Well-Governed Companies

Best Practices Spread from Well-Governed Companies

Well-Governed CompaniesAs I have advised companies where I have submitted proxy access proposals,  I am not singling out your company with the aim of implementing proxy access. In fact, I would rather first target well-governed companies, which are more likely to adopt best practices as outlined by the Council of Institutional Investors. Best practices generally spread from well-governed companies to companies that are not well-governed, not the other way around.  We can’t portray a company as having bad corporate governance, as an outlier, until most companies have adopted best practices.

The key in 2016 is to establish a track record of robust proxy access, a 2.0 version that meet best practice standards. Once proxy access become ubiquitous, poorly governed companies will find it harder to resist such proposals and it will begin to be invoked at companies with the poorest governance practices.

This strategy is supported by studies such as Does Majority Voting Improve Board Accountability? by Stephen J. Choi, Jill E. Fisch, Marcel Kahan and Edward B. Rock. 

I reproduce the abstract from that study below:

Directors have traditionally been elected by a plurality of the votes cast. This means that in uncontested elections, a candidate who receives even a single vote is elected. Proponents of “shareholder democracy” have advocated a shift to a majority voting rule in which a candidate must receive a majority of the votes cast to be elected. Over the past decade, they have been successful, and the shift to majority voting has been one of the most popular and successful governance reforms.

Yet critics are sceptical as to whether majority voting improves board accountability. Tellingly, directors of companies with majority voting rarely fail to receive majority approval – even more rarely than directors of companies with plurality voting. Even when such directors fail to receive majority approval, they are unlikely to be forced to leave the board. This poses a puzzle: why do firms switch to majority voting and what effect does the switch have, if any, on director behavior?

We empirically examine the adoption and impact of a majority voting rule using a sample of uncontested director elections from 2007 to 2013. We test and find partial support for four hypotheses that could explain why directors of majority voting firms so rarely fail to receive majority support: selection; deterrence/accountability; electioneering by firms; and restraint by shareholders.

Our most dramatic finding is a substantial difference between early and later adopters of majority voting. The early adopters of majority voting appear to be more shareholder-responsive than other firms. These firms seem to have adopted majority voting voluntarily, and the adoption of majority voting has made little difference in shareholder-responsiveness going forward. By contrast, later adopters, as a group, seem to have adopted majority voting only semi-voluntarily. Among this group, majority voting seems to have led to more shareholder-responsive behavior.

These differences between early and late adopters have important implications for understanding the spread of corporate governance reforms and evaluating their effects on firms. Reform advocates, rather than targeting the firms that, by their measures, are most in need of reform, instead seem to have targeted the firms that are already most responsive. They then seem to use the widespread adoption of majority voting to create pressure on the non-adopting firms. Empirical studies of the effects of governance changes thus need to be sensitive to the possibility that early adopters and late adopters of reforms differ from each other and that the reforms may have different effects on these two groups of firms.

From the conclusion:

The difference between early and late adopters has broader lessons for understanding the spread of corporate governance innovations. In principle, there are two plausible strategies that shareholders can use in selecting targets for governance reform. The first is to target companies that are most in need of governance reform, where the reform will have the most impact and where the company is arguably least able to resist. The second strategy is to target companies that already have the most shareholder-friendly governance, where, although the reform will have the least impact, the company is most amenable to adopting the innovations (either because it is committed to shareholder-friendly governance or because it realizes that the innovation will make little difference). Once the innovation has become established at 44 shareholder-friendly companies, shareholders might then proceed to target those companies that are most in need of the reform, at a time when these companies are less able to resist because the reform is less novel or has even become a governance “norm.” At least for the introduction of majority voting, one of the most widely adopted innovations over the last 20 years, shareholders appear to have pursued the second strategy and to have been highly successful.

I certainly don’t fault institutional investors who target poorly governed companies for proxy access. They are frequently taking the more difficult course of action. Rewards could certainly be greater when they win. However, I choose a path of less resistance. Retail shareowners will keep up last season’s momentum with proposals at more well-governed companies at the same time that we circle back to early adopters, filing a second round of proposals to ensure they meet best practices,

Shareholders are welcome to use my latest templates. Fixing Proxy Access Lite outlines how to move company bylaws from proxy access 1.0 to 2.0. Avoiding Proxy Access Lite: Revised Template outlines a proposal that can be used at a company that has no existing proxy access bylaws. Before submitting either, you should review the company’s existing bylaws to tailor the exact language for submission.

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