective.
Welcome & Introductions from Linda Sweeney, executive director, Corporate Directors Forum; Larry Stambaugh, conference program chairman, Corporate Directors Forum. I must say, Linda, Larry, Cyndi Richson and Jim Hale have built this conference into a premier event.
Plenary Session: Shareholder Hot Topics
Moderator Cynthia L. Richson, president, Richson Consulting Group; former member, PCAOB Standing Advisory Group, former head of corporate governance, OPERS & SWIB. Panelists – Patrick S. McGurn, special counsel, RiskMetrics Group , ISS Governance Services; Jennifer Salopek, chairman, Charlotte Russe Holding, Inc. principal, ARC Business Advisors LLC; Andrew E. Shapiro, president, Lawndale Capital Management, LLC; John Wilson, director, Corporate Governance, TIAA-CREF.
Again, there was some focus by panel members of long-term vs. short. Are compliance driven measures and the use of compensation consultants driving oversized compensation? Some seem concerned that directors are more focused on compliance and in developing a plan that can be explained than they are in coming up with the best package. Also of concern, last year’s rally may lead to out-sized awards implemented last March or April.
As several others at the conference also pointed out, options are a vestige of the tax system… better to see restricted stock granted as performance targets are met. The feeling expressed by many is that the tax system shouldn’t be driving the form of C-Suite pay. There is also a tendency by a shareowner elite to focus on exit that leads many companies to underinvest in strategy, R&D, and management systems.
Shapiro sees a wave of management led buyouts on the horizon as well as activism by creditors to address over leveraged balance sheets and liquidity problems. He is buying up debt that can be converted to equity… reamortizing balance sheets. He expects this to continue for several years because of limited economic growth. Management is likely to see the light at the end of the tunnel first and will use that advanced knowledge to look for private buyout opportunities. He sees too many no-shop clauses, rights of first refusal and other deal protectors that give a control premium to management. In these situations, independent directors should seek real competition through an auction.
John Wilson was asked about how proxy access would be impacting TIAA-CREF. He responded that ideally they will have access rights and never use them. Just having that power should lead to more dialogue between shareowners and companies. They will look at each situation individually and may side with as access filer or management.
Pat McGurn said these types of contests will be management’s to lose, not to win. RiskMetrics will need to be convinced of the need for change. It will be something of a last resort, like just vote no campaigns. Many are likely to settle out before proxies are finalized, either through trade-offs or board enlargement. He also noted that out of 12,000 board candidates up for election last year, fewer than 100 didn’t get elected. Many such contests are coming at companies that don’t have majority vote requirements.
Shapiro and others pointed out the real impact of proxy access may be overblown, since not much will be saved by having a universal proxy card. Challengers will still need to campaign and that costs money. Additionally, many hedge funds won’t use it because of the change-in-control exclusion.
Asked about liquidity, Wilson said at TIAA-CREF it is driven more by economic conditions than any growing net-flow of baby boomers out of the workplace. Companies should see long-term shareowners as their allies, not those who acquire rights just before the proxy vote. Again, emphasized the need for constant communication.
Salopek said one of the advantages she has found in having a split chair is increased dialogue with shareowners. Shareowners find it more difficult to talk about concerns, such as about CEO pay, when the CEO is also the chair.
Shapiro emphasized the need for communication, citing its lack as the biggest reason for escalation by funds like his. He also sees that interaction as part of director responsibilities around “duty of care.”
Another panelist cited a university of Santa Cruz study that showed even one woman director on a corporate board led to greater board independence and better financial reports. (sorry, I did a quick search but didn’t find the study) That led to discussion around diversity and the need to apply thinking more broadly. I know that CalPERS and CalSTRS are working to build a pool of potential candidates for proxy access nominations. Diversity will play a large part in developing the list.
Shapiro gave some advice concerning annual meetings, pointing to Warrn Buffett’s practice of calling on individual committee chairs to report their respective parts of the annual report. Also some discussion around virtual meetings with Intel pulling back on their virtual-only meeting, but that web broadcast would allow many more to participate and would make them a real event that could generate a lot of publicity and positive dialogue. (see my posts on this from 1/20/10 and earlier same day)
Wilson’s final advice included papering in a day or two of engagement for directors with shareowners before the meeting. Shapiro similarly recommended calling your top 10 shareowners to hear their concerns… actually check in with several types. Keyword for the panel — communication. Further reading: Activist Shareholder Dialogue, Andrew Shapiro.
Plenary Session: Shareholder Rights AND Responsibilities
Moderator The Honorable Leo E. Strine, Jr., vice chancellor, Delaware Court of Chancery. Panelists – Theodore N. Mirvis, partner, Wachtell, Lipton, Rosen & Katz; Brandon J. Rees, deputy director, office of investment, AFL-CIO; Lynn A. Stout, professor, Corporate and Securities Law, University of California, Los Angeles School of Law; Lynn Turner, managing director, LECG; former chief accountant, SEC; trustee, AARP, Colorado PERA.
We were reminded that individuals still own about a third of all shares, mutual funds and ETFs are the next largest holders with pensions coming in third with about 20%. Turnover by all seems to be going through the roof. While it was about 150% in the early 2000s, it accelerated to 200% and last year 300%.
Among the most pressing issues this season for labor are “say on pay” and proxy access. Compensation plans aligned with long-term interests and holding. Restricted stock awards should be held for five years and preferably beyond retirement. When chasing return and trying to beat the market, active managers are likely to be little concerned with corporate governance or proxy issues. Yet, ideally these should factor into investment decisions. Labor would like to see reforms in the tax code and a very small transaction tax to discourage turnover.
Turner was largely in agreement with Rees up until that transaction tax. He sees the need for taxreforms, greater transparency and much more dialogue, as well as a heightened fiduciary duty that would include better disclosure of conflicts of interest. All funds should have to disclose votes and policies. He also sees too many funds voting for poorly performing corporate directors. As I heard this last point, I couldn’t help thinking, “Yes, but how do we know which are the poorly performing directors?” Maybe the new disclosures required by the SEC will begin to give clues.
Ted Mervis noted a 2003 Conference Board report that investment fundsshouldn’t compensate on a quarterly basis. Yet, that isn’t likely, because funds with the highest returns this year attract the most capital next year… even if there is no correlation in the performance for both years. Perhaps sharowner democracy amounts to “faith-based” corporate governance, since there is so little evidence that shareoweners are really in it for the long-term.
There was some mention that corporations are more likely to talk to activist funds than indexed funds, even though they are less permanent shareowners. I presume this is because activist funds are more likely to spend time and money analyzing the issues, whereas indexed funds, wanting to minimize expenses, may do less.
Stout said there is decades of evidence that trading eats up about 1.5% of return each year. The greater the sharowner power, the higher the issuers turnover.
Rees said he supported indexing, long-term investing, defined benefit plans, disclosure of proxy voting and a reassessment of securities lending practices and rules.
Mervis thinks too many directors may be knowing each other “by name tags” because of increased turnover and less collegiality.
Strine seemed to put forth the idea that shareowner rights aren’t inherently good. In fact, maybe we should embrace shareowner ignorance. Increasing leverage to chase returns can lead to ruin. He agreed with Stout, we need higher fiduciary standards for investors.
Stout seemed disposed to a small transaction tax and thought ERISA standards are needed to limit what funds can invest in. It is also time that companies looked at adopting bylaws limiting those who can file bylaw proposals to those without certain conflicts and derivative positions… maybe shareowners should have to hold for two years. That got a lot of attention from directors in the audience who virtually swarmed Stout at the panel’s conclusion.
For further reading see The Mythical Benefits of Shareholder Control (Stout, 2007) Fiduciary Duties for Activist Shareholders (Iman Anabtawi & Lynn Stout, 10 April 2009) Find more reading from several of the panelists on the Conference Materials page. Personally, Lynn Stout is one of my favorites. I don’t always agree with her conclusions, but she is certainly a creative and stimulating thinker.
Plenary Session: The Fast Changing Regulatory Landscape: Judicial, Congressional and Executive Developments
Moderator Theodore N. Mirvis, partner, Wachtell, Lipton, Rosen & Katz. Panelists Rhonda L. Brauer, senior managing director, corporate governance, Georgeson; Byron S. Georgiou, of counsel, Coughlin Stoia Geller Rudman & Robbins LLP, Financial Crisis Inquiry Commission member; Robert Jackson, Jr., deputy special master for executive compensation, Department of the Treasury (aka deputy “pay czar”); Frank Partnoy, George E. Barrett Professor of Law and Finance; director, University of San Diego Center for Corporate and Securities Law.
Mervis went over the pending proxy access proposal and discussed legislative push for separating board chair and CEO, push against staggered boards, mandatory risk management committees and enhanced disclosures. Some boards are getting ahead of the ball by passing their own measures granting shareowners a say on pay but limiting it to every three years.
Brauer advised boards to be ready with their own proxy access proposals.What alternative does your board want if given and opt out option. Be ready for that possibility and check with your shareowners first.
Jackson advised to look at how your compensation policies might be incentivising risk. Have a discussion before the fact with your shareowners and disclose the process you use to think about risk. Too many financial intermediaries are making decisions that extend over years but are paying bonuses based on only yearly returns.
Partnoy thinks reviewing a “worst case” scenario might be a useful exercise for most companies in developing a risk profile. Partnoy expressed his desire to see financial institutions treated differently.
Georgiou noted the Financial Crisis Inquiry Commission got an enormous volume of google searches during its first hearing. Regulators can’t keep up with innovation and need market mechanisms to enforce behavior.
One key reform might be a requirement to have underwriters hold a portion of the securities they create. They should be required to eat their own cooking, maybe also institute clawback provisions for their earnings. Capitalized gains and socialized losses doesn’t work. The issuer paid model is faulty. Even CEOs recently asserted no one should be too big to fail. Discussion around a resolution authority to take down such companies without risk to the larger economy. Problems at seven or eight firms shouldn’t be allowed to infect the whole system.
Lunch Panel: Bad Loans, Gatekeepers and Regulators – Is change on the Horizon or just a Mirage?
Moderator Lynn Turner, managing director, LECG, former chief accountant, SEC; trustee, AARP, Colorado PERA. Panelists – Charles Bowsher, former Comptroller General of the United States & Head of the GAO, director, the Financial Industry Regulatory Authority (FINRA); Kristen Jaconi, former senior policy advisor, for Domestic Finance, US Department of Treasury, former senior counsel to Michael Oxley, US House of Representatives; Barbara Roper, director, investor protection, Consumer Federation of America, member, PCAOB Standing Advisory Group.
Bowsher sees at least part of the problem stemming from traders getting essential control of several banks, like at Enron. Safe and sound banking is important to reestablish. Favors a risk regulator with real stature but is worried that legislation that is 1700 pages long fails to focus.
Roper sees the idea of an individual systemic risk regulator as a reform in name only, since they wouldn’t have the tools to do the job. They need to have the staff, tools and the authority, otherwise reform will be a mirage. See her testimony to Congress here. What we need, if anything is to be accomplished, is a fundamental shift in how we see regulation.
Jaconi says we aren’t thinking big enough. The center of arbitrage is London, not New York. We need to be thinking on the scale of the IMF. Another point she emphasized was the importance of inspections and examinations. Training inspection staff will be critical but there is little notion of that in current proposals.
The consensus of the group seemed to lean in the direction of mostly mirage with some substantive reform. The public has embraced say on pay but watered down derivative regulations appear likely to mostly miss the mark.
Plenary Session: Risk Management: Monitoring for Known and Unknown Risks Moderator James Hale, former EVP, general counsel & corporate secretary, Target Corp.; director, The Tennant Company. Panelists Heidi M. Hoard Wilson, VP, general counsel & corporate secretary, The Tennant Company; Stephen A. Karnas, director, Mars, Incorporated; Lynn Turner, managing director, LECG; former chief accountant, SEC; trustee, AARP, Colorado PERA.
Wilson discussed their extensive process at Tennant, from weekly meetings, board involvement, measuring probability and potential costs, disaster recovery plans, their ranking process, supply chains, etc. She discussed the need to pay special attention to sole source suppliers. You need to know who to turn to if they go bankrupt.
