#ICGN16, the annual meeting of the International Corporate Governance Network, was held in San Francisco, June 27-29. #ICGN16 was the hashtag for tweeting at the meeting, so check Twitter for additional posts to #ICGN16. This post is a continuation of a few rough notes from the conference. Read Part 1, Part 2, Part 3 and Part 4 of #ICGN16. Continue Reading →
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#ICGN16, the annual meeting of the International Corporate Governance Network, was held in San Francisco, June 27-29. #ICGN16 was the hashtag for tweeting at the meeting, so check Twitter for additional posts to #ICGN16. This post is a continuation of a few rough notes from the conference. Read Part 1, Part 2, and Part 3 of #ICGN16. Continue Reading →
This the fifth part of my coverage of this year’s ICGN event in Boston. I haven’t taken the time to edit the prose to make complete well-flowing sentences. Still, I hope you find them of some value. Here we touch on the idea of a Stewardship code for the US and I captured a few remarks from DuPont’s former CEO, Ellen Pullman. Continue Reading →
Assessing Climate Change Risks is part four in my coverage of this year’s ICGN event in Boston. These posts haven’t been checked for accuracy and I haven’t taken the time to make complete well-flowing sentences. Still, I hope you find them of some value. Continue Reading →
This the third part of my coverage of this year’s ICGN event in Boston. These posts haven’t been checked for accuracy and I haven’t taken the time to edit the prose to make complete well-flowing sentences. Still, I hope you find them of some value.
Morning keynote on Differential Voting Rights: Corporate governance and investor protection in companies with a controlling shareholder
This year’s ICGN event in Boston was a real treasure, beginning with the panel on Political Lobbying Donations. I loved the fact that ICGN was held back to back with CII at the same hotel. I took a few notes at the conference and will share some of them with readers. I’m not a very fast note taker, these posts haven’t been checked for accuracy and I haven’t taken the time to edit the prose to make complete well-flowing sentences. Still, I hope you find them of some value. Continue Reading →
I attended day one of the ICGN Boston Event and CII 2015 fall conference at the Westin Copley Plaza in Boston, MA. I will do at least a post or two on this wonderful combined meeting in future. However, I’m also negotiating with a couple of companies on proxy access and will be taking a much needed vacation out of country with my wife, who just retired. Therefore, my posts will not be forthcoming for a while. Continue Reading →
24 November 2014 – The International Corporate Governance Network (ICGN) announced two senior appointments today as part of a strategic focus to increase regulatory engagement and expand governance education. George Dallas joins the ICGN team as Policy Director and Tom Rotherham-Winqvist has been contracted as Education Advisor. Continue Reading →
Help Wanted ICGN – Job Description
The Senior Policy Advisor will be responsible for advising/supporting the Managing Director and the International Corporate Governance Network (ICGN) Board on key policy issues which includes:
Guest Post: Miguel Carrasco – Managing Director and proxy solicitation consultant at Proxycensus Ltd specializing in issues relating to information transmittal, social media technology in IR and the technicalities of the cross border voting process.
The International Corporate Governance Network sent comments to the Ontario Securities Commission (OSC) and the Australian Stock Exchange (ASX). I think they warrant widespread reading and adoption. What follows are highlights from the OSC letter.
Gender diversity is a competitiveness issue for a company as a whole and a critical dimension of governance, both in the board’s oversight of the enterprise and in the board’s own composition and talent management. Increasing the representation of skilled and competent women on corporate boards will strengthen the corporate governance culture and ultimately contribute to value for all stakeholders. Continue Reading →
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.
Opening Remarks by Jon Feigelson, Senior Managing Director, General Counsel and Head of Corporate Governance, TIAA-CREF and Roger W. Ferguson Jr., President and Chief Executive Officer, TIAA-CREF. Continue Reading →
Join ICGN in Cape Town, following PRI in Person, on 3-4 October for the ICGN Debate and Responsible Investing Programme, hosted by IoD in Southern Africa and endorsed by the Johannesburg Stock Exchange. Continue Reading →
Unfortunately, I got sick in New York, so missed the entire second day of ICGN 2013. Several weeks later, I am still recovering and am way behind in my other work, so any real comments I have on the conference will be long delayed. In the meantime, here are a few selected tweets.
They aren’t in order. Some may be retweets. Nothing guaranteed here re authenticity or links that work but I found them interesting and hope you will as well. I’ve edited out some duplicates but some may remain. It was a great program. Continue Reading →
I urge readers to support the June 20th petition by the Council of Institutional Investors (CII) to the NYSE and Nasdaq for the exchanges to require listed companies to elect directors by majority vote in uncontested elections. CII’s letters to both exchanges are posted here. Continue Reading →
I look forward to seeing many of you at ICGN‘s forthcoming Annual Conference, hosted by TIAA-CREF and taking place from 26th-28th June at the Grand Hyatt Hotel in New York. A summary agenda is accessible via this link for more information. Please visit the ICGN website where you can register. See my 2010 coverage. Continue Reading →
CalPERS announced on Monday, April 2nd that Anne Simpson, who heads their corporate governance efforts, has been elected to the Board of the Council of Institutional Investors (CII). Continue Reading →
After extensive consultation with global investors, the ICGN releases two new best practice guidelines: ICGN Guidance on Political Lobbying and Donations and Model Contract Terms Between Asset Owners and Managers. Said Christianna Wood, Chairman of the ICGN Board of Governors:
In the post-global financial crisis environment few topics have received as much attention as asset manager contracts and corporate political contributions. We are pleased to be able to launch these Continue Reading →
Recently, ICGN held their annual conference in Paris. From the Twitter feed, it appears I missed a good one. (see ICGN Via Twitter) I’ve already mentioned Jon Lukomnik’s appeal to look again at the idea that shareowners’ interests and executives’ can be aligned through compensation strategies.
I think one origin of our errors was revising the tax code so that executive compensation above $1 million is only a tax deductible expense if performance based. The result has been, as Lukominik observes, that compensation plans have taken on the characteristics of “a slot machine: They pull a lever and three years later out comes a trickle of coins or a fountain of folding money.” This is a topic worthy of much discussion.
Another truthsayer at the conference was Robert A.G. Monks, whose L’Appel can be read as quickly as fast food but provides nutritional value of a much higher order. Bob lays out a number of observations. I’ll just list a few: Continue Reading →
@SMDavisYaleGov Stephen Davis. Debate on exec pay: time to replace alignment, paying CEOs simply as employees? See U-Turn For Exec Comp? 23 people gathered in a windowless conference Continue Reading →
Madame Colette Neuville received the prestigious ICGN Life-time Achievement Award in Corporate Governance at its Annual Conference. Madame Neuville, known as a stark defender of minority shareholder rights in France for the last 20 years, is recognised for her defence in cases such Vivendi vs Havas in 1998, Schneider vs Legrand in 2001 and Renault vs Nissan in 2002. An economist and lawyer, Madame Neuville has organised her efforts through Association de Defense de Actionnaires Minoritaires (ADAM). She has been a member of the European Corporate Governance Continue Reading →
Disclaimer: Given Dodd-Frank, proxy plumbing and all those comments I want to provide the SEC, the report below doesn’t do the ICGN Mid-Year Conference justice. I wrote this up more than a week later with poor notes and memory. Comments, corrections and substitute photos are solicited.
The Financial Crisis Inquiry Commission will report in December to give an unbiased historical accounting of the causes of financial crisis. It will be out in book form but will also be available through download.
$11 trillion in wealth was wiped away. The market took until 1954 to get back to the levels of 1929. Let’s hope this one doesn’t take as long but, more importantly will we learn the lessons necessary to prevent or minimizes future bubbles?
It was a failure of accounting and deregulation. Too many were rewarded based on volume not on performance and their was no continuity in risk (they thought) after all the slicing, dicing and creative complexity.
Rewards can’t be asymmetric and function properly. This was not a natural storm; the clouds were seeded. Signs were there, such as a 2004 warning from the FBI about a housing fraud epidemic, but they were glossed over. Now, our remaining investment banks are largely trading banks, not focused on generating capital but on gaming the markets. The betting market is much larger than the real economy… with more than 85% of transactions being synthetic.
Dodd-Frank requires the investment banks to hold 5% of the securities they sell but I’m not sure what good that does since that portion of their business is now minor. We need to rethink the role of finance in our economy. Continue Reading →
ICGN conferences are a great place to network with others in the field of corporate governance from around the world. The 2010 conference in beautiful Toronto Canada was no exception. I’ve reported on day 1 and day 2 of the topical sessions. Now time to cut loose a little.
