A Survey on Corporate Governance

Robert Purse reports on an international survey on corporate governance, concluding that respondents may support stronger standards and possibly a universal code of best practice:

Although 60% of respondents said ‘yes’, it is noteworthy that 40% responded either ‘no’, or ‘not sure’. Whilst we have no direct evidence to support the proposition, we are of the view that high standards of good governance should be self-evident with little room for uncertainty.

Source: A Survey on Corporate Governance

FTSE Russell Index Considers Booting Firms With Lots of Non-Voting Shares – WSJ

A proposal being floated by a large index firm could force finance chiefs at companies like Alphabet Inc., Facebook Inc. and Ford Motor Co. to choose between keeping their places in broad stock benchmarks or changing their share class structures.FTSE Russell is proposing possible restrictions on the inclusion of companies with unequal voting rights in its indexes, but the firm will weigh input from clients and investors before working out specifics.

Source: FTSE Russell Index Considers Booting Firms With Lots of Non-Voting Shares – WSJ

Airlines, Stock Splits and Voting – Bloomberg

Matt Levine writes in Bloomberg:

[C]ross-ownership of many U.S. airlines by the same diversified institutional investors — index funds and “quasi-indexers” — discourages the airlines from competing on price and quality, and encourages them to focus on margins. An airline that cuts fares or spends money on better service to win market share isn’t necessarily doing its shareholders any favors: The increased market share comes at the expense of other airline companies that the shareholders also probably own….I think the “index funds ruin capitalism” story is best read as just one strand of a larger “financial capitalism ruins capitalism” story, and while the index funds story is still pretty niche, the financial capitalism story has become very popular. In this story, managers and investors have stopped thinking of companies as companies, as human networks of employees and customers and investors, and now think of them instead as numbers, as sets of financial factors to be optimized. There are many explanations for this: Developments in graduate business education, or the rise of corporate activism, or the cultural role of Wall Street. But the basic story is that companies used to balance the interests of workers, customers and investors; now they have adopted a fully investor-centric model in which profits are the only goal and customer service and workers’ rights are sacrificed. Sheelah Kolhatkar writes that “the investors-above-all doctrine seems to have triumphed over the more inclusive approach.”

Source: Airlines, Stock Splits and Voting – Bloomberg

BlackRock, Vanguard and State Street bulk up governance staff

BlackRock, Vanguard and State Street have expanded their corporate governance teams significantly in response to growing pressure from policymakers and clients to demonstrate they are policing the companies they invest in.The move by the world’s three largest asset managers, which together control nearly $11tn of assets, will help address fears that investors are not doing enough to monitor controversial issues around executive pay and board diversity at the companies they invest in.

Source: BlackRock, Vanguard and State Street bulk up governance staff

A ‘Delaware Trap’ for Companies – WSJ

A new study by Robert Anderson IV finds that choice of law firm plays a significant role in the decision to incorporate in Delaware.

Dr. Anderson examined regulatory filings related to raising private capital, and concluded that it is all about the company’s choice of law firm near the time of founding.He found that some larger, elite law firms may steer businesses toward a Delaware incorporation with their own needs in mind, rather than because of any superior quality of the state’s legal system or the companies’ needs. Perhaps, he speculates, it is easier and less expensive for them to focus on Delaware, rather than having to master the laws of many states.In contrast, other firms—such as smaller, regional firms—are likely inherently focused on their state’s law, and therefore might be expected to disproportionately recommend in-state incorporation, he says.

Because it is difficult for companies to reincorporate, there is little incentive for states to compete for incorporation business and the franchise fees it generates by offering robust alternatives to Delaware law, Dr. Anderson says.

“The consequence is a stagnant menu of relatively homogeneous state corporate law with little innovation, even though innovation might benefit shareholders,” he says.

