TK Kerstetter Wrong on Board Disclosure

TK Kerstetter wrong on board disclosure proposal at the SEC. TK Kerstetter is the president and CEO of Board Member Inc. a privately held publishing, database, research, and conference company focused on corporate board issues and governance trends. Corporate Board Member is sent to all corporate directors of public companies on the NASDAQ, NYSE Euronext, and NYSE Amex stock exchanges. Usually, the publication contains excellent advice. A rare exception is Kerstetter’s Director Qualification Disclosure Will Prove Lame. (The Board Blog, 12/9/09)

TK Kerstetter Wrong on Board Disclosure: Kerstetter’s Logic

Kerstetter argues the SEC’s recent proposal (File No. S7-13-09) to require disclosure of board and nominee experience and qualifications is

just another burden to America’s public companies and another deterrent to any private or foreign company wanting to list in the ole USA… the pendulum has swung too far on this proposal [and will lead to] mass over analysis of each director on the merits of his or her proxy qualifications bio, which could lead to additional criticism of the nomination process or even to board ineptitude lawsuits. 

According to Kerstetter, there is no correlation between who is a great director and “how meaty their bio looks or how accomplished they might be in their profession.”

Any corporate secretary, well-versed securities or proxy lawyer, proxy solicitor expert, or good public relations guru will be able to make a director bio or qualifications paragraph look fairly impressive.

In short, Kerstetter appears to think, if a director has been nominated or renominated by the board, they must be the best available candidate. Kerstetter is living in the past, when Soviet style elections presented a single list of candidates that would be elected even if they only got one vote each. 

TK Kerstetter Wrong on Board Disclosure: What Others Say

Strength and resiliency in nature come from diversity. That fact is increasingly recognized by boards and investors. Let’s take a quick review of just a few comments to the SEC on the proposal Kerstetter finds so bothersome:

  • CalPERS: “It is valuable if a company puts forward their case to support why a nominee is qualified to serve on the company’s board and how their skill-sets, experience and background complement the team and thereby contribute to the board’s effectiveness… boards will also benefit from input from a diverse team which can challenge the “group think” which undermines the ability to challenge and innovate… Shareowners need to understand how the board evaluates its own performance, and where responsibility lies for carrying this out and ensuring progress on measures for improvement.
  • Florida SBA: “We find a discussion of why and how a certain member would be important to the board to be a welcome addition. Extending the disclosure to any public boards served in the past five years… However, we encourage the Commission to consider a longer disclosure period or no time limits for certain criminal offenses such as fraud.
  • Calvert: “We encourage the Commission to require companies to disclose whether they consider diversity in the nomination of director nominees. Such disclosure would give investors confidence that nominating committees are searching beyond the traditional circles to consider fresh and independent viewpoints.”
  • U.S. Chamber of Commerce: “We support the enhanced disclosures regarding director nominees contained in the Proposals.
  • NACD: “Whether freshman or long-serving director, we believe that experience and education should be reported so that those shareholders making judgments on a director candidate’s capability to serve are adequately informed.”
  • CII: “Recent governance trends among large U.S. companies, such as electing directors by a majority of votes cast and declassifying boards, have made director elections more meaningful… the disclosures… should identify an individual’s specific skill set, such as manufacturing or public relations expertise, any relevant experiences or accomplishments in that area of expertise and how those skills would benefit the company. We believe that this more fulsome disclosure, on an annual basis, would help investors determine whether a particular individual and the board’s composition overall are appropriate for the company… Recent studies suggest there is a direct correlation between diversity and corporate financial performance.”

We are undergoing a soft revolution in governance, with corporations becoming more responsible to their shareowners. Boards are beginning to ask their large institutional investors for their input on board nominees. Many may be doing so simply to learn of concerns. However, as such communication opens up, companies learn. If they fail repeatedly to take advice, they run the risk of a challenge that might start with a withhold campaign and then escalate to proxy access and even a contest for control. On the other hand, companies that work to establish relational investors who pass on good ideas are likely to generate more wealth. 

A recent survey of by Corporate Board Member and PricewaterhouseCoopers found that

58% of the survey respondents think investors should be able to communicate with the board at any time, a big increase over the 37% who felt that way in 2008. Even more impressive, 82% say shareholders should be able to ask the board questions at the annual meeting, versus 52% last year. (The Buck Moves Into the Boardroom, Corporate Board Member, Fourth Quarter, 2009)

Lowell W. Robinson (a director with International Wire Group and the Jones Apparel Group) was quoted in the same issue saying, “I still cling to the belief that if you don’t like a company, sell your stock; otherwise, trust management.” He’s a director elected by shareowners, yet his loyalties are obviously more to management than to shareowners.

I like T. Boone Pickens Jr’s response to this kind of arrogant perspective. “Most of the time management’s attitude toward shareholders is ‘If you don’t like the way we run things, sell your stock.’” “That’s like the gardener telling the estate owner, ‘If you don’t like the way I take care of your property, sell it and move out.’ That’s not the way the real world works.”

TK Kerstetter Wrong on Board Disclosure: Vote Him Off the Island

Mr. Kerstetter appears to be in the camp of directors like Mr. Robinson, who feel no obligation to appeal to and represent their own shareowners. Unless there is evidence that demonstrates their statements to be temporary aberrations, I’d vote them both off the island if given a chance.

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