Karnas described his experience at Mars and their use of a chief risk officer primarily functioning as facilitator. Their process is top down as well as bottom up, a little different than that of their recent acquisition, Wrigley, which views risk primarily from a centralized perspective. He discussed how each work and how they are likely to be integrated. Interestingly, the Mars board gets very involved, apparently traveling on a bus, during quarterly Board weeks, to their factories so they can view the production process and operations and become very familiar with risk at the core business level.
Turner discussed his approach as one of finding out keeps them up at night. Ask your external auditor what are the top five risk areas at your company and at the competition. Ask the executives the same and note differences. What are the key trends in marketing, spending rates… key dashboard issues. How do you get to know risks that don’t get communicated? He stressed the need for a bottom up process, as well as top down.
The consensus of the group was that risk is an issue that should be addressed by the full board, not shuffled off to an individual committee… although it may be important for the board to get input from multiple committees.
Plenary Session: A Compensation Committee in Action (A Socratic Dialogue)
Moderator Larry Stambaugh, chairman & CEO, Cryoport, Inc., principal, Apercu Consulting. Panelists – James Hale, former EVP, general counsel & corporate secretary, Target Corp., director, The Tennant Company; Garry Ridge, president & CEO, WD-40 Company; Anne Sheehan, Director of Corporate Governance at CalSTRS; Matthew T. Stinner, senior managing director, Pearl Meyer & Partners.
This was an interesting play-like exercise that was so much fun, I failed to take notes. However, I do recall the pretend CEO using that famous line, “It depends on what the meaning of the word ‘is’ is,” in response to a question from the compensation committee. It was a good discussion of the factors of what goes into pay for performance and the importance of what gets left out that isn’t recognized until after the fact.
Key points: Most companies don’t factor in consideration of performance relative to peers or even the market… and they probably should. Plans should be simple and easily understood but driving compensation based on a single metric, like net income, probably results in too narrow of a focus. Payouts should be held for 3-5 years to emphasize longer term thinking. Further reading: Compensation Committee topics on BoardMember.com and Compensation Season 2010 (Wachtell, Lipton, Rosen and Katz)(PDF).
Dinner and Keynote Speaker; John J. Castellani, president, Business Roundtable
Castellani asserted there is a cultural divide between public thinking reflected by Congress and that of business leaders that is not unlike the divide between C.P. Snow’s scientists and nonscientists. The public wants many thing from business: high quality, employment, good stewardship, earnings, shared sacrifice. They see little difference between finance and other sectors… lumping all large businesses together. Board attention is generally more concentrated on good earnings and stock performance.
Congress suffers from ignorance regarding how businesses work. They think boards are constituent based. They think boards operate like Congress does. The prevailing view is that directors are rubber stamps of CEOs. Yet, the truth is that CEOs are practically an endangered species (my term, not his)… going from a tenure of 8 1/2 years in 2006 to 4.1. He sees most of the reforms like “say on pay” and separating CEO and chair positions as a “relief valve” for American frustration with bigness and fears there will be unintended consequences.
We need to help politicians understand how businesses work. He noted that the costs and performance of the U.S. health care system have put America’s companies and workers at a significant competitive disadvantage in the global marketplace. (see Business Roundtable Health Care Value Comparability Study) People hate insurance companies and banks. They are looking for shared sacrifice. For further reading: John J. Castellani’s blog entries on the Huffington Post.
Plenary Session: Insider’s View of Surviving a Proxy Contest
Moderator Karin Eastham, director, Amylin Pharmaceuticals, Inc., Illumina, Inc., Genoptix, Inc., Geron Corporation. Panelists – Daniel M. Bradbury, president & CEO, Amylin Pharmaceuticals; Daniel H. Burch, chairman, CEO & co-founder, Mackenzie Partners, Inc.; Suzanne M. Hopgood, director of board advisory services, National Association of Corporate Directors director, Acadia Trust Realty, Point Blank Solutions Inc.; James P. Melican, senior advisor, Ridgeway Partners, former chairman, PROXY Governance, Inc.; Alison S. Ressler, partner, Sullivan & Cromwell LLP
One discussion during the session was the problem that during a proxy fight, particularly in a three card proxy fight, shareowners can split their vote between cards, picking the best directors from each advocate. However, that opinion was not universal. The opposing viewpoint was that slates are good because they are more likely to result in an integrated board and directors with complimentary vetted skills.
It was a very informative session focused mostly around Amylin Pharmaceuticals, in addition to several experiences of Ms. Hopgood. Aside from three proxy cards at Amylin, the company also had three previous CEOs on their board, one as chairman. Takeaway points for me were as follows:
- Things generally go worse when the company refuses to talk. Earlier is better.
- RiskMetrics doesn’t seek to review a strategic plan from dissident slates unless they are seeking a change of control.
- Most dissident groups are giving more thought to their director candidates these days… no longer mostly relatives.
- Hire a good proxy solicitor.
- Review corporate governance practices and consider eliminating those that are unpopular with media, like shareholder rights plans (poison pills). If you are going to make changes, do it before the contest.
- Identify possible conflicts of interest all around.
- Don’t retain CEOs on the board after they leave.
- Pay close attention to board skill sets and succession planning.
- Learn what shareowners are thinking.
- Dissidents shouldn’t assume they’ll get the votes if the stock price tumbles.
Plenary Session: What is the Director’s Job Today, and How Does He or She Prepare for It?
Moderator Kenneth Daly, president & CEO, National Association of Corporate Directors. Panelists – John T. Dillon, director, Caterpillar, Inc., Kellogg, Company, DuPont; Matthew M. Orsagh, director, Capital Markets Policy, CFA Institute Centre for Financial Market Integrity; Margaret M. Foran, VP, chief governance officer & secretary, Prudential; Richard H. Koppes, director, Valeant Pharmaceuticals International, former general counsel, CalPERS.
Ken Daly explained that NACD had worked with CII, ICGN, AFL-CIO, BRT and others to develop 10 principles, which they have posted on their website and on the Conference Materials page. He urged all directors to download the principles, review them and provide NACD with feedback. The idea is to empower boards to lead the way in restoring public and investor confidence. “If we don’t act, lawmakers will do so with prescriptive rules and regulation.”
One interesting finding from a recent survey was that board members are less happy with agendas than CEO/Chairmen. Strategy is top priority for boards in the coming year. Interestingly, the conference made use of their ability to rapidly survey those in attendance regarding various topics. We simply pressed numbers on a little remote control type gadget and in seconds they displayed the results. This worked smoothly until this panel where there was one glitch. Asked if information received from management engages the board’s expertise in planning and executing strategy, the graph makes board members seem a little more satisfied than they really are, since there isn’t much difference between 51% and 49%.
Aside from the fun with numbers, I noted the following takeaway points:
- Boards want to discuss strategy before it is fully baked; strategy is job #1.
- Directors shouldn’t play the role of gotcha. Trust and respect are essential to board functioning. Dissent should be accepted.
- IT expertise and succession planning deficient on many boards.
- Balancing long and short-term strategies is key… see Aspen Principles.
- Put something in your proxy regarding succession planning.
Further reading: The New and Emerging Fiduciary Duties of Corporate Directors by Elizabeth B. Burnett and Elizabeth Gomperz.
Keynote Speaker: William A. Ackman, founder and managing partner, Pershing Square Capital Management LP. Apparently, Ackman was on a recent edition of Charlie Rose, so Frank Partnoy couldn’t resist beginning the interview as if he were Charlie Rose.
With all the talk about the need for long-term holders, that was one of the first questions. Pershing Square typically holds for about 2.5 – 3 years. Ackman described his process, which mostly involves picking stocks that are undervalued (spread between price and value) and then he works on a strategy to get the market to recognize that value.
He described his efforts at Wendys, which owned Tim Hortons. The chains weren’t really a great fit because of differences in how they operate and management styles, so he worked to get Hortons spun off… yielding a hefty profit. Ackman believes competition for board seats will give us better candidates and will cause boards to do more self-examination. Choice will force board to adopt term limits to keep fresh.
He says boards should invite their largest holders and short-sellers to discuss any issues or concerns they may have. Try your best to understand your harshest critics. You’ll probably learn something. Asked how he’d do that, he suggested issuing a press release inviting the company’s biggest critics to call in and schedule a confidential meeting.
Another case he discussed extensively was Borders, which he believes had been consistently mismanaged and is now finally facing a possible turnaround, even though the CEO that helped them regrow the company had just resigned the night before for a better offer… with no warning.
One factor that appears to keep him invested for a longer term is reputation. If he bails out too quickly with a loss, his reputation suffers more than if he keeps a company for longer but ends up making something.
Where’s the next crisis? Akman thinks it is likely to be failed municipalities.
Pre-Conference Bonus Sessions – “Legal Issues in the Year Ahead: What Directors and General Counsel Need to Know”
Session 1: “What to Expect in Regulation,” presented by Frank Partnoy, director of USD’s Center for Corporate and Securities Law.
The sun was shining outside our beautiful auditorium at the University of San Diego but Professor Partnoy’s prognostications inside the hall were gloomy with his comparisons of the current financial crisis and the Great Depression. “This is 1931,” he said, noting that markets recovered from the 1929 crash but then turned down again. Because of the recovery (like the little bear market in 1930), he doesn’t see strong demand for reform. Like then, banks say they will reform themselves. Like their Pecora Commission, our Financial Crisis Inquiry Commission is mostly political theater. Pecora didn’t even arrive at the commission remembered for him until 1933. Our efforts could be similar. If history is a guide, it will take a couple of years.
Partnoy doesn’t see real reform on the horizon until more revelations of wrongdoing. He predicts the Volker rule will be watered down and sees an absence of commonsense in the process.
Proxy access is coming but there are still some vestiges of a federal versus state law battle. Delaware incorporated companies may already adopt bylaws and many may do so to preempt the proposed federal default rules. (Elsewhere at the conference the advice was more to be ready, once we know what the rules will be.) Partnoy described the basic outline of the proposed default, with its thresholds ranging from 1, 3 and 5%, depending on size – the 25% limit on board members so nominated and the one year holding period.
Broker nonvotes won’t count this year and that has hedge fund activists excited. They don’t care much about proxy access because the new rule can’t be used for a change in control, and that’s what hedge funds seek. Derivative and credit rating reforms may be the most important reforms on the horizon for 2010. However, strong action appears unlikely. Yes, they’ll probably pass something but there won’t be a central clearing platform for the derivatives that really matter. Banks don’t like the idea of open source disclosure of all contracts, even on a lag basis.
Partnoy thinks the Fed will have to raise rates at some point and when they do, we may see derivative contracts implode. Institutional investors who actually depend on rating agencies to grade risk are being naïve or irresponsible. He cited several commonly know examples where the rating agents gave companies high marks… even as companies tumbled into bankruptcy. Perhaps on of the more important provisions will be to expose credit rating agencies to legal liability. See additional discussion at Proposed Credit Rating Reforms May Empower an Embattled Moody’s (HuffingtonPost, 1/4/2010) and Why Rating Requirements Don’t Make Sense (WSJ, 1/18/2010)
Session 2: What to Expect in Litigation, facilitated by Fran Partnoy. Panelists included Leo E. Strine, Jr., Vice Chancellor of the Delaware Court of Chancery; Darren J. Robbins, Coughlin Stoia Geller Rudman & Robins LLP; and Koji Fukumura, Cooley Godward Kronish LLP.
Initial discussion focused around the issue of individual director liability and the fact that many funds are pushing for that. They want individual directors to feel the pain, not just be covered by D&O insurance. So far, it appears that most of the money that has come out of director pockets has come from CEOs who also chair their boards. Cases were down in 2009 because the market is up. Companies have spent up to $80 million to defend two directors. Strine offered up a bit of speculative advice. Separate director’s insurance from officer’s insurance. Officers get most of the focus, often depleting the coverage available. Options backdating and earnings smoothing created a culture of corruption that led to the move by public funds to go after individual directors. See discussion at Insurance for A-Side D&O Exposures after Enron—A Riskier Proposition?, IRMI.com and Recent Developments in D&O Insurance, HLS CG&FR Bog.