Dr. Anderson’s research doesn’t take into account various factors that prior research has shown to influence incorporation decisions, such as the antitakeover statutes of a business’s state of headquarters, says Lucian Bebchuk, the James Barr professor of law, economics and finance at Harvard Law School and the director of its program on corporate governance.Delaware manages to snare more than half of the incorporations of U.S. public companies.

A study by Dr. Bebchuk and Alma Cohen, a professor of empirical practice at Harvard Law School, found that companies are more likely to incorporate in Delaware rather than their state of headquarters when they have more employees or sales, when they’re based in the Northeast or South or when their state of headquarters has fewer antitakeover statutes.But Dr. Anderson says he’s confident that weighing states’ antitakeover statutes wouldn’t undermine his results.

Source: A ‘Delaware Trap’ for Companies – WSJ

We Strongly Oppose the Oxymoronic “CHOICE” Act

We join with the Council of Institutional Investors in strongly opposing the falsely named “CHOICE” Act, which would eliminate critical shareholder rights and market responses that ensure the integrity of our financial markets. The proposal would sharply reduce the number of shareholder proposals and shareholder oversight on ceo pay, restrict the ability of independent proxy advisory firms to provide essential information and guidance on matters of corporate governance, and entrench underperforming and overpaid executives. It has been less than a decade since the financial meltdown and Congress, fueled by corporate political contributions, is trying to get rid of some of the reforms that restored the credibility of our financial markets.

From CII:

CII supports sensible, effective rules that safeguard investors and strengthen markets.

Three Principles to Protect Investors and Strengthen Capital Markets

As Congress and the administration consider revamping key aspects of America’s financial regulatory system, CII urges policymakers to uphold and enhance critical protections for investors.

Painful reminders of the massive failures of oversight—by regulators and corporate boards—that contributed to the financial crisis of 2008 are with us still. The market meltdown cost millions of Americans their jobs and homes, and devastated their retirement savings. Robust reforms have helped to restore investor confidence in the integrity of the marketplace. That trust must not be undermined.

That’s why CII believes that any future financial reforms should uphold three principles that foster fair, stable and vibrant markets:

  • Protect fundamental shareholder rights
  • Promote effective disclosure and reliable financial reporting
  • Safeguard the independence of the Securities and Exchange Commission (SEC)

The House Financial Choice Act, however, would weaken critical shareholder rights that investors need to hold management and boards of public companies accountable, and that foster trust in the integrity of the U.S. capital markets. CII has outlined its concerns in detail in recent comment letters here and here, in a Member Toolkit and below on this page.

CII Member Toolkit for Responding to the CHOICE Act

1. Protect fundamental shareholder rights
Robust shareholder rights ensure that investors are treated fairly and equitably, that management and boards are accountable to owners and that market participants have confidence in the integrity of capital markets.

Strong public company boards of directors are the first line of defense for shareholders. The board has a fiduciary duty to see that senior managers run the company in the long-term interest of its owners. But holding directors accountable to shareholders is inherently challenging in today’s public companies, where equity ownership is dispersed among thousands of owners. Balanced rules ensure that shareholders have fundamental safeguards, including a level playing field in director elections, a meaningful vote and effective tools to engage management and the board.

Support fair rules for shareholder proposals.

  • Shareholder proposals are essential tools for investors, individually and collectively, to express their views to management and boards on major governance and other issues. The vast majority of these votes are strictly advisory; even if they pass, boards can choose whether to act on them.

    However, the major U.S. House bill to roll back financial regulation would sharply increase the regulatory hurdle for shareholder proposals. The legislation reportedly would require any shareholder wishing to put a proposal on a public company ballot to own at least 1 percent of the company’s stock for a minimum of three years. That would raise the stock ownership threshold for filing a proposal at Apple, the largest market cap company, to $7 billion. This radical change could effectively shut out shareholder proposals. Congress should not micro-manage the shareholder proposal process, which the SEC has overseen well for decades, and especially not through draconian restrictions on filersRead more…

Support fair rules for electing directors.

