Home » How We Think » Street Talk » Corporate Governance
Maybe I'm in a mood but this particular article on the already over-saturated topic of Sabarnes-Oxly ten years after the fact really prunes my petunias...
I'm sure Mark Rogers is a smart guy and I'd like to think his intentions are pure. But if SOX isn't working ten years later, then let's not make it worse by setting term limits, limiting the number of company boards upon which a director can sit or making up some sort of continuing education requirement.
Let me ask you this:
Does arbitrarily forcing a qualified director who has effectively served in his/her post to step away from the company help or hinder a company's ability to execute its long-range growth agenda and best protect the interests of investors?
I find it hard to believe it would do anything but hinder the company and hurt investors. Unlike the justices on the Supreme Court, company directors do stand for re-election regularly. Therefore, they are already limited to the term for which they were elected as there is no guarantee that investors will support his/her re-election or that the governing body itself will ask this director even to stand for re-election. If the director is performing well and bringing the unique skill set that is sought by the governing body (not to mention has accumulated the specific company insight and market knowledge to serve in this capacity), then why in the world would we categorically decide how long a company and its investors can benefit from this individual's involvement? Governance is not a one-size-fits-all solution... at some point, we have got to learn that such broad-stroke, "easy" button solutions do not work. In fact, they can actually hurt more investors than they help.
Does deciding for an individual how many boards he or she can sit on help or hinder a company's ability to execute its long-range growth agenda and best protect the interests of investors?
Again, I don't see how it helps a company or its investors to shrink the pool of qualified director candidates (particularly if we're also going to limit how many terms a director can serve). This is a decision that needs to be made on a case-by-case basis by investors and the governing board (and, to a lesser extent, the individual director). If he/she isn't performing because he/she is over extended, then the board and/or the investors can take the necessary actions. In fact, there's already a name for this process - it's called the Annual Meeting of Stockholders. Perhaps what we need is legislation that forces... errrr... encourages... investors to read the company's proxy statement, ask questions, and then - *gulp* - actually cast their vote.
As for continuing education... I love Mr. Rogers' use of "almost" in this sentence: "In almost every major profession there are continuing education requirements set forth by the applicable licensing body." Love the subtly of that sentence... makes it seem so overwhelmingly obvious without actually stating a definitive fact. In many ways, it's "almost" a good point.
Listen, I'd love to change the world too but at least I know I don't know what to do. Well, I know what not to do... so that's a start...
What would you do?
According to The Wall Street Journal, there have been 106 supplemental proxy filings this year regarding executive-pay plans (an increase of 83% from a year ago). Blair Jones, managing principal at Semler Brossy said in the Journal story, the supplemental filing "... is a second attempt to say ‘perhaps we weren’t as clear as we could have been in explaining our compensation strategy.’” ("Supplemental Proxy Filings Surge" - June 26, 2012).
While that's a scary number, what's even more scary is that in only four of those situations did the proxy advisory firms overturn their initial recommendation.
What do these scary numbers tell us? That supplemental proxy filings aren't worth the virtual paper upon which they are printed? I wouldn't go that far - in many cases, the supplemental proxy filing is absolutely necessary to address assertions made (or conclusions drawn) in by the proxy advisory firms.
Nope... the takeaway for me is simple: it's too risky to wait until the proxy is mailed to start the discussion on executive-pay plans with the compliance officers at your institutional investors. This conversation needs to take place long before the proxy is mailed so that you have enough time to properly delineate the rationale behind the pay plan, as well as to give your investors the chance to provide feedback and, if appropriate, input to your compensation committee. If nothing else, by creating a direct line of communications early can dramatically reduce the need for investors to send management a message through its proxy ballot.
Just my two cents, of course. Anyone have other pocket change on this issue?
A few weeks ago, I said that if you wait for your investors to bring up sustainability, you will have all-but-missed a major opportunity to differentiate your company as an investment option.
Yes... I saw you roll your eyes. And, yes, I heard you snort. I also heard you mumble, "dude's an idiot."
It's okay... I've got a wife and kids so I'm used to this reaction.
Plus, I know I'm right (for a change).
For example, just recently the mighty KKR announced that its "green portfolio program" continues to expand globally. Pretty telling when an investor of KKR's ilk asserts its clout/muscle/influence/je ne sais pas in this way, don't you think? Don't roll your eyes - tell me why you disagree because, from where I sit, the expectations for sustainability reporting are building fast.