There was also discussion around the fact that many disclosure only cases filed in state courts are abusive. They are filed as soon as any action happens, like an agreement to sell. Several cases discussed. Strine also cautioned to watch shortcuts regarding tax avoidance and don’t sign consents of action after the fact… like documents where management fills in the blanks later. Gimmicks are gimmicks and should be avoided. Also some discussion around a case where the company tried to sue its own internal auditors for malpractice but couldn’t.
The deadline was August 17th, so the comment letters on proxy access have all been filed and posted. Many are well worth reading. If you don’t see yours posted, you might want to resubmit it.
TIAA-CREF, one of the more conservative shareowner activists, calls on the Commission to raise the threshold to 5% for shareowners at all companies, regardless of size. Additionally, they want to require a two year holding period and recommend instead of the “first in” approach, nominations should go to the largest owner or and (here they get creative) to the shareowner or group that has held their shares the longest. They voiced opposition to reimbursement: “Reimbursement of expenses could be used to facilitate the election of special interest directors. Reimbursement also encourages fighting and proxy contests to achieve representation at the distraction of directors rather than dialogue and productive change.” Instead, they favored “incentives for a meeting between shareholders and the board in order to identify director candidates who are acceptable to both parties… Ultimately, the best possible outcome is to avoid a proxy contest altogether… We believe that the nominee should receive at least 20% of the vote in order to be re-nominated in subsequent years.”
Cornish Hitchcock, writing on behalf of the LongView Funds warns against a state-law carve-out, praising the merits of a uniform system. Like TIAA-CREF, the LongView Funds would like to see the required holding period extended to two years and nominations going to the largest nominator.
J. Robert Brown, of theRacetotheBottom.org, offers a spirited rebuttal to comments by the Delaware Bar Association regarding their argument in favor of private ordering. “The evidence in fact suggests that in the absence of a federal requirement, companies will opt for a categorical rule denying access.” “Evidence suggests that management’s control over the drafting process and its ability to rely on the corporate treasury eliminate any real prospect of private ordering. Instead, when matters are made discretionary, they result in a categorical rule that favors management.” “The only way to ensure meaningful access to the proxy statement is to adopt a federal rule that institutes the requirement.”
Lucian Bebchuk’s letter, signed by 80 professors, favors the rulemaking and notes, “no matter how moderate eligibility or procedural requirements may be, shareholder nominees must still meet the demanding test of getting elected before they can join the board. A shareholder nominee will join the board only if the nominee obtains more votes than the incumbents’ candidate in an election in which incumbents, but not the shareholder nominee or the nominator, may spend significant amounts of the company’s resources on campaign expenses.”
As expected, the Shareholder Communications Coalition, comprised of the Business Roundtable, the National Association of Corporate Directors, the National Investor Relations Institute, the Securities Transfer Association, and the Society of Corporate Secretaries & Governance Professionals sent a letter opposing the rulemaking “until the Commission: (1) completes its intended examination of the proxy system; and (2) promulgates new regulations to modernize and reform this cumbersome and expensive system.” “A shareholder nomination process that operates in a proxy voting system that cannot produce an accurate and verifiable vote count will do little to improve the overall
corporate governance system.” I just can’t help making a snarky comment. So we should just go with the current system that elects incumbents based on inaccurate and unverifiable voting results until we can ensure the system works properly
Broadridge submitted a letter discussing various technical issues. Great for those who want to get into the weeds.
Writing on behalf of Sodali, a global corporate governance consultancy, John Wilcox asks: “Is Rule 14a-11 is sufficiently deferential to the traditional role of the states in regulating corporate governance?; and (2) Does the proposal achieve the Commission’s goal of removing burdens that the federal proxy process currently places on the ability of shareholders to exercise their basic rights to nominate and elect directors?” His analysis answers with a resounding yes.
Eleanor Bloxham, of the Value Alliance and Corporate Governance Alliance notes that “having an orderly, ongoing process for shareholder to nominate directors may produce improvements in shareholder returns. Certainty, competition in the process for board seats could, I believe, produce better candidates.” She addresses the issue of affiliation and loyalty, Bloxham recommends each candidate be required to prepare a statement as part of the proxy process that would stipulate that the candidate understands that as a director, if chosen, their obligations are to act in the best interests of all shareholders, including minority shareholders, and to act without preferential treatment related to who may have nominated them.”
As I have previously mentioned, I signed on to a letter from the United States Proxy Exchange (USPX), endorsed by members of the Investor Suffrage Movement, Robert Monks, John Harrington and John Chevedden. Glyn Holton did a great job of putting together sixty-nine pages of comments. I urge everyone to read our common sense approach outlining the democratic option, the need for deliberation and the reasons for our recommendations, which include:
- Mandating a federal standard that take precedence over state laws.
- Placing all bona fide candidates on a single management distributed proxy card.
- Not encouraging a system where corporations are willing to
reimburse expenses shareowners incur in conducting a proxy contest, since this will only escalate costs paid by shareowners.
- Don’t place an overt limit the number of candidates shareowners are able to nominate. If limits are need to keep the pool manageable:
- limit individuals to five for-profit corporate boards
- charge a modest fee
- require a system of endorsements
- require all candidates to file pre and post election estimates and accounting of all campaign expenditures
- Reduce the focus on control by establishing a system that will encourage diversity. “Corporate democracy will allow shareowners to take ‘control’ away from an entrenched board and not give it to any one faction.”
- Eliminate the arbitrary and elitist proposed thresholds, opting instead for the time-tested $2,000 of stock held for a year. “The challenge should reside in winning the election, not in making the nomination.”
- Increase candidate statements to 750 words and specified space for graphics that can address any issue related to the election, including short-comings of the current board.
- Measures to ensure board members nominated by shareowners are not marginalized.
- Implementation of a broad safe harbor for individual director
communications with shareowners.
- Amendments to Rule 14a-8 also clarify that shareowner resolutions can seek to collectively hire a proxy advisor, paid by for with company funds, that isn’t precluded from offering advice on board elections.
- Require that companies must allow shareowner resolutions to be presented during the business portion of the annual meeting.
- An override mechanism on Rule 14a-8(i)(5) (Relevance) and (i)(7) (Management Functions).
Dozens of studies in communications and organizational behavior find current corporate structures to be inefficient. Most decision-making structures, including those now governing corporations, are designed around status needs related to dominance and control over others. They are not designed to maximize the creation of wealth for shareowners or for society at large. In order to gain higher status, individuals seek to dominate more and more people. This dynamic moves the locus of control inappropriately upward. In order to generate more wealth, we need to take advantage of all the brains in our companies, as well those of concerned shareowners. We can do so by making corporations more democratic, top to bottom.
Now, we eagerly await the Commission’s action. If they are slow in finalizing the proposed rules, I hope it is because they carefully read our letters and are rewording them to require more, not less, democracy.
- What Will TARP Bring? (RMG, 11/24/08), see especially comments from Connecticut State Treasurer Denise Nappier
- Issues to Consider: Special Meetings to Authorize TARP Preferred Stock(TheCorporateCounsel.net Blog, 11/25/08). Most companies don’t have the authority to issue preferred shares under their charter and are scrambling to file preliminary proxy materials for a special meeting to obtain shareholder approval.
- CII letter re: Executive compensation provisions of the Troubled Assets Relief Program’s (TARP) Capital Purchase Program (CPP) Importantly, CEOs should hold a “significant portion of their equity-based compensation for a period beyond their tenure.”
- RiskMetrics Group Releases 2009 Proxy Voting Policies. Policies available through their Policy Gateway. Sign up for their December 4, 1:00 p.m. EST webcast to review 2009 policy updates.
- Tweaks: Now showing management positions on upcoming meeting. ProxyDemocracy also hints at “a new voting service.”
Where Were the Directors?
Citigroup Saw No Red Flags Even as It Made Bolder Bets (NYTimes, 11/22/08) provides a good look at how one bank faltered. Was the board just stupid? No, says MIT’s Michael Schrage, “it’s NOT stupidity; it’s the absence of rigor and skepticism combined with incentive systems that encouraged people to ‘cheat’ on their risk assessment… again, people are entitled to be ‘wrong’ – they are not entitled to say that it’s OK to make $100 billion bets [loans/securitization, etc.] based on models that don’t allow real estate prices to go down… or worse yet, assume historical ‘default rates’ for people who have literally put nothing down on their ‘homes.’ At least one or two directors should be asking: how is our exposure hedged? Where were those questions? Will it take another round of shareholder suits to get answers? Sad… and (even worse) unprofessional.”
Being a director in these difficult times has obviously gotten less attractive. Not only are they now expected to ask those “difficult” questions, they also need to meet more frequently. “So far this year, 46 outside directors who are CEOs or chief financial officers left the boards of 42 companies in three struggling industries — financial services, retail and residential construction — concludes an analysis for The Wall Street Journal by Corporate Library in Portland, Maine… The departures come as CEOs had already been trimming their outside board commitments. CEOs of Standard & Poor’s 500 companies held an average of 0.7 outside directorships this year, down from one in 2003, according to recruiters Spencer Stuart.” (As Firms Flounder, Directors Quit, WSJ, 11/24/08)
Fully half of the California’s 400 largest public companies have no women in top executive positions. Just over 3% of the state’s CEOs are women. One bright spot, “Women occupied 10 percent of board seats, up from 9.4 percent in 2007 and 8.8 percent in 2006.” (UC Davis study: Women still lag in holding top business posts, SacBee, 11/24/08)
Eliot L. Spitzer, former governor of New York and state attorney general from 1999-2006, offers his recommendations for revitalizing corporate governance and the market in Capitalism’s beneficiaries must compete in reworked market. (Newsday, 11/24/08)
RiskMetrics Group says will advise investors to withhold votes from corporate directors who approve tax “gross-ups” to cover executives perks. “A 1984 law imposed a special 20% tax when such packages exceed a certain limit. But many companies agree to pay the taxes — often at huge cost.” (Proxy Firm Targets Practice of Paying Executives’ Tax Bills, WSJ, 11/24/08)
“CEOs of large U.S. corporations averaged $10.8 million in total compensation in 2006, more than 364 times the pay of the average U.S. worker, according to the latest survey by United for a Fair Economy.” Peter Drucker suggested “CEO salaries should be a maximum of 20 times the salary of the lowest paid worker.” Haruka Nishimatsu, CEO of Japan Air Lines, gets $90,000 annual salary to run one of the worlds top 10 airlines. Bob Selden argues 20 is the magic number (Management-Issues, 11/21/08) with several bonus possibilities based on 20.
CalSTRS CEO Jack Ehnes has joined the board of Ceres, a national network of investors and environmental organizations. “Joining the Ceres board is a natural fit for CalSTRS. We’ve a history of considering climate change and other risks in assessing investment opportunities,” Ehnes said. “Together, we will move sustainability principles more prominently into the investment equation, for the good of the planet and the bottom line.” (press release, 11/21/08)
In the 20 years of publishing an annual list of the 10 Worst Corporations of the year, this year’s group is “in many ways, emblematic of the worst of the corporate-dominated political and economic system that we aim to expose with our annual 10 Worst list.” (The 10 Worst Corporations of 2008, Robert Weissman, Multinational Monitor, 11/24/08.
Behind the first tsunami wave, there may be another on the way which is potentially more lethal. $55 trillion in credit derivatives built around $16 to $17 billion of corporate debt. Yet, Vince Cable MP, Liberal Democrat Shadow Chance, says “These staggering figures – many times the size of the world economy – are less overpowering than they appear since most institutions have hedged any exposure they have to credit derivatives… There will have to be a strengthening and redefinition of multilateral bodies if we are to steer clear of the beggar-my-neighbour, nationalistic, economics which helped to turn the global financial crash of the inter-war period into a major slump. Whether or not this process is christened Bretton Woods II is less important than a recognition that there have to be strong, respected, multilateral rules and institutions. (Strengthen our systems of global governance, eGov Monitor, 11/24/08)
The Impact of Shareholder Activism on Financial Reporting and Compensation: The Case of Employee Stock Options Expensing provides additional evidence that shareowner activism works. They examined the economic consequences of more than 150 shareholder proposals to expense employee stock options (ESO) submitted during the proxy seasons of 2003 and 2004.
