CEO Incentives can boost short-term stock price but destroy long-term value, according to the two winning academic papers of the Investor Responsibility Research Center Institute (IRRCi) annual investor research competition. The winning academic research teams share a $10,000 award. Continue Reading →
Tag Archives | long-term
Can We Really Govern for the Long-Term vs the Quarterly Fixation? This is Part 3 of my coverage of Directors Forum 2017 in San Diego, which was billed as Directors, Management, & Shareholders in Dialogue. I was also hoping to learn more about President Donald J. Trump and how his administration might impact corporate governance. See Part I and Part 2. As usual, the Directors Forum was under Chatham House Rule, so I’m mostly just posting a few observations that were interesting to me. Photos from the professional photographer at Directors Forum 2017 Photo Slide Show.
Norges Bank published their second annual report on responsible investment of the Government Pension Fund Global. They clarified expectations towards companies in 2015 and are creating a model I hope many will follow
The report provides a comprehensive review of work by Norges Bank on responsible investment in the management of the fund. Key areas of this work include developing and promoting international standards and principles, expressing expectations towards companies, and being an active owner.
Norges Bank expects companies to address a broad set of long-term risks in their strategies, investment plans, risk management and reporting. They updated expectations with regard to children’s rights, water management and climate change in 2015, and today they are also publishing their expectations for how companies manage human rights. Monitoring environmental, social and governance risks in the portfolio is an important part of Norges Bank Investment Management’s work on responsible investment. Continue Reading →
The Conference on the Use and Misuse of Stock Price will take place on Friday, September 19, 2014, from 9:00AM-5:30PM at Columbia Law School in New York City and will be hosted by the Millstein Center and IRRC Institute. Mark your calendar. Continue Reading →
Directors & Boards ran an important series of articles in its 1st quarter 2011 magazine on Fixing the Annual Meeting. Some excellent ideas are put forward, especially if we parse out the thoughtful from the conventional. (Link through the Shareholderforum to a compilation of most of the articles cited below from Directors & Boards and also reference their extensive review of electronic meetings.)
One of the most dramatic ideas, central to any real attempt to actually make annual meetings worthwhile, is the major survey finding by David Shaw, publishing Director of Directors & Boards. 90% of shareowners responded that annual meetings are “very important” or “somewhat important.” Contrast that with 78% of public company directors, who responded that annual meetings are “somewhat important” or “not very important” or “not at all important.”
Until directors recognize the importance of annual meetings to the shareowners they are supposed to represent and take their related duties seriously, the schism is likely to remain or grow.
Let’s look at the advice given by authors in this focus issue, starting with Continue Reading →
A recent brief from the National Institute on Retirement Security, Who Killed the Private Sector DB Plan?, finds the following are the main factors that contributed to the decline in private pension funds:
- Increased regulation, which has had the unintended consequence of impacting both the cash flow of the firm and volatility of plan funding;
- Private-sector industry changes, which resulted in fewer unionized jobs, and fewer new industries establishing DB pension plans; and
- Imperfect knowledge of employee preferences for traditional DB plans.
Despite these problems, traditional pension plans are good for both employees, in ensuring a certain modicum of income security in retirement, and for employers, as they remain a cost-efficient and highly effective recruitment and retention tool. Therefore, several solutions and policy are explored that could reverse the downward trend in pension plans. These include:
- Creating an avenue for third-party sponsorship of the DB plan,
- Amending regulations so that funding is less volatile,
- Finding ways to make it easier for employees to contribute to plan funding, and
- Designing plans so that they are more portable as workers change jobs.
I think a multiple employer set up on a geographic basis might be promising:
The New Benefits Platform for Lifetime Security would allow employers to choose between competing Benefit Administrators in order to offer retirement and other fringe benefits. These Benefit Administrators would assume the traditional role of plan sponsors, and would be organized on a geographic basis, with regional exchanges possible. The system would be open to both large and small employers in the public and private sectors, and would be governed by rules set by the Federal government.
Instead of focusing on how to take pensions away from public employees, we should be exploring ways to increase retirement security for all workers. Who Killed the Private Sector DB Plan? is a good start. From a corporate governance perspective, it is critical that a larger proportion of funds in the market are held for the long-term so that shareholders begin to think and act more like shareowners. Pension plans are much more likely to take a long-term perspective than are the funds typically available through 401(k) plans, which are often focused quarter-to-quarter in order to generate fees from more deposits.
See also, How to think about the public pension mess, Salon.com, 3/3/2011.
In Reining in Excessive Risk Taking by Executives: Experimental Evidence, researchers Mathieu Lefebvre and Ferdinand Vieider find that excessive risks are likely to be reduced by aligning executives’ interests with those of shareowners. (paper available at SSRN, March 2010) Abstract follows:
Compensation of executives by means of equity has long been seen as a means to tie executives’ income to company performance, and thus as a solution to the principal-agent dilemma created by the separation of ownership and management in publicly owned companies. The overwhelming part of such equity compensation is currently provided in the form of stock-options. Recent events have however revived suspicions that the latter may induce excessive risk taking by executives. In an experiment, we find that subjects acting as executives do indeed take risks that are excessive from the perspective of shareholders if compensated through options. Comparing compensation mechanisms based on stock-options to long-term stock-ownership plans, we find that the latter significantly reduce the uptake of excessive risks by aligning the executives’ interests with those of shareholders. Introducing an institutionalized accountability mechanism consisting in the requirement for executives to justify their choices in front of a shareholder reunion also reduces excessive risk taking, and appears to be even more effective than long-term stock-ownership plans. A combination of long-term stock-ownership plans and increased accountability thus seem a promising direction for reining in excessive risk taking by executives.