These are some fairly raw notes from the June 2013 ICGN Annual Conference in New York City. I was unable to attend the second day but the first day was great. Don’t miss the 2014 ICGN Annual in Amsterdam, 16-18 June.
TIAA-Cref is cautiously optimistic. They reviewed 36 large financial companies, urging long-term value creation. The demographic trend is undeniable; our population is aging. We are living longer with lower fertility rates. There is an unsustainable imbalance re supporting retirees. 40% spent on SS, medicare, medicaid. (“The US government is like an insurance company with an army,” James Carville said at a more recent conference.) The public sector faces a crisis of unfunded liabilities. Planning for financial security falls more and more to individuals who aren’ t financial literate. (For example, see How America’s 401(k) Revolution Rewarded the Rich and Turned the Rest of Us Into Big Losers.)
Financial services firms place dead last in trust of industries. We need to raise corporate governance standards. Recommends Robert Shiller (Yale) Finance and the Good Society. Creating the architecture or fulfilling social goals. We must present a long-term focus as universal owners. Critical to participate as active owners. Not monolithic. We often agree on the outcomes but not the pathway. Quiet vs noisy activism.
Lipton revolutionized the way we think. 80% of stock in largest companies held by institutional investors (II). Activist hedge funds can mobilize II (holds 4-10%) but think they have a better path. Would be good if they were interested in the long-term. Points to need for ongoing engagement with largest shareowners to ensure long-term focus. Must set strategy to also focus on short-term to insure against push by activists. Need to bring independent directors along in visiting investors.
Independence difficult. Must act independently or run the risk that company won’t be acceptable and they can be removed. Regulators expect directors to understand how to weigh risk, not just the integrity of who is presenting the data and plan. Composition of boards has changed dramatically to address time constraints. Difficult to serve on more than one committee. Not infrequently the result of activism is sale of the company. Selling the company – advise board to retain known financial advisor (credible) to give a report to the board with respect to proposal and options. If no reason to sell, mount a defense. 120 day notice bylaw re intent to nominate directs.
Dell directors decided they could take virtually unlimited time to review options. Increased use of media. The major audience is 25 institutions with controlling interests. Two advisory services “control” 15-25% of the vote. Must take into consideration how press and public opinion will play with proxy advisors and those 25 shareowners. For many years, fund proxy analysis was very thin. Hard to get to portfolio managers, shielded by proxy departments. BlackRock created proxy department that reviews proxy governance but also company strategy. Decisions not made so much on best practice procedures but substance of business strategy.
More concerned with experience than skin in the game. If major investors, directors concerned with their views. But if they want to do a transaction with the company, that’s where they really need to deal with the fairness of the transaction. Procedural fairness, majority of outside shareowners must approve. Independent committee and majority of shareowners approving.
Re founders, their companies have been organized to retain control. Works fine if they retain skills and drive. History of dual-class companies is not that attractive. Not in interest to keep control for 2, 3, 4 generations. But not really a problem that corporate governance is capable of dealing with. ISS established in response to greenmail. Began to address staggered boards, supermajority. All have come to pass at large companies except separation of chair and CEO and proxy access. Meaningless in light of short-slate and responsiveness to activists. No evidence it improves company performance but is one desire from 1985 that is still pushed.
Diversity of mindset and experience. The market will determine if shareholders agree with activists. Poison pill – 30 years later. Good thing? Yes, didn’t take any rights away from shareholders. It is a tool that directors have and shareholders control the board. Allows them to get a better offer. Shareholders have benefited from fate not being decided in 30 days. He’s not about to abandoned his baby.
Plenary 1: Engagement – a triumph of activity over action?
Engagement by shareholders is touted by some as the solution to the problem of underperforming companies. Others argue that it is doubtful that there is a sufficiently significant body of shareholders willing to engage with management and boards to make the difference. The evolving nature of the process means that there is no consensus on how it is best done, what the rules of conduct should be and who should bear the cost. And all too often it is portrayed as a battle of the titans – shareholder vs. company – rather than a frank but constructive dialogue about corporate performance. What kind of engagement is valuable to companies? How can shareholders measure the return on their engagement efforts? How would things change if engagement was mandatory?