Targeted firms were more likely to adopt ESO expensing relative to a control sample of S&P 500 firms, particularly when the proposals received a high degree of voting support. Non-targeted firms were more likely to adopt ESO expensing when a peer firm was targeted by an ESO expensing shareholder proposal, suggesting the presence of spillover effects of this shareholder initiative.
Targeted firms also experienced a decrease in the level of CEO compensation relative to a control sample of S&P 500 firms.
Guide for Pension Turbulence
A new guide from the Principal Financial Group offers advice to employers reviewing the their retirement programs. Navigating Your Way through Market Turbulence takes a look at how the market volatility may be affecting four retirement plan types: defined benefit, defined contribution, Employee Stock Ownership, and nonqualified deferred compensation. (Principal Guide Outlines a Course, PlanSponsor.com, 11/18/08) Elsewhere, PlanSponsor.com noted that stock investments of state and local government retirement systems have declined 35% so far this year. I’m sure it is more by now.
The Corporate Library’s latest report, “The Corporate Library’s Preliminary 2008 Director Pay Survey” finds:
- S&P 500 index companies spent an average of more than $2 million on board compensation last year
- the median increase in total board compensation was just under 11%;
- the median increase in compensation for individual directors was almost 12%, the third year of double-digit increases for directors and boards, though the rate of increase appears to have slowed;
- median total board compensation for the S&P 500 is over $2,000,000; and
- median total compensation for individual directors of S&P 500 companies is just under $200,000.
The report is available for $45.00 at The Corporate Library’s online store. See also S&P 500 Cos’ Median Board Compensation Rises 11% – Survey, CNNMoney.com, 11/19/08)
Executive Compensation and Coming Targets
As Dave Lynn notes, the first issue of the new quarterly “Proxy Disclosure Updates” Newsletter, free for all those that try a no-risk trial to Lynn, Romanek and Borges’ The Executive Compensation Disclosure Treatise & Reporting Guide, has now been posted. The first issue focuses on key new disclosures all companies will need to address in the wake of the Emergency Economic Stabilization Act of 2008 (EESA) and other regulatory responses to the crisis. (Your Upcoming Proxy Disclosures – The EESA Effect, TheCorporateCounsel.net Blog, 11/20/08)
Bonuses and Layoffs
Of note, companies that participate in the various relief programs administered by Treasury (hundreds are expected), that pay bonuses to CEOs or NEOs, and have laid off employees during the year will need to disclose in their CD&As whether the bonus formula would have been met without the cost savings from the layoffs. If they can’t show the bonuses resulted from real growth and they are essentially paying bonuses “on the backs of fired employees,” not only will their CD&A be deficient, they will soon be facing outrage from their shareowners and the general public. The newsletter says, “we expect that, at many companies, CEOs and other executives will forgo their bonuses this year.” Look for companies that did pay bonuses and that laid off employees to be targeted from every angle.
Also of note in this excellent newsletter is a discussion of the reduction in the annual deduction limit from $1 million to $500,000 for senior executive compensation at companies getting relief. Mark Borges and David Lynn write, “it’s difficult to see how financial institutions that exceed the cap won’t have to disclose that fact (including the amounts paid to each NEO in excess of the cap) and explain why in their CD&A.” “The more stringent cap imposed by the new standard will likely cast the spotlight on compensation deductibility for all companies, not just financial institutions.” (my emphasis) “Boilerplate” language won’t suffice. They further note that in the current environment, “foregoing a compensation deduction is likely to be considered material by most investors.” Therefore, they recommend including the aggregate amount of the foregone deduction. Even better, would be to address the deductibility of each element as they are discussed.
Whether such disclosures will be enforced by Treasury or the SEC may, in some sense, be immaterial, since failure is likely to bring on the wrath of shareowners and the general public. Failure to follow the advice offered in Proxy Disclosure Updates could be costly.
Of related interest, scientists found that people in experiments “offered medium bonuses performed no better, or worse, than those offered low bonuses. But what was most interesting was that the group offered the biggest bonus did worse than the other two groups across all the tasks.” (What’s the Value of a Big Bonus?, 11/19/08) Maybe cutting those bonuses will actually improve performance.
While investors in the U.S. stock market have lost more than $9 trillion since its peak a year ago, a WSJ survey finds that Before the Bust, These CEOs Took Money Off the Table (11/20/08) Top executives at 120 public companies cashed out a total of more than $21 billion. “The issue of compensation and other rewards for corporate executives is front-and-center in the wake of the financial meltdown.”
Planet Hero Dies
Ceres Founder Joan Bavaria passed away on 11/18/08 after a battle with cancer. She was the co-founder of the Social Investment Forum, a collection of research, advisory, banking and community loan fund organizations dedicated to advancing socially responsible investing. She founded Trillium Asset Management, the first U.S. firm dedicated to developing social research on publicly traded companies. Bavaria also co-founded Ceres, with a mission to move companies, financial markets and policy makers to find solutions to sustainability challenges such as global climate change. Few have done so much in so little time. See Ceres Honors the Life of its Visionary Founder Joan Bavaria.
The Failure of Corporate Law
Kent Greenfield’s The Failure of Corporate Law: Fundamental Flaws & Progressive Possibilities posits that corporation law shouldn’t be thought of as “private” law, which governs the relationships of individuals, but as a branch of “public” law, such as constitutional, tax, or environmental law. Corporations are sanctioned by the state and our goals for them should include more than just maximizing profits for shareowners.
Corporate laws determine the rules for some of the largest most powerful entities in the world and America is exporting our model abroad. I’ve warned audiences around the world not to adopt our regulatory scheme wholesale. While my advice has been vindicated by the latest financial meltdown, it is good to see an extraordinary legal scholar pushing for thoughtful change.
“Our nation could choose, and should choose,” writes Greenfield, “to require that democratic values govern corporations, rather than having corporate values govern democracy.”
Some functions are just too important to be left to for-profit companies. Airline security is one. Another would be ensuring an economy that meets our collective goals, not just the goals of shareowners, as modeled by a law-and-economic view.
Greenfield’s discussions are well argued. His critique of “enablingism” and the role of corporate law limited to establishing default rules parties would choose if they actually negotiated them, to be enlightening. As he points out, it simply reinforces status quo market power, rather than ameliorates it. In this trickle-down theory of law, we get only the rights we can pay for. It’s a theory based on the premise that “what is good for shareholders is good for corporations, and what is good for corporations is good for society.”
Yet, income inequality in America is worse than in any other developed nation and is the worst since WWII. What is good for the workers may be a better placeholder for society as a whole than what is good for shareholders. Workers have every incentive to keep their firms alive, whereas shareowners are generally willing to take greater risks because they are more diversified.
Greenfield reminds readers, “The so-called free market was a creation of law, not of nature.” “Private entitlements should spring not from some theory of extralegal natural rights but from a theory of the social good, formed by political judgments about how best to achieve that good.” Treating corporate law as private law exaggerates private rights at the expense of public interest.
Our present legal conception is not inherent in capitalism but was inherited from the laissez-fare politics of the Gilded Age. Corporate law, like labor law, tax law, and environmental law should be predicated on collective political decisions about social goals and ideals. Non-utilitarian values such as equality and human dignity should inform corporate law, just as they inform other areas of law.
A central tenet of the book is that internal governance procedures can lower external enforcement costs. Plus, they follow the corporation outside the boundaries of states and countries. Greenfield critiques the law-and-economics paradigm, arguing that shareowners aren’t the only ones entitled to ownership claims. Even though a stakeholder approach should be more efficient overall, he argues it is reasonable for society to forgo the possibility of very high corporate profits to avoid disproportionate harm to workers and communities. This is especially so, given that only a small portion of affluent shareowners stand to the reap the gains from high profits, since 1% own 34% of all shares and 10% own 77%.
Greenfield formulates five principles for those developing public policies in the area of corporate governance:
- The ultimate purpose of corporations should be to serve the interests of society as a whole.
- Corporations are distinctively able to contribute to the societal good by creating financial prosperity.
- Corporate law should further principles 1 and 2, reminding us “there is no such thing as a limited liability society.”
- A corporation’s wealth should be shared fairly among those who contribute to the creation of that wealth.
- Democratic corporate governance is the best way to ensure the sustainable creation and equitable distribution of corporate wealth.
I like Greenfield’s values. He backs up his arguments with research on real behavior, not just with economic theory. For example, research finds that “an individual’s decision about whether or not to comply with rules is ‘more strongly influenced by legitimacy than it is by estimates of the gain or loss associated with that behavior.’” Monitoring costs are “deadweight losses.” The more we can reduce them by involving workers, the more productive our corporations will be.
- Enlarging board fiduciary duties to include workers and other stakeholders. Relaxation of profit maximization norm and support for stakeholder statutes.
- A federal law that protects workers from fraud, similar to SEC Rule 10b-5 that protects investors. More efficient labor markets will allocate labor to where it will be most productive.
- Ending Delaware’s dominance. Federal chartering… short of that, states should exert their prerogative of regulating the internal affairs of companies. In other areas of law, the state with greatest interest typically prevails. Corporate law should be no different.
They Took on Napster: Who’s Next?
Corporate Secretary ran an interesting article by Brendan Sheehan on three outsiders who launched a proxy fight at Napster. (The outsiders, 11/08) “What makes this situation startlingly unique is the demographic of the dissident group: the action was begun by a young investor with a very small holding in the company who was joined by two other small retail holders, none of whom had any prior history with leading a shareholder fight against a company.” It is a tale of shareowner empowerment worth reading.
The shareholder action has been credited by some as being the catalyst for the sale of Napster to Best Buy. The three involved were Perry Rod, a 29 year-old professional investor, Kavan Singh, an entrepreneur who operates ice cream franchises, and Thomas Sailors, an investment manager. Perry Rod is involved in Market Rap, a discussion board hoping to “bring together, embolden, entertain, and empower investors with tools that have never before been a part of the investment community.” We’ve added a link to Market Rap on our Forums page. We’re always looking for good conversation on corporate governance. Let us know what you think of Market Rap.
ISPs and Privacy
Trillium Asset Management Corporation (TAMC) is filing a number of proposals at internet service providers (ISPs) on freedom of speech and privacy issues. Trillium filed resolutions with AT&T and co-filed at CenturyTel (NYC Pension Funds lead) and Verizon (Harrington lead) and will be filing at Comcast (NYC Pension Fund lead) in the next few days.
ISPs serve as gatekeepers to the Internet. They have extraordinary power over political, social, artistic and commercial use of the Internet. With this power comes the responsibility to protect human rights and democratic values. It also presents the companies with a number of financial, legal, commercial, reputational and regulatory risks. As such, these funds are asking ISPs to issue a report “examining the effects of the company’s Internet network management practices in the context of the significant public policy concerns regarding the public’s expectations of privacy and freedom of expression on the Internet.”
The effort is being coordinated by Open MIC, which TAMC founded using the Ceres and IEHNorganizing model and includes participation by NYCPF, Harrington Investments, Calvert Investments, and Boston Common Asset Management. (see also: FCC shouldn’t tolerate abuses by Internet’s corporate gatekeepers, The Seattle Times, 8/15/08)
Accountability of Bailout Questioned
Naomi Klein, author of The Shock Doctrine: The Rise of Disaster Capitalism, has described the bailout as “borderline criminal” when she spoke to Amy Goodman of Democracy Now!
- Rather than being used to get banks lending again, the bailout money “is instead going to bonuses, is instead going to dividends, going to salaries, going to mergers.”
- Without Congressional authorization, “the Treasury Department pushed through a tax windfall for the banks, a piece of legislation that allows the banks to save a huge amount of money when they merge with each other. And the estimate is that this represents a loss of $140 billion worth of tax revenue for the US government.”
