Directors Forum 2017 in San Diego was billed as Directors, Management, & Shareholders in Dialogue. Sure, all well and good, but I went there also hoping to learn more about President Donald J. Trump. He is the subject of a huge portion of tweets, Facebook posts and much of the news, so I expected Trump to also be the center of attention at Directors Forum 2017.
I know what those in my immediate circles in Sacramento are saying. Clinton got 58% of the vote to Trump’s 34%. My news silos are much the same. At Directors Forum 2017 were directors and managers from companies, large and medium (the focus is rarely on small companies, although the Forum does better than most). Investors representing trillions of dollars in assets were in the room and on stage. What was the speculation on Trump and his impact on what we do?
As usual, the Directors Forum was under Chatham House Rule, so I’m mostly providing a little more background and some commentary on the presentations. Others may have drawn different conclusions.
Directors Forum 2017 – Shareholder Hot Topics: What’s on their radar for 2017?
- Aeisha Mastagni, portfolio manager, corporate governance, CalSTRS (Moderator)
- Kenneth A. Bertsch, Executive Director, Council of Institutional Investors
- Allison Bennington, Partner, General Counsel, ValueAct Capital
- Darren Robbins, Partner, Robbins Geller Rudman & Dowd LLP
- Gwen Le Berre, Director, Proxy & Governance, Charles Schwab Investment Management
This is just about always my favorite panel at the conference, probably because I submit about 50 shareholder proposals myself each year and look forward to learn what others are doing.
- If I read the panel right, their consensus is that SEC rules to mandate universal proxy ballots are likely to move forward, regardless of Trump’s election. For background, see opposition statement from US Chamber of Commerce and others. Discussion of both sides. Why CII supports universal proxy ballots.
- There was some discussion around short-termism by hedge funds, although the only hedge fund represented on the panel was ValueAct Capital, which has only had one proxy fight in 17 years out of 40 engagements. They are offered a board seat(s) at about half the companies they engage with. In my opinion, hedge funds are a mixed bag, with ValueAct being one of the best for investors concerned with the long-term. For a good discussion, see Is There A Fix For Short-Termism?
- Majority voting still hasn’t taken hold at small and mid-cap companies. CII is doing a letter writing campaign. FAQ: Majority Voting for Directors. They also point to the need for “consequential majority voting.” If you lose a majority vote, you go off the board within 90 days (Microsoft policy). This could be my next area of focus after proxy access.
Consequential majority voting requires an uncontested nominee to receive more “for” votes than “against” votes in order to be elected and establishes a reasonable point at which an unelected director may no longer serve on the board. It is the only approach that places ultimate authority in the hands of the company’s owners. In this regard, it is the only approach with “teeth.”
- Business risk is increasing from environmental and social issues, including reputational risk (such as Mylan and Wells Fargo). Director’s in best position to reduce downside from reputational risk. Board members too confident in experts – have to ask and get questions answered in plain English. One action might be automatic clawbacks in specified circumstances. VW, Wells, Valeant – think about how to avoid. Questioning hard, bringing in your own experts, don’t show undue deference to CEO. Time To Update Risk Factors In Your Annual Report.
- CII issued a guide to shareholder engagement on cyber risk. The guide is intended to enable shareholders to ask appropriate questions of boards to gauge whether companies are taking proper steps to mitigate cyber risk. The guide poses the following five questions:
- How are the company’s cyber risks communicated to the board, by whom and with what frequency?
- Has the board evaluated and approved the company’s cybersecurity strategy?
- How does the board ensure that the company is organized appropriately to address cybersecurity risks? Does management have the skill sets it needs?
- How does the board evaluate the effectiveness of the company’s cybersecurity efforts?
- When did the board last discuss whether the company’s disclosure of cyber risk and cyber incident is consistent with SEC guidance?
- Will proxy access be used by hedge funds. No, failed case is testimony to that. Many hedge funds do not usually hold for three years before a contest. They will still need to solicit and will want to at least threaten control. Shifting standards – 20% or 2 really supported; lifting the cap above 20 members for proxy access, not so much. See CII’s Proxy Access by Private Ordering.
- Index funds are adding to corporate governance staff. Will there be a limit to the indexers? Yes, because opportunities for active managers increase as indexing increases because of mispricing.
- Special meeting rights generally supported. Say on pay has shifted shareholder rights. Even if Dodd-Frank rolled back would we have still have push for shareholder rights.
- Compensation – more from subjective factors to more objective standards. Sometimes those objective standards can change though, so can be problematic. Pay factors too complex. Some felt say on pay might move to triannual.
Discussions around increased power of Republicans due to election of President Trump and winning both houses of Congress:
- Will the SEC raise the resubmission limits for shareholder proposals? That seems more likely than raising the ownership threshold, although the Business Roundtable (BRT) is calling for many ‘reforms,’ in part, to lock out three individuals (including me) and those focused on social issues. See Fixing the Shareholder Proposal Process. The Business Roundtable wants the ownership requirement increased from $2,000 to 0.15% at large companies and 1% at smaller companies, with a holding requirement of three years, rather than one. As an example, filers would need to own over $1M in Apple. In addition the BRT wants more direct involvement by Commissioners in replacing or overseeing the no-action process.
- Cost-benefit analysis on SEC rules. A bill aimed at paralyzing the SEC with additional requirements on cost-benefit analysis passed the House 243-184 on Jan. 12, mostly along party lines. It would also require the SEC to revisit all of its rules every five years to determine whether they are “outmoded, ineffective, insufficient, or excessively burdensome” and alter them accordingly. As a former regulator in California, we faced similar provisions. Our department ended up contracting with the University of California for economic analysis, adding sunset clauses to all rules and doing perfunctory reviews. The process cost a fortune and was probably a factor in raising industry fees.
- Proxy advisors are still under attack, based on a lot of falsehoods pushed by the media.
- See also, US Corporate Governance: Will Private Ordering Trump Political Change?
Sorry about the photo quality. I always have trouble when the bright screens are in the background. More about Directors Forum 2017 coming in Part 2, next week.