Search The BoardAgenda

Friday 29 July 2011

Court closes door on proxy access in US …

… though not completely. Two lobbying organisations for corporations won a partial victory in the US Court of Appeals, striking down the proxy access rule from the Securities and Exchange Commission. The Business Roundtable and the US Chamber of Commerce wanted to block the rule from coming into effect next year. They argued the rule – which gives shareholders meeting certain conditions the ability to nominate directors and have the companies pay to send out voting materials to shareholders – was unconstitutional. The Court of Appeals justices didn't get that far into the case, however. They overturned the proxy access rule on a technicality. They agreed with the plaintiffs that the SEC "failed adequately to consider the rule's effect upon efficiency, competition, and capital formation". That means the SEC could come back with a new rule after what would be, in effect, an economic impact statement.

Dodd-Frank unhappy anniversary: The ruling came almost exactly on the anniversary of the Dodd-Frank "Corporate Responsibility" Act, which had mandated the SEC to do something along these lines. That "something" involved reheating that rule that been thrown out before – also after a lawsuit by corporate lobbyists – in the aftermath of the collapse of Enron. While some shareholder activists might be disappointed to lose this way to prise open the corporate boardroom, others aren't so sure. Adam Emmerich, a partner in the corporate department at Wachtell, Lipton, Rosen & Katz, a law firm that has taken strong stances on corporate governance, wrote: "we believe this is a positive development for American corporations and their shareholders." Proxy access wasn't necessary or even beneficial, he contended, adding: "we do not expect this ruling to decrease the frequency of proxy contests."

Source documents: The court ruling is a 21-page pdf file. The Emmerich statement in on the Harvard Law School blog.

Sunday 24 July 2011

Should small company governance be different?

The question is part of the green paper that the European Commission issues a few months back as part of its general review of corporate governance arrangements in the European Union. The EU has previously shied away from going into the governance business, after member states asserted the priority of national law. But after the financial crisis, the status quo no longer sufficed, so the green paper was a first step towards some sort of new regulatory drive. Its wide-ranging questions started, though, with that particularly problematic one. Does size matter? Although its question concerned only companies with equity trading on public markets, the commission's question raises the spectre that corporate governance regimes and perhaps even law might extend obligations currently faced by large listed enterprises to private companies and even micro-businesses. Yes, size matters and there an end to it! Perhaps.

The green paper consultation was drawing to a close when a group of Canadian academics and practitioners weighed in. Writing to the commission on all the points raised, they started with this one. It's worth reading at some length:

Inevitably, good governance will look somewhat different depending on a company’s scale and dimensions. But, a diminutive corporate size, we maintain, is not a suitable reason to relax or diminish the principles of good governance. There is a compelling business case to be made for smaller companies to adopt good governance principles and to adhere to – or aspire to – lofty governance standards as a goal. The need to create standards and behaviours that add value by adopting good governance principles is as important for small and medium-sized enterprises (SMEs), we argue, as for larger enterprises.

… although overshadowed in the business press and in the public consciousness by larger market-cap companies, are in many ways the lifeblood of most economies and markets in Europe, in North America and elsewhere. To state the obvious, SMEs are, in many cases, the next generation of large market-cap enterprises. As larger enterprises, these companies and their governance practices will increasingly come under the microscope and be subjected to the heightened scrutiny by shareholder activists. If SMEs had not begun with a proper corporate governance culture, it becomes more difficult to overcome this as they grow.


So, size matters not as much as culture, and you need to get the culture right from the outset. Perhaps. The emphasis in this submission is on culture, not architecture, not the superstructure of committee and board balance and measurements of independence and all the trapping of best practice. Culture is a state of mind, in directing an enterprise of whatever size.

Source document: The submission by Canadian academics and practitioners to the EU consultation is a 53-page pdf file.

Better boards for healthcare – map the gap with best practice

You sit on the board of a healthcare provider. In the UK much of that comes in the National Health Service, though increasingly bits of the work are done in the private and charitable sectors of the economy. You have a responsibility to look after the provider's financial resources, much or even all of which comes from taxpayers. You have a responsibility for the care of patients, too. This is, therefore, not just an exercise in maximising the return on shareholder equity or other narrow definitions of corporate governance. What does the board do?