  • The House bill would prohibit the SEC from finalizing a proposed rule to allow shareowners to freely vote for the board candidates they favor in a contested election for board seats. The SEC’s proposal for universal proxies would give shareholders voting by proxy (the vast majority of investors) the same voting options as shareholders who vote in person: freedom of choice to vote for the specific combination of director nominees they believe best serves their interests. Congress should not block SEC action on this critical mechanism for holding directors accountable to the shareholders they are elected to represent. And the SEC should adopt its proposed rule as soon as possible. Read more…
  • Shareholders should have the power to remove directors in uncontested elections, too, if they think the directors are doing a poor job. That is why CII supports a strong majority vote standard in director elections, rather than a plurality standard that permits boards to ignore the owners’ wishes when the majority of owners oppose directors standing for re-election. At the very least, there should be clarity about the vote standard the company uses. Too often, shareholders are in the dark about how votes for director are counted. The SEC should finalize its proposal to require companies to provide clear disclosure in proxy statements of the voting standard used in uncontested director elections. Read more…

Support fair shareholder votes on executive compensation.

  • The 2010 Dodd-Frank Act’s requirement that public companies offer shareholders a periodic advisory vote on executive compensation (“say on pay”) has been a winning game-changer for companies and their shareholders. Say-on-pay votes enable shareholders, individually and collectively, to express their views about CEO pay. They have sparked improved communication between boards and shareholders, and greater understanding among investors about corporate strategy and how pay incentives drive the strategy.

    While say-on-pay votes are strictly advisory and most pass by wide margins, they have led many board compensation committees to improve pay-for-performance incentives in executive compensation. Shareholders overwhelmingly support annual say-on-pay votes.

    The House bill would require companies to hold say-on-pay votes only when there is an ill-defined “material change” to executive compensation. Congress should preserve the requirement that companies hold regular say-on-pay votes and the option for this important vote to occur annually. Read more…

Support fair rules for “clawbacks” of unearned executive compensation.

  • Dodd-Frank’s requirement that companies recover (claw back) incentive-based compensation from executives when a material error results in a financial restatement is simply fair pay for fair play. Executives who reap additional pay for “hitting the numbers” should not be rewarded when they fail to hit the numbers. Congress should preserve this important shareholder protection.

Support independent proxy research.

  • Independent research helps investors cast informed proxy votes. But access to independent research is threatened by a proposed legislative provision that could drive up the cost of voting responsibly–and possibly drive proxy advisory firms out of business.

    Proxy advisory firms play a vital and necessary role in assisting pension funds and other institutional investors in carrying out their fiduciary duty to vote proxies in the best interest of plan participants and clients. Many investors purchase research from proxy advisory firms but vote according to their own guidelines.

    The House bill would give companies an incentive to try to delay publication of proxy advisor reports as long as possible, increasing costs to advisory firms and their investor clients. Congress should not interfere with the right of investors to purchase independent proxy research. Read more…

2. Promote effective disclosure and reliable financial reporting

Investors and other market participants depend on prompt, transparent disclosure of important corporate financial information. High-quality, timely disclosure gives investors a full picture of a company’s businesses and helps investors price risk. But some observers have proposed drastic cuts in corporate reporting requirements for public companies.

Support disclosure requirements that investors need to make informed investment and voting decisions.

  • Investors are the primary users of financial reporting information, and they do not view “information overload” as a problem. A CFA survey of investors found that 80 percent of respondents did not think reducing the volume of financial statement disclosure was important. Investors are more concerned with obtaining meaningful information. While eliminating disclosure overlap makes sense, regulators should focus on protecting investors—the owners of public companies—when considering appeals for reduced disclosure. Congress and the SEC should balance corporate demands for less disclosure with investors’ need for effective disclosure.
  • Hedging by executives undercuts pay incentives. Equity granted as a long-term incentive is supposed to be at risk; hedging insulates executives from risk. It also severs alignment with long-term shareholders. That’s why CII policies call on public companies to bar executives from hedging company stock. At a minimum, shareholders should be able to know if and how executives are hedging, because hedging weakens alignment of executive pay with long-term shareholder value.

