Below are some relatively quick notes I took at the Corporate Directors Forum 2013, held on the beautiful campus of the University of San Diego, January 27-29, 2013. See materials. The program was subject to the Chatham House Rule, so there will be little in the way of attribution below but I hope to provide some sense of the discussion.
I throw in a lot of opinions. Some are those of panelists, some are mine, and some came from the audience. I learned a few things, renewed acquaintances and made some new ones. If corporate governance is your thing, I hope to see you there in 2014.
First, a quick shout out to Linda Sweeney, executive director, Corporate Directors Forum; Larry Stambaugh and Michael J. Berthelot, program co–chairs; James Hale and Anne Sheehan, meeting co–chairs, as well as all the others who made CDF such a great experience, including valets, cooks, wait staff, student volunteers and many more.
“Shareholder Hot Topics” Moderator: Margaret M. Foran, chief governance officer, VP & corporate secretary, Prudential Financial Inc. Panelists: Edward J. Durkin, director of corporate affairs, United Brotherhood of Carpenters & Joiners of America. Alan MacDougall, founder & managing director, Pensions Investment Research. Consultants Ltd. (PIRC)(UK). John K.S. Wilson, director, corporate governance, TIAA–CREF. Scott Zdrazil, first VP & director, corporate governance, Amalgamated Bank.
Began discussion with interesting stories of companies who attempted to work with shareowners and those who didn’t. One of the examples of a stand-offish company no longer exists. Advice to companies: Don’t go in with a PowerPoint, we’re here to educate you attitude. Shareowners are not there to micromanage but neither do the wish to be complacent. Dialogue around risks and reasonable disclosure. Shareowners do their homework. Have someone there who knows the issue, not just the talking points. Timing: better dialogues occur in the fall or off-season, not just before the vote. Be prepared to listen. TIAA-CREF talks to 500 companies a year. They choose who to talk with more based on relationship of pay to performance, rather than just performance. 3-5 yr TSR. Years of engagement on compensation.
The fact that options weren’t expensed set the groundwork for focused activism. Certain practices bear scrutiny regardless of performance. Not fans of say on pay. Will vote at 2600 companies, so there is some reliance on best practices. Every plan should be distinctive. Difficult to review all the specifics in a few months. Too much time and energy on exec comp. Everyone wants to talk to you now. In past, it was complete silence. Come full circle. Put out proposal to change to triennial vote. No takers. Dialogue around that. Companies heard shareowners loud and clear.
One of the big issues is the Harvard declassification initiative. Promotes short-term thinking. Director evaluation is a team sport, because we have a hard time evaluating individual members. Time and resource question. Investment decision separate from ownership decision. That needs to be rationalized. Ownership and governance should work together. Buzz in corporate world. Time to convince shareowners is before the vote, not after.
In UK 65% didn’t understand their own comp plan. System is broken. Looking at 46 different issues related to comp plans. Disconnect between how you think about exec pay vs other employees. Increased communication and dialogue… that’s the only benefit. Impossible to keep on top of the metrics. Complexity is well beyond rocket-science. Relate to the company business model. Some have chosen not to read explanation. Looking at pay and business model based on 5 year track record. Market fragmenting but 3-4 shareowners still own 10-15% of stock (FTSE). That is where the long-term dialogue should focus.
Kay Review – need more significant investor forum. Shareowner vigilance. Comp wasn’t broken in the 1960s. Pay aligned with interest of shareowners over long period of time. Don’t have to do a deep dive. Quality of research improving. Company must explain and why… that can bring level of comfort. Want to align board/CEO interests with shareowners.
Proxy access. 3 models last year. 3/3/25, 1%/1, and my retail focused one. Coalesced around 3/3/25. HP agreed to put forward. Won at Chesapeake and Nabours. Investors will support at challenged companies. Earth didn’t stop rotating. Concerns were overblown. Tool intended to be rarely used. This year still in period of incubation. Disney/Hermes 3/3/25. Will there be support at company with stronger shareowner value? Dialogue most important. Beyond top 10 or top 20. Titanic analogy. Majority vote, independent board leadership, conflict of interest if chair is not independent. Discussion totes for goats. Get comments from shareowners and votes in return for totebags. Discussion around some shareowners believing no CEO should earn more than the President of US. Yet, 98% of pay plans approved. Confidence level is 12% (CEOs or Boards?) vs politicians 13%.