The Institute of Chartered Secretaries and Administrators in the UK has been trying to find out what actually happens in the boards of NHS trusts, the bodies that oversee the hospitals funded directly from government. It organised an online survey of trust directors and secretaries, observed about 20 boards in action and reviewed the board papers for more than 1,200 board meetings. What it found wasn't very encouraging:

  • Lack of strategic focus: There was little discussion of strategy. Outside directors felt their primary role was holding the executive team to account, so only 10 per cent of the agenda dealt with strategic issues, compared with 60 per cent with recommendations for best practice. Most of the rest of the items, by the way, were issues in patient care.
  • Indecision: The observations showed little evidence of challenge, board papers were of "variable quality" and boards were presented with far more item "to note" than to decide.
  • Transparency: Only one per cent of respondents thought that giving the public a say in shaping services was a priority for the board. Nor would having open board meetings be a good way to increase accountability. Bear in mind that government reforms under consideration now have targeted open board meetings as mandatory.

And more. There are issues with the methodology that raise some questions, but ICSA argues that the findings are "directionally valid" if not "statistically valid". There are reasons to question some of findings. Board agendas, for example, have items "to note" where regulation prescribes that board "note" something. They may not occupy any time at all in an actual board meeting. But the study suggests that things aren't quite ideal on boards – yet another area where the public sector is following the lead of private-sector companies.

Source document: The ICSA study "Mapping the gap: Highlighting the disconnect between governance best practice and reality in the NHS," is a 48-page pdf file.

More – and more structured – narrative reporting on the cards in UK

Everybody knows that financial statements are snapshots of a time gone by. Using them to navigate is like driving forward while staring in the rear-view mirror. The "solution" is more and better non-financial reporting, where management tells us what they are doing about all those things that are difficult to quantify and then equate to cash. When it came to power a year ago, the Conservative-Liberal Democrat coalition in the UK made early rumblings about revisiting the issue that its Labour predecessor had discarded at the last minute when company law was reformed in 2006: the operating and financial review. After a consultation paper last October and a summary of responses a few months later, things have gone quiet at the Department for Business, Innovation and Skills. But a formal response from government is due in September, and a minister has offered a preview of what it contains. Edward Davey, the Conservative MP looking after the matter at BIS, has suggested that narrative reporting should be split into two sections. Speaking at the ICSA-Hermes Transparency in Governance Awards, he said companies would need to produce a Strategic Report and an Annual Directors' Statement.

"The Strategic Report will, as its name implies, be strategic," he said. "It will be a short document, aimed at shareholders, in which the business tells its story. It will be the one stop shop for anyone wanting to know the key facts about a company. It should be a truly integrated report that shows how the company's financial results are linked to its strategy, business model and long-term risks and opportunities - including environmental and social issues." As that explanation expands, so too does the length of the document.

The second part would contain the detailed disclosures that companies are either required to make by law or that they provide voluntarily, he said, disclosures "that are important to somebody, but not to everybody".

Source document: A summary of his remarks in available in Company Secretary magazine online, the journal of the Institute of Chartered Secretaries and Administrators.

Women on boards – code or law?

The debate has been going on for a long time, but if you listen to it carefully, you'll hear a crescendo. Women will play a bigger role in boards of directors very soon. It may come in statute in some countries, as it has in Norway and a few other places. It may come by "directive", the European Union's language for legislation that member states can implement in their own ways. Or it may arrive through the side door of a code of conduct, backed by something like the "comply-or-explain" principle in UK corporate governance. But come it will. Lord Davies wrote a report for government published in February, which prompted a review at the Financial Reporting Council, custodians of the UK Corporate Governance Code. Listen to this voice, from the Institute of Chartered Secretaries and Administrators. In its submission to the FRC consultation, ICSA said:
We think it is important that the Code is amended to achieve more diversity and more effective boards. Although many companies will wish to implement the recommendations of the Davies Report voluntarily, we think the inclusion of new provisions in the Code would be the best way to achieve compliance by all companies. It would also provide for a standard method of reporting as all companies would report on progress towards achieving their internal targets for the percentage of women on their boards in their Annual Reports.