Summertime means a lot of things to different people: Family vacations... summer camps for the kids... cookouts... fireworks... baseball games... summer blockbuster movies... a(nother) trip to rehab for some artist whose summer concert tour might not be selling as well as hoped... time to catch up on books you've been meaning to read...
Let me add one book to your list (or start your list for you magazine-only readers): The Shareholder Value Myth by Lynn A. Stout, a law professional at Cornell. Don't believe me? Read this write-up by The New York Times... she's bringings the heat, am I right? And the fact that she is willing to point the finger at her academic brethren clearly shows there's no half stepping allowed with Professor Stout.
For those of you who tire easily after reading 140-characters, let me cull some soundbites from the NYT article for you:
"The blame lies with economists and business professors who have pushed the idea, with generous enabling from the corporate governance do-gooder movement, Ms. Stout contends. Stocks, as a result, have become the playthings of hedge funds, warping corporate motivation and eroding stock market returns.."
" ... the idea that shareholders "own" their companies isn't actually so set in the law, Ms. Stout argues... what the law actually says is that shareholders are more like contractors, similar to debtholders, employees and suppliers. Directors are not obligated to give them any and all profits, but may allocate the money in the best way they see fit. They may want to pay employees more or invest in research. Courts allow boards leeway to use their own judgments."
"The professor's argument is that as companies have increasingly focused on their stock prices... they have inadvertently empowered hedge funds that push for short-term solutions...the average holding period of a stock was eight years in 1960; today, it's four months."
"The biggest ill has been to align top executives' pay with performance, usually measured by the stock price. This has proved to be 'a disaster,' Ms. Stout says. Managers have become obsessed with share price. By focusing on short-term moves in stock prices, managers are eroding the long-term value of their franchises... Ms. Stout also blames the corporate governance movement, which pushed for such alignment. It has 'proven harmful to the very institutions that it is seeking to benefit,' she says. 'Investors are actually causing corporations to do things that are eroding investor returns.'"
"[Companies should ]... think about their customers and their employees and even to start acting more socially responsible. Shareholders... would be 'relatively weak - and that's a good thing.'"
Obviously, there are two sides - if not more - to every story... how would you counter this argument?
No, no... this isn't another ROBBIE awards ceremony... we're talking shareholder votes this time.
If you only read one obituary from this most recent proxy season in the States, make it this study of US mutual funds by Tapestry Networks (in concert with IRRC Institute).
Among the many highlights was this gem: mutual funds are increasingly relying upon proxy advisory firms to serve as data aggregators. "Across the board, participants in our research said they value proxy firms’ ability to collect, organize, and present vast amounts of data, and they believe smaller asset managers are more reliant on those services."
All the more reason companies need to treat proxy matters as a year-round campaign and make sure their investors understand their governance structures, protocols and practices. Similarly, doing so will allow companies to clearly understand their investors' governance concerns and sensitivities long before they send out the proxy ballot.
Be interested to know what jumps out at you when reading this report.
A couple of weeks ago, Citigroup former Chairman Richard Parsons played the "Cool Hand Luke" card to explain why shareholders voted down the company's executive compensation plan.
My question is - is this the tipping point that restores some equilibrium to the investor relations pendulum that has been so heavily tilted towards the compliance aspect of the discipline over the past few years?
In other words, is it time to give IR back to the IRO that is as fluent - if not more fluent - in communications as s/he is in financials?
This is not meant as a slight on the corporate secretary... or the general counsel... or the outside SEC attorneys... or the compensation advisors to the Board... or the Treasurer that also wears the IRO hat... or... well, you get the picture. The point I am trying to make that investor relations is both a compliance and a marketing function. Companies that lose sight of that do so at their own peril (as Citi learned the hard way) and, in many cases, leave significant value on the table.
There was an interesting post recently on the TAI blog about the top five shareholder concerns in 2012. The post was inspired by an interview with the iconic Nell Minow in Corporate Secretary magazine.