    Dodd-Frank’s requirement that companies disclose their policies on company-stock hedging by executives would give investors a better understanding of who is allowed to hedge and how. But Congress should let the SEC adopt its proposed hedging disclosure rule, not gut requirements for disclosure of hedging.

3. Safeguard the independence of the SEC
Sufficient, stable and independent SEC funding is critical to ensuring the integrity of the U.S. capital markets.

Support full funding for the SEC.

  • While reducing the federal deficit and burdens on American taxpayers are vitally important, the SEC needs appropriate resources to fulfill its mission: protecting investors; maintaining fair, orderly and efficient markets; and facilitating capital formation.

    Funding the SEC does not increase the federal deficit or cost taxpayers any money. Its funding is fully offset by transaction fees from self-regulatory organizations. The SEC is the only independent federal agency that is tasked explicitly with protecting investors. Congress should give the SEC the resources it needs to police the markets effectively.

Support the SEC’s rulemaking authority.

  • Flexible rulemaking authority helps keep the SEC nimble and responsive to changing market needs. But the House bill would heap additional, unnecessary reviews on the SEC that would hamstring its rulemaking capacity and undermine its ability to fulfill its mission. The SEC would do little else but evaluate its rules.

    Shareholders are no fans of unneeded regulation. But the SEC already performs cost-benefit analyses on proposed rules, as numerous laws require (including the Administrative Procedure Act, the Paperwork Reduction Act of 1980, the Small Business Regulatory Enforcement Fairness Act of 1996 and the Regulatory Flexibility Act). While some costs of proposed rules can be estimated reliably, the benefits of regulation are often difficult to measure. Congress should not shackle the SEC with excessive cost-benefit analysis requirements.


Read More…

Universal Proxy Cards

  • The right of shareholders to elect directors to represent them is a fundamental right of share ownership. That right is especially critical when there is a contest for board seats. Contested elections are pivotal events for companies and for shareholders, since board seats, and in some cases, board control, are at stake.
  • In contested director elections, management and the dissident shareholder who is running competing candidates should provide shareholders with proxy cards that list all director nominees. Such “universal proxy” cards would guarantee that all shareholders are able to choose among all nominees to vote for the specific combination of nominees that they prefer, regardless of which slate they are on.
  • But that is not what happens now in contested elections at U.S. companies. Shareholders can choose any combination of nominees only if they vote in person at the meeting. For many retail and institutional investors, however, attending shareholder meetings is prohibitively costly and time-consuming. The vast majority of shareholders vote by marking proxy cards. And shareholders voting by proxy when there is contest for board seats generally can only vote either management’s card or the dissident’s card. They cannot “split their ticket” and vote for some nominees from each side.
  • Mandatory universal proxy cards for all contested elections would guarantee that shareholders are able to choose from among all board nominees, regardless of whether they vote in person or by proxy.
  • Opponents of universal proxy cards contend their use would encourage more proxy contests or favor dissidents. But there is no compelling evidence for either assumption.
    • The SEC’s universal proxy proposal does not eliminate the substantial cost and risk associated with waging a dissident campaign. Legal, administrative and solicitation expenses required for a dissident to wage a proxy contest can run to six or seven figures. Furthermore, the SEC proposal requires dissidents to solicit shareholders representing at least a majority of outstanding votes.
    • A Harvard study found that universal proxy cards in general favor neither management nor dissidents. Perceptions vary about which side benefits more, and those perceptions depend on contest-specific circumstances. Companies and dissidents have been on both sides of this issue. Tessera Technologies sought universal cards in its 2013 contest with dissident Starboard Value, as did Shutterfly in its 2015 proxy fight with Marathon Partners, but the companies were rebuffed. When dissidents sought universal proxy cards at Target in 2009 (Pershing Square) and DuPont in 2015 (Trian Fund Management), the companies declined. Parties in contests rarely request universal proxy cards because they assume the other side will refuse. The only clear “winner” from universal proxy cards is the investor.
  • Claims that universal proxy cards would empower special interests do not hold up, either. Ultimately, board seats would go to nominees who receive the most votes.

