This is first time I’ve attended a Council of Institutional Investors (CII) semi-annual conference. My report from first day events can be found at CII Fall 2014 Conference: Part 1. Okay, I’m getting more cryptic in my second day of notes. Sorry, I’m not willing to take the time to clean them up. Watch out for possible misstatements. Don’t bet on anything I write. There are no fact checkers or even grammar editors at corpgov.net.
Welcome CII Attendees
Jay Chaudhuri, Chair, Council of Institutional Investors. Chaudhuri briefly discussed the movement of corporate governance into the mainstream. Activists are increasingly engaging and being engaged by their target companies. The IPO market is once again booming with 162 in first 1/2 of year. Alibaba raising $21.8B.
Morfit practices quiet diplomacy. Average holding 3-5 years. Looks for great businesses that have been mismanaged and/or misunderstood. Average holding 15 companies. In most, they are the largest or in top three but not in case of Microsoft. Talk your way onto the board and help it. That seems to be their strategy of quiet diplomacy.
Concentrates a lot of effort on exec compensation. Gain sharing 20% of profits above some threshold. Not helped by complexities of tax laws. Likes comp tied to increasing TSR, mostly above 30%. Jiggered pay incentives away from showing up to performing. Even less pay for underperforming the market.
Need to take into account restructuring. Adobe switched from software purchase to licensing. Short-term hit on profits but much better for long-term. Behavior was constrained by the way compensation was configured.
Financial planning and analysis. Dashboard data drives board discussions. ValueAct reorients discussion from being around speculation to being around facts. Better analytics before and after. Allocated expenses and R&D into the divisions. Why R&D dollars into lowest growth products may be right strategy but at least you have a conversation based on facts.
Valeant. Too much money chasing too few ideas. Many had delusions of grandeur. R&D was destroying value. Overbuilding capacity. Zig while everyone else zagging. Reinvesting in a select group for geographies Lotions and potions mixing. 40% compounder since 2008. Believer in strategy. Move yardstick of measurements to 3-5 years, with a hurdle rate 10%-15%. Have directors buy shares with their own money and have them hold it until 2 years after they leave. Once a year you forecast out 3, 5, 10 years. Also look backwards.
Incentivized management to buy stock with their own money. For every share they bought they got a equal 5-year RSU or got shares based on growing share value above a hurdle. For much more on Morfit and ValueAct Capital, see my previous reports:
- Shareholder Activism: Stanford Rock Center for Corporate Governance Series – Part 1 of 3
- Shareholder Activism: Stanford Rock – Part 2 of 3
- Shareholder Activism: Stanford Rock Center for Corporate Governance Series – Part 3 of 3
IPO and Silicon Valley Governance
Anne Chapman, VP of Capital Research and Management, Capital Group; F. Daniel Siciliano, Faculty Director, Arthur and Toni Rembe Rock Center for Corporate Governance, Stanford Law School; Anne Simpson, Senior Portfolio Manager & Director of Global Governance, California Public Employees’ Retirement System; Moderator: Donna Anderson, VP & Global Corporate Governance Analyst, T. Rowe Price.
IPOs are the most active they have been in three years. But there has been an increase in dual-class shares and other problematic practices. Deal size has more equalized. 2014 more frequently saw stock price also rise in second day. Increase in independent chairs but big increase in dual-class shares. More declassified boards but vast majority of IPOs classified. Is Jobs Act facilitating? Investors are getting less information under Jobs Act.
Has interest in continuum. Governance is fundamental. Will be raising issues. Still buy but will be pushing for good corporate governance. If you have a high degree of trust, you are willing to let those poor practices play out for a while. Listing standards should come in because individual investors too small to have an impact on the entire market. CII wrote to NYSE and NASDAQ saying don’t allow dual-class listing standards.
Mostly focused on financial. Gives IPOs with poor governance standards a haircut in terms of valuation. Mostly investing after they go public. Gentle quiet pressure after that.
Unreasonable one-size-fits-all? Absolute no-fly zones. Should have disclosure at minimum. Look at competitors. Once in public market, you’re a grown-up and we want accountability to the providers of capital. Focus on sunset provisions. Relative performance – have tied to performance. Boards should be the ‘adults in the room.’ Diversification is not a reason to not to pay attention.
Hope springs eternal. Minimal level of guidelines for companies before they go public. Letter to the IPO community. Set it out and had meetings but aren’t in a position to dictate. Collective action urged. Horowitz has too much capital, so collective action difficult. Lack of trust starts at VC level.
My point: High tech firms aren’t all the same. How much is Silicon Valley poor governance due to the fact that many are internet based where scaling up is easy. If they don’t need the money they can dictate the terms.
Venture funds are largely outside the normal corporate governance rules. It is the venture fund system itself. There is a factor about missing out on outsized performance. Attention to good corporate governance comes in later. Yes, looking at parsing internet firms out for special consideration in the data.
My coverage too cryptic? Barry Burr did a better job for Pensions&Investments. Read his article, Panel offers differing views on governance with public technology companies. Here’s a sample:
An asset owner, money manager and academic faced off in a panel discussion at the Council of Institutional Investors conference in Los Angeles expressing widely different views on the degree of toughness investors should bring to bear to demand better corporate governance at technology companies coming to the market…
Among issues raised during the panel discussion Sept. 30 are:
- differences on how strictly the governance structure of new companies should adhere to best practices compared with mature companies;
- lack of trust between institutional investors and entrepreneurs;
- resistance of top-tier venture capital managers to the correlation of good corporate governance and corporate performance; and
- limited capability and willingness of pension funds and other institutional investors, even with their huge assets, to withhold investing to bargain for better corporate governance terms when venture capitalists can reach out to vaster global sources of capital…
“We are not typically in a position to dictate this (governance) structure of private equity because of the lack of control of investing through limited partnerships,” Ms. Simpson said…
“I would say the vast majority of venture capitalists are very profit seeking, extraordinarily aggressive and on a good day kind of legally bound but amoral,” Mr. Siciliano said. “That means … the legal standard should not be the standard” for governance.