According to Nell, the top five concerns includes such things as executive compensation ("At most companies, investors don’t seem to care - shareholders approved 98% of the executive pay packages in last year’s say-on-pay votes," countered TAI) and quality of board/individual directors ("... in 2011, 45 directors received less than 50% of the votes cast, out of thousands standing for election," noted TAI). The author of the post also offered that Nell's list should have been:
share price appreciation
corporate cash balances
share price appreciation
share price appreciation
share price appreciation
A tad extreme but point well taken. I agree that shareholders - like voters - tend to be swayed by their wallets at election time. That said, I can't believe that the list of five really boils down to just those one and a half things. From where I sit, shareholders are paying close attention to Board composition and quality but I would suggest that the focus here is really more on the director selection/succession criteria process than the individuals themselves. I also believe that there is more of a growing interest in sustainability than TAI is acknowledging. That said, my sense is that most investors are more interested in it as another intangible asset like new product innovation, R&D, etc. rather than looking for which company is doing the best in a particular CSR initiative.
What do you think of these lists? Does the answer lie somewhere in between or do you have a completely different list in mind?
Thank goodness for Johnson & Johnson.
First of all, they have great baby powder... far and away the best of breed as far as I am concerned. I still use it. Likewise, I'd say their baby oil and baby shampoo are of similar stature (and, let's be honest, there's no better smelling shampoo than the no-more-tears elixir in the classic golden bottle). Also - and perhaps more relevant for this forum - they have made it cool to talk about reaching the individual investor again - a topic that's long been dear to me.
Doug Chia, the company's corporate secretary, recently participated in a NYSE webinar about the upcoming proxy season and talked about how the company rebuilt its proxy statement this year in order to better serve the company's individual investors.
Have you seen the latest proxy statement from J&J? If you haven't you should take a look - it's really well done. Among other things, I think the additions of the "at a glance" content (see pages 5 or 36, for example) enhances the transparency of document by infusing it with some much needed/long-awaited "plain" English. Similarly, I think the expanded director bios starting on page 18 are a must for all companies - whether or not you have a retail base to serve. At the risk of repeating myself, I cannot stress enough how critical it is that companies clearly delineate the specific expertise each individual brings to the board and how that experience correlates the company's growth strategy, particularly in today's unsettled markets. When it comes to corporate governance, investors are dubious, proxy advisory firms are suspicious and activists are ready to pounce. The risk associated with letting them draw their own conclusions is too great.
Be curious how you are approaching this year's proxy statement. Has J&J's approach made you rethink your approach with the retail community?
To say there are a lot of deals stuck in the IPO queue might already qualify as one of the great understatements of 2012, right up there with "Republicans seem to disagree on who should be the GOP nominee" and "The European financial market seems a bit strained of late."
To say I have a recommendation for either the GOP or Europe might qualify as one of the great overstatements of all time, I do have a strong recommendation for those companies currently waiting to go public: use this time wisely!
Time after time I have seen management teams view "going public" as the completion of a process rather than the beginning of one (¿Cómo se dice "rude awakening"?). Believe me... companies that begin preparing for this new reality long before the S-1 is being drafted have a much easier time transitioning and performing after the deal has gone effective.
To that end, here are seven simple strategies for future public companies to consider in advance of the offering. For those of you who have already walked this (green) mile or are walking it right now, what would you add to the list?
« Older Posts
Memo to: Those who prepare managements for earnings conference calls
Re: Avoiding the most common (and biggest) earnings conference call mistake
All - effective immediately, earnings conference calls will require a strong closing statement to be used by your CEO following the conclusion of the "Questions and Answers" segment. Allowing this discussion to abruptly end with the senior leader of your organization muttering, "Ummm... okay... thanks for dialing in this morning. We'll talk to you in three months when we next announce earnings" is no longer acceptable for the following reasons:
After roughly an hour on the phone - and too many questions on topics off in the weeds - management teams need to bring the conversation back to those essential takeaways from the quarterly performance (e.g., pleased with our ability to drive higher operating margins despite flat sales; encouraged by the progress we're making in integrating our latest acquisition; focused on more fully leveraging our market position as economy rebounds... you feeling me on this?). Letting the call end with a brief discussion on expected tax rates is not only a major faux pax but a wasted opportunity to reassert your value proposition for investors.
It's also a lie... at least I hope it's a lie... please tell me you are talking to your investors in between earnings calls.
Please let me know if you'd like me to convene the group to discuss further - perhaps over a working lunch. In the meantime, I thank you for your prompt attention to this surprisingly wide-spread problem.