The best example of that, within the context of the whole group, was a bit of a celebration at the Royal Ontario Museum. Tops in entertainment was “illusionist,” Brian Michaels. One trick involved a guy from the audience and, of course, a beautiful assistant tied up.
…And there was the jacket, on the assistant. Time to get untied.
Another illusion involved a woman from the audience who verified use of an ordinary tissue, which was then made to spin in the air with no visible means of support. Maybe you had to be there.
With ICGN being held in Canada, they brought several famous hockey players up on stage, along with a couple of Mounties and a woman with a great voice who sang the national anthem. Then the icing on the cake, with three of our Canadian hosts being presented with hockey jerseys. All had Wayne Gretzky’s number 99 and their own names on the back, with our “team” name, ICGN, on the front. They’ve skated to glory!
I had a great time networking with dozens of people I had previously only met via e-mail. One of these was Alex Todd. He authored a chapter in the forthcoming book, Corporate Governance: A Synthesis of Theory, Research, and Practice (Robert W. Kolb Series). Todd proposes “Aspirational Corporate Governance,” building on the work of Shann Turnbull and others. The ACG framework specifies three aspirational conditions for good corporate governance:
- Requisite organization handles information complexity.
- Requisite variety in information from stakeholders reduces uncertainty.
- Adaptive capacity provides response mechanisms to compensate for stakeholder uncertainty.
Todd goes on to create a diagnostic tool for measuring and analyzing these (existing and prospective) principles and practices as well as a blueprint for improving the design of any governance system. He groups governance styles into four broad categories that correlate with distinct business performance metrics:
- Control – management-controlled companies have better sales growth performance;
- Trust – companies with corporate governance practices that help shareholders establish trust enjoy higher valuations (Tobin’s Q);
- Sovereignty – companies with truly independent boards, both from management and shareholders, are more profitable (return on equity and profit margins); and
- Influence – companies with boards that are strongly influenced by management and where shareholders have fewer rights pay out more to shareholders in dividends and stock repurchases.
Read more in his article, Corporate Governance Best Practices: One size does not fit all. He recently revisited his research findings by tracking the stock performance of a small sample of companies with each of the four governance styles over the past two years and found distinct patterns in stock price performance associated with each of the four governance styles. However, the results were markedly different from the original study. This time, during the recession, issuers with the Management Controlled Board style had the worst stock performance and were by far the most likely to become delisted, while issuers with the Management Influenced Board style delivered the best shareholder returns, largely due to their tendency to pay dividends.
Todd appears to be on to something applicable to both structuring funds and, of course, in advising corporate boards.
Another fellow I got to meet was David R. Koenig, who recently launched The Governance Fund, LLC, a private investment management firm that uses a proprietary model of corporate governance based on several data-sets to capitalize on what he terms “the value gap” between well-governed and poorly governed companies. They’ve back-tested ten years of data and have been sending out model portfolios to potential clients so they can see that development isn’t based on cherry-picked after the fact correlations. I note that one of ICGN’s co-founders, Jon Lukomnik, the founder and managing partner of Sinclair Capital, LLC, has joined the Investment Committee of The Governance Fund, LLC, and will serve on its Board of Directors.
I see Koenig was also interviewed in the recently published book, The Hedge Fund Book: A Training Manual for Professionals and Capital-Raising Executives. You can peek inside the book at Amazon and see something about the fund’s unique characteristics. For one thing, the fund’s compensation is based on both risk and return. That’s very unusual and should serve them well, since the recent meltdown seems to have incentivized money managers to take excessive risk for short-term gain. Another feature is transparency of all positions and trades executed to investors willing to sign nondisclosure and intellectual property agreements.
Another unique characteristic is their Governance and Risk Advisory Board, which meets on a quarterly basis. The minutes of their review of the governance and risk management practices of the investment manager is made available to all investors as one method of providing enhanced transparency. Members include the following:
- Dr. Robert Mark, former Chief Risk Officer, CIBC and 1998 GARP Risk Manager of the Year, Managing Partner, Black Diamond Risk Enterprises, LLC
- S. Jean Hinrichs, former Chief Risk Officer, Barclays Global Investors, 2003 Buy Side Risk Manager of the Year (BGI)
- Dr. Don Chance, James C. Flores Endowed Chair of MBA Studies and Professor of Finance, Louisiana State University
- Dr. Robert Kolb, Professor of Finance/Frank W. Considine Chair of Applied Ethics, Loyola University
- Dr. Joseph Swanson, Clinical Professor of Finance, Kellogg Graduate School of Management, Northwestern University
Of course, I’ve had a strong interest in this subject for years, posting some thoughts on the idea of a Corporate Governance Mutual Fund in 1996, so I’ll be eagerly following the progress of the Governance Fund.
I also got a chance to learn a little about EIRS (Experts in Responsible Investment Solutions) from Peter Webster. I’m particularly interested in their ESG proxy voting service, which can help funds actively implement UN PRI or other principles into ownership policies and practice. See their one of their latest briefings on the risks of bribery.
Vindel Kerr, who I first met at a conference in London at the 6th International Conference on Corporate Governance (ICCG), is busy on a second edition of his book Effective Corporate Governance: An Emerging Market (Caribbean) Perspective on Governing Corporations in a Disparate World.
During one of the lunches, I got a chance to meet Anne Kvam with the Norges Bank Investment Management. They make CalPERS look small but don’t seem as far developed with regard to corporate governance… or maybe it is just those mild Norwegian manners. For example, they’re against “say on pay,” reasoning that’s the job of the board. Fine, if you can actually hold the board accountable… which I don’t think we can in most instances in the States. NBIM does appear very progressive regarding social issues. For example, see Pension funds urge chocolate industry to end child labour. There’s a good deal of transparency on their site and I look forward to paying closer attention to their ESG efforts.
Too many others to mention but I must say I’m looking forward to a possible visit to India in the fall and looking up Dr. YRK Reddy, who I’ve been in touch with for many years, and others if they are available during my stay. Well, until we meet again.
Other finds at ICGN:
- The Rotman International Centre for Pension Management (ICPM) publishes the Rotman International Journal of Pension Management in partnership with Rotman / University Toronto Press twice a year. To sign up, simply email [email protected]. Be certain to include your name, organization, and email address along with a subject line that reads RIJPM Subscriber Request. Great articles by some of the top researchers.
- Barroway Topaz puts out a quarterly client newsletter that can be downloaded in pdf format.
ICGN 2010 Annual Conference, The Changing Global Balances: Toronto, Canada
Publisher’s Disclaimer: Many of the speakers, especially those affiliated with governments, indicated their remarks represent their own personal views. Not being the best note-taker, what follows are my cryptic recollections and personal comments. I’d say they are for entertainment purposes only, but that would lead readers to anticipate more than I deliver. For actual quotes and transcripts, contact the International Corporate Governance Network.
TUESDAY 8 June
Session 7 The New Balance – The World’s Largest Shareholders
The weight – and therefore influence of large pension funds and major asset pools
continues to grow. This session focused on the investment and governance philosophies of some of the world’s largest shareholders. What are the demands for better corporate governance when you expand investments in developing markets? How will these funds react to the shareholder democracy initiatives in the US? What do they think about say-on-pay and how do they secure the competence of the board of directors in portfolio companies?
Moderator: Frank Dubas, Global Managing Partner – Sovereign Financial Institutions, Deloitte, USA
David F. Denison, President and Chief Executive Officer, Canada Pension Plan Investment Board. – Assume risk. Build in for turbulence. Looking to emerging markets. We’re there now assuming they will be there in 10 years. Resilience in this recent downturn. We can have good alignment of interests with some of the long-term sovereign investors in Asia. Compensation is consuming a lot of time but it should because of its multifaceted nature. It is not just what you pay but how ensure it aligns with corporate strategy to reflect key elements. How take into account risk? Manage within tolerable limits. Much of what goes on in the boardroom is invisible but we can see the compensation framework and how directors use their discretion to make those decisions. It is a major indicator re director competency.
There is now a renewed realization that government must play a stronger role. We’ve overshot on the lack of regulation. Focusing on risk, caps on leverage. Capital levels. Canadian banks relied on force capital levels. We encourage government to get back to more regulations. Not stifling regulations. Align risk managers with a 30 yr time frame built into investment horizon. Difficult to build into compensation since discounting factors for 20-year compensation wouldn’t create what we want… wouldn’t retain the talent we need. It is a constant trade off to keep compensation as long as we can but not so long that we don’t attract talent. No easy answer. Engagement: with about 35 companies over past 12 months. Dramatically different attitude post downturn. Say on pay opens conversation to other key governance issues. Important investment related issues. Weighting impact of companies to focus resources. Develop networks, coordinate with others.