- Dwarfing the $700 billion bailout itself, is “$2 trillion that’s been handed out by the Federal Reserve in emergency loans to financial institutions, to banks, that actually we don’t really know who they’re handing the money out to, because, apparently, it’s a secret.”
She also describes the conflicts of interests with the law firm Treasury hired to work on the language of the bailout bill. It is no wonder we didn’t get the same rights the UK got, like board seats, voting rights, higher dividends, suspension of dividends to shareholders, restrictions on bonuses and requirements the money be loaned. “It is not the banks that were partially nationalized, it is Treasury that has been partially privatized.” Klein argues Congress should challenging violations of the bailout legislation. Instead they are saying “we can’t afford to enforce the law … that somehow, because there’s an economic crisis, legality is a luxury that Congress can’t afford.” (Naomi Klein: Bailout is ‘multi-trillion-dollar crime scene,’ David Edwards and Muriel Kane, rawstory.com, 11/18/08)
It isn’t a bailout, Kine says, but a parting gift to Bush’s base, looting the Treasury on the way out the door. Will Democrats and Obama address the issues or simply use the looting to justify coming cuts?
Bank Directors Under Fire
MIT Sloan School researcher Michael Schrage writes, “The most important governance reform in financial services would make risk management the explicit duty of the board. The experience of the past decade shows that non-executive directors cannot rely on representations by management about risk exposure.” That isn’t new; boards have always had this responsibility.
However, Schrage goes on to say they should be required to disclose “the most serious exposures of their companies in trades, positions, investments and operations,” as well as their approach to monitoring and managing those risks. Additionally, “the Fed would have the right to interview the company’s non-executive directors to hear their reasons and rationales for their risk assessments.” They could then pass along the transcripts to regulators and post them for shareowner review. Schrage also recommends that bailout bank boards also have government “observers” on their boards, nominated by regulators. (How to sharpen banks’ corporate governance, Financial Times, 11/17/08) Banks think they have trouble attracting board candidates now. If Schrage’s recommendations went through it might be nearly impossible. Still, he has some creative thoughts worth exploring.
A 10Q filed by Capital Corp. of the West (CCOW) reveals the CEO, who gets paid $500,000 a year, also gets a $55,000 car. Footnoted.org suggests that “in light of the fact that the bank is asking the feds (read: taxpayers) for a $46 million helping hand… couldn’t Cupp settle for a Nissan Versa?” ($55K for a bailout-mobile?, 11/18/08)
Pension Funding Dips
The 100 largest corporate pension plans posted an asset value loss of more than $120 billion. “We’ve been issuing this index for eight years and have never seen a monthly asset loss so large,” said John Ehrhardt, co-author of the Milliman 100 Pension Funding Index, in the announcement. Funding now stands at 92.7%, a 12-percentage-point decline from the funded ratio at the beginning of the year. (100 Largest Pensions Face Record Loss in October, PlanSponsor.com, 11/17/08)
Tell Obama: Truth to Both Capital and Labor
Drivers for DHL Express recently learned they would be losing their jobs next year, but many of them didn’t learn it from their employer. They heard the news from customers, while dropping off packages. Fifty-four percent of American workers said they’ve heard nothing from their employers about the economy and how it is affecting business, and 71 percent said they want to hear more from the top in this moment of uncertainty. (For employers, a quandary: speak of woes or wait?, Boston Globe, 11/15/08)
Publicly traded companies are legally obligated to make any disclosure that could have a “material” effect on their share price to all stockholders at the same time and they are prohibited from lying to their shareownrs. This helps create more efficient markets for capital flows. Unfortunately, similar rules do not apply to their communications with employees.
Boston college law professor, Kent Greenfield, lays out why such a law would create a competitive market that more efficiently allocates labor in his book “The Failure Corporate Law.” It is very simple and is modeled after SEC Rule 10b-5. See also his paper “The Unjustified Absence of Federal Fraud Protection in the Labor Market” available online through the Social Science Research Network.
Such a law could be an important move for the Obama administration in addressing the economic crisis and also in establishing the dignity of labor. Fraud should be treated as theft, whether it is perpetrated on shareowners or employees. Contact the Obama-Biden Transition Team. Tell them we want a level playing field and more efficient labor markets. We want a law protecting workers modeled after the current SEC Rule 10b-5 that prohibits lies to shareowners.
Incentives Channeled Greed
“The shareholders who financed the risks had no real understanding of what the risk takers were doing, and as the risk-taking grew ever more complex, their understanding diminished… No investment bank owned by its employees would have levered itself 35 to 1 or bought and held $50 billion in mezzanine C.D.O.’s.” Michael Lewis, who chronicled the excesses of 1980′s Wall Street in Liar’s Poker, returns to his old haunt to figure out what went wrong this time.
Grab a cup of coffee; its a long article but it reads more like a novel than your typical report on the meltdown. Toward the end, Lewis takes John Gutfreund, who took Salomon Brothers public, out to lunch. “It’s laissez-faire until you get in deep shit,” says Gutfreund. I guess that’s where we all come in with the bailout. But who’s going to bailing us out… oh, right.. our children and our children’s children. Thanks to Mark Latham for alerting me to The End (Portfolio.com, 11/11/08). If you still have energy after reading Lewis, take a look at Latham’s VoterMedia Finance Blog. He actually offers some interesting solutions to the mess.
China has done a much better job of the bailout than the US with the largest stimulus package in history (20% of GDP), focused on construction and social services… health care, low-income housing, rural infrastructure, water, electricity, transportation, the environment, and technological innovation. This sounds more productive in the long run than buying into banks so they can buy other banks.
As Joshua Holland writes, “China is not in the same position as the United States — they’ve got huge cash reserves and a trade surplus, while we’ve got massive debt and a trade deficit. China also isn’t hemorrhaging cash to maintain 700 military bases and occupy a couple of far-flung countries. But the “full faith and credit” of the U.S. government is still worth something, and we may not have any option but to follow their lead.” (Our Economy May Be in a Death Spiral — Will Washington Stop the Bleeding?, AlterNet, 11/15/08)
Two Posts: One for Us, One for Obama
Two posts worth noting. First, Broc Romanek notes the SEC now accepts interpretive queries in writing via online form. (Corp Fin’s New Bag of Tricks: E-mail Your Questions!, TheCorporateCounsel.net Blog, 11/14/08) News you can use… if they answer.
Second, Nell Minow offers an Agenda for a New President: Improve Corporate Governance on The Ichan Report (11/14/08). Minow quickly lays out eight recommendations, all well worth implementing. Here’s a few more:
- Proxy access. Shareowners need to be able to avoid the cost of a separate solicitation and should have the ability to place the names of their director nominees on the corporate ballots. Ownership thresholds should be at 3% or 100 shareowners, holding at least $2,000 of stock for a year. We need that provision for groups of small shareowners (like they have in the UK) because many small companies in need of corporate governance reform have no significant institutional share ownership. We need proxy access so that “independent” directors will know they ultimately answer to shareowners, not CEOs.
- Proxy exchange. Shareowners shouldn’t have to instruct management as to how they want their proxies voted. Instead, they should provide their instructions to an independent proxy exchange.
- Proxy assignment. Institutional investors should be encouraged to announce their votes in advance so that retail shareowners can “vote by brand,” imitating the decisions of trusted investors. The law should facilitate the assignment of proxies to voting agents without fear of penalty for solicitation.
- Expand fiduciary duty. The ultimate purpose of corporations should be to serve the interests of society as a whole, not just shareowners. As Kent Greenfield notes, “there is no such thing as a limited liability society.” Extending fiduciary duties to employees would begin the process of making the internal governance of companies more responsible to the larger society. Many studies have shown that companies with employee ownership and participation are more productive and efficient. (Greenfield, Reclaiming Corporate Law in a New Gilded Age)
- No More Lies to Labor. The law attempts to protect investors, but not investors, from corporations that lie. A very simple law modeled after SEC Rule 10b-5 could create more competitive and efficient markets for the allocation of labor. The rights of labor to the truth should be no less than the rights of investors. (Greenfield, The Unjustified Absence of Federal Fraud Protection in the Labor Market)
Advice on Corporate Website Disclosure
Jane K. Storero and Yelena Barychev offer advice on the SEC’s August interpretive guidance concerning the use of company websites for compliance with disclosure requirements. (Corporate Governance of Public Web Sites, Law.com, 11/14/08)
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Harrington Resolution Would Broaden Fiduciary Duty
In response to the global economic meltdown brought on by the country’s largest financial institutions,Harrington Investments, a socially responsible investment (SRI) advisory firm, announced they have submitted binding bylaw amendments at Citigroup, Bank of America and Goldman Sachs to create board committees on “U.S. Economic Security.”
Together, the banks have received a total of $60 billion in Federal assistance under the Troubled Asset Relief Program (TARP) of the U.S. Treasury. Citigroup and Goldman Sachs received $25 billion each and Bank of America received $10 billion. The bylaw requires bank boards to consider the impact of bank policies on U.S. economic security as part of their fiduciary duty:
Considerations may include:
- the long term health of the economy of the U.S.,
- the economic well-being of U.S. citizens, as reflected in indicators such as levels of employment, wages, consumer installment debt and home ownership,
- levels of domestic and foreign control, and holdings of securities and debt, of companies incorporated or headquartered in the U.S. and
- the extent to which our company holds securities of foreign companies or has employees or representatives holding positions on the boards of directors of foreign companies.
The U.S. Treasury has purchased preferred stock in these companies but waived all voting rights. This effectively leaves no mechanism for U.S. taxpayers to intervene, should these banks act irresponsibly or against the interest of their most important shareowner – the American people.
“Following recent government interventions, there can be no doubt that the financial integrity of these companies is interdependent with a strong and secure U.S. economy, said John Harrington, CEO of Harrington Investments.
“The time has come for shareholders and members of the public to demand that bank managers and boards work to ensure that recent events are not repeated and that the investment by the US taxpayers brings reciprocal benefit to U.S. economic security in general,” stated Harrington.
The shareowner resolution argues that such a dramatic taxpayer effort to stabilize the U.S. economic system was precipitated by “years of irresponsible lending and business practices. Unregulated trading in speculative derivatives and a general lack of management and board oversight at major U.S. financial institutions has brought the global economy to the brink of disaster.”
Harrington Investments has a long history of advocating that corporations act in the interests of all stakeholders in society, a strategy they believe is also in the long-term interest of shareowners.
Although buying bank stock is a better strategy than buying toxic assets, TARP still puts the cart before the horse because it doesn’t address the fundamental problems. Full investor confidence won’t return until laws are changed and regulations promulgated to build a safer market. Broadening the fiduciary responsibility of boards to include all stakeholders, rather than just shareowners, is one of many ideas outlined by Kent Greenfield in his important book, The Failure of Corporate Law: Fundamental Flaws & Progressive Possibilities.
More fundamentally, Greenfield argues that corporate law should not be seen as a narrow field of private-law, but should be part of the larger social and macroeconomic policy, like environmental and tax laws. The so-called “free market” is not the creation of nature but of laws, defining the rights of property, contracts, and the rules of internal governance for the largest and most powerful institutions in the world — corporations.
Free market defects such as externalities, collective action, lack of transparency, “tragedies of the common,” short-termism and many more are better addressed not by imposing more laws to constrain corporations from the outside but by building more democratic mechanisms into corporations themselves. The resolutions offered by Harrington Investments move in that direction and deserve support. Harrington Investments has taken the lead in recognizing corporate governance as a public policy tool.
Taxpayers Say NO to Bonuses
U.S. taxpayers, who feel they own a stake in Wall Street after funding a $700 billion bailout for the industry, don’t want executives’ bonuses reduced. They want them eliminated, writes Christine Harper for Bloomberg News. Compensation at Goldman Sachs, Morgan Stanley, Citigroup and the six other banks that received the first $125 billion of the federal funds is under scrutiny.
Goldman paid CEO Lloyd Blankfein a record $67.9 million bonus for 2007 on top of his $600,000 salary. Goldman’s profit is down 47% this year and is expected to report its first loss as a public company in the fourth quarter that ends this month. The stock price has dropped 67% this year and Goldman received $10 billion from the U.S. government in the bailout last month.