Keynote Speaker: Richard K. Davis, chairman, president & CEO, U.S. Bancorp Industry won’t be there without their banks and leverage. Companies don’t have their own money. 98.575% of loans have to be paid back. Banks that failed had much higher tolerance for defaults. Risk committees at banks are now the tough committees. Durbin amendment reduced cost of plastic. Collins amendment. Volcker rule. Never before has politics overseen regulation like it does today. Banks are bineg asked to be risk free. New normal. Global crisis. Banks are at the center. Leverage got to high. Legislation is chilling. Congress criticized as asleep at switch.. now too active. Ben Bernanke – Unusual Uncertainty (QE2). From politics to regulators.
No future in “nothing goes wrong.” That’s like praising the goalie, not the striker. Need good offense and defense. Don’t provide a service you wouldn’t provide to grandma, since not everyone likes their parents (humor). Didn’t do subprime. Companies and especially banks are profoundly cultural. Can’t win if your don’t do it honestly. Don’t lie because it is hard to remember.
Think like fiduciaries who have gone from baggage handlers to pilots. Tolerance higher for missed baggage than for not landing the plane properly. Banking has changed form lost luggage to life-threatening. If you have a loan and missed a payment. Now one person is assigned to you and back-up assigned to them. Intensely more triple checking. Board must prove a credible challenger of management. Must show evidence of active ownership. Needed for regulators. Have to show your work, instead of just getting the math problem right.
Bankers are ahead of the game. Risk is our business. Credit risk, market risk, operational risk, reputational risk. Committees for all. Business practices, legal – no more we’ve done this way forever or everyone is doing it. Need to ask if we should we still be doing it. Gave an example to how company was wiring money to a specific bank, instead of any bank, even when wiring to that bank costs the customer. They changed it and saved money for their customers, even tough it cost the company money. Yes, we will make less money but it will be better and more predictable. The bar has changed. Make it right.
Whatever a leader does now sets up what he/she does later – and there is always “a later.” Find the violations and fix them going forward. Should learn from feedback. Don’t preclude innovation. Pivot to win like in basketball. Banks can be too complicated to run. Audit committee comes in and explains risks to risk committee. Also invites in regulators to hear the issues… where we might go wrong. Leverage of Goldman went from 25 to 12 ratio. When you are trading the house’s money, how connected is that to mission? (unless your mission is just making money) We’re 95% done losing banks from the crash. Banks are finding their way to natural partners. Holds joint committee Audit/Risk meeting once a year.
“Boardroom Hot Topics” Moderator: Anne Sheehan, director of corporate governance, California State Teachers’ Retirement System (CalSTRS) Panelists: Marsha J. (Marty) Evans, rear admiral, U.S. Navy (Ret); director, Office Depot, Inc., Weight Watchers International & others. Abe Friedman, managing partner, CamberView Partners; former head of corporate governance, BlackRock & Barclays. Michele J. Hooper, director, PPG Industries, Inc., UnitedHealth Group; former audit chair, Target Corporation. Mark Preisinger, director of corporate governance, The Coca Cola Company.
Shareholders now viewed as vital partners. Found it valuable to speak to shareowners and ISS. Followed up with institutional investors to get more specific insights. Caveats – directors may need reminders of FD requirements before such meetings. They are often carefully orchestrated. Management and board is joined in trying to engage with shareowners. All shareowners not alike. Hard to do it all just before the vote. Hard to balance hedge fund activists with long-term shareowners. Both enrich the discussion. It takes a while for directors to get comfortable talking directly with shareowners. Usually starts with shareowners to head corporate governance officer. Who’s best to address particular issue? Nominating committees have shared lots of criteria for skills assessed. Don’t share individual names for nominees but share skill sets and advisory committee brings additional people to company’s attention. Article in NACD’s Directorship current edition by Michele Hooper and Anne Simpson, How to Engage Shareholders When Selecting New Directors.