Shareholder Proposals

  • Shareholder proposals are an essential tool for investors, individually and collectively, to express their views to management and boards on major governance and other issues.
  • The vast majority of shareholder proposals are strictly advisory; even if they pass, companies can choose whether to act on them.
  • Shareholder proposals have encouraged many companies to adopt enhanced governance policies that today are viewed widely as best practice. For example, electing directors by majority vote, a radical idea a decade ago when shareholders pressed for it in proposals, is now the norm at 90% of large-cap U.S. companies.
  • The CHOICE Act would require a shareholder wishing to put a proposal on a company’s annual meeting ballot to own at least 1% of the stock for three years (the current threshold is $2,000 worth of stock for one year). That would raise the ownership threshold to file a shareholder proposal at Apple, for example, to $7.5 billion. At Wells Fargo, the threshold to file would be $2.6 billion. Even the largest pension funds would not be able to file shareholder proposals.
  • Current SEC rules require a shareholder to refile a proposal only if it has received at least 3 percent of the vote on its first submission, 6 percent on the second and 10 percent on the third. The House bill would raise those thresholds to 6 percent, 15 percent and 30 percent, respectively.
    • Those hurdles would also knock out many shareholder proposals. The percentage of proposals since 2000 that are estimated to fall below those thresholds are 13.32 percent, 31.5 percent, and 50.14 percent, respectively
  • Critics contend that shareholder proposals are a growing burden on companies. But the number of shareholder proposals has not climbed significantly. In recent years, it has vacillated from a high of 1,126 in 2009 to a low of 691 in 2011.
  • What has changed is that support for shareholder proposals has grown and represents a significant proportion of investors.
    • In 2016, 61 percent of proposals that came to a vote received at least 25 percent support from shareholders, up from 31 percent in 2000 (source: ISS Voting Analytics).
    • The proportion of proposals that win the support of a majority of shareholders has risen, too. In 2016, 21 percent of proposals received a majority of votes cast, up from 15 percent in 2000 (source: ISS Voting Analytics).
  • The SEC oversees a robust appeals process that allows companies to exclude proposals from the proxy card that do not meet certain procedural and/or substantive hurdles. SEC staff has a well-earned reputation for deliberating fairly. In 2013-2015, companies challenged nearly one-third of shareholder proposals and about half were omitted from the proxy.
  • Companies complain about the burden of costs “imposed” by shareholder proposals. But incurring those costs is largely their choice; it is the cost of trying to exclude the proposal from the proxy. The cost to put a proposal on the proxy ballot is de minimus.

Say on Pay

  • A periodic advisory vote on executive compensation (“say on pay”) is an essential tool for investors, individually and collectively, to express their views on a matter that goes to the heart of corporate governance and performance. It is important for boards and their compensation committees to frame pay decisions around long-term shareholder interest, and not simply respond in a vacuum to pay demands of senior managers.
  • The 2010 Dodd-Frank Act requires public companies to offer shareholders say-on-pay votes annually, every other year or every three years. Most companies hold say-on-pay votes annually, which CII and most institutional investors prefer.
  • But lthe Financial CHOICE Act includes a provision that would require public companies to hold advisory votes on executive compensation only when there is a “material change” to executive compensation.
  • A 12-year global study found significant benefits from say on pay. Following adoption of say-on-pay laws in various markets, the link between CEO pay and firm performance increased, especially at companies with poor pay practices and weak governance. Say on pay also coincided with reduced disparity between CEO compensation and the pay of other top executives, a factor associated with higher firm valuation.
  • Say-on-pay votes have been a catalyst for discussion between U.S. boards and shareholders, leading to greater investor understanding of company strategy and how pay incentives drive the strategy. Growing comfort in engaging on pay is leading to more discussion between companies and investors on a range of other issues.
  • Since 2011, when say-on-pay became mandatory at U.S. public companies, boards have been eliminating club memberships, tax gross-ups and other executive perks. They have also strengthened links between executive compensation and corporate performance.
  • Say-on-pay votes usually are not controversial, and shareholders generally have been deferential to board compensation committees, except where shareholders clearly see a problem. Each year since 2011, more than 97 percent of say-on-pay proposals win majority support of shareholders.
  • Eliminating say-on-pay votes would prompt more investors to vote against corporate directors at companies with troublesome pay practices, because they would have no other mechanism by which to signal their disapproval.