Takuya Fukumoto, Director, Corporate Accounting, Disclosure and CSR Policy Office, Economic and Industrial Policy Bureau, Ministry of Economy, Trade and industry, Roy Katzovicz, Chief Legal Officer and Investment Team Member, Pershing Square Capital Management, L.P. Harlan Zimmerman, Senior Partner, Cevian Capital. Moderator: Eliot Spitzer, Former New York Governor
Is exit too easy in our capital markets? Is the cost of voice so significant that it isn’t worth the effort. culture of exit has failed. Misattribution when you don’t realize people have figured out the right path, so may not always return calls from management. Reluctant engagement. Reputation, legal risk to activism. Rising expectation of voice in US, Europe, Japan (15% already experienced activism). Mixture of active voice and passive voice. Time needed to respond to voice. Feedback from exit is really not heard and isn’t an option for indexers, especially since companies don’t access capital very often.
Hedge fund short-term strategies have dried up and they are now primarily pitching to Institutional Investors (II). IIs won’t work against their own interests. IIs have very limited resources devoted to corporate governance, so they must pick and choose battles. Real activism requires cooperation. Japan 30% foreign ownership and more active. Study by Bebchuck. Holding period two years but mutual funds turn over 110% per year. Even after activists leave, targeted companies outperform for 3 years. There is no pop because there is no bubble downside. Just because price goes up in short-term doesn’t make it a bubble that will burst.
Japan, increasingly open to voice by institutional investors. Never seen II that say they are only pursuing the short-term. Several examples of collective engagement offered up, including those not involving hedge funds. BofA example of public policy campaign. Collective action problem is defining the issues. Why so hesitant to push? Proxy rules limit to 10 people before you have to file SEC docs. If you are diversified, energy isn’t worth it because you don’t get enough of the upside. Activity not only good for specific company but also good for the system .
Nordic countries. In Sweden shareowners actually nominate board so there is no CEO king behind the drawbridge. Compensation isn’t big issue in Japan because it is relatively low. Compensation not only source of reimbursement…. reputation is important. Campaigns have generally involved underperforming companies and initiatives to split chair/CEO. Some mutual funds are active but that is made difficult by conflict of interest. Some not pushing for change themselves but are going to activists with ideas of who they should engage The trend among large diversified IIs is to vote “the right way.”
Germany five year terms. Turnover in Sweden and Finland not high because shareowners “hire” the directors. Norges Bank joined nomination committee of Volvo… shows development of institutional investors as owners. Richard Bennett – absolute returns to meet liability (pensions). How contribute to absolute rather than relative. Pension bubble will be huge. Expectations may have been appropriate. Promised too much. Need to solve collective action problem with or without activists. Overweight in companies you are trying to fix. Not just protect but create vole. Focus portfolios.
Japanese funds investing more in equities, rather than bonds. ETFs low cost. Depends on societal pressures. Threat of populism is long-lived. Shareowners different than intermediaries. Custodians more problematic (?). Fear of concentration of too much power. Healthy mistrust of wealthy people. Short history of Financial Euphoria (book)
The different approaches taken to improving the current gender balance on boards and to developing the pipeline of women available to become board directors as well as senior executives reflect a number of cultural, legal and governance differences. This panel discussed the drivers of and constraints on change in relation to the US, UK and Australia and reflected on lessons that can be transferred across borders.
Ann Byrne, Chief Executive Officer, Australian Council of Superannuation Investors, Sacha Sadan, Director of Corporate Governance, Legal & General Investment Management, UK, Anne Sheehan, Director of Corporate Governance, California State Teachers’ Retirement System. Moderator: Doug Chia, Corporate Secretary, Johnson and Johnson
ASX companies should have at least 2 women on boards. (ACSI position). 80% of men but only 50% of women directors have prior experience on ASX boards. Fantastic mentoring program. In the UK things have mored along. Chairmen agree diversity is a good thing… at least they do so in public. 3 years ago 3.5% directors were women; now 17%. Disclosure is better. Voluntary approach.
Not about board experience; its about diversity of skills and perspective. 2% of FTSE directors are women 21% are non execs. Similar to Norway. The pipeline is poor. Chairmen get it but do CEOs? Perhaps we need a 12 step process. If so, we’re now at acknowledgement. Performance benefits are key. Credit Suisse & Catalyst presented the evidence. Put together database of women who are board ready. Writing to companies. Seeking refreshment policies around term limits/tenure. Good discussion to have. If you don’t free up seats, you won’t get diversity. Boards need to look beyond CEO board members. Look at CFO, HR, counsel, and those with other skills. Companies should make sure women are in the pool of candidates to be considered. Facebook was used as an example of a company that since being criticized put on two women on its board.