Anne Kvam, Global Head of Ownership Strategies, Norges Bank Investment Management, Norway. – We’re big and can’t maneuver. Having a well functioning efficient market is key because we can’t beat the market. Very long term. Not a question of being there or not being there. The challenge is how to be there to get information, to be responsible. As investors we’re concerned. UK, its bossy, standard setting.
Phone call from China, why voting against? You gave is no reason to vote for the measure. Without the necessary information to evaluate, we vote against. “Oh, okay we’re going to ignore your vote.” Looking at the competence and quality of boards. Independence… goes well beyond that. Diversity much more than gender. How are board members recruited? Recruitment was changed. What are competencies we’re looking for in women and then started applying that to men as well. Annual election. We vote against all say on pay. We see that as the board’s role. We will hold them accountable for how they do it. We don’t want to be bogged down. More important is that we have the right board. The competence of directors is paramount. Remuneration is important. We measure to what degree they succeed… then we hold them accountable. 9 out of 10 calls have been about compensation. I just don’t think that’s the right place to put the focus.
Government’s role: Self-regulation won’t work. Well functioning, legitimate. Increasing role as shareowner, prudent. Audience: How hold accountable if you can’t vote them off the boards? Even though we don’t have means yet, we will continue that fight, since we will be around for a long time… we’ll stick to our principles. Question re engagement: Not able to engage as much as we would like. Have to say no thanks to many because we don’t have capacity. We want to speak to boards on our agenda, not necessarily their’s. Relative vs. absolute returns. Strict selection of topics, markets and tools.
Scott Evans, President & Chief Executive Officer, TIAA-CREF Investment Management and Teachers Advisors, USA. – We’re permanent investors. Partner with investors we trust. Focus on individual securities. Avoid exposing to too much risk in any sector. We have an independent risk management group. They scan the skies looking for inclement weather. In some of these markets shareholder rights are much different. We have to evolve our practices to mesh. Agree that competence is what we seek. We have (or soon will have) established so many shareholder rights. Access to proxies, say on pay, majority voting, major planks. We’ve arrived to where we have rights. It’s now going to be about using our power wisely, proactively and consistently. How do we get the wide spectrum of shareholders engaged? Very important time for the transition of corporate governance. Sees government walking a fine line. On the margin, we caution that rules may have unintended consequences but they are good on balance. Question from Peter Clapman re activism. Equity staff actively engaged… both sides of house working together. We pursue engagement quietly were we think there’s a concern and clear changes need to be made. By being focused, concentrating on companies with big problems… stay out of the papers. Has excellent coordination with others investors on issues.
Session 8 – Break Out Sessions – How Do We Fix The System?
US style governance and the system of capitalism has come under attack as a result of the economic crisis. Now is the time to focus on specific problems and specific solutions. Each of the breakout sessions examined a particular issue. I only attended one but provide a few scattered comments reported on some others.
8.2 Carrots, sticks or codes? How can we make shareowners become good stewards?
For the first time the UK will have its own code for investor best practice. Is this a model that will work for the rest of the world? Other jurisdictions are developing their own codes – is there a case for a universal code? What are the barriers? Agreement on need for voluntary adherence. See FRC UK website. Revising to issue code with 7 principles and three objectives, generating a critical mass. Comply or explain may come. Clarifying relationships between fund managers, trustees. Appropriate regulatory reinforcement. Accept responsiblity to obtain or retain. Independent organization to monitor (Peter Butler) driven by shareholders themselves. Carrots – proxy access, disclosure, communication among shareowners themselves. CalSTRS interest in code. Develop and articulate best practices. Some US funds are active owners that but many funds need encouragement. Question to audience: should there be a global code of corporate governance for investors. Yes 74%; No 20%
8.3 What boards have learnt from the financial crisis
Some companies are coming through the crisis bruised and battered. Others have sailed through whilst many failed. What have boards learned from their experiences and what would they do differently now?
Difficult to draw conclusions. Need for boards to pay attention to risk. Key theme is getting right people on boards. Risk committee, risk officers. But still need right people on board and adequate time to have conversations around risk. Institutional changes; at least many are now having the conversation. Those with risk committees fared better than most. Institutionalized way to bring risk issues to board, priority acknowledged. Whatever you institute don’t fall to trap of imitation box ticking. Emphasized importance of accountability and responsibility at board level. Audience survey: 41% think boards aren’t taking adequate steps. Did the pre-crisis focus on independence interfere with technical capacity? No 63%.
8.5 Shareholder litigation
What has been the experience of shareholder litigation over the recent past. Has litigation improved standards of governance? What are the trends in litigation we can expect post the crisis? Is shareholder litigation going to be much more common in jurisdictions outside of the US? Is more litigation good or bad for financial markets?
Moderator: Michelle Edkins, Managing Director, Head of Corporate Governance Europe, BlackRock. – European right to nominate board members much stronger.
Charles Elson, University of Delaware, USA – Benefit of. Effective in duty of loyalty cases. Courts comfortable judging thieves. On the care side much more difficult. Care claim doesn’t exist in DE. Suit on a care claim that forces a specific change like clawbacks can be good where litigation results in decisions to avoid liability. SOX brought 404 review of internal control and risk.
Danger is that it has resulted in systems better designed to avoid liability than to address actual risk and controls. Institutions had risk depts but missed risk and kept board liability shielded. Ultimately costs the system itself. Cases specifically brought for specific reforms work. SOX created risk analysis. Unintended consequence because someone sold them a bill of goods. Companies typically threw a bunch of retired internal officers at it to cover the legal requirements. Prevention – independent, vibrant elections, skin in the game (incented). Need to address loyalty but can’t really get good governance on that through litigation. Elections have always provided the out, in theory, but you couldn’t get rid of directors in practice.
Shifting $40B in days. Where is corporate governance? Stoneridge did away with second-hand liability. Most important trend is limiting standing to those who purchased securities. Can only sue on offerings purchased. Notice to a class. Custodial banks should be filing claims for you. If you switched banks you often don’t have trading evidence to know if you’re in the class. How assured? If there’s a settlement and you’re in that class, you may have a fiduciary duty to file and be in the action. How do I ensure my claim is being filed? Ask your law firm. At custodian, many fall though cracks. Some comparison of Europe, South America. More European countries moving toward class litigation. Germany has group litigation but can take 13 years. Opt in. Everyone has right to litigate their case. Can settle a case on class basis but not bring them. (Dutch, prepackaged global settlement. Judge gave extraterritoriality on a prepackaged settlement because company wanted it.) What did you money managers know and when? Infrequently go to trial.
Interesting dialogue among audience members on limited discovery rules in Germany. There, loser pays their costs (Canada as well). Markets developing in advance of regulatory framework. Individual actions may be brought together as a group where there is a vibrant active pension fund… angry because they’ve lost huge amount to fraud. Willing to take action. Very uneven and bumpy. Shell wanted to draw a line in sand and get rid of issue of overstating oil reserves. Cultural barrier to Europeans suing in US. More leverage by bigger institutions.
Who benefits most? litigators and market. Who suffers? current shareowners. How hold accountable? remove from office.
8.6 Governance issues in controlled and private companies
There are many controlled companies that perform well over sustained periods of time. What can we learn from these companies? Because of the lack of accountability, minority shareholders need to be aware of the risks and warning signs when things might be going wrong – what are these? How can shareholders put pressure on controlled companies? Dual class shouldn’t be banned but should cease with trigger events. Majority board independence. Cumulative voting for directors. Minority should have board representation. Stand up to board. If not enough liquidity to get out, then don’t go there.
Session 10 – The Quality of Shareholder Votes
It is widely acknowledged that there are serious issues with the proxy voting system around the world. When shareholders cast their votes there are a variety of reasons that their votes may not be counted. They could be lost, pro-rated or rejected. The investor will never know if this has occurred. Derivative instruments create a second set issue in the proxy voting system, not only do they contribute to overvoting problems, they also lead to votes being cast by persons with no true economic interest in the corporation. While the result is often benign, it can distort the decision making process. This session examined three issues – the nature and extent of problems with the proxy plumbing system; empty voting/negative voting/hidden voting; and the role of institutional investors in promoting the effectiveness of the voting system.
