Do Independent Directors Curb Financial Fraud? The Evidence and Proposals for Further Reform

Cindy A. Schipani, University of Michigan, writes on the Harvard Law School Forum on Corporate Governance and Financial Reform:

One would have hoped these SOX-created independent watchdogs [independent directors] would reduce the incidents of securities fraud and result in better governance. Yet, our analysis of the number of class action settlements for claims of financial fraud for settlements greater than $10 million shows no significant decrease since the adoption of SOX. We presume that settlements of over $10 million indicate serious concern of the board evidencing the viability of the suit. The dollar amount for analysis was chosen to reduce the incidence of strike suits in our data. Thus, the lack of a significant decrease in these claims seems to indicate that it may have been unreasonable to expect independent directors — who almost by definition are not privy to the day-to-day affairs of the firm—to have enough incentives or information to ferret out complex, and likely hidden, fraud.

Moreover, and perhaps even more troubling, our data also shows that independent directors themselves are not necessarily immune from the temptations of financial fraud, particularly with the gains to be had from backdating stock options. SOX’s reliance on them may simply have transferred oversight responsibilities from compromised executives to compromised and ill-informed board members.

An alternative approach to the SOX mandates would have been to empower the shareholders directly and enable them to exercise a greater degree of direct oversight over the managers.

This supports our view that no director can be truly “independent” unless elected through a robust nomination system that includes proxy access and a majority voting requirement — as well as a robust system for enforcing fiduciary obligation in voting institutional shares in the interest of beneficial holders.

Source: Do Independent Directors Curb Financial Fraud? The Evidence and Proposals for Further Reform

Brazil: Vale minority shareholders nominate candidate to board | Reuters

Brazil’s mining company Vale SA on Wednesday said Aberdeen Asset Management PLC, on behalf of minority shareholders, nominated Isabella Saboya to join the company’s board.

Vale said in a securities filing that Sandra Guerra was also nominated by the minority shareholders as a substitute board member for Saboya in the election scheduled for April 20, 2017.

Source: Vale minority shareholders nominate candidate to board | Reuters

Wells Fargo Accounts Probe Lets Board Off Easily But Proxy Advisory Firms Disagree – TheStreet

Ron Orol writes in The Street:

A report on Wells Fargo’s (WFC) fake-accounts scandal commissioned by the bank’s independent directors is far less critical of the company’s board than two studies issued last week by influential shareholder advisory firms. Instead, the 113-page analysis released Monday of how employees working to meet the San Francisco-based bank’s ambitious sales targets created more than 2 million unauthorized credit card and savings accounts over a five-year period lays much of the blame with former CEO John Stumpf and former community banking chief Carrie Tolstedt.

According to the report board “members believe they were misinformed” (note use of the passive voice, a telling indicator of a failure to accept responsibility). ISS sees it differently:

A report days earlier from Institutional Shareholder Services, the most influential shareholder advisory firm in the U.S., was less forgiving of the board. The firm recommended that investors vote against 12 of Wells Fargo’s 15 directors, including the four members who oversaw the investigation.

Members of two board subcommittees “failed over a number of years” to provide sufficient risk oversight at the scandal-plagued lender, the ISS report said, and the board overall failed to implement an “effective risk management oversight process in a timely way” that could have spared the bank’s reputation.

In our view, the compensation plan alone, rewarding the number of transactions instead of the quality of transactions, is sufficient reason to replace the entire board.

Source: Wells Fargo Accounts Probe Lets Board Off Much Easier Than Proxy Firms – TheStreet

Equilar | The Gender Pay Gap for Board Chairs

Companies are increasingly electing women to their boards, but the number still pales in comparison to male representation at public corporations. According to the Equilar Gender Diversity Index, 15.1% of Russell 3000 director seats were held by women at the end of 2016, an increase from 13.9% in 2015. However, in 2016, men accounted for 96.3% of the non-executive board chair positions in the Russell 3000, vs. 3.7% for women. This statistic clearly illustrates the gender disparity among board leadership positions, particularly with board chairs, as Equilar noted in a recent study.

Furthermore, there is pay gap between men and women when it comes to the top positions on these boards. A separate Equilar study looked at the median board fees for non-executive board chair positions for the same group of companies—the Russell 3000—and found a gap in pay between males and females across percentile ranges. At the median, female chairs received $234,934 in total compensation as disclosed in the director compensation table of proxy statements filed for fiscal year 2015, more than $10,000 below the median for men at $245,143. This difference was notably smaller at the middle of the study sample. At the 25th and 75th percentiles, male board chairs earned approximately $30,000 and $46,000 more, respectively.

Source: Equilar | The Gender Pay Gap for Board Chairs

How Are Public Company Boards Transforming Themselves? : NACD Blog

NACD has an excellent summary of changes boards are making to respond to new challenges, including more focus on cybersecurity, more use of search firms to find new directors, and:

Information Rich, Insight Poor Boards receive much information from management but express concerns about the quality of that information. While directors noted an average increase of 12 hours for document review in preparation for meetings, roughly 50 percent of respondents noted a glaring need for improvement in the quality of information provided by management.