We need to get the sell side involved. Portfolio separated from governance is a problem. When Australia women directors dropped from 12 to 9% that got a great deal of attention. When Facebook IPO cam out there was not one woman on its board and CalSTRS sent letter early on expressing concern. They were holding though VC fund. Took on life of its own, going viral. Universal support. From a business imperative, it was so idiotic.
How do we measure success? Has to be measured in a number of ways. Should’t have to raise with every board we meet. Maybe we need a few boards with all women. Vibrant discussion on boards. We recommend against less renumeration reports when women are on board because they tend to change the tome and the pay excesses. Success would be ICGN doesn’t have a panel on women in the boardroom… when it becomes accepted practice. New appointments – are they 50/50? That’s why it is a board evaluation process.
UK, 9 year assumption of independence does bring change. Skill matrix is important to create. Mentoring program important to introduce women into the board circle. CalSTRS has filed proposals to seek diversity as part of criteria for nominations. NACD report on the importance of diversity on boards. Boards need to be strategic… looking out 3-5 years. Frontier Communications put in term limits, which will insure turnover. Not enough NEOs other than CEOs encouraged to be placed on boards. We will be voting against non-diverse boards starting in 2015.
Catalyst – Setting the Record Straight. Half directors don’t have CEO experience. Generational diversity? CalSTRS – age diversity included. Skill sets may require more than 30 year old but they may be qualified if customer base in 20s and 30s. Age is an important aspect. Executive issue. KPI should tie 30-40% women execs. Need to know diversity plans of execs. HR aspect – women in the pipeline. Issues like maternity leave dropping years of service. Italy 2012 quota. It works. Obligation by board and shareholders to have 1/3 of board with the gender less represented (almost always women). Quotas unlikely in US. Too few diversity committees.
Stanford research calls for professional directors to accelerate appointments. Business schools teaching corporate governance gives another pool. Global Board Ready Women on Linkedin. “Board Ready Women” need improved induction process. Qualifications depend on company. Industry experience, governance knowledge, best qualified. Diverse Director Database originated by CalPERS and CalSTRS and now at GMI is building every day.
Lessons in leadership: leveraging the micro messages around you.
Your professional effectiveness is influenced by the environment in which you work, the culture and leadership. Being aware of the micro messages around you and how to send and receive them drives behavioral change which can have a significant impact on your effectiveness and the influence you have on others.
Stephen Young, Senior Partner of Insight Education Systems, LLC, USA
The power of small. The subtle things we do are more revealing than assumed. Insight Education Systems. separate requisite skills from impact side. Direct influence on performance of others. What you say is not as important as what they hear. Connection to bottom-line. Oprah speaks to the mainstream. Subtle messages about how we perform. We use denote while we connote. Managing the elephants while the ants walk by. #1 obstacle is ego/pride… not in the best interest of client. Task completion… create list of tasks that need to be completed to do the job… ends up limiting. Need to create sense of engagement. Micro-measuring. Micro-inequities. Subtle semiconscious – global, usually unintentional. Changing the inflection transforms meaning.
“I didn’t say she stole the book.” Emphasis on different words in the same sentence changes everything about what it says. Micro-messaging: The Power of Small. Taking responsibility and ownership through use of “I” “my” etc.
The independent board is meant to provide robust and objective oversight of, and counsel to, management. Has the pendulum swung too far towards independence at the expense of other credentials? Does independence necessarily equate to effectiveness? How can shareholders tell from the outside if directors are independent-minded? What are the most important credentials.
Independent directors meet alone without management in the room. Citigroup – board reconstituted after crisis. Governance processes reviewed. Informed by discussion with regulators and others. Chair/CEO roles split. Separate risk committee. Several committees meet monthly. Human dynamics more important than structure. Independence from an oversight point of view in executive session. Equally important is independence of thought. Independent of mind can be much different than normally defined. Need both. Correlation between tenure and independence. Global diversity, experience in industries you service. Cultural competency. Important to have gender and whatever off the checklist. Freshness. Experience is important to understand history but also need to bleed in fresh thinking…. need the balance. Citi has mandatory retirement age of 72. Plenty of examples of people overstaying their welcome.