Moderator: Carol Hansell, Senior Partner, Davies Ward Phillips & Vineberg LLP, Canada
Henry Hu, Risk Director, Securities and Exchange Commission, USA. – Problem of decoupling votes with economic interest. Negative. Debt can also be decoupled, credit default swaps. Creditors might want company to go into bankruptcy. Role of proxy advisors, states. Dual record dates; how does that dovetail with proxy voting? Participation rate. Retail investors technology to increase. Counting correctly. Overvoting. Votes actually voted. Hidden morphable ownership. Area enormously complex, only solved by a huge research grant (humor from prior academic post). SEC will look at comment letters with extraordinary care.
Erik Breen, Head of Responsible Investing, Robeco, The Netherlands. – Might be rational
not to vote, depending on expense of voting. Most investors lend to earn more money. Has flexibility to recall shares to my liking but don’t use much. 90%/10% better to have capability in-house to get most payoff. Doesn’t trust the voting system. Uncertain, poor audit trail. Too big of a voting chain. No incentive or liability if they get it wrong. Can’t breakdown into pieces. Keep true interest of beneficiary in mind, if outsourcing.
John Wilcox, Chairman, Sodali Ltd., USA. – Quality of vote is the issue. Bipolar or split brain issue. On corporate side: real businessmen don’t deal with compliance; they pay others for that service. At institutional investors there’s a gap between investors/traders and governance staff. Shareowners are now more powerful, so voting can make a difference. Some have made votes matter. Shareholder rights are promised in proxy plumbing. Environmental and social movement showed true economic impact. Gulf of Mexico. great lessons against split brain. Voting rights quality going to be recognized and improved through new rights. Lending should be economic. Where does the ownership lie at any one moment? Tax laws are applicable to rapid trading in derivatives. Could those rules be useful in tracking voting rights? We should be trying to make corporate governance process customized to companies.
Ken Burch from audience. Good corporate governance requires real judgment, can’t rely on proxy service for applying. Shareowners are accountability shy. You can’t depersonalize director elections.
Keynote: Lucian Bebchuk, Friedman Professor of Law, Economics, and Finance Director, Program on Corporate Governance, Harvard Law School
The Wages of Failure. The standard narrative of the meltdown of Bear Stearns and Lehman Brothers assumes the wealth of the top executives was largely wiped out along with their firms. Commentators have used this assumed fact as a basis for dismissing both the role of compensation structures in inducing risk-taking and the potential value of reforming such structures. Paper provides a case study of compensation at Bear Stearns and Lehman during 2000-2008 and concludes this assumed fact is incorrect.
We find that the top-five executive teams of these firms cashed out large amounts of performance-based compensation during the 2000-2008 period. Top executive teams of Bear Stearns and Lehman Brothers derived cash flows of about $1.4 billion and $1 billion respectively from cash bonuses and equity sales during 2000-2008. These substantially exceeded the value of the executives’ initial holdings in the beginning of the period, so the executives’ net payoffs for the period were decidedly positive. The divergence between how the top executives and their shareholders fared implies that it is not possible to rule out that executive pay arrangements provided them with excessive risk-taking incentives.
Paying for Long-Term Performance lays out remedies focusing on equity-based compensation, the primary component of executive pay, we identify how such compensation should best be structured to tie pay to long-term performance. We consider the optimal design of limitations on the unwinding of equity incentives, putting forward a proposal that firms adopt both grant-based and aggregate limitations on unwinding. We also analyze how equity compensation should be designed to prevent the gaming of equity grants at the front end and the gaming of equity dispositions at the back end. Finally, we emphasize the need for widespread adoption of limitations on executives’ use of hedging and derivative transactions that weaken the tie between executive payoffs and the long-term stock price that well-designed equity compensation is intended to produce.
In contrast to “hold until retirement,” set forth by proponents such as AFSCME and Jesse Brill, Bebchuk and Fried point out that can incentivize premature retirement, especially for long-serving successful executives.
- Prevent the ability to cash out equities quickly. Once vested, unwinding should be limited, holding for a fixed number of years.
- For example, hold for two years after vesting, then allow sale of up to 20% per year for five years (approach adopted by TARP Special Master, Feinberg)
- Limit the fraction that can be unloaded each year, say to 10%. Avoids short-term focus because 90% still held.
Execs may use inside information to decide when to sell or may control release of decisions disclosed.
- Remedied by hands-off cashing schedule, and here’s the part I hadn’t heard before, based on the average price of that year, rather than in a given day.
- One of the most important takeaways was that companies must prohibit executives from engaging in any hedging that protects against downturns in company stock price. If they don’t, executives can undo the effects of pay incentives built in by the board. While one size doesn’t usually fit all, Bebchuk believes this bit of advice is applicable to all companies.
- Another bit of advice. We all recognize that options don’t reflect actual loses. He suggests linking to a broader basket of the company’s securities, such as shares, preferred shares and bonds.
Government’s role: Provide shareowners with rights to prevent structures detrimental to long-term value. UK has stronger rights.
- Effect the power to replace directors: proxy access, majority voting, annual elections
- Effect the rules of the game: initiative to change charter, expand scope of subjects influenced through bylaw changes.
Warned that corporate governance applicable where shareowners are widely dispersed may not be applicable or may even be counterproductive where there are controlling shareownrs. At financial companies government should play broader role. With pay supervision other forms of regulations can be looser.
See also Lucian Bebchuk’s Keynote Speech at the ICGN Annual Meeting, Regulating Bankers’ Pay, The Elusive Quest for Global Governance Standards, and 2000-2010 Publications and Working Papers. When does he sleep?
Also consider: 10 percent of companies with the most highly paid CEOs earned unusually low returns in both the near- and long-term. Another study finds a negative relationship between a higher CEO share of the executive compensation pot and firm value.
Session 11 – The Evolving Role of Hedge Funds in Corporate Stewardship
This covered growth in Assets Under Management overall and by strategy type. Particular focus given to equity based strategies: Merger Arbitrage, Statistical Arbitrage and ‘quiet’ Activists. Quantitative and qualitative analysis on recent trends (e.g. leverage/prime broker issues/prop. trading desks, etc.) affecting these strategies and to what extent they are impacting markets. Do these strategies feed into claims of hedge fund short-termism?
Jane Buchan, Chief Executive Officer, Pacific Alternative Asset Management Company, USA. – Says hedge funds bigger than private equity. Asked: What do you fear? Anything that would restrict short selling.
Omar Asali, Harbinger Capital Partners, USA. – Discussed several cases. Looks for companies that are undervalued. Tries quiet strategy, then noisy. Works behind closed doors most of the time. If interests not aligned, take more adversarial position. We don’t have formulaic answer re proxy policies. turnover 3, 4, 6 times in 3-6 months but some up to 7 yrs… work with management in those companies.
Cliff Asness, Managing and Founding Principal, AQR Capital Management, LLC, USA. – Quant fund, value strategies. Doesn’t like accrual methods, sustainable growth, anti-democratic not better.. seems to be a push…benefits are in the price. Either neutral or we like good governance. Voting on prices. We’re looking for prices that aren’t right. Outsource most of the proxy voting. Useful platform for embarrassing management or to vocalize attention. Statistical arbitrage. Random “riskless” arbitrage (a trade we kind of like… we do it but the guy who runs it says we don’t.. they do it over days, not seconds). 6 to 12 month momentum strategies, profit in 3 out of 4 yrs. Nontaxable investors (like pensions) should be pursing short-term strategies because don’t have to be tax efficient. What do you fear? Anything that would restrict short selling.
Eric Knight, Chief Executive Officer, Knight Vinke, USA. – Why would you take on government? Take on when gov is a large shareowner. Royal Dutch Shell can’t be taken over, so if mismanaged a lot of potential stored value. There’s an enormous amount of information on these large firms that no one is reading. HSBC board members spend 20 days /yr. reading what’s been handed to them by management. They’re all brain-washed. (With respect.) Who has most votes. Can’t have proxy contests at large firms. Recognizing that, no group can bring about change. Big firms are controlled or at least influenced by stakeholders, gov, press, regulators, taxpayers, competitors. We look at which has interests aligned with shareowners. Communicate with a broad audience through press. Buy full pages in newspapers. Might spend a year before trying to force restructuring. Invests in highly liquid large caps over -5 yrs. We don’t short or leverage because it would handicap us. Avoids stalling tactics. European banks leverage 100 to 1. US 100 to 3.
Moderator: Christy Wood, Chairman, ICGN
Session 12 – The New Balance in Economic Growth – the Emerging Economies
Governance is critical to capital market formation in all jurisdictions. Approaches to governance have developed in the emerging economies appropriate to their markets and culture. What corporate governance improvements are under consideration in the emerging economies countries? This session theme is “Distinctive Aspects of Our Governance Practices and Why They Work for us.”