“I’d advise the CEO to say he can’t take anything if it’s one of these firms getting bailed out by the government,” said former compensation consultant Graef Crystal. (Bonuses for Wall Street Should Go to Zero, U.S. Taxpayers Say, 11/11/08) I couldn’t agree more.
Of course, bonuses and executive pay aren’t simple matters. For those who want to dig beneath the surface, I recommend Crystal’s page of recent reports. In the Spring of 2009, he will be teaching a course in executive compensation at the University of California at Berkeley’s Boalt School of Law. Too bad he won’t be getting a few million for all the effort he’s put into this field during the past several decades. For an education on stock options and repricing, read his paper on Apple. How would Steve Jobs have fared had he kept his 55 million underwater option shares and not exchanged them for 10 million free shares? Instead of $647 million, they’d be worth $4.4 billion. “Steve Jobs is a terrific innovator and one of the most admired people in America. But in this one instance, he sure got it wrong.” (Disclosure: The publisher of CorpGov.net is a shareowner in both Goldman and Apple)
Call for Climate Risk Disclosure
In response to the SEC’s request for public comment on its 21st Century Disclosure Initiative, which proposes to modernize the disclosure system so that the information is more useful and transparent to investors, the Investor Network on Climate Risk (INCR) called on the SEC to consider environmental, social and governance (ESG) reporting as a key element of the project. They called on the SEC to “integrate reporting of material ESG risks into its new disclosure system.” (Institutional Investors Call on SEC to Require Climate Change Disclosure, SocialFunds, 11/5/08)
INCR is a network of institutional investors and financial institutions overseeing more than $7 trillion in assets. The 14 signatories to the letter include institutional investors such as CalPERS, CalSTRS, and the Maryland, New Jersey, New York City, and New York State public pension funds or treasurers.
In December 2007, Congress required the U.S. EPA to propose a reporting rule for industrial plants and other large sources of greenhouse gases. The EPA has yet to comply with the law. Let’s hope there is a change with the Obama administration.
According to a survey conducted for the Network for Sustainable Financial Markets, as reported inPIRC Alerts, three things are judged almost certain to happen in an attempt to address the financial meltdown: more intrusive regulation with stronger penalties; greater scrutiny of executive pay and rewards; and governance of financial institutions will be much tighter, with greater involvement in governance seen as the most likely development. Only 11% of the respondents said they will not change their professional behavior as a result of this crisis. (Blame game, latest installment, 11/11/08)
You Don’t Ever Want a Crisis to Go to Waste
So says Rahm Emanuel, President-Elect Obama’s new chief of staff. We’re all trying to anticipate and influence the direction of this rare opportunity. Consider this, in 2002 scandals at Enron and WorldCom totalling $80 billion or so led to Sarbanes-Oxley. The current melt-down has vaporized $6.5 trillion, according to Jay Whitehead, publisher of CRO. The response will be massive.
Paul Krugman notes that “what really saved the economy, and the New Deal, was the enormous public works project known as World War II, which finally provided a fiscal stimulus adequate to the economy’s needs.” Krugman hopes Obama’s economic plans have the “necessary audacity.” (Franklin Delano Obama?, NYTimes, 11/10/08) Gretchen Morgenson’s How the Thundering Herd Faltered and Fell, says Obama should ensure that finance officials in charge of taxpayer-financed bailouts operate them with more transparency. She also suggests banks be forced to raise additional capital in the markets and develop and exit strategy. (NYTimes, 11/8/08)
FT points to a speech made during the campaign for clues to Obama’s direction. “The change we need goes beyond the laws and regulation. We need a shift in the cultures of our financial institutions and our regulatory agencies . . . It’s time to realign incentives and the compensation packages so that both high-level executives and employees better serve the interests of shareholders.” He then called for the creation of a “financial market oversight commission” to update the president, Congress and regulators about the state of financial markets. (Obama has told financial industry what to expect, 11/08/08)
Pay is for the general public, the hot-botton issue. Congressman Henry Waxman, chairman of the Committee on Oversight and Government Reform, sent a letter instructing State Street and eight other banks to provide details about the compensation packages of their 10 best paid executives by 11/10/08. “You might as well put on your red flannel pajamas and run around in a field of bulls if you’re going to pay State Street’s CEO more this year than you paid him last year,” said Frank Glassner, a consultant with Design Compensation Group in San Francisco. (The compensation question, Boston Globe, 11/9/08) See also Why We Need to Limit Executive Compensation, BusinessWeek, 11/4/08)
Of course, Obama’s first order of business is making appointments. Doug Halonen, writing for P&I, speculates on possibilities for the SEC, the Department of Labor’s Employee Benefits Security Administration assistant secretary’s post and director of the Pension Benefit Guaranty Corporation. (Help wanted sign is out for top jobs, 11/10/08)
Topping the legislative wish list of corporate governance experts, according to Barry Burr, are proposals giving shareholders a say on pay and proxy access. Patrick McGurn expects a bill within the first 100 days. Charles Elson agrees, the election results “will mean an increase in government involvement, for better or worse, through the SEC and Congress.” (Shareholders see victory in Obama administration, P&I, 11/10/08) Rep. Barney Frank, says he wants to reintroduce “say on pay” legislation early next year—and pair it, perhaps, with a provision allowing proxy access.
Of course, everyone isn’t just waiting on January. Rich Ferlauto, of AFSCME, has announced their “signature shareholder proposal” will be to require executives to hold stock options until after retirement. The proposal will target as many as a dozen companies next year. Ed Durkin, of the United Brotherhood of Carpenters, says they will focus on “core executive comp issues” at financial services firms, such as freezing new stock option awards to senior executives unless those options are indexed to peer-group performance and limiting severance to double an exec’s annual salary. Golden coffins and parachutes will also be a popular target in 2009, according to Nicholas Rummell, who also cites proposals by John Chevedden to request reincorporation in North Dakota, which enacted shareholder-friendly laws. (Proxy activists upping exec-pay ante, Financial Week, 10/9/08)
RiskMetrics-ISS will feature an 11/12/08 webcast “What’s Next on Say on Pay?” at 1 pm EST. A second forum on the subject will be held in the New York on the 13th, hosted by the Drum Major Institute for Public Policy to address social interests in executive compensation issues. See also, Gary Lutin’s Shareholderforum.com, which has been focused on the subject for several months with excellent posts from a large number of experts.
ICGN issued a statement on the global financial crisis emphasizing the importance of shareholder rights and responsibilities. (press release) It call for more transparency of derivative positions held by hedge funds, proxy access and say on pay. “Stronger rights will enable shareholders to hold boards more firmly to account for the longer term consequences of their actions. This is important because more effective boards are vital to prevent a recurrence of the crisis.” These issues and others will be further debated at the next ICGN Event being held in Delaware on the 9th and 10th of December.
Broc Romanek’s TheCorporateCounsel.net Blog alerts us to SEC Legal Bulletin 14D, the latest installment in pre-proxy season guidance on shareholder proposals from the Staff. According to Romanek, the Staff Legal Bulletin tackles these topics:
- Inability of proponents to seek companies to amend board charters if state law empowers board to initiate amendments
- Sending defect notices if registered owner proponent hasn’t met holding period
- Requirement that proponents send copy of their correspondence to the SEC Staff
- New e-mail address for the Staff to which no-action requests and correspondence can be sent
- Corp Fin has created a new page for incoming no-action requests that the Staff has not yet processed. This will be helpful for those in-house folk who like to track the other companies that have received a similar proposal during the proxy season.
Within a few years, I anticipate a very different landscape. Proxy access and say on pay will empower shareowners to police their own companies. However, the Business Roundtable isn’t likely to yield the power of its members easily. Their Shareholder Communications Coalition calling on the SEC to initiate a comprehensive evaluation of the shareholder communications process could very well lead to the increased ability of management to communicate directly with shareowners at about the same time as broker votes are removed. No one can offer reasonable arguments against increasing the ability of parties to communicate, even if one side has access to corporate coffers to get their points across.
Therefore, at least part of the next frontier may be efforts to educate retail shareowners. It is unrealistic to expect individuals with small investments to thoroughly read proxies and digest the issues before voting. Expect efforts that rely on reputational brands, such as the United Shareholders of America: The Icahn Plan, the Investor Suffrage Movement and Proxy Democracy to take a greater role as they get organized.
Aristotelian Corporate Governance
Modern democratic states have “cast aside meaningful deliberation about the end or purpose of human life.” The minimalist state attempts only to guarantee peace and facilitate the accumulation of wealth by its citizens. Likewise, the modern corporation.
Corporate Social Responsibility (CSR) widens the dialogue and scope of obligations from economic and legal to social and ethical. Both CSR and Alejo José G. Sison’s Corporate Governance and Ethics: An Aristotelian Perspective would move us from a minimalist approach of freedom from oppression or maximum return to one that focuses on the common good, fostering ties and promoting virtue.
Corporate citizenship should move beyond protecting the rights required for the pursuit of economic interests, to engaging in sociopolitical actions based on a broader mission. Instead of a “nexus of contracts,” Sison, though his study of classic political theory grounded in Aristotle, sees a “corporate polity,” reciprocally dependent on the flourishing of stakeholder-constituents.
Under a liberal-minimalist approach to corporate citizenship, each constituent is invited to actively participate in the deliberation and execution of the common corporate good. But not only is that not practical, it doesn’t fit Sison’s Aristotelian notion of a more civic-republican notion of communitarian corporate citizenship where shareholding managers “represent the stakeholder group best equipped to govern the corporation,” since they are fully invested in, and impacted by, their collective actions in the corporation.
Sison provides a strong critique of Coase’s “the nature of the firm,” Jensen and Meckling’s “agency theory,” and the “shareholder or financial theory” of the firm formulated by Friedman. “Under the guise of asceptic, value-neutral, amoral and ‘scientific’ theory, immoral business and management practices have in fact been promoted.” Prophecies tend to be self-fulfilling in the social sciences because the knower cannot be separated from the actor.
Behind these oversimplified theories is “an unenlightened subservience to mathematical models as the only vehicles worthy of the name of science.” While math may be neat, “real life is messy.” I like Sison’s call for a new theory of the firm grounded in realistic and ethical views of human nature that acknowledge the symbiotic relationship between working toward a common goal and perfecting the self.
Sison also moves readers nicely through a number of case studies that approach Weberian like “ideal types,” from “corporate despots and constitutional rulers” to “aristocratic and oligarchical corporate governance regimes.” Finally in that framework, he reviews an example of a “corporate democracy” and a “corporate polity.”
In democracies, “the majority that governs pursues their own particular interests,” whereas in a polity “the many that participate in governance seek the good of all, the common good.” Democracies, which strive after particular interests within a legal framework characterized by “an emphasis on justice as equality and freedom in the best, and doing whatever one likes in the worst, of cases,” are seen as less noble and inspiring than polities, with their greater focus on the common good.
Sison provides good critiques of United Airlines (the democratic model) and IDOM (the polity model), pointing to where they failed to live up to ideal types. However, I was disappointed that he did not conclude by positing a new theory of the firm that would draw on the lessons of Aristotle.
Instead, he ends with what I suspect he views as more practical advice. For example, those on nominations committees should look for loyalty, administrative capacity and justice as the most relevant characteristics in potential candidates.
Those on compensation committees should focus on moderation of temperance. CEO’s should be more interested in virtues rather than excessive pay. Aristotle, he notes, “advocated the education of desire,” such that “people would not crave more than what they actually need.”
The compliance committee should strive for the spirit of obedience to the law, especially in small matters for “small errors or faults are always easier to remedy or rectify than bigger ones.”
At bottom, Sison emphasizes the need for corporate governance to analyze and evaluate not only how changes impact the firm but how they cultivate virtues in those who govern the firm. Only virtue can ensure delivery of the good, since we must depend on virtue to ensure the rules are properly interpreted and implemented. Sison would place less emphasis on developing foolproof instruction manuals and more on developing virtuous habit and customs, since “it is only from habit and custom that the law could draw force and strength.”