Increased Shareholder Engagement Boards are increasing their shareholder engagement, but their level of preparedness to address activist challenges is uneven. This year, 48 percent of respondents indicate that a representative of their board held a meeting with institutional investors over the past 12 months, compared to 41 percent in 2015. Only 25 percent of respondents have developed a written activist response plan, which may be a critical tool to effectively address a forceful challenge from an activist.

Source: How Are Public Company Boards Transforming Themselves? : NACD Blog

Conference Board: Proxy Advisory Service Firms on the Role of the Director

The Job of the Corporate Director – Perspectives of Proxy Advisory Firms

Wednesday, March 1, 2017

Mandarin Oriental, 1330 Maryland Avenue, SW Washington, DC 20024

Complimentary event, registration required.

Please join us for the first in a year-long series of roundtable discussions to examine what different stakeholder groups see as the “job description” for public company directors. In this first discussion, we will examine the role and expectations of directors from the perspectives of the leading proxy advisory firms.

The role of the corporate director has evolved over time, and the job has become more demanding in recent years. Structural changes in our capital markets have contributed to this. Major corporate crises and the reforms in their aftermath have also impacted what is expected of boards. The Governance Center is undertaking a year-long examination of the range of expectations of public company directors. Examining this from the perspectives of key stakeholders in the marketplace, we hope to develop a construct for how we think about the job of a director and analyze what that job entails in different situations. As with all Governance Center events, this is a special, invitation only meeting.

Scheduled List of Speakers:

  • Martha L. Carter, Ph.D., Senior Managing Director, Teneo Governance
  • Kevin E. McManus, Vice President and Director of Proxy Services, Egan-Jones Proxy Services
  • Maureen O’Brien, Director, Corporate Governance, The Marco Consulting Group
  • Katherine Rabin, Chief Executive Officer, Glass, Lewis & Co. (invited)
  • John Roe, Head of ISS Analytics, Institutional Shareholder Services (invited)
  • Howard Sherman, Executive Director and Head of Corporate Governance Business Development, MSCI ESG Research
  • Douglas Chia, Executive Director, Governance Center, The Conference Board

Register to attend.

CEO-Chairmen now in the Minority as Split Role Model Gains Ascendancy | Chief Executive magazine

Large companies that combine the CEO and chairman roles now count in the minority, marking a new milestone in American corporate governance history that’s been more than a decade in the making.The potential tipping point comes as companies face increasing investor scrutiny about the independence of boards and executives, possibly fanned by the recent bogus-accounts scandal at Wells Fargo that led to the departure of previous CEO and Chairman John Stumpf.

”Of all Fortune 500 companies, 52% now separate the positions, according to a new analysis released this week by Willis Towers Watson. That’s up from 32% a decade ago.

Source: CEO-Chairmen now in the Minority as Split Role Model Gains Ascendancy | Chief Executive magazine

PRI 50/50 Climate Project Webinar on Climate-Competent Boards

The PRI-50/50 Climate Project Webinar on Climate Competent Boards, moderated by VEA Vice Chair Nell Minow, is now available for replay.  It features:

  • Anne Simpson, Investment Director, Sustainability, California Public Employees’ Retirement System (CalPERS)
  • Kirsty Jenkinson, Managing Director and Sustainable Investment Strategist, Wespath Investment Management
  • Rakhi Kumar, Managing Director, Head of Corporate Governance, State Street Global Advisors
  • Michelle Edkins, Managing Director, Global Head of Investment Stewardship, BlackRock
  • Edward Kamonjoh, Executive Director, 50/50 Climate Project


The growing need for boardroom climate competency – Pensions & Investments

Richard Ferlauto has an excellent article about the vital importance of climate expertise on boards of directors.

Despite the anticipated rollback of climate related governmental policies such as the Environmental Protection Agency’s Clean Power Plan and limits on methane emissions by the Trump administration, investors still need to understand the risks that climate change poses to their portfolios. Unequivocal disclosures and boards equipped to manage and govern climate risk will be more important than ever. Now, however, it appears investors will not able to rely on federal regulatory standards or policy interventions to manage climate risk related to greenhouse gas emissions and the emphasis on fossil fuel production. They will be left to their devices to understand the very real financial impacts that climate issues could have on their portfolios.Regime change in Washington does nothing to affect the science and reality of increased climate risk and the need for long-term strategic planning that accounts for potentially crippling financial, ecological and technological disruptions at the companies most susceptible to climate risks.

Source: The growing need for boardroom climate competency – Pensions & Investments

Three Steps Boards Should Take to Monitor Sustainability

Evan Harvey, Nasdaq’s Director of Corporate Responsibility, defines sustainability across three critical areas:

Environmental (“Issues we readily associate with sustainability”) — Emissions, carbon usage, recycling, waste water, water usage, etc.

Social (“How you treat people”) — Benefits, programs, human resources, policies that attract a diverse and innovative talent pool, etc.

Corporate Governance (“The structure of your corporation”) — Rules, checks & balances to ensure shareholder needs are being met, etc.“ Sustainability is everything that helps your company sustain itself—its people, its profits—well into the future. It’s a long-term approach. Anything you can’t see in a financial statement that contributes to that long-term mission is sustainability.

Source: Three Steps Boards Should Take to Monitor Sustainability