Moderator : Hasung Jang, Dean and Professor of Finance, Korea University Business School – 20 yrs emerging market 1/2 – family dominated ownerships similar to India, Brazil. Some litigation beginning in China. Pensions investing abroad. Recent initiative to introduce poison pills. Q: Why retrograde step now? Ans: We made much progress since crisis. Regulators taking back step to be friendly to business. Hasn’t been legislated yet.
Brazil – José Luiz Osório, Founding Partner, Jardim Botanico Partners, Brazil. – Improved investment market protection. Private special listing requirement. 204 IPOs in 2010 raising $100B. Huge success. Need a free press so can use as tool for activism. Board must vote best interests of owners but large concentration of ownership. New simplified proxies, how they pay (fixed and variable) some didn’t disclose. International accounting standards soon. New reforms 20% independent directors increased to 30%. Growing fast. election yr. wages increased 10% in first quarter. 10% base interest rate? Election yr. seminar, importance of equity markets as second part of presidential debate, so recognized in politics. Do your own diligence. Increased disclosure requirements for manager but 40 companies got together and sought an injunction. 4th largest buyer of US securities. We’ve been allowed to invest abroad for 2-3 yrs. Now listing or ADR equivalents is beginning.
China – Jamie Allen, Secretary General, Asian Corporate Governance Association. – Reaction against western standards emotional reaction but will get on. Best ideas come from around the world. Stimulus underlined role of state and state sector. Last 5 years banks becoming more normal. Decreasing non-performing loans. Have they taken step backwards? Independent directors, committees, financial standards, reporting. Not really step backwards but continuum. Different local institutions. Supervisory boards in China but party role strong, playing an important role above boards of directors. Ethical and cultural development is the rationale. Much more disclosure on who’s on committee. (state enterprises) What does it leave for board but implementing strategies, looking at operations… can be useful. Chair may be open minded to get views of others. Meetings fully scripted. Cross border acquisitions in Asia and around world. Dealing with different regulatory regimes may force them to be more open and sophisticated. Evolving. Q: Are minority shareholder allowed to say something in the not so free press? Ans: No, and that will constrain them at some point. Minority shareowners will play a role… especially in other part of Asia. Retail investors in China seem more interested in going to court and protecting rights. If can litigate, they may exercise stronger powers. Potential for plaintiffs bar where in other parts of Asia all the attorneys are working for corporates. Hard to invest abroad. Most still held by state. 20-25% of shares owned by individuals.
India – DR YRK Reddy, Founder Trustee, Academy of Corporate Governance. – BRIC $300B foreign reserves. Sansex up 90% in ten years. 2nd most attractive market after China. 139 new issues last year. 25% in public hands may be soon mandated for traded enterprises. That might help discipline minority interests. Unlisted state owned enterprises are going to have to follow same standards. Related party transactions/ relationship based, trust-based. Family businesses. Monarchs are not going to spawn a revolution against themselves. Manner of selecting directors has improved. Activism in boards have changed. Management needs to be challenged. The seem to be realizing the importance of more diverse opinions internally. Structurally, SME can’t take standards in full sum. Will take time. Internationalized firms appreciate world standards. 9% growth. Jamie did white paper on India. There is little counting of actual votes in India. Indian companies have been acquiring companies abroad. 2nd highest in UK.
Brazil wins corporate governance beauty question among those in attendance.
Closing Remarks and Thanks
Christy Wood, Chairman, ICGN.
ICGN 2010 Annual Conference, The Changing Global Balances: Toronto
Publisher’s Disclaimer: Many of the speakers, especially those affiliated with governments, indicated their remarks represent their own personal views. Not being the best note-taker, what follows are my cryptic recollections and personal comments. I’d say they are for entertainment purposes only, but that would lead readers to anticipate more than I deliver. For actual quotes and transcripts, contact the International Corporate Governance Network.
MONDAY 7 June
Christy Wood, Chairman, ICGN opened the conference noting that Canada set highstandards for its banks and in other areas, helping it weather the financial crisis better than the US.
Conference opening keynote
Jim Flaherty, Minister of Finance, Canada spoke of the G20 Summit coming to Toronto and walked us through how the financial crisis occurred and was addressed, noting that a majority of the stimulus packages will end about next March. The Canadian economy, which is growing at a rate of more than 6%, hopes to then cut its deficit in half, even while cutting taxes. He said that
Canada has the lowest taxes on businesses, is the first tariff-free country on manufactured imports and has the strongest recovery within the G7. Shareholders should bear the costs associated with bank failures, preferably through use of contingent cash reserves. He looks forward to a federal securities regulator in Canada and expressed hopes that emerging economies would increase domestic demand to counterbalance European fiscal discipline.
Session 1: The New Global Economic Balance
The financial crisis of 2008 and the “Great Recession” of 2009 raise tough questions about governance of the global financial system. The write-down of assets is approaching US$ 4 trillion, a record-setting destruction of wealth. How can global governance gaps be overcome? Is global integration under threat or will the widespread social backlash subside in a post-crisis world? What will the “New Normal” look like in terms of economic balance?
Antonio Borges, Chairman of the Hedge Fund Standards Board and the European Corporate Governance Institute, Portugal. – Greece represents the tip of an iceberg in the banking sector. What starts with a small country can create contamination. Sovereign debt had not been considered risky, like CDOs. Countries blame market speculators, according to conventional wisdom, but we need to solve the moral hazard problem that would accompany any bailout.
Christian Strenger, Government Adviser and Director, DWS Investment GmbH, Germany. – The root cause lies in fundamental deficits, lack of stringent supervision. The general public and the banks were misled concerning the safety of Greek bonds.
George Lewis, Group Head, Wealth Management, RBC Royal Bank. – Lewis began on an optimistic note, discussing the need to address trade flows and market distortions.
Borges: The Eurozone is working fine, in balance. Countries that are competitive will attract capital. Some Southern European countries have misspent their debt wastefully. Their fiscal problems will only be eliminated by becoming competitive and through growth. Stressed the importance of savings, since a lower savings rate leaves them very vulnerable when foreign capital is at stake.
Moderator Chrystia Freeland, Global editor-at-large, Reuters, Canada. – But didn’t Goldmen Sachs facilitate by hiding possible liabilities through public/private partnerships?
Strenger: Too often things were allowed that were not entirely in conformity with the highest ethics. There’s noting wrong with making $100M in a day but the general public finds it difficult to understand. Authenticity problems.
Lewis: We need to reinforce the role of fiduciaries and agents. Regulators need to establish better fiduciary standards, empowering shareowners, reinforcing a duty of care – suitability, not inappropriate mortgage products. Too little down-payment and there was also the issue of commissions based on selling mortgage products.
Borges: Don’t ask regulators to do more than they can, otherwise you generate a false sense of security. Who are the people interested in financial security? Investors must be mobilized around tougher transparency requirements. Investors are in charge, not regulators but ownership is decoupled when control rights are traded away. High frequency trading is having a growing impact, since a large number of shares do unvoted. (or were these last points made by Strenger?)
Lewis: Yes, there are problems around ownership and control. We need sound regulations to level the playing field, reinforcement of a stronger role for debt holders.
Freeland: Was government bailing out its friends? Canadian banks rebut that the source of risk wasn’t commercial banking but mortgages in the US.
Borges: It wasn’t casino banking but relying on market specialists. In addressing the issue Borges noted that about 80% of corporate financing comes from banks in Europe, about the reverse of in the US, where about 80% comes from market equities.
Christian: At least part of the problem was that companies are often engaged in businesses their boards don’t fully understand.
Borges: The most important role of financial markets is to impose discipline. Shareowners need to hold companies accountable.
Audience: A major function of the market is to control risk but if you can pass on the risk, responsibility vanishes and you don’t have to at prudently.
Borges: People who take risks must do so responsibly. Although retail investors may need protected, sophisticated institutional investors must push for transparency and then take risks. Risks should be taken by specialists. Regulations may raise the cost of capital.
Lewis: Touched on proposed Basel III rules and competition.
With more diversification by institutional investors, they know less and less about the markets they are in. Global guidelines and standards influenced by ICGN become more important. Meeting is timely with G20 also coming to Toronto. There was discussion around the idea that attempts to regulate executive pay have actually driven pay higher. Real answers will come with better boards and more control by shareowners, whose rights have been hampered in the US. Consensus around the idea of more input from ICGN into G20. ICGN should be viewed by them as a valuable resource worth consulting.