The background includes the European Commission's "Strategy for Equality between Women and Men 2010-2015". Further action by the EU may well follow a review of progress in March 2012, when legislation, not codes, could be on the table. "We believe it is important for the UK to be seen to be taking action on this matter ahead of the EU review of progress and think that inclusion of a Code provision (and thereby a requirement for UK companies to report on progress) would demonstrate that the UK is taking the matter seriously and making progress towards the aspirations of the EU," ICSA said.

Source document: The ICSA response is a two-page pdf file.

Saturday 16 July 2011

News Corp., integrity and authenticity

The statement was simple, abject, forthright, unlike the corporate discourse that for weeks had preceded it. Rupert Murdoch said: "We are sorry." The action that prompted the advertisement in all the major UK newspapers wasn't described. Les Hinton, Murdoch's trusted aide for 52 years, had resigned as chief executive of Dow Jones and publisher of the Wall Street Journal. Rebekah Brooks has resigned a few hours earlier as chief executive of News International, the wholly owned subsidiary of News Corp. that operates its UK newspapers. Brooks had been editor of the now-closed News of the World at the time of the worst alleged excesses. Hinton had been chief executives of News International – her boss. The circumstances that led to it dominated the news those weeks, at least in the UK, where the story crowded out disasters and terrorists acts in other countries and prevented serious discussion of fiscal and monetary policy in the eurozone and US, issues of great macroeconomic import. This micro-story, however, holds lessons in psychology, ethics and corporate governancee, not to mention freedom of the press, so it's more than a little local disturbance in a small island that led a once-great empire many years ago.

News Corp. apologises, July 16, 2011We are sorry. Never mind that it was signed by Rupert Murdoch over a News International logo when the man holds no position at the legal entity of that name, not even that of shareholder. That they are difficult words to say means we have consciences, scruples, even principles. Saying "sorry" only comes easy to the cynical. That it took so long for Murdoch and News Corp. to say it, suggests that allegations of his supposedly unprincipled attitudes are somewhat wide of the mark. Comments that Murdoch is "only interested in the money" contradict those that describe his investor-unfriendly love of the dirty print business and then recount the money lost on keeping newspapers like The Times in business. A complex ethic is at work here, part driven by utility, part by virtue. Murdoch is an authentic businessman, in ways that suggest how difficult it is to separate categories in ethics, even in the face of what society at large regards as unethical behaviour. Can ethical people engage in unethical actions? This case suggests the answer is yes, which tells us we need to think long and hard about ethics.

Corporate governance at work: The corporate governance section of its website starts with the simple statement: "News Corporation’s Board of Directors and management are committed to strong corporate governance and sound business practices." The corporate governance lessons loom large here, but they're not a clear as some commentators assert. News Corp. is a family-run business. One look at the board will tell you that: father, two sons, close colleagues and former senior executives make up the executive side. The non-executives have a bent towards Australia, whence Murdoch sprang, or business interests through their Chinese connections or links to the world of private equity. One independent non-executive is a member of the family that sold the Dow Jones business to News Corp. This is a tight board, capable of marshalling resources and pushing the business forward in the direction its principal owner wants. Family-run businesses with outside shareholders (as News Corp. does, aplenty) run big risks of conflicts of interests. They rightly trade at a discount to the market (as News Corp. does), leading to a higher cost of capital and a need to drive more aggressively for margin. It's also the characteristic of a lot of businesses that put something other than margin as their first priority.

Voting rights: News Corp. is also a business with unequal voting rights for the capital, a condition much derided in what scholars and practitioners now call the "governance industry" but one surprising common in media businesses in America and elsewhere. That makes the position of the father, the 80-year-old chairman and CEO, impregnable, not an entirely bad thing when he's a genius, as many of his critics and rivals acknowledge.

Challenge? Shareholders can rarely challenge management anyway, especially in the US. With the boardroom unlikely to show control, challenge may still take place, but on only one side of the board's activities. The News Corp. board may well come up with reasons to challenge the strategic thinking at the company, if not the boss's final decision. In good times, that may be enough. In bad times, it may help, too, when you want a single decision, forcefully executed, after a robust debate. But it helped less in the times in between, when decisions are less dramatic but more likely to be ambiguous. Was this sorry tale a case of that?