“The key to good governance ultimately lies in the education of the governors or rulers,” writes Sison. It is a powerful notion, sure to be embraced by university professors and associations focused on training, such as the NACD. While in no way wishing to diminish the important role of education, I wish Sison had continued with a further exposition of how democratic and polity based business models could be improved. What fertile conditions foster both the common good and the proper education of virtue in employees and leaders? How can we restructure organizations to encourage active engagement in decision-making and the development of virtues in individual participants? Please give us a second volume.
CGQs in Stock Picking
Many studies have shown a correlation between some corporate governance elements and positive returns. The more such correlations can be found, the more shareowners will demand reforms. TheLENS fund (sadly gone), led the way in actively pursuing investments in companies that have unrealized value, pushing for governance reforms, and earning a good return. Now, Rich Duprey, at the Motley Fool, is running a series of articles that look at RMG’s Corporate Governance Quotient, or CGQas one factor to be analyzed in stock picking decisions.
“There are many factors that an investor should consider in deciding whether a company is good, and how well it treats shareholders shouldn’t be least among them. View these rankings as a way to gauge how these businesses stack up against one another relative to their shareholder policies,” he says. Do These Stocks Deserve Your Support? (11/6/08), Duprey should be praised for at least broaching the subject. I hope others follow his example.
As I’ve written many times in the past, you can easily look up the CGQ of many companies on the Yahoo! Finance website. Just look up a company and then go to the “profile” page. You’ll then find the CGQ in the lower right corner. Sure, its something of a box ticking approach. A truly effective corporate governance rating system might be more “path-dependent.” Still, I find it to be a good rough guage. In my own investing, it is one of many considerations. However, I am much likely to submit proxy resolutions at companies in my portfolio with low CGQ scores.
For example, look at Whole Foods Market, which scores almost in the bottom 20% of the S&P 500. The company has lots of potential, even in this melting market. I like their emphasis on natural foods, their use of renewable energy, empowerment of workers through teams and many other features. I’m not giving up on them and have submitted a proposal seeking reincorporation in North Dakota, which provides an advisory vote on pay, majority voting in director elections, separation of the chairman and CEO positions, annual board elections, and the right of 5 percent shareholders owning stock for two years or more to nominate corporate directors, as well as another half-dozen or so measures to empower investors. WFMI could move from a laggard to the vanguard… maybe even on to one of Rich Duprey’s future lists.
Draft Minow (updated)
Speculation on Obama appointments now abound. One of my favorites is a post by footnoted.org that Nell Minow would be a natural to chair the SEC. Wow, just the thought of it! Putting a shareowner’s advocate like Minow in charge of the SEC would be like putting an environmentalist in charge of the EPA.
For eight years, appointments have been given to people who disagree with the fundamental mission of the agency they’re appointed to. How would the world change if the regulators actually believed in their agency’s mission? With her experience at OMB, LENS, ISS, and The Corporate Library, it would be hard to find anyone more qualified. Minow is ready for the SEC. Is Obama ready for Minow?
Other names being mentioned are former Commissioner Harvey Goldschmid, now at Columbia University; current Commissioner Elisse Walter; New Jersey Governor Jon Corzine; New York Attorney General Andrew Cuomo; Damon Silvers of the AFL-CIO; John Olson, a partner with Gibson, Dunn & Crutcher; former SEC commissioner Mary Schapiro, now CEO of the Financial Industry Regulatory Authority; and Robert Pozen of MFS Investment Management. (Risk & Governance Weekly, 11/7/08)
Bloomberg says potential successors include William Brodsky, chief executive officer of the Chicago Board Options Exchange; Mellody Hobson, president of Ariel Capital Management; and Gary Gensler, a former Treasury Department undersecretary and partner at Goldman Sachs Group Inc., as well as former SEC Commissioner Harvey Goldschmid, former Fidelity Investments Vice Chairman Robert Pozen, AFL-CIO Associate General Counsel Damon Silvers, and Federal Deposit Insurance Corp. director Martin Gruenberg. (Obama Faces `Urgent’ Task in Replacing SEC’s Cox, Lawmakers Say, 11/7/08) For more names, see Rumors: Who Will be the Next SEC Chair? (TheCorporateCounsel.net Blog, 11/7/08)
Whoever gets the position, I hope they will be an advocate not only for large institutional investors but also for small retail investors. In this presidential election, we’ve seen what a difference can be made when people think their votes count. One of the benefits of increased involvement is increased legitimacy. Today the markets face their greatest failure of legitimacy since the Depression. Under e-proxy, less than 6% of retail shareowners are even bothering to vote.
The next SEC Chair can help bring back confidence in the markets by focusing on the legitimate roleall shareonwers should share, including the ability to place the names of director nominees on the corporate proxy. We need a rule like the UK’s that allows not only groups holding 3-5% of a corporation’s shares to access the proxy but also groups of 100 shareonwers. Many companies with the worst governance have no substantial institutional investors, leaving out a 100 shareowner provision would leave shareowners without the tools needed to regulate their own interests. In his approach to regulations, Obama should look first to mechanisms, such as access, that promise high value with very little cost.
Back to the top
Ralph Ward, publisher of Boardroom INSIDER, editor or The Corporate Board magazine and author of several books offers an important new volume on the boardroom leadership. Whatever differences people have concerning the direction of corporate governance, it is clear that much comes down to the deliberations of a very small group of people — corporate directors.
For many decades boardroom leadership came from the CEO who also chaired the board. Now, even where those two positions remain with the CEO, we are seeing a new locus of leadership among newly defined “independent” directors. While there are many good books that lay out the legal obligations of directors, none so clearly examines the concept of “leadership” in the boardroom. As this volume hits the bookstores, let’s take a brief look at the corporate governance environment.
A recent Booz Allen Hamilton study of the world’s largest 2,500 publicly traded corporations found that forced turnover among CEOs rose by 318% since 1995. Over the last several years, there has been a gradual change in board leadership structures. According to The Corporate Library’s 2008 Governance Practices Report, “focus on board independence has led many companies to separate the positions of CEO and Chair of the Board or to name an independent board member to serve as a lead or presiding director.” Their study found the chair position is completely independent of the company at 21% of the almost 3,000 companies studied. Large cap companies are less likely to split the positions than are small cap companies — 26% of small cap companies, 19% of mid cap, and only 13% of large caps split the positions.
Examining the principles of four very prominent associations we find all recognize this shift to board empowerment. CII says boards should be chaired by independent directors. If they are not, the board should provide a written statement in the proxy materials discussing why combining those roles is in the best interest of shareowners and they should name a “lead” independent director with approval over information flow to the board, meeting agendas, etc. to ensure an appropriate balance of power between CEO and directors.
ICGN principles say the chair of the board should neither be the CEO nor a former CEO and should be independent. The NACD says boards should consider formally designating a nonexecutive chairman. If they don’t, they should designate independent members of the board to lead its most critical functions. Even the BRT’s principles say that it is “critical that the board has independent leadership.”
Ward’s book is certainly timely. It is also fairly comprehensive, without getting bogged down in unreadable details. Although he acknowledges an independent chair may be the dominant model many years down the road, Ward also addresses what many shareowner activists view as interim models involving “lead” and “presiding” directors. He even has a chapter for combined CEO/Chairs on how to cope with the new realities. No matter where your company falls on the spectrum from board “independence” to board “capture,” you’ll find your board’s leadership needs addressed.
Ward begins with a very short history of boards that takes us from when they were composed primarily of the largest shareowners, to an era of employee directors, and on through Sarbanes-Oxley, which “used the audit committee to bash its way into the boardroom.” Sure, you already know this history but don’t skip it. Ward keeps it brief and provides the reader with a good grounding to take the measure of our current trajectory.
The next several chapters cover the new legalities of directors, like meeting in “executive session.” There are better books for systematically laying out these requirements. One of the best is The Role of Independent Directors after Sarbanes-Oxley by Bruce F. Dravis. However, Ward’s focus is not so much the requirements themselves but on how they are being met and what best practices leaders are struggling to develop in board evaluations, board logistics, acting as a liaison with the CEO, educating the board, etc.
The book is chocked full of interesting statistics, legal requirements, but most importantly, opinions from experts who have faced the same problems your board is facing now. For example, how important is it to name a new independent chair from existing board members? Whatever you decide, you’re very likely to benefit from the advice of others who have already done it. Plus, he provides a large number of valuable references and links to additional resources, like job descriptions for presiding directors, lead directors, and independent chairs. His discussion of how these roles differ and what skills are needed for each is the best I’ve seen.
At one point, Ward points to the irony that “by forcing independent boards to wrestle more with the regulatory nuts and bolts of the business, we may have actually weakened their powers in relation to management,” presumably because they must depend on management for this information. Luckily, boards have risen to the challenge by developing specialized skills and processes.
How are governance, audit and compensation committees coping? Ward gives us an excellent picture of what is going on inside such committees, what problems they are grappling with, and how they are adapting to new demands. He sees the chairs of each of these committees and the board itself as moving in the direction of approaching these positions “as full-time, consulting-like jobs.” Ward is probably right that better pay and professionalization are next steps.
Further along the trajectory, I couldn’t put it any better than his final words. Directors will support management, but not to a fault; they don’t owe their position on the board to the CEO. Rather, the other outside board members and major shareholders elected them to their leadership position, and the latter will lay claim to their loyalty… These next generation board leaders may not have all the answers when it comes to independent board leadership. But they definitely won’t be afraid to ask questions.” The New Boardroom Leaders: How Today’s Corporate Boards are Taking Chargeprovides an excellent guide to those wanting to take charge of corporations, the most pivotal institutions in our society.
Walden Calls Out State Street
Sometimes shareowners simply must call out companies who don’t live up to their own ideals. A case in point is State Street Corporation, a respected leader in the financial services industry. Their State Street Global Advisors (SSgA) has a long track record of responsive service to investment management clients, according to Walden Asset Management (Walden). Yet, Walden now finds itself in the position of filing a shareowner’s resolution to officially ask for a review of the guidelines and voting record of SSgA.
Last year according to a Ceres report, SSgA voted against all 50 shareholder resolutions addressing climate change. Walden wants State Street to look back at this history. The letter transmitting their resolution included the following:
SSgA has stated publicly that it understands how ESG factors can affect companies financially and has heralded its investment in Innovest. However, when it comes to proxy voting, it appears that State Street’s practice contradicts statements in its own Corporate Social Responsibility Reports and other public venues that recognize the importance of ESG factors in contributing to long term business success.
Further on in the letter, Walden notes that the central guiding principle in proxy voting “is whether a resolution would advance shareholder value by protecting reputation, reducing risk, or supporting a forward thinking strategic plan by the Board.” They go on to cite other financial institutions that have taken a more “nuanced” approach to ESG issues.
The resolution itself notes that SSgA’s annual Corporate Social Responsibility (CSR) Report claims that “corporate social responsibility is good for business.” SSgA was managing $80 billion in assets incorporating environmental, social and governance factors as of 2007. Yet, their proxy voting record “seems to ignore State Street’s proclaimed environmental commitment and stated position regarding the impact of key environmental factors on shareholder value.”
“Ironically, State Street reports its own greenhouse gas emissions in its CSR Reports and further describes the company’s active role in addressing climate change.” The resolution seems to ask why State Street doesn’t support efforts to require such disclosures at other firms, since failure to address this issue could lead to a decline in long term shareholder value. The resolved portion of the resolution reads as follows:
Shareholders request the Board to initiate a review of SSgA’s Proxy Voting Policies, taking into account State Street’s own corporate responsibility and environmental positions and the fiduciary and economic case for the shareholder resolutions presented. The review should consider updating State Street policies. The results of the review, conducted at reasonable cost and excluding proprietary information, should be reported to investors by October 2009.