Session 2 – The business case for more women on boards
Diversity affects the way groups behave. Evidence indicates that more diverse groups foster creativity and produce a greater range of perspectives and solutions to problems. A larger proportion of women on boards seems to affect directors’ attendance behavior and the number of scheduled board meetings. Demographically dissimilarity in the boardroom seems to affect incentives for replacing CEOs, the director nomination process, and the design of compensation systems. But is this enough to prove the “business case” for more women in the boardroom? The panel discussed the most recent academic findings as well as practical experience from the US and Norway, the only country in the world where gender diversity on boards are regulated in law.
Eli Sætersmoen, Managing Director, Falck Nutec AS, Norway. – The threat was that companies that didn’t comply with the new requirement of 40% women on their boards would be liquidated. She’s been serving on boards for more than 10 years and sees that women add value… more detail oriented… leading to more socially robust and stronger boards. Interestingly, once companies had to bring on women directors they became very concerned about qualifications for directors. Once qualifications were written down, they were also applied to men. Result: golf club members down; professionals up. She suggests the Norwegian model could be adjusted based on culture… the real question is political will.
Faye Wattleton, former Chair of Nom. Comm of Este Lauder, USA. – She was the only woman on the board but it takes three before the culture of the board really changes. There needs to be a “critical mass” to reduce the need to “explain the details to the woman on the board.” We are a different species, resulting in more decisions grounded in reason and more open communication. A company’s highest governing boy should reflect society or at least its own customer base. Favors something more like affirmative action, rather than mandates like Norway.
Daniel Ferreira, Reader (associate professor), Department of Finance Director, Corporate Finance and Governance Programme, Financial Markets Group (FMG) London School of Economics. (book chapter on Board Diversity, Women in the Boardroom and Their Impact on Governance and Performance and other papers). – One difference is that not only do women directors have a better attendance record at board meetings but men at boards with women also have better attendance, suggesting their presence results in the job being taken more seriously. Women are most likely to be on certain committees, least of which are compensation committees… so there was no data to correlate women on boards with executive pay. Boards with women were more likely to replace CEOs after poor performance… apparently, tougher monitors. Gave a plug to further research being done by his “Women in the Boardroom” co-author Renee B. Adams on Swedish boards (see also).
Deborah Gillis, Vice President, North America, Catalyst. – Companies with more women had 53% higher return on equity. (see The Bottom Line: Corporate Performance and Women’s Representation on Boards, 2007 and the Catalyst Research and Knowledge Base). Agreed with Wattleton re need for three to change culture, signaling a tone at the top that is respectful of differences. More woman directors also leads to more woman corporate officers, more innovation and out of the box thinking. Companies with diverse boards are more likely to recruit the best talent. She would be hesitant to require quotas and likes the SEC’s recent requirement for disclosure re diversity to ensure the conversation at least happens. Boards need to broaden their search beyond C-suites.
Moderator David R. Beatty O.B.E., Conway Director, Clarkson Centre for Business Ethics and Board Effectiveness, Rotman School of Management, University of Toronto.
Session 3 – The Evolution of Capital markets – threats to good corporate governance
Capitalism has both good and bad sides. On the one hand, it fuels economic growth and wealth creation. On the other, it is susceptible to being managed or even manipulated by certain players in the system. This session examined threats to good corporate governance ranging from the role of new exchanges and high-frequency trading, derivative-based ETFs to regulatory arbitrage between stock exchanges.
Claire Bury, European Union. – We’ve moved from believing everything to nothing about what bankers tell us. Interested in high frequency trading and increasing liquidity at US banks. Also expressed concerns with securities lending/empty voting. Advocates transparency above a certain level in debates in Brussels this week. Concerning short-selling, sees need for European-wide disclosures. When voting capital is small, relative to trades shares, it leads to major problems. Frenetic trading generates profits for bankers and brokers but not usually for investors. During Q&A, suggested that maybe debt holders should hold voting rights if shareholders don’t exercise their rights.
Tom Kloet, Chief Executive Officer, TMX Group, Canada. – TMX recognizes the difference between mature and venture companies, operating both the Toronto Stock Exchange and the TSX Venture Exchange. Regarding high frequency traders, they are in the market to stay. With 25% of the volume, they keep markets liquid. He doesn’t think they are hurting corporate governance. ETFs were a key invention, first appearing on TSX 20 years ago.
Marcel Jeucken, Manager for Responsible Investment, PGGM Investments, The Netherlands. – Emphasized using shareowner rights, integration of voice with the investment process, and transparency. Advocates disclosing votes and informing management. Yes, buy proxy research, but also underst how that impacts each specific company, avoiding a check-box approach. Funds should be transparent themselves. Indexes can’t vote with their feet. Funds that integrate corporate governance concerns within their investment designs should outperform. Problems in Asian companies where votes are counted by hands raised, not in proportion to the number of shares held.
Moderator Doug Steiner, Strategic and technical operations consultant, Scotia Capital, Canada. Mentioned that he sees market for voting rights coming. We may soon be monetizing voting rights. (see Monetization, Realization, and Statutory Interpretation by Paul D. Hayward and post by Broc Romanek)
Session 4 – The New Balance in Corporate Social Responsibility
Understanding and managing a corporation’s relationships with its stakeholders is critical to the corporation’s ability to execute its strategy. A significant part of CSR, Environmental Strategy, is top in the minds of investors, businesses and governments internationally. The resource sector faces some of the most high profile issues in this area. During this session leading CEOs discuss their approach in mitigating their impact on theenvironment.
David Collyer, President, Canadian Association of Petroleum Producers . – Thinks tar sands mining can be responsible but they need to listen to their critics. Demand for energy is growing exponentially. Developed world is stabilizing but not India, China. Doubling by 2050. Oil on decline.
Supports diversification of supply sources but we need to be pragmatic about how long they will take to develop. World increasing reliant on conventional gas and oil resources. Tension: enviro, eco growth, energy security and reliability. Going to need all sources. How done responsibly. Oil producers are in much more than oil sands. They’re active in renewables. But oil sands lie at the nexus. They are a key part of addressing energy, representing the 2nd largest reserve of oil in world… 1/2 of accessible reserves. Canada is open to dialogue not possible in other parts of world where oil is being developed. Water use is a low 2% of Athabasca River flow. Surface area impacted by mining is less than a medium sized city. Only slightly higher contributor to greenhouse gases and conventional extraction. Canadians, 74%, support continued development. Working with his members to facilitate responsible engagement. Believes in responsible energy and they’re on track to improve and demonstrate. We’re up to the challenge.
Brian Ferguson, President and Chief Executive Officer, Cenovus Energy, Canada . – One of 25 largest Canadian companies. Probable reserves of 2.1 billion barrels. Technology driven oil sands company operating in Alberta and Saskatchewan.
Uses two technologies. On 15% use conventional mining techniques but 85% of sands are accessed through horizontal drilling wells. Cenovus has 40% of the global carbon capture and sequestration capacity… 15 million tons stored to date. Small footprint at well-pad. Striving for good governance. Rigorous, respectful and ready. One doesn’t have to be sacrificed for the other (environment and energy). Environmental stewardship integrated with exploration and extraction. Corporate responsibility impacts business. Will release report later this month. Oil sands will be a significant contributor for decades to come. Measurable improvements in intensity, footprint, air pollutants, water usage. 95% of water they use is brackish water. None from surface. Production growth is up 190%. Injecting steam into wells, extracting from wells below. Relative infancy so innovation continues. They see themselves as a technology company in the oil industry. Working on 50 different technologies. Energy efficiency and operations program. Environmental opportunity fund (with investments in renewables).
Hal Kvisle, Chief Executive Officer, TransCanada Corporation. – TransCanada is involved in pipeline and power generation. They are North America’s 2nd largest narutral gas storage operator. Big project to move gas down to US Midwest. Another to bring gas down from Alaska. ExxonMobil partner. Building largest compressors globally for the Mackenzie valley pipeline. $800M to get through regulations. $40B project. Mega project challenges. NGOs always ready to weigh in. Impact on right of way. Constructing below ground (unlike Alaska pipeline). Impact on consumers. 85% from clean sources, 15% coal. Reduce consumption. Substitution. Different forms of energy. Remove CO2 from atmosphere. Values: integrity, collaboration, responsibility, innovation. The entire financial sector was painted with one brush but Canada did relatively well. Things may unfold that way on energy side as well.