The muddled middle: The phone hacking and bribery alleged to have happened at one of the News International UK titles was shocking because it was business as usual. This wasn't just a bad decision on a bad day, as the company, its editors and executives repeatedly tried to claim. It doesn't appear to have been an obsession with numbers to the detriment of human relations and the human touch, either. If the allegations are true – and closing the (profitable) newspaper in question as well as saying Sorry are signs things were amiss –, in what some people have called the culture of the business, or what might be better termed its ethos. News Corp. wanted good stories, a journalistic virtue. People at varying levels of the business shared that concern. And being the "bad boys" was part of what made this an "authentic" news organization. There's virtue on both sides. Integrity screams out about the character of these actors, despite the outrage at the actions committed under their guidance if perhaps not explicit direction. And, yes, the money matters, too. Virtue doesn't always equate to a philanthropic spirit.

Politics, too: But the reason News Corp. matters is because the media matter. They influence public discourse, though they have much less control over it now than they once did. Murdoch's politics (liberal, in the European sense, tending towards libertarian) come coupled with rebellious radicalism. The term "right-wing" doesn't come close to describing the complexity. These are politics that alienate the establishment as much as its social critics. Enemies would prefer that the Murdochs – father and son James, at least – had resigned, rather than the trusted, aging aide and the divisive heroine of newsroom. That won't happen, because the integrity and authenticity of the venture demand that they stay. The resignations of Hinton and Brooks are meant to "draw a line under the matter", we hear in the press. Practices will change. The character of the man and the ethos of the company, though, look intact. Consider the subtext of Rupert Murdoch's news release announcing Hinton's departure concluded:

Let me emphasize one point - News Corporation is not Rupert Murdoch. It is the collective creativity and effort of many thousands of people around the world, and few individuals have given more to this company than Les Hinton.
This isn't the end of the story, though. Rupert Murdoch, in saying "sorry" said as much. The final sentence of his apology was this:
In the coming days, as we take further concrete steps to resolve these issues and make amends for the damage they have caused, you will hear more from us.
To be sure, we will. Integrity and authenticity demand it every bit as much as the politicians who are trying now to call the Murdochs to account.

Source documents: The news release on Hinton's resignation tells a bit of the story. The corporate governance section has links to its ethics statement and board mandates, and to the resignation letter from Brooks.

Saturday 9 July 2011

The rich get richer and the poor …

… get better off, too. The economic growth in the developing world is proceeding at such a pace that the poor probably are better off on average, despite the deep recession in the developed world and the continuing disparity in wealth in different regimes. But this is a story about the other end of the spectrum. For more than 20 years the consultants at Capgemini and the bankers at Merrill Lynch have been studying the trends at the top. This year's version of their World Wealth Report makes pretty clear that there's room at the top, but you have to be doing pretty well to get there. Their annual study has generated a couple of unavoidable acronyms, the HNWIs and the UHNWIs: high net-worth individuals and ultra-high net-worth individuals. And recession? What recession? "Globally, HNWIs' financial wealth grew 9.7% in 2010 to reach US$42.7 trillion, surpassing the 2007 pre-crisis
Peak," the firms report. "The global population of HNWIs grew 8.3% to 10.9 million." The rich are richer. And there's more:
  • Rise of Asia: The population of HNWIs in Asia-Pacific, at 3.3 million individuals, is now the second-largest in the world behind North America, and ahead of Europe for the first time.
  • Europe not particularly slow: Europe's HNWI wealth totalled $10.2 trillion after growing 7.2 per cent in 2010, while Asia-Pacific HNWI wealth was $10.8 trillion, up 12.1 per cent.
  • North America in fine shape: North American HNWI wealth hit $11.6 trillion in 2010, up 9.1 per cent.
  • Latam: Latin America saw another modest gain (6.2 per cent) in its HNWI population in 2010 and HNWI wealth rose 9.2 per cent.