I found it interesting to go onto the SSgA site to see what they are telling clients. Here’s one sentence from a report entitled Climate Change Poses Risks and Opportunities for Fiduciaries by Bill Page, dated, January 7, 2008: “Since, on average, more than 70% of pension fund portfolios consist of exposure to public corporations, trustees should seek to understand the potential of climate change to affect their portfolio companies and their underlying assets.” It isn’t difficult to see the irony here. How can trustees better understand the potential of climate change to affect their portfolios if State Street is out there opposing resolutions seeking such disclosures? I’m glad Walden is holding their feet to the fire.
First Field Agents Named
The first 10 field agents have been named to the Investor Suffrage Movement. These agents will begin by performing shareholder-related services on behalf of activists or institutional investors—tasks such as contributing their own proxies or attending a shareowner meeting to present a proposal. Moving forward, field agents will contribute in a myriad of ways to the development, testing and implementation of a Global Proxy Exchange.
Of the pioneers who signed on in October, most have made significant contributions to shareholder activism, corporate governance and/or socially responsible investing. Several are famous for those efforts. For example, the first agent named was John Cheveddan who learned at the arm of John Gilbert. John is the most active individual shareowner in submitting proxy proposals. Last year, he was involved in submitting 40 proposals and received a majority vote on 20 that were adopted by management.
The tenth agent named was John Harrington, President of Harrington Investments. Harrington is the author of Investing With Your Conscience: How to Achieve High Returns Using Socially Responsible Investing (1992) and The Challenge to Power: Money, Investing and Democracy (2005). He is the former President & Chairman of the Board or Working Assets Management Company and former Chairman of the Board of Progressive Asset Management. Those of us in between aren’t too shabby either.
The program is off to a great start. I expect that within a few years, we will have field agents in every major city and on every university campus.
Shareholder Communications Coalition
The Business Roundtable has formed a Shareholder Communications Coalition calling on the SEC to initiate a comprehensive evaluation of the shareholder communications process. The Coalition comprises five associations: Business Roundtable (BRT), National Association of Corporate Directors (NACD), National Investor Relations Institute (NIRI), the Securities Transfer Association (STA), and Society of Corporate Secretaries & Governance Professionals (SCSGP). See 10/29/08press release. According to the Coalition, this evaluation should include the following principles and recommendations:
- Direct Communications with Individual Investors. The SEC should eliminate the NOBO/OBO distinction thereby giving companies access to contact information for all of their beneficial owners and permit companies to communicate with them directly. Shareholders desiring to remain anonymous should bear the cost of maintaining their privacy, such as through the establishment of nominee accounts.
- Voting By Retail Investors. The SEC should examine how to protect the vote of the retail investor, particularly in the case of unvoted shares. Institutional investors generally vote 100% of the time, in response to their legal responsibilities and facilitated by electronic systems. They also are aided, as noted above, by proxy advisory services. Retail investors have no similar voting facilitators or proxy advisory services, and, in fact, often have no motivation to vote their shares. Among the alternatives that the SEC should consider to protect the interests of retail investors are: (a) pass through of voting rights directly to beneficial owners; (b) proportional voting; and (c) client directed voting.
- Competition among Proxy Service Providers. Brokers, banks, and other intermediaries should not stand in the way of direct communications between companies and the beneficial owners of their securities. Companies should have the ability to determine the distributors of their communications, and should not be forced to pay for the costs of a system in which the fees and the service providers are determined by third parties.
- Proxy Voting Integrity. The SEC should consider additional steps to ensure that the proxy voting system is transparent and verifiable. In this regard, the SEC should examine its ownership disclosure requirements and consider requiring disclosure of both voting and economic ownership along with both positive and negative economic ownership.
- Proxy Advisory Services. The SEC should review the role of proxy advisory services and the procedures used by these firms in generating recommendations.
The Speculation Economy: How Finance Triumphed Over Industry
Lawrence Mitchell chronicles the formative era of what he calls The Speculation Economy between 1897 and 1919 when the American corporate landscape shifted from independent factories controlled by entrepreneurs to one driven by financiers, promoters, and business managers focused on the stock price – “stock market capitalism” – where more is made from legal and financial manipulation than from practical improvements such as technology, management, distribution or marketing.
This turn was “neither the necessary nor inevitable form of the American economy.” As I read it, the resulting speculative economy pushed our collective life to more atomistic forms of competitive individualism that may eventually be our undoing. “It is within our power either to change it, to modify its rough edges or to accept it as it is,” argues Mitchell. It should be easier to move forward purposely if we understand how we got to where we are now. Mitchell does an excellent job chronicling the journey.
“For almost two decades now, many countries have been at a decision point as to whether they will adopt the American way or pursue their own, or even whether they have much choice in the matter. This book teaches them that they do,” he writes. I’ve had much the same inclination, warning investors in Japan, Korea, China and elsewhere that they can do better as I try my hand at reforming our own system.
Mitchell breaks the history of this important shift into three rough phases:
- Antitrust reform proposals and the federal incorporation movement tried to compel corporate disclosure of financial information to reveal the true value of corporate capitalizations. The merger wave of 1897-1903 brought middle-class Americans to the market.
- Antispeculation driven by efforts to address the effects of watered securities that flooded the market following the merger wave. One major focus was controlling overcapitalization to maintain the safety of banks and the national economy. 1903-1914 saw steadily increasing investments in common stock, as well as bonds and high quality industrials/railroads.
- Consumer protection treats investors like consumers, seeking to provide information to individual investors so they can make self-reliant, informed investment decisions, keeping the market efficient, safe and stable. Common stock overtakes bonds as the investment of choice in the 1920s. Growth of investment trusts, predating mutual funds, and investor protections, culminating in the Securities Act of 1933.
In Mitchell’s interpretation of history, the giant corporation was created primarily to sell stock that would make its promoters and financers rich. The corporate form limited destructive competition and took advantage of the efficiencies of size and centralized management. The stock market took the place of a vanishing frontier for the middle class. Wall Street became our wilderness and corporate stock our grubstake.
Financiers could profit, whether industrial profits were high or nonexistent. Arbitraging the stock, profiting from price discrepancies instead of work, became the path to wealth and a touchstone of America’s self-destructive short-term economy.
American’s had long viewed private property as an “extension of the individual, the product of the individual’s motivations, interests, talents and efforts.” Competition would be between corporations, rather than individuals. The stockmarket became the measure.
At first, the issues were how to prevent the excesses of monopoly. Yet, the competition between states was a race to the bottom for corporate licensing fees and the eventual defeat of James Madison’s idea of chartering by the federal government. Readers learn the origin of terms such as “watered stock,” “overcapitalization” and how the matters of “valuation” and “goodwill” were addressed over time.
Also interesting is the development of the financial press. In 1899, for example, the Wall Street Journal’s primary concern was the safety of principal, rather than the rate of return. “Stocks should not be regarded as an investment, because it is optional the with management of a company whether it pays a dividend or not… Therefore the outside investor should always take bonds instead of stock.”
In 1902, the United States Industrial Commission observed that democracy and self-governance were only learned by practice, and the man who was accustomed to “absolute submission in industry” carried the consequences of that submissive posture into civic life. Giant combinations robbed Americans of the kind of entrepreneurial spirit and individualistic impulse they had enjoyed as farmers and small proprietors. Over time, participation in corporate governance, as stockowners, came to be seen as a possible reinforcement to political efficacy.
“As early as 1899, the New York Times implied that investing in securities more or less fulfilled the demands of Locke’s labor theory of value. ‘As soon as a capitalist is willing to be troubled further, as soon as he begins to take a personal interest in his investment, and to give his personal attention to looking after it, he ceases to be a mere capitalist, and his return from his investment becomes, not merely the interest on his money, but also something in the nature of wages for his own services in the way of superintendence.”
That language, implying that active informed investors can enhance wealth production, presaged CorpGov.net’s homepage by almost 100 years. What is new since the 1899 New York Times article is that corporations now have so much control over our society that they have become effective intermediaries for shareholder influence, not unlike the citizen’s use of representative government to influence society-at-large. Land gave colonial Americans the right to vote and influence politics. Stock gives modern Americans a similar role with our dominant institutions, corporations.
Mitchell explains that during the time period leading to the speculation economy, having a stake and taking an active interest in corporations was also seen as a defense against socialism. “Ownership would keep workers happy, productive and away from strikes.” By the 1920s offering employees stock ownership was widespread. US Labor Commissioner Carroll D. Wright even predicted in 1903 that the wage system would disappear and be replaced by “profit sharing and cooperative plans.” Maybe that’s happened on Wall Street, but elsewhere we have a long way to go.
A large portion of the book is devoted to explaining the various pieces of federal legislation and key players. Mitchell documents the growing influence of financial promoters on politics and a preference for investigatory commissions and delay over substantive regulations. We also see the development of the Republican Party as the representative of financial interests, as well as the importance of alliances with Southern Democrats who were suspicious of any action that would erode state’s rights. Ultimately, according to Mitchell, it was a group of Southern Democrats, under Woodrow Wilson, “that made America safe for business.”
The Panic of 1907 was a watershed in moving from the antitrust phase of securities regulation to an antispeculation stage, as people tried to address consequences of the beginning dominance of finance over industry. Here, we see “the idea of securities regulation as consumer protection (treating securities as consumer goods) in contrast to securities regulation for consumer protection (to reduce monopoly prices caused by corporate finance) had only limited acceptance and was not yet embraced as a federal responsibility.” (177)
“As corporations needed to retain cash to grow and dividends became a smaller share of corporate profits, price appreciation followed as a substitute for dividends.” The USA moved into the speculation economy based not on “productive assets or past profits but on the possibility of profits to come at some unspecified point in the future. They demonstrated their willingness to invest on faith…” What had changed was the suitability of stocks as repositories for the savings of ordinary people.
When you bought stock for income, you had to pay attention. Mitchell quotes Graham and Dodd: The typical stockholder “gave at least as much attention to the asset value behind the shares as he did to their earnings records.” The pre-WWI buyer knew the corporation, paid attention to the business. “The postwar buyer did not care about the corporation. He cared about price trends, reputations and rumors.”
Mitchell, highlights the important role played by Liberty Bond drives, which encouraged purchase on the installment plan, in bringing the idea of investing in securities to the American public. Those drives established an army of investors and securities salesmen.
Regulation, as it evolved, focused on the disclosure of the terms for selling, rather then the details of corporate governance…due diligence in purchase, not in ongoing operations. The result is less of an emphasis by investors on fundamental values and more of an emphasis on expectations that are built upon the expectations of others. “The natural response is for management to do what it has to do in order to meet the market’s expectations, no matter how unrealistic those expectations may be.”
In the epilogue, Mitchell discusses how, until recently, corporate control was lodged with large stockholders, financial institutions and the families of founders who insulated management from market pressures. The takeover decade of the 1980s stripped that insulation away. “Shareholder valuism” came to describe the purpose of corporations.
Impatient short-term stockholders give managers “irresistible incentives to maximize stock prices at almost any cost to the corporation’s long-term health.” Annualized turnover on the NYSE jumped from 36% in 1980 to 88% in 2000 and 118% in 2006. “There can be little question that American business is driven by finance. And the demands of finance have become short-term.” Europe, Japan, Canada, New Zealand and Australia still have concentrated block-holders insulating management and taking a more long-term perspective. But for how long?
Mitchell notes, “When corporate economies are ruled by concentrated ownership, the responsibility for success or failure is primarily on those who own the controlling interests. When a corporate economy is ruled by a stock market characterized by the dispersal of ownership throughout society, responsibility shifts. Members of the speculation economy typically treat their participation in American corporate capitalism as a private matter with their decisions made on the basis of their own self-interest and without much regard for the behavior or decisions of others.”
As I have reported elsewhere, the Gates Foundation holds the same philosophy. How they invest is a private matter, with no relevance to their overall mission. Many of us question if the damage done by such a consistently short-term investment philosophy, and the example set for other foundations and endowments, is undoing the good work of Foundation grants.
The strength of our economy, the health of our people and planet, may depend on our ability to take a longer-term multigenerational assessment of our welfare.
Mitchell concludes that incentives to move us toward long-term health “can only be provided by the market for, in the end, the market is the master.” However, he also makes it clear that markets are socially constructed. They can be reshaped to achieve more salubrious results, if we will only provide the incentives.