A George Washington Law School survey that asked alumni which elective courses had proven the most useful to them and which electives they wish they had taken. Here are the top 3 ranked courses on usefulness: Continue Reading →
Tag Archives | research
Quality independent directors are hard to find today. Ask Azim Premji. India’s third-largest IT company, Wipro, is about to join the horde of companies violating Sebi norms by keeping independent directors beyond the suggested nine-year maximum tenure.
After the Storm: The Unregulated Effect of a Corporate Governance Crisis Continue Reading →
The ERIAL (Ethnographic Research in Illinois Academic Libraries) project — a series of studies conducted at Illinois Wesleyan, DePaul University, and Northeastern Illinois University, and the University of Continue Reading →
The Delaware Journal of Corporate Law recently announced their hosting of the 27th Annual Francis G. Pileggi Distinguished Lecture in Law with the above topic by Professor Jill E. Fisch. The lecturer is a leading voice in the field of corporation law, and the lecture provides the Delaware Bar, particularly the members of the bench on both the Court of Chancery and the Supreme Court, an opportunity to challenge academia with practical concerns. The notice is available here. Registration information is available here. September 23, 2011 in Wilmington.
Jill E. Fisch is a nationally known scholar, whose work focuses on the intersection of business and law, including the role of regulation and litigation in addressing limitations in the disciplinary power of the capital markets. Her 1997 paper, Retroactivity and Legal Change: An Equilibrium Approach (Harvard Law Review), introduced a new framework for retroactivity analysis that could apply to both adjudication and legislation. Her 2003 paper (with Stephen Choi), How to Fix Wall Street: A Voucher Financing Proposal for Securities Intermediaries (Yale Law Journal), proposed a voucher financing mechanism to increase accountability for securities intermediaries such as research analysts, proxy advisors and credit rating agencies.
The Destructive Ambiguity of Federal Proxy Access posits that private ordering, within the framework of existing state regulation, offers a more flexible mechanism for maintaining equilibrium in the allocation of power between shareholder and managers. The article concludes by outlining the federal regulatory changes necessary to enable effective private ordering.
Business Ethics and Corporate Sustainability contains fourteen essays examining mainstream business models with the aim of designing more sustainable systems with regard to corporate responsibility issues, such as the environment and human rights, while reducing overall risk profiles and increasing legitimacy.
Christopher J. Cowton, for example, examines the moral status of corporations, their collective responsibility and systems of blame distribution. While it makes sense to blame a corporate entity as a first approximation, that should be only the first step in determining blameworthiness. Leaving blame as resting with BP for the Gulf oil spill, risks failing to identify and blame culpable individuals. Cowton moves us away from reified notions of corporate moral agency, to focus on methods of tracing responsibility in detail to specific individuals according to governance and responsibility frameworks. People are moral agents; corporations are not. Johan Wempe advances this notion further, examining notions of role responsibility.
Kevin T. Jackson retraces Aristotelian notions of generosity as a moral virtue and ends with a promising direction in his discussion of venture philanthropy, which in some respects, harkens back to businesses during the Middle Ages. Wouldn’t it be great if entrepreneurs started measuring themselves not by how much money Continue Reading →
Wharton Professor of Management Witold Henisz and two co-authors researched the role that stakeholder events played in companies’ efforts to maximize profits. Their paper, Spinning Gold: The Financial Returns to External Stakeholder Engagement, found the value of stakeholder relationships worth twice as much as the value of physical Continue Reading →
News Corp got Andrew Dominguez and Eben Esterhuizen to thinking about why boards fail. They came up with the following:
- No Repercussions: Shareholder lawsuits don’t pose much of a threat to an incompetent board. Most U.S. companies incorporate in Delaware, where state laws exempt board members from financial liability for their actions.
- Poor Data: Some boards receive too little or too much information – or just plain bad information. This often occurs when a company’s management is trying to manipulate the Continue Reading →
The Corporate Transactions Handbook by Lawrence Hsieh is an annually supplemented legal guide designed to help attorneys, bankers and, I would add, boardmembers, to become fully acquainted with the major legal issues related to a variety of corporate transactions in the most popular practice areas.
One unusual characteristic of the book, especially for a legal handbook on such a complex topic, is the lack of footnotes. This, and the extensive use of flow-charts and graphs (over 200), add to the guide’s readability. For me, the graphics are its major strength or improvement over other such guides I have read.
One of the potentially more interesting chapters for board members is Key Deal Point Issues, which provides an overview of some of the most commonly negotiated non-structural issues such as creating a collar, where parties agree to both a floor and cap, much like having a collar or call and a put to yield greater certainty to the value of a stock. An earnout provision can be used to bump up the purchase price or a portion thereof, based on the performance of the target after the closing date. This can be very helpful when the buyer wants target managers to stay onboard for some time after the transaction. The chapter provides a good guide to concepts such as representations, covenants, closing conditions, qualifiers and indemnification that boardmembers should be familiar with so they can properly assess proposed transactions.
These basic transaction types are discussed in much more detail in following chapters along with many other topics. Corporate Transactions Handbook covers a big subject, running in multi-dimensions from liabilities, consents, tax consequences, and transaction types to takeover defenses, securities laws and loan structuring. Lawrence Hsieh explains the broad range possibilities and potential pitfalls in enough depth to get most through more than the basics.
The Business Roundtable and Chamber of Commerce made their case and the Court found the SEC rulemaking on proxy access arbitrary and capricious “for having failed once again… to adequately assess the economic effects of a new rule.”
The SEC rules certainly didn’t come out the way Les Greenberg and I envisioned when we petitioned back in the summer of 2002. Ours was a simple proposal, summed up in one sentence:
The intended effect of the suggested modifications is that the solicitation of proxies for all nominees for Director positions, who meet the other legal requirements, be required to be included in the Company’s proxy materials.
I didn’t realize Just how bad the actual language is that got adopted until I read an illuminating paper by Jill E. Fisch of the University of Pennsylvania, The Destructive Ambiguity of Federal Proxy Access. I urge everyone who cares about this critical issue to read Fisch’s paper. Continue Reading →
I’m on the editorial advisory board of the Critical Studies on Corporate Responsibility, Governance and Sustainability series of books to be published by Emerald and so am helping them scour the world for contributing authors. The next book in the series will be edited by Dr. Suzanne Young, Associate Professor, La Trobe University, Australia, and Professor Stephen Gates, Audencia Nantes School of Management, France. The topic is Institutional Investors and Corporate Responses: Actors, Power and Responses. How Do Institutional Investors Use Their Power to Promote the Sustainability Agenda? How Do Corporations Respond?
In many economies, institutional investors such as pension funds hold the largest share of stocks, and as such are the dominant shareholder class. They are increasingly using their power to bring about a change of corporate Continue Reading →
A roundup of academic research from the world of