Damon Silvers, Director of Policy and Special Counsel for the AFL-CIO, Member of the Congressional Oversight committee for the TARP. – Ambiguities: Middle East blood, Nigeria, environmental issues. Good jobs in Alberta. Getting harder and harder to extract fossil fuels. People died on BP platform. Energy prices rising and becoming more volatile. Funds have chased commodity prices over time. Financial crisis should teach us the need for regulation. We are universal investors and don’t jump in and out for glamor. Bubbles: look out for them. Tobacco also reduced a lot of good jobs. Labor had a close relationship. We tried to figure out how to act responsibly. They ended up facing perjury charges, admitted to selling poison. There is no way to look at fossil fuels as anything other than selling poison. Good they are trying to do it less dirty but we shouldn’t continue to deny, even through there are a lot of good jobs there, that global climate change must be addressed sooner rather than later. The challenge isn’t how to shut it all down but is come up with a feasible transition strategy.
Collyer: Tobacco industry of our times. No. Hydrocarbons are going to be here. Policy makers will decide. This isn’t about my energy being better than yours. Focus has to be on cleaning up. Dirty oil? The worst kind of tobacco. Market will decide. Barriers could be put in place based on environmental damage.
Moderator Chrystie Freeland, Global editor-at-large, Reuters, Canada. – Asks Ferguson about worst case scenario? Yes, they’re looking at that. Every employee must understand their safety role. How do you make sure you go home safely. Governance practices and procedures. Understanding risk. He doesn’t contemplate an environmental disaster. When pressed, he responds that a “steam rupture” could come to surface. But it could be easily contained and mitigated. The inherent risk is low.
My reaction: Come on, you just lost all credibility with that answer… although, I then start thinking the Gulf spill could be good news for oil sands. For a more balanced view, see Report Weighs Fallout of Canada’s Oil Sands, NYTimes, May 18, 2009. My conclusion: If reliance on oil is like tobacco, oil sands will place us on a speedier path global warming and massive death… even if a lot of profits are made along the way.
Session 5 – International Financial Reporting Standards – Was Accounting a Root Cause of the Global Financial Crisis?
Were accounting standards one of the reasons behind the financial crisis? How do the standards continue to impact on companies?
Shyam Sunder, James L. Frank Professor of Accounting, Economics and Finance, Yale School of Management. – Principles are hare to define. In legal systems, we have judges. The head of Arthur Andersen liked the ideal in the 1950s. Sunder likes it today. God has no accounting standards. While institutions seek order, we should keep in mind that any such order will be circumvented. Messiness will continue.
Paul Cherry FCA, Chairman, Standards Advisory Council,
Canada. – Canada put in place a form of arbitration.
Unfortunately, it was done once and shelved.
Moderator Kim Shannon, President and Chief Investment Officer, Sionna Investment Managers, Canada
Session 6: The New Balance: Strategic Environment for Business, Keynote: Lowell Bryan, Director (Senior Partner), McKinsey & Company, US
Dramatic shifts in world economy. Showed pictures of a couple of cities in China 15 years ago and today. Wow, from hovels to high rises. Expects, 50% growth in next 10 years from emerging markets.
Drivers. Organized people, urbanization, labor productivity. Less dependents, purchase power. Over 10-15 years there will be adjustments in currency that may reduce growth. Over $1B new middle class consumers in next 20 years. Creating new business models. Rethought and re-engineered. Refrigerator designed for interruptible electricity. GE developed electrocardiogram for India that cost 15%. Demand is up for raw materials.
Volatility could be back. How do you get your house in order with this much unemployment? We could revalue our currency. Demand for commodities will put pressure on prices. If currencies are overvalued, they will overpay for commodities. Developed countries are paying too little. China is paying too much.
Fault lines: currency misalignment, commodity (currency issue), debt risks. Surveys show a high probability of another financial shock in next 3 years. Safe harbors? Organizations need to be more flexible. Scenario planning should be taken seriously. Improve risk/reward opportunities. Banking relationships. Error on side of over-capitalization, over-liquid and over-prepared. Decisions just in time.
Invest heavily in options that pay. Lots of broken business models, capital strategies, regulatory regimes, posture to governments, make decisions just in time. Keen awareness of time horizons critical.
Companies have more degrees of freedom than individuals and governments. There are consumption growth opportunities. Assumption for inflation: risk here is financial. Demand driven high in developing markets. Developed world cutting spending and deficits. Will global structures survive? He thinks we’re going to get adjustment because market forces will push us to do so. Look at Asia in 1987. Their policies have served them well. Difficult economic times could lead to other problems.
Rise in populist governments. If you express your fears and prepare, maybe they won’t happen. Governments need right policies. Will populations do the right thing in a crisis? US saves more, gets better trade balance… not happening. Democracies frequently don’t understand their own interests. We face a backlash from a fading middle class, like the Tea Party. It has to happen to get policy adjustments. He’s confident government leaders will do right thing… eventually.
Welcome Reception at the Royal Ontario Museum
Peter Dey, Chairman, Paradigm Capital Inc., Canada received a lifetime achievement award for his work in making corporate directors more effective, developing governance guidelines in 1994 for companies on the Toronto Stock Exchange, and later helping develop global governance guidelines for the Organization for Economic Co-operation and Development and its Global Corporate Governance Forum.
Dey said he supports shareholder activism by advocacy groups like the Canadian Coalition for Good Governance (CCGG), but said their best tool is the use of private conversations with a board, not “public confrontations.” “Where you can be most effective is identifying good directors, getting them on the slate and electing them, and, if necessary, removing ineffective directors,” he said. “But to try to jump in and make judgments where the board should be making judgments, I think is just the wrong direction.”
As Canada gears up for the G20 summit, Toronto also gets ready to host the world’s largest investors at the International Corporate Governance Network’s (ICGN) annual global summit. The conference runs June 7 – 9 in Toronto, Canada and will gather institutional investors representing almost US$10 trillion in assets under management. If you’d like to touch base with CorpGov.net Publisher, James McRitchie, please email me before or during the conference.
“Policymakers and market participants alike want capital market stability, however regulation alone is not the best approach. We encourage G20 leaders and policymakers to recognize that engaged shareholders who exercise their rights and responsibilities are also fundamental to the proper functioning of capital markets, said Christianna Wood, Chairman, ICGN Board of Governors.
Jim Flaherty, Minister of Finance for Canada, will open the conference with a keynote address at 8:45 a.m. on June 7. More than 60 speakers from 30 leading markets will tackle a range of subjects including:
- The new world order following the ‘2009 Great Recession’ and 2008 banking crisis;
- The aftermath of the latest oil disaster with a look at CSR in action and resultant costs to society and share value;
- Impact of high-frequency trading and its possible role in massive and unexplained “market glitches”, plummeting stock market prices and high volatility; and
- Increasing international role of ‘super’ investors from government controlled funds from emerging markets such as China and global hedge funds.
The three-day summit will look beyond the traditional corporate governance lens of a public company and will instead focus on the wider evolution of capital markets to restore equilibrium integral to stability and growth of the world’s economies.
The recent banking crisis and collapse of the Greek economy leading to plummeting stock markets on both sides of the Atlantic, highlights the inter-dependencies between the world’s leading stock markets that can no longer work in isolation. Today’s environment presents a ‘New Global Economic Balance’ and one which sets new regulatory challenges and responsibilities on market participants for both issuers and investors alike. “Thoughtful discussion on this topic is urgently needed with all parties at the table, including rising powers from China and India as well as influential investors such as Sovereign Wealth Funds or hedge funds,” said Carl Rosen Executive Director of the ICGN.
Leading speakers include:
- Lucian Bebchuk: Friedman Professor of Law, Economics, and Finance Director, Program on Corporate Governance, Harvard Law School, USA;
- Jane Buchan: CEO, Pacific Alternative Asset Management Company, USA;
- Antonio Borges, Former Partner, Goldman Sachs, Portugal;
- David F. Denison, President and CEO, Canada Pension Plan Investment Board;
- Scott Evans, CIO, TIAA CREF, USA;
- DR YRK Reddy: Founder Trustee, Academy of Corporate Governance, India;
- Anne Kvam: Head of Corporate Governance, NBIM, Norway; and
- Shyam Sunder: James L. Frank Professor of Accounting, Economics and Finance, Yale School of Management.
“Investors have no borders. Canadian institutional investors are among the most active participants in global capital markets. As a committed member of the ICGN, we are proud to co-host this Summit and we look forward to welcoming the world’s governance community to Canada to discuss the most pressing issues currently disturbing global markets,” said Jim Leech, President and Chief Executive Officer of the Ontario Teachers’ Pension Plan.
The conference coincides with the ICGN’s 2010 Annual General Meeting which will map the ICGN’s work programme going forward, policy initiatives and priorities, and will elect board members for the coming year.