Investor access to independent proxy research

  • Proposed legislation would require proxy advisory firms to give companies advance copies of their recommendations and elements of their research and to resolve corporate complaints about errors prior to voting. It would also force proxy advisory firms to hire an ombudsman to address issues companies raise.
  • The new regulatory scheme would pressure proxy advisors to accede to management’s recommendations to minimize delays and added costs, reducing the value of the research to investors.  Moreover, the scheme might inhibit proxy advisors from even issuing research and recommendations where the subject company invokes the process and does not confirm its agreement with the resolution of issues raised.
    • It would also narrow the already-limited window for investors to cast thousands of votes during the spring proxy season.
    • It would create new barriers to entry, including yet-to-be determined registration qualification standards to be set by the SEC, in what has been a low-margin industry with few competitors, and potentially drive some proxy advisory firms out of business
  • Solutions already exist to address significant errors in proxy advisors’ reports:
    • Companies can quickly offer corrections to proxy advisor reports and communicate them to the marketplace via a regulatory filing in addition to the error correction processes undertaken by the proxy advisors themselves.
    • Proxy advisors do revise reports to correct material errors as well as to include any new information that is material. Critically, we understand that the leading providers communicate that information to clients immediately in the form of an alert to subscribers.
    • Market discipline is the ultimate backstop: advisory firms that make too many errors risk reputational damage and the loss of investor clients.
  • The proposed regulatory scheme is based on the false premise that proxy advisory firms dictate proxy voting results. There is no compelling empirical evidence to support that assumption; moreover, academic literature suggests otherwise
    • Many pension funds and other institutional investors buy and review proxy advisors’ research and recommendations, often buying research and recommendations from multiple providers, but vote according to their own guidelines.
    • For example, in 2016, Institutional Shareholder Services (ISS), the largest proxy advisory firm, recommended against say-on-pay proposals at 12 percent of Russell 3000 companies. Yet just 1.7 percent of those proposals received less than majority support from shareholders.
    • Similarly, while ISS opposed the election of 6.5 percent of director-nominees in the 2016 proxy season, just 0.2 percent failed to garner majority support.

Leading Investors Launch Historic Initiative Focused on U.S. Institutional Investor Stewardship and Corporate Governance

The Investor Stewardship Group, a collective of some of the largest U.S.-based institutional investors and global asset managers, along with several of their international counterparts, today announced the launch of the Framework for U.S. Stewardship and Governance, a historic, sustained initiative to establish a framework of basic standards of investment stewardship and corporate governance for U.S. institutional investor and boardroom conduct.