We are still in the early stages of board/investor engagement. It is only very recently that large institutional investors started demanding the attention of boards. 5-10 years ago, it was cutting edge. 1950s mutual funds really began the trend to a more diffuse shareowner base. 1985 the Council of Institutional Investors was created. With Enron things really begin to shift. Many new requirements. SOX and Dodd-Frank with say-on-pay. Institutional investors are interested in talking. Don’t expect to talk to board on everything but rare issues (such as pay), that’s when they are asking for discussions. Why not just concentrate on top 10? Because those below can be very influential (iceberg).
If responsible for going out and talking with owners, the governance officer must have access to directors. It is often a full time job to stay attuned. Activist vs responsible engaged owners. Money flowing into strategy. We will see more and more. Corproate governance functions have grown and become more robust. Talent is upgrading. Expertise is higher and experience is longer. We are all becoming more sophisticated, so it becomes more important for companies to engage.
CEO jobs are different today. They are spending less time on the business of the business and more on Congress, shareowners, etc. Some activist investors are more challenging than others but we learn from all. The quality of work in preparation for engagement on both sides is light years ahead of 5 years ago. Short-term activists can’t do anything without getting the support of long-term shareowners. ValueAct Capital is a $10B player but you don’t read about them trying to embarrass companies. They take 5-10 year positions. IT governance and platforms are increasingly important.
Another issues is diversity of the current directors. As need for skill sets change, how quickly do they change directors. How do they refresh? Who is going to volunteer to step down? Companies are backing away from age-limits. Term limits are an option. Most like idea of evaluations but are they doing individual evaluations robustly? A possible UK import that might be a good approach is that at 9 years, board members would no longer be considered to be independent directors. It forces the question in a slightly less arbitrary way. Some don’t agree with it. Some who meet “independence standards” never are. It wouldn’t be a cure but I certainly like the idea.
CDNA has become more difficult in telling the story. Move by ISS around what is realizable pay is an important issue (see Equilar report). Comparability with data on peer groups. If you can’t tell the best story, something is wrong. Might lead to more formulaic process. How do you demonstrate that you challenge management? There is an iron curtain between board meetings and shareowners. Boards do challenge… talk about alternatives. What did we look at and reject, but you won’t find it in our minutes. Process is your friend when you get into trouble. Governance reviews on a periodic basis. After due consideration… proof is in the pudding. Persomance can only mask bad management for so long.
“Striking the Balance: When Do Shareholders Need to Push for More? When Do Companies Need to Push Back?” Moderator: Ann Yerger, executive director, Council of Institutional Investors. Panelists: Daniel M. Bradbury, former CEO, Amylin Pharmaceuticals, Inc.; director, Illumina, Inc.. Michael Garland, assistant comptroller, environmental, social & corporate governance, Office of NYC Comptroller John C. Liu. Marc Rome, VP, corporate governance and assistant corporate secretary, Chesapeake Energy Corporation. Anne Simpson, senior portfolio manager, global equities, California Public Employees’ Retirement System (CalPERS). Glenn W. Welling, founder & chief investment officer, Engaged Capital, LLC; former managing director, Relational Investors LLC.
Cited Weil Alert on Preserving the Balance in Corporate Governance, which I think set a good tone. Shareowners shouldn’t manage; companies should understand their shareowner base. Regulations should be viewed as a backstop, not a first option. Shareowners look to independent directors to ensure accountability. They should be the ones facilitating conversations. If you don’t implement what does make sense, your company will soon be out of balance. Don’t continuously gloss over shareowner proposals.
Balance suggests no movement but we’ve had wide swings. Corporate governance has experience something of paralysis, with shareowners being unable to hire and fire directors, with insufficient disclosures and policies that left shareowners out of decision-making. Too many boards have had a self-selection bias that fails to address a changing environment. Disgruntled investors attract the attention of activist investors who look at themselves as part of the solution. They are experts at creating value for owners or they are out of business. CalPERS stopped its policy of “name and shame” a few years ago in favor of a more discrete approach. They generally won’t file a proposal unless they have exhausted other engagement options.
Just a quick note, I highly recommend the January/February edition of NACD’s Directorship; always relevant and informative, the issue that kicks off the proxy season is even more so. I was happy to see some of my own thoughts concerning virtual-only shareowner meetings and proxy access included.