Fair to disclose board composition matrix. Valid question. We have close to a matrix in proxy. Group that compliments each other. Trying to supplant board members. Collaborative process of consensus between management and board. Need to consider CEOs opinions. If that doesn’t work then need a new CEO. If you make a mistake, you’re stuck. Has to be a collaborative process.
Board refreshment process. Number of years vs age?
Follow the money: A question of ethics
A moving presentation from one of the world’s leading humanitarian writers and thinkers on the ethical challenges facing fund managers by Dr Samantha Nutt, Founder of War Child North America and #1 Bestselling Author of Damned Nations and interview by James Shinn, Lecturer, Princeton University and Teneo
My stakeholders live in poverty. Only stock they’ve traded is on four legs. Common ground. Discussed non-financial reporting. Shareowners and customers deserve more. When do ethical considerations trump financial concerns? What’s more important to shareholders? Relativistic nature. Profit shouldn’t come at any price. Yet, no agreement on precise definitions. Only way is careful consideration of the evidence. Ethical dimension. Two quarters changed her life. Assessed health needs in Somalia for UNICEF. Fundamental challenge was access to services…. example of mother with child was detained for two days. Automatic rifles were more available than clean drinking water. 200M AK47 without including ones we don’t know about and small arms $1B. Cost is less than admission to Disneyland. 600 rounds a minute. 90% come from 5 permanent members of UN. $400B per yr. Doubled since 9/11.
Small arms don’t recognize borders. Almost every pension fund has investments in arms manufacturers. Those who are selling should investigate who weapons go to. Divestment, investor coalition Arms Trade Treaty might be an effective antidote. Acts of terrorism don’t stimulate economic growth. Strong correlation between rape and mining operations. Need reports in line with OECD guidelines. Divestment is tricky. Internationally binding legislation (EEC mandating EU incorporate nonfinancial disclosures). Labor policies, safety standards, deaths, children working, anti corruption standards, relationship with NGOs, complaints. Stakes are high but higher for those in conflict. Make the effort.
- Read the stories at least every day. Make it part of your routine.
- Establish consistent approach to examining non-financial disclosures; collaborate
- Articulate a commitment to giving back. Build a relationship to see where money goes.
- Never lose sight of the stories.
Unions mandating screens at public pension funds. Approach has been voluntary. All carrot, no stick.
I missed the following:
Plenary 4: Sustainability reporting: initiatives and innovations
A major barrier to ESG integration in investment decision-making is the lack of meaningful disclosure by companies. There are a number of initiatives to address market weaknesses in this area, including the development of reporting frameworks and investment benchmarks or indices. But is there sufficient demand to warrant adoption? Who will drive the change beyond the early adopters? What lessons have they learned?
Kevin Bourne, Managing Director, FTSE Group, Evan Harvey, Director of Sustainability, NASDAQ OMX,Jerome Lavigne-Deville, Director, SASB Standards Development, Barbara Pomfret, Senior Environmental, Social & Governance (ESG) analyst, Bloomberg
Moderator: Anne Simpson, Senior Portfolio Manager, Investments Director of Global Governance, CalPERS
Plenary 5: Director-shareholder engagement – passing fad or the new normal?
Arguably the relationship between board directors and shareholders is the crux of the corporate governance equation. Shareholder expectations of directors are changing and as part of that more direct engagement is likely. What are the pros and cons of by-passing management to engage directly with board directors? Given the demands on their time, which investors should directors prioritize for engagement? How should such engagement be monitored and reported? What are shareholders expecting from engagement and is that same expectation held by directors? How will that change over the next five years?
Amra Balic, Head of Corporate Governance and Responsible Investment EMEA, BlackRock, Julie Daum, Partner and Co-Practice Leader of the Board and CEO Practice, Spencer Stuart, Peggy Foran, Chief Governance officer, VP and Corporate Secretary, Prudential Financial, Abe Friedman, Managing Partner and Founder, CamberView Partners, LLC
Moderator: Holly Gregory, Weil Gotshal & Manges LLP
Closing Keynote Address by Indra K. Nooyi, Chairman & CEO, PepsiCo and interviewed by Michelle Edkins, Managing Director, Global Head of Corporate Governance and Responsible Investment, BlackRock
Introduction to 2014 ICGN Annual Conference by Rients Abma, Executive Director, Eumedion and Erik Breen, Vice Chairman, ICGN