#ICGN16 was the hashtag for tweeting about the 2016 annual meeting of the International Corporate Governance Network held in San Francisco, June 27 – 29th, 2016. Check Twitter for additional posts to #ICGN16. What follows are a few of my rough notes from the conference. Accuracy for details isn’t one of my noted strengths, so I’m tempted to say the notes are for entertainment purposes only but I do hope readers will get some sense of the proceedings.
#ICGN16: PreConference Rethink of ‘One Share, One Vote’
Even before the ICGN16 (International Corporate Governance Network annual conference) met in San Francisco last month, two prominent former board members kicked off lively debate by proposing a radical rethink of what has been a guiding principle for many in the movement for good corporate governance. Peter Clapman and Richard Koppes argued in a WSJ opinion piece that longterm shareholders should have greater voting rights.
…the shareholder-rights agenda has been largely achieved. Only 10% of S&P 500 boards are classified today, while some 90% are elected by majority vote. Only 3% have a poison pill in force. More than 35% of S&P 500 companies have adopted proxy access…
Activists increasingly demand board representation to implement their agenda, often meaning that short-term investors take and quickly relinquish boards’ seats. Boards frequently settle with activists out of fear of losing a proxy battle—or worse, winning a Pyrrhic victory. (Time to Rethink ‘One Share, One Vote’?)
While there has been substantial progress, most corporations remain relatively democratic-free zones. Almost 44% of small-cap companies have classified boards and 63% of them don’t have majority vote standard. Only a minuscule proportion of companies have adopted proxy access and the vast majority of such bylaws can’t be implemented because they cap the number of participants to a group of twenty. According to the Council of Institutional Investors:
…without the ability to aggregate holdings even CII’s largest members would be unlikely to meet a 3% ownership requirement to nominate directors. Our review of current research found that even if the 20 largest public pension funds were able to aggregate their shares they would not meet the 3% criteria at most of the companies examined. (Proxy Access: Best Practices)
Activists play an important monitoring role that is unlikely to be adopted in a meaningful way by indexed funds, which tend to be very long-term holders. Index funds compete with each other mostly on the basis of cost. Every dollar they spend monitoring or engaging portfolio companies is a dollar out of the earnings. Every dollar of improved corporate performance must be shared with competitors owning the same stock. See my series inspired by Gilson and Gordon, The Agency Costs of Agency Capitalism: Activist Investors and the Revaluation of Governance Rights, which discusses why most mutual fund managers don’t effectively monitor corporate governance. For a counter argument regarding indexed funds read Passive Investors, Not Passive Owners.
Want fewer short-term shareholders? Impose a very small financial transactions tax. More reading: Tenure Voting and the U.S. Public Company, March 1, 2016 by David J. Berger, Steven Davidoff Solomon and Aaron Jedidiah Benjamin. Certainly a good topic of discussion at #ICGN16.
#ICGN16: Opening Keynote by SEC Chair Mary Jo White
Securities and Exchange Commission Chairman Mary Jo White addressed the #ICGN16 via video, beginning with the role of the SEC in requiring disclosure and reciting some of the same signs of progress noted by Clapman and Koppes above.
While specific disclosures can certainly provide more transparency and further certain goals, practices that are designed solely to satisfy disclosure requirements may not meaningfully address the underlying issues that are at the root of your priority. As the Global Reporting Initiative’s (“GRI”) Reporting 2025 Project Analysis on Sustainability put it, commenting on improving sustainability disclosure: “Despite the increasing transparency, change towards a sustainable economy is progressing slowly.
Still, transparency is the main tool the SEC has, so the SEC will continue to ensure the disclosures needed so that investors can make informed decisions, such as influencing corporate behavior to ensure sustainable corporate value.
With regard to board diversity, White noted:
Minority directors on boards of the top 200 companies on the S&P 500 have stagnated at 15% for the last several years, and the percentage of these companies with at least one minority director actually declined from 90% in 2005 to 86% in 2015. In 2009, women held only 15.2% of board seats at Fortune 500 companies and that number has only risen to 19.9% in the past six years; 73% of new directorships in 2015 at S&P 500 companies went to men. At this rate, the GAO has estimated that it could take more than 40 years for women’s representation on boards to be on par with men’s. The low level of board diversity in the United States is unacceptable…
To respond to these issues, I announced in January that I had directed the SEC staff to review our rule and the extent and quality of disclosures that have followed, with an eye toward revising the rule if there was a need. And, I can report today that the staff is preparing a recommendation to the Commission to propose amending the rule to require companies to include in their proxy statements more meaningful board diversity disclosures on their board members and nominees where that information is voluntarily self-reported by directors.
On non-GAAP financial measures, White said MD&A, earnings releases, and investor presentations often include non-GAAP financial measures, allowing management to better explain operations more fully. However, “In too many cases, the non-GAAP information, which is meant to supplement the GAAP information, has become the key message to investors, crowding out and effectively supplanting the GAAP presentation.”
Last month, the staff issued guidance addressing a number of troublesome practices which can make non-GAAP disclosures misleading: the lack of equal or greater prominence for GAAP measures; exclusion of normal, recurring cash operating expenses; individually tailored non-GAAP revenues; lack of consistency; cherry-picking; and the use of cash per share data. I strongly urge companies to carefully consider this guidance and revisit their approach to non-GAAP disclosures.
Her final topic was sustainability. “Our rules and guidance are clear that, to the extent issues about sustainability are material to a company’s financial condition or results of operations, they must be disclosed.” Despite difficulties in determining what should or must be disclosed, “In 2015, 75% of the S&P 500 companies published a sustainability or corporate responsibility report and over 90% of the world’s 250 largest companies did so.”
A number of organizations have also published useful guidelines or are developing sustainability disclosure frameworks and metrics. The GRI Sustainability Framework, for example, is now being widely used by companies to prepare their sustainability reports. Another organization, the Sustainability Accounting Standards Board (“SASB”), is developing voluntary sustainability standards for approximately eighty industries in ten sectors. …
We understand, however, that there are those who do not believe that our materiality-based approach to sustainability disclosure goes far enough. That is one of the reasons we included a discussion of the topic in our recent Regulation S-K Concept Release and solicited input from investors and others on whether we should consider line-item disclosure on certain issues. I encourage you to share your perspectives and give us your input on whether changes are needed, and if so, what specifically should be changed.
She concluded her remarks to #ICGN16 attendees by encouraging investors seeking to alter corporate behavior to use our “stewardship and influence” to bring about change.
More coverage to come. Also check Twitter for additional posts to #ICGN16 by others,