The Investor Stewardship Group represents some $17 trillion in assets under management, largely comprising the retirement and long-term savings of millions of individual investors around the world, and is being led by the senior corporate governance practitioners at institutional investor and investment management firms. At launch, the Investor Stewardship Group comprises BlackRock, CalSTRS, Florida State Board of Administration (SBA), GIC Private Limited (Singapore’s Sovereign Wealth Fund), Legal and General Investment Management, MFS Investment Management, MN Netherlands, PGGM, Royal Bank of Canada (Asset Management), State Street Global Advisors, TIAA Investments, T. Rowe Price Associates, Inc., ValueAct Capital, Vanguard, Washington State Investment Board, and Wellington Management.“

In markets around the world, there are well-established governance and stewardship codes. The Investor Stewardship Group’s goal is to codify the fundamentals of good corporate governance and establish baseline expectations for U.S. corporations and their institutional shareholders,” said Anne Sheehan, Director of Corporate Governance at the California State Teachers’ Retirement System. “The Group brings all types of investors together and enables us to speak with one voice on these fundamental issues.”The initial standards focus on corporate governance principles for listed companies and investment stewardship principles for institutional investors. Taken together, the standards form a framework for promoting long-term value creation for U.S. companies and the broader U.S. economy.

“This initiative reveals the depth and breadth of agreement amongst institutional investors,” said Rakhi Kumar, Managing Director and Head of Asset Stewardship at State Street Global Advisors. “The stewardship principles encourage all investors to take responsibility for owning the stewardship process and being accountable to those whose assets they manage. We encourage all institutional investors to join the Investor Stewardship Group to further these corporate governance and stewardship principles.

”The Framework is the result of a two-year effort by a broad range of investors. As an ongoing, dynamic effort, the Investor Stewardship Group is calling on every institutional investor and asset management firm investing in the U.S. to sign the Framework at http://www.isgframework.org.

Noted Glenn Booraem, Principal & Fund Treasurer at Vanguard, “We believe that the principles detailed in the Framework will further the productive dialogue and, most importantly, continue to drive positive change among institutional investors and the companies in which they invest. By articulating this set of shared behavioral expectations, we seek to promote our common objectives to create sustainable, long-term value for all shareholders.”

The Framework goes into effect January 1, 2018 to give U.S. companies time to adjust to its standards in advance of the 2018 proxy season.

The Framework’s principles are as follows (for additional information on these principles, please visit http://www.isgframework.org):

STEWARDSHIP PRINCIPLES FOR INSTITUTIONAL INVESTORS1:

Principle A: Institutional investors are accountable to those whose money they invest.

Principle B: Institutional investors should demonstrate how they evaluate corporate governance factors with respect to the companies in which they invest.

Principle C: Institutional investors should disclose, in general terms, how they manage potential conflicts of interest that may arise in their proxy voting and engagement activities.

Principle D: Institutional investors are responsible for proxy voting decisions and should monitor the relevant activities and policies of third parties that advise them on those decisions.

Principle E: Institutional investors should address and attempt to resolve differences with companies in a constructive and pragmatic manner.

Source: Leading Investors Launch Historic Initiative Focused on U.S. Institutional Investor Stewardship and Corporate Governance

In Trump Era, Weil’s Millstein Sees Promise for Corporate Governance | The American Lawyer

One of the great statesmen of corporate governance, Ira Millstein, answered questions about boards and the changes likely to come from the new administration in an interview with The American Lawyer, excerpted below:

How would you characterize the state of corporate governance today?

I’m very proud of how far we’ve come. Directors understand they have a job to do. Investors are seeking long term gains. But corporate governance keeps evolving. We happen to be at one of the big [moments of] change. The biggest challenge I think we have is that the country has gone rather short-term. Today we have hedge funds and insurance companies and all the rest who profit by holding stock in corporations. The stock becomes almost a commodity. They go short-term and look for faster gains, rather than invest as if they were in it for the long-term.You can’t pass a law to say don’t do that. Capitalism is capitalism. I believe in the market and I believe in capitalism. What you have to think about is, who can change this? The board is the last resort.

Do you foresee any way the new administration can impact corporate governance?

