Wayback: Five, Ten and Fifteen Years Ago in Corporate Governance

Mr. Peabodys WayBackMachine

Mr. Peabody and Sherman prepare to go back in time to visit corpgov.net 5, 10 and 15 years ago.

Five years ago in Corporate Governance

In the year-end reflections two contributing factors deserve more attention. First, “prophetic warnings” from religious groups on the dangers of subprime loans via shareowner resolutions. Second, a call from Sanford Lewis for boards to revoke implicit policies of “don’t ask, don’t tell” with regard to liability issues. (Two Overlooked Lessons From the Financial Crisis)

“Firms that pay their CEOs in the top ten percent of pay earn negative abnormal returns over the next five years of approximately -13%. The effect is stronger for CEOs who receive higher incentive pay relative to their peers. Our results are consistent with high-pay induced CEO overconfidence and investor overreaction towards firms with high paid CEOs.”  (CEO Greed Doesn’t Work for Shareowners)

Intel Corp. recently announced they will no longer hold annual shareholder meetings. Instead, they plan to host shareholder forums, or “virtual shareholder meetings.” In 2000, Delaware enacted legislation allowing corporations to do exactly this. Arrogantly, that state’s legislators granted shareholders no say in the matter, leaving the decision solely to the discretion of corporation’s entrenched boards. (Guest Commentary From Glyn Holton: Emergency at Intel)

Ten years ago in Corporate Governance

Barbara J. Krumsiek, CEO of Calvert Group, noted that in 2004, Calvert filed seven resolutions with companies, asking them to diversify their boards of directors and contacted 154 companies that had no female or minority directors. 31% have since added at least one woman or one minority to their board. Calvert released its Women’s Principles, a code of conduct for corporations, in June. Last week, Dell Inc. and Starbucks Corp. said they would implement the principles. Update: Krumsiek was honored as the recipient of the 2014 SRI Service Award at The SRI Conference. (my coverage)

Pay without Performance: The Unfulfilled Promise of Executive Compensationwas the best book published in 2004 in the field of corporate governance. Lucian Bebchuk and Jesse Fried focus on one aspect of corporate governance, executive pay, and clearly demonstrate that many features of executive pay are better explained as a result of shear managerial power, rather than arm’s-length bargaining by boards of directors. After thoughtful analysis, they find “systematic use of compensation practices that obscure the amount and performance insensitivity of pay, and the showering of gratuitous benefits on departing executives.”

In “The Other Pathway to the Boardroom,” the result of a survey of 1,012 senior managers at 138 major companies, James D. Westphal and Ithai Stern of the University of Texas, found that “people feel a natural obligation to help those who have ingratiated them.” In a twelve month period, challenging the CEO’s opinion on a strategic issue one fewer time, complimenting the CEO on his insight two more times, and doing one personal favor increased by 64% the likelihood of an appointment to a board where the CEO was already a director. (Suck Up and Move Up,Fast Company, 1/2005) The other pathway to the boardroom ought to be sucking up to shareholders through a record of proven performance.

We have been advocating reform in this area since 1995. Finally, the Financial Accounting Standards Board (FASB) published FASB Statement No. 123R (revised 2004), Share-Based Payment, a revised standard that requires most companies to recognize the cost of stock options on their books by the middle of next year.

A new quantitative study by Moody’s Investors Service fround that companies with stronger takeover defenses have riskier credit profiles. Moody’s research finds that more defenses are associated with higher downgrade rates, lower upgrade rates, and higher default rates.

Fifteen years ago in Corporate Governance

In the year-end reflections two contributing factors deserve more attention. First, “prophetic warnings” from religious groups on the dangers of subprime loans via shareowner resolutions. Second, a call from Sanford Lewis for boards to revoke implicit policies of “don’t ask, don’t tell” with regard to liability issues…

Money for Nothing: How the Failure of Corporate Boards Is Ruining American Business and Costing Us Trillions (Hardcover))(2010) by John Gillespie and David Zweig begins with a story familiar to just about everyone on the globe — corporate and economic collapse brought on by greedy CEOs. The authors look behind the headlines to reveal and document the systematic failure of corporate boards who are supposed to look out for shareowner interests but are still too often picked by the very ones they are supposed to advise and monitor… the CEOs. They discuss how companies spend enormous sums of shareholder money to fight off reforms, either directly or through organizations like the US Chamber of Commerce or the Business Roundtable. According to the authors, “corporate boards remain the weakest link in our free enterprise system.”

Last March I heard Nell Minow on Intelligence Squared… a good show that could be even better with more focus. Here’s an idea for Gary Lutin’s Shareholder Forum, the Investor Suffrage MovementMoxyVote or Broadridge Communications — prior to the annual meeting hold a debate between resolution proponents and corporate representatives. Or, pit the Chamber of Commerce against The Corporate Library, the Business Roundtable against the Council of Institutional Investors. Have a panel of academics, knowledgeable on the subject critic presentations, provide their votes and their reasons — then give verified shareowners and the general public an opportunity to vote on the resolutions.

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