These are some relatively quick notes that I’m sharing from the Corporate Directors Forum 2012, held at the University of San Diego, January 22-24, 2012. This post may be a cryptic… incomplete sentences bt hopefully mor intelligible thN txt msgN or Tweets.
Chatham House Rule prevailed, so little here in the way of attribution but should provide some sense of the discussion. Many opinions below are those of panelists. Some were from the audience. Some are just what I’ve heard that I hope is related. Attend next year and you’ll get a more complete picture.
What’s So Bad About Poison Pills, Staggered Boards and Chair/CEOs, Anyway? (2 vs 2)
- Moderator Frank Partnoy, George E. Barrett professor of law and finance; director, University of San Diego Center for Corporate and Securities Law
- Steven A. Rosenblum, partner, Wachtell Lipton Rosen & Katz
- Marc Rome, VP, corporate governance and assistant corporate secretary, Chesapeake Energy Corporation
- Lisa Lindsley, director, capital strategies, American Federation of State, County & Municipal Employees (AFSCME)
- Scott Zdrazil, first VP & director, corporate governance, Amalgamated Bank
A hammer can be dangerous but can also be used constructively; same with poison pills. The issue that keeps coming up is power balance. Investors are looking for accountability. Are the tools used responsibly?
If unpopular, they are often voted down, but a vote is not always given.
With adoption of a pill there is usually an immediate drop in value. It is an entrenchment device. The mindset is disturbing… so little trust from so many shareowners. Clearly, some takeovers are not good. There are market factors beyond board control. Efficient market theory discounted.
Companies can face opportunistic bids that are underpriced. Having a pill allows a board to get a premium. Yes, it can be misused but the focus should be on having a board that operates well. Companies mostly don’t have pills on an ongoing basis. If you adopt without approval, ISS will recommend against your board. Rather than get attacked they adopt off the shelf when needed. There’s too much of a knee-jerk reaction to pills.
Staggered boards. Nabors is a poster-child. No, staggered boards create value. Leave tools in place and address if they are abused. No, it is a matter of core rights. It is about shareware franchisement. Annual elections allow responsible evaluation of directors.
It is all about what the appropriate balance is between shareowners and boards. Boards should not ignore governance votes by shareowners but shouldn’t automatically adopt either. A sector downturn or in the larger economy can put boards in a position of weakness with regard to tools when defenses are removed. You elect representatives to boards. They’re in the best position to evaluate strategic arguments. Just because something is in fashion it doesn’t mean it is right. Relevance is in the takeover context.
Chair/CEO. Different arguments? Relates to tone at the top, ability to ask questions. Issue of governance. Can have good directors with or without. Mandating does little. Issue is a red-herring. Doesn’t think it would fundamentally change…. seems like a check the box approach.
If the board is exercising oversight, they can’t do that objectively if led by same person. If you want independence chairs you own us and eventually it will happen but there is no large academic evidence in support. We don’t make decisions based on momentum but the market may be catching up. So far, it is still being done on a case-by-case basis.
If there is no strong voice on board, then a lead director or independent chair is good… or if the CEO is just too young to lead the board. One-size fits all doesn’t fit. Again, we are facing the “governance-industrial complex” dictating fashion. Doing it case-by-case is the best approach.
If pills are good tools, why not put them to a vote of the owners? Directors face challenges from all sides. Those from shareowners too frequently handicap boards. The best innovative companies will stay private and will have less access to capital. There is a push to exempt companies less than $1 billion.
That’s a false dilemma. Does the cost of SOX justify result? Some say yes. Feels like attack from shareowners. Do shareowners engage first? Don’t have time to engage. Our experience if that if we do, companies will stall. We’re open to dialogue once the proposal filed. The evolution is toward engagement over last 20 years. Boards didn’t respond. Therefore, file. Companies now are more receptive but mostly to the top 20 holders. However, there may be more beneficial engagement if you don’t announce as soon as you file.