These figures have been tracked for years as a measure of the state of the economy and a leading indicator of demand for financial services, in particular hedge funds. A few people even reckon that the roots of the financial crisis lie in the explosion in size of these portfolios over the years. According to this line of thought, demand from individuals for large volumes of low-risk investment with high returns is the demand-side of the excesses in supply of derivatives of mortgage-backed securities. It's worth noting in these figures that wealth is rising faster than the number of wealthy people. In the words of the famous foxtrot from 1921 (tune by Richard Whiting, lyrics by Raymond Egan and Gus Kahn), Ain't we got fun!

Source document: The Capgemini-Merrill Lynch World Wealth Report is a 40-page pdf file.

Boards aren't doing more strategy, despite the crisis

Corporate boards aren't spending any more time and effort on strategic matters than they were before the financial crisis, according to a survey by the consultants at McKinsey. "Corporate boards are under pressure to take more responsibility for developing strategy and overseeing business risk after the financial crisis exposed many cases of inadequate governance," they write. "Yet … directors report that their boards have not increased the time spent on company strategy since our previous survey." That was conducted in February 2008, seven months before the collapse of Lehman Brothers.

Just 44 per cent of respondents said the board simply reviews and approves management's strategies. Only slight more than a quarter describe board performance as excellent or very good. Moreover, the proportion of boards that formally evaluate their directors has dropped over the past three years.

Respondents said the most effective remedies would be to spend more time overall on board work, improve the mix of skills or backgrounds on the board, and have tougher and more constructive debate. Where have we heard that before?

Source document: The article is available in McKinsey Quarterly online.

Seven more 'myths' about money

Hot on the heels of their attempt to debunk some widely held views on corporate governance, the combination of David Larcker and Brian Tayan have expanded their efforts to take hot air out of the corporate governance debate. Expanding the third and most contentious of the "Seven Myths of Corporate Governance", the two Stanford University scholars have come up with a more provocative set of assertions. They further charge both scholars and a lot of people in the corporate governance industry of getting the wrong end of the stick about the role of carrots in corporate governance. These false notions include that:
  1. The ratio of CEO-to-average-worker pay is a useful statistic
  2. Compensation consultants cause pay to be too high
  3. It is easy to tell whether a compensation package encourages “excessive” risk taking
  4. Performance metrics and targets tie directly to the corporate strategy
  5. Discretionary bonuses should be eliminated
  6. Proxy advisory firms know how to evaluation compensation contracts
  7. The numbers in the financial statements for executive options accurately capture their cost and value

This piece has the same good intentions as their previous one – exploding the folklore that has developed in a field where evidence is both ambiguous and hard to come by. They use the forum of the Rock Center's working paper series to explain: "Problems of excessive compensation and poorly structured contracts will not be remedied by artificial changes and congressional mandates. Why don't experts rely on the research to arrive at informed and fact-based solutions?" And that's sounds a bit like a plea for corporate-sponsored funding for a research programme.

Source document: The polemic "Seven Myths of Executive Compensation," by David Larcker and Brian Tayan of Stanford University, is a nine-page pdf file.

Seven 'myths' in corporate governance

Amid the tens of thousands of words that academics produce each month, every so often someone seeks to slice through the verbiage and sum up the essence. That's probably the motivation that lies behind the decision of the Rock Center at Stanford to issue this concise (though less than rigorous) view of what people have been saying about corporate governance in the last half-dozen years or so. David Larcker and Brian Tayan have identified seven such myths, ideas that have developed and that "continue to be accepted, despite a lack of robust supporting evidence":
  1. The structure of the board always tells you something about the quality of the board
  2. CEOs in the U.S. are overpaid
  3. Pay for performance does not exist in CEO compensation contracts
  4. Companies are prepared to replace the CEO if needed
  5. Regulation improves corporate governance
  6. The voting recommendations of proxy advisory firms are correct
  7. Best practices are the solution to bad governance

Inviting readers to respond is another odd touch for an academic output, but then this may well be an attempt to stimulate consulting business – or lunch invitations – as much as to dispel fuzzy thinking.

Source document: The provocation "Seven Myths of Corporate Governance," by David Larcker and Brian Tayan of Stanford University, is an 11-page pdf file.