I don’t think there’s a lot they can do to change how boards operate. There is a big wave of discontent in this country. Trump caught it. The lawyers, media and banks missed it. Trump got elected by people who are not happy, because they’re out of jobs and they can’t find the work they used to be able to get. I’m now thinking that there is something boards can do about this. They should listen to the fact that, unfortunately, only a tiny piece of the American public trusts the corporate sector.I’ve been thinking about what they could do to make it easier for people who are dispossessed. If competition requires them to move out of this country, then do it, but in doing it, why not think about how you can help the people who are dispossessed. Maybe you can start educating people about what’s coming. I don’t think we can, as a private sector, continue to disregard this. It’s too important.I think the private sector has a role to play here. I’m not urging companies to set aside a bundle of money to do good. I’m urging boards to think of this as a matter of reputation. I think that is good business.

Source: In Trump Era, Weil’s Millstein Sees Promise for Corporate Governance | The American Lawyer

The Dark Side of Blockholder Philanthropy

Does the market respond unfavorably to generous CEOs? This paper from Thomas Shohfi “suggests that large philanthropists aren’t very good monitors, and that other investors realize it.”

Who would you rather own a business with, Mahatma Ghandi or Ebenezer Scrooge? Behavioral economics research points to considerable benefits of co-ownership with Gandhi, as counterparties (like suppliers, customers, and potential employees) work harder and offer better contracting terms when dealing with philanthropic principals. Understandably, these contracting parties feel better about not driving the hardest possible bargain, as the proceeds to a firm co-owned by Ghandi go at least partially towards noble causes.Corporate governance research based in agency theory, however, points to Scrooge being a major shareholder also having benefits. That is, small shareholders typically rely on the self-interest of large shareholders to monitor their shared investment. For those small shareholders, having Scrooge as a blockholder may be comforting, as he would likely be a very close monitor of managers (for his own benefit). Research in this mold has found that self-interested blockholder monitoring is particularly effective at discouraging wasteful investments in R&D, M&A, and PP&E. In this line of thinking, where the self-interest of large investors (and their associated monitoring of managers and the firm) comforts small investors, the market could view large investors’ philanthropy as troubling. If this philanthropy signals weakening self-interest on behalf of the newly charitable blockholder in question, smaller investors could worry that, as the monitor they rely on is less interested in wealth, this monitor will subsequently provide less monitoring of their shared investment. Sticking with our original analogy, this is akin to Scrooge taking a big step towards being Ghandi (i.e. Scrooge on Christmas morning). If you relied on Christmas Eve Scrooge’s preferences for wealth to keep an eye on an investment you two shared, this display of Scrooge’s new wealth preferences (giving wealth away à la Christmas morning Scrooge) could certainly have you worried! (citations omitted)

Source: The Dark Side of Blockholder Philanthropy

The Business Roundtable’s Proposal to Silence Shareholders

The Business Roundtable, once again proving that they only like capitalism when the providers of capital are silent and powerless, has released a proposal to “improve” the shareholder proposal process. They say this is necessary because

the current shareholder proposal process is dominated by a limited number of individuals who file common proposals across a wide range of companies but own only a nominal amount of shares in the companies they target. These investors are pursuing special interests — many of which have no rational relationship to the creation of shareholder value and conflict with what an investor may view as material to making an investment decision. As a result, the current process is often used to promote the self-interest of a minority of shareholders, frequently at a significant cost to the company. 

The BRT’s claims that these “improvements” are necessary are unpersuasive, including the alleged “costs” of proposals and a completely inapposite analogy to “proxy access” eligibility. A non-binding proposal is in an entirely different category than nominating a director who may be elected to the board.

If the BRT would pay less attention to the proponents and more attention to the level of support the proposals get from a wide range of investors, they would understand that this is what is referred to as a market test. It is an outrage that they want to limit even further the shareholder proposal process, when even a unanimous vote in favor is advisory only. The best way for corporate executives to reduce the number of proposals and votes in favor is to adopt corporate governance best practices and develop better lines of communication with investors.

Source: Responsible Shareholder Engagement and Long-Term Value Creation | Business Roundtable