The ICGN Annual Conference is being hosted by the Ontario Teachers’ Pension Plan and Canada Pension Plan Investment Board, two of Canada’s largest institutional investors and proponents of good corporate governance. The conference is co-chaired by Claude Lamoureux (former CEO of the Ontario Teachers’ Pension Plan) and David Beatty (founding Managing Director of the Canadian Coalition for Good Governance).
Lindsay Tomlinson, Chairman of the National Association Pension Funds, addresses the ICGN and notes that the Institutional Shareholders’ Committee put out a Statement of Principles on Shareholder Engagement. It will now have some enforcement teeth. (Check Against Delivery, 3/25/2010)
Firstly we expect that it will be an FSA requirement that all investment management firms authorised to do business in the UK will be required to make a statement about the way in which they comply with the Code. This could include words to the effect that they take no notice of it, but it would be a public statement which is made through our main regulator. A regulator which has immense power – for example to ban me from the industry for life.
In addition to that, there will be some form of monitoring mechanism which we proposed should be through each individual’s firms front office controls report a SAS70. And we are anticipating that the FRC will, itself, undertake some form of monitoring, probably at the aggregate level, but maybe extended to individual firms.
ICGN’s annual conference, this June held in Toronto, is on “The Changing Global Balances.” It just so happens that students at theRacetotheBottom.org are also exploring a good portion of this phenomena with a series “The BRIC Project,” which began on April 1, 2010. Dan O’Connell will write posts about corporate governance practices in Brazil. Rich Jasik will do the same for Russia. Kinny Bagga will examine India, with Dan Snare exploring corporate governance in China. Here’s a few fascinating observations from day one:
- Between 1997 to 2006, the cumulative volume of foreign portfolio investment into shares of companies located in BRIC countries grew to $697 billion from $70 billion.
- Brazil, Russia, India and China made up more than 50% of world GDP back in 1800, make up about 15% now are are likely to again make up 50% by 2050.
- BRICs already contribute almost half of global consumption growth.
- Being invested in the right markets—particularly the right emerging markets—may become an increasingly important strategic choice for corporations.
- “Conditions for Growth” include macro-economic stability supported by price stability via fiscal deficit reduction, institutions, openness to trade and foreign direct investment, and education.
- Corporate governance remains one of the most important factors constraining the BRICs’ attractiveness to potential long-term shareholders. Less active minority shareowners and large share concentrations inhibit market-driven changes in control.
I look forward to future posts in this interesting series.
In new calls for strengthened accountability, transparency and alignment in non-executive director pay, the International Corporate Governance Network (ICGN) is specifically calling for pay to consist solely of a combination of a cash retainer and equity based remuneration. The ICGN also calls for the elimination of perquisites for non-executive directors.
Commenting on the new Guidelines the ICGN Chairman, Christianna Wood says,
As the shareholder’s representatives, non-executive directors are elected by the owners of the company and must have a strong alignment of interest with the owners in the form of meaningful equity ownership while serving on the board. Furthermore, directors have a conflict of interest in that they set their own pay and as a result need to provide the utmost transparency and clearly state the board’s philosophy behind the director remuneration programme.
These principles were crafted over the last several years in a consultation that included many of the largest global shareowners. Ted White, Chairman of the ICGN Remuneration Committee responsible for developing the new Guidelines also commented,
These principles were hotly debated by our members from around the world. While practices differ from country to country, continent to continent, we all agreed that this was an important policy and that the principles of accountability, transparency and alignment of interest were agreed upon principles that should exist in the setting of all non-executive director remuneration programmes.
The ICGN acknowledges that remuneration practices differ around the world. Carl Rosen, ICGN Executive Director added:
Among the agreed upon themes are that non-executive director equity remuneration should be immediately vested and not performance-based. The ICGN believes that directors should have solely cash retainer and equity ownership remuneration, with a preference against the use of options.
The Guidelines aim to help communicate investors’ perspectives on this critical issue and are primarily addressed to companies and their non-executive board members. Since remuneration policies are set by the board, it is important that they be transparent, address shareholder expectations, and those setting them be held accountable. Accordingly, three principles underpin these guidelines: transparency, so investors can clearly understand the program and see total remuneration for non-executive directors; accountability, to ensure that boards maintain the proper alignment of interests in representing owners; and alignment of interest between non-executive directors and shareowners. The cornerstone of non-executive director remuneration programs should be alignment of interest through the attainment of significant equity holdings in the company meaningful to each individual director. Key aspects of the Guidelines are as follows:
- Places an emphasis on non-executive director alignment of interest with long-term owners.
- Draws a distinction to differences to executive remuneration, particularly related to performance-based remuneration.
- Opposes the use of performance-based remuneration for non-executive directors.
- Examines the tools of remuneration, and favors solely cash retainer and equity, with a preference against the use of options.
- Provides flexibility for companies to implement the principles in ways consistent with their unique circumstances.
- Calls for clear disclosure including the philosophy of the non-executive director programme.
- Calls for equity to be vested immediately but subject to holding periods.
- Suggests companies establish ownership guidelines for non-executive directors.
- States non-executive directors should not be eligible for retirement benefits.
The Guidelines are intended to be of general application around the world, irrespective of legislative background or listing rules. As global guidelines, they need to be read with an understanding that local rules and structures may lead to different approaches to these concepts. The ICGN will also seek change to legislation, regulation or guidance in particular markets where we believe that this will be helpful to generating corporate governance improvements and particularly where such change will facilitate dialogue and accountability.
The ICGN Non-executive Director Remuneration Guidelines has been developed by the ICGN Remuneration Committee in consultation with ICGN members. A consultation paper on the subject was sent to ICGN members for comment and a wide range of responses were received and contributed toward the final draft. The Guidelines will be launched at the ICGN Conference, being held on the 24 – 25 March at London’s Guildhall, entitled ‘Will shareholders rise to the ownership challenge?’ The event is hosted by the City of London and supported by the Department for Business, Innovation and Skills, among other partners.
The world’s foremost leaders in corporate governance will gather in Toronto from 7 – 9 June 2010 at the International Corporate Governance Network’s annual global summit to focus on the evolution within the global capital markets and its impacts on corporate governance. Full details of the program and side meetings can be found at www.icgn.org/conferences. According to David Beatty, Founding Managing Partner, The Canadian Coalition for Good Governance (Canada) and co-chair of the ICGN conference:
This year’s summit will bring together the world’s top thought leaders on corporate governance issues to look at new trends we’re seeing in the global capital markets – including the emergence of the BRIC countries – and its impacts on fostering good corporate governance from a global perspective. We are looking beyond the traditional corporate governance lens of a public company and focusing on the evolution of capital markets and the questions it raises for corporate governance. As we have seen from the recent global financial crisis, which sparked volatility across the industry, restoring equilibrium in capital markets and good corporate governance are integral to stability and growth in the financial markets.
“In an environment where policymakers and market participants alike are focused on reform, it’s time for ‘market-led’ change in corporate governance. Regulatory evolution alone is not enough to ensure global capital market stability. Thoughtful discussion on this topic is urgently needed with all parties at the table – including rising powers from China and India as well as influential players such as Sovereign Wealth Funds or hedge funds,” says Christianna Wood, Chairman of the board, ICGN.
The ICGN Annual Conference is being hosted by the Ontario Teachers’ Pension Plan and Canada Pension Plan Investment Board, two of Canada’s largest institutional investors and proponents of good corporate governance.
Over 60 speakers from 30 leading markets will tackle a range of subjects ranging from the evolution of capital markets and threats to good corporate governance, a new model for shareholder stewardship and rising influence of hedge funds and sovereign wealth funds, the efficiency of regulatory solutions to market-led problems, challenges to proxy voting across borders, executive compensation, increasing gender balance on boards, to the influence of BRIC economies and its impact on Western style governance.
Speakers include leading figures from policy, business, investment and stakeholder groups. The Conference is being opened by Jim Flaherty, Minister of Finance for Canada, which precedes a joint session with the World Economic Forum with a focus on the new global economic balance. Key sponsors are the Royal Bank of Canada, RBC Dexia Investor Services and TMX Group.
The conference coincides with the ICGN’s 2010 Annual General Meeting which will map the ICGN’s work programme going forward, policy initiatives and priorities, and will elect board members for the coming year. ICGN is a not for profit membership organization promoting the cross border exchange of information and experience, advocacy for reform and development of best practices in corporate governance. It has over 470 members based in more than 45 countries worldwide, who include investors responsible for $9.5 trillion in global assets.
James McRitchie, the publisher of CorpGov.net will be there. How about you, eh?