These are some relatively quick notes that I’m sharing from the Corporate Directors Forum 2012, held on the beautiful campus of the University of San Diego, January 22-24, 2012. Since I am busy with no-action requests this proxy season (especially proxy access proposals), this post may be a cryptic… not complete sentences bt hopefully mor intelligible thN txt msgN.
The program was subject to the Chatham House Rule, so there will be little in the way of attribution but I hope to provide some sense of the discussion. There may have been changes in panel members not reflected here. I throw in a lot of opinions. Many are mine. Some are those of panelists. Some are just what I’ve heard that I hope is related. I had a great time, but I think of this forum as a great form of entertainment, as well as learning and exchanging ideas. Others prefer stock car racing. If where corporate governance is headed is your thing, I hope to see you there in 2013.
I don’t usually post photos of the venues I attend but Joan B. Kroc Institute for Peace & Justice is just to magnificent to ignore. Here are a couple of stock photos. The photo of the auditorium must have been taken from the ceiling or maybe the sound booth.
Shareholder Hot Topics
- Moderator Anne Sheehan, director of corporate governance, California State Teachers’ Retirement System (CalSTRS)
- Panelists Michelle Edkins, managing director, global head of corporate governance & responsible investment, BlackRock
- John K.S. Wilson, director, corporate governance, TIAA-CREF
- Michael Garland, executive director, corporate governance, Office of New York City Comptroller
- Brandon J. Rees, deputy director, office of investment, AFL-CIO
Proxy access. What are we going to see with regard to proxy access? Only one union affiliated proposal has been submitted and that from Amalgamated Bank. Invasion of Norges Bank with five proposals caught people by surprise, especially since they submitted binding resolutions with thresholds of 1% held for one year.
Those I have talked with don’t want to promote overuse. This year, we will all focus on the language of the proposal and the governance issues at each specific company.
Three of the panelist’s funds (CalSTRS, TIAA-Cref, NYC) supported the amicus brief filed on proxy access. That brief expressed the opinion that private ordering is not a substitute for universal access. Some think all companies should have it…. substantial long-term institutional investors should have the tool but not short-term investors. Private ordering is not ideal. Good companies will move in that directions but those who resist it… that’s where it is most needed. It should be a universal right.
Some other institutional investors and many directors take the position that you vote off directors if there is a problem but you don’t nominate them. Much of the arguments center around the assumption that there are good shareowners and bad shareowners. Why shouldn’t shareowners have the right? You still have to get the vote of the other shareowners. The majority, it is argued, is likely to do the sensible thing. Proxy access doesn’t assure a seat on the board.
The threshold of 3% held for 3 years is extremely difficult to meet. The largest coalition of public funds recently was that challenging the Massey Energy board… 11 funds but they didn’t even have 3%. Investors are not interested in using proxy access frequently but in having it there as a right, as a backdrop to strengthen boards. If getting pressure for short-termism directors can then say, I’m subject to a vote by my long-term shareowners. Maybe it will help give them some backbone.
Excessive pay is a consequence and a symptom… we can’t see what goes on inside boards. BlackRock and other large funds often write to companies. “We would like them to talk to us.” Yes, proxy advisors are important but companies have skewed to get the support of proxy advisors not funds, some argue. Many large funds have policies but they are a starting point. If a company does something unconventional, many funds we will lend support — if you explain why it is beneficial and how it is important for long-term shareowners. “Talk to us in advance.”
Of course, dialogue will not guarantee support and company’s can’t talk to all funds. There is a myth perpetuated that funds we are at the opposite ends of spectrum from boards. Untrue. We all want the company to succeed. There was a plea for companies to distinguish between shareowners and analysts. Management jumps when analysts say boo. Maybe they should do a little checking with funds as well.
In an example provided, one company’s director who didn’t receive a majority vote was then elevated to head governance committee. Some boards show very little regard for the opinions of the shareowners. Apparently, the company got deep into further trouble. Don’t ignore the vote. Shareowners are trying to give boards information.
We are entering the second year of say-on-pay (SOP) votes. There were many 20% pay increases last year. Yet, the vast majority SOP measures got passed. However, many leading companies made changes on tax gross ups, golden parachutes, perks, etc.. Those companies that didn’t get overwhelming votes need to reassess. Union funds are targeting companies that got less than a 70% vote in support. They are targeting tax gross ups, accelerated equity awards, golden parachutes and the like. Want to see what shareowners find outrageous? Take a look at footnoted* for the latest find in SEC filings. Boards were advocating 3 year votes but the marketplace demanded annual. At least that question seems settled for now.
We’re making a difference but it is at the margins, say the governance professionals. They are pleasantly surprised that there is now more engagement. Votes against compensation committees went down last year as most funds took a wait and see on SOP. If companies are not responsive this year, directors will be opposed this year if the company didn’t take action. Pay is important. CalSTRS sent out 100 letters and got good response. See their Lessons Learned.
Quality of conversation on pay is now much better. That was the objective of SOP. Jury is out as to wether or not pay practices improve. We erred on the side of deference because it was the first year. Over the next few years standards will rise. Best to talk in to funds in the fall, when you are putting together your pay plan, rather than after. Look holistically regarding alignment with shareowners. Quality of disclosure about why compensation is the way it is should be high. When funds vote against, it is usually because there is an issue they can’t explain.
Comparison with Europe. UK has had SOP for eight years. Engagement yes. Yet, pay continues to go up while value of stock has not. They have become more thoughtful. Unfortunately, pay is complicated. BlackRock and some other funds were not in favor. If board judged poorly on how to pay then they vote against board or the compensation committee. They don’t have the inside information, so don’t feel they no how pay should be structured but they can see after the fact. They supported a 3 year cycle thinking one year is busy work and doesn’t reflect long-term thinking but other shareowners have spoken.
Total is compensation important. Incentives have an effect as well as too high of pay. CEOs pay is set in a bubble. Pay that is too far out of alignment reduces employee morale, especially in times of shared sacrifice. CEO to worker pay ratio disclosure may be coming in 2013. Yes, it is a hot button regulatory issue… Chamber criticizes cost but companies have not suggested changes to reduce cost… hoping it will go away.
NYC funds are doing more around claw-backs due to restatements, excessive risk-taking, unethical behavior. Clawbacks for ethical and reputational harm. Make sure there is an up the ladder component to your clawback. Even if the person didn’t engage in unethical behavior or excessive risk-taking, they may have benefited. Tone at the top is important. Boards should disclose when clawback tools are exercised. Funds are sensitive to privacy issues but there needs to be some transparency. The funds started with banks with regard to risks and compliance but are now expanding to other industries.
Political contributions is another hot topic. 100 resolutions are now headed for or are on company ballots. We are looking for transparency about contributions and process. Board effectiveness is being assessed, succession planning… is it on the board agenda?
Integrating corporate governance factors into the investment strategy question. Most funds still don’t seem to be using them for picking stocks but most funds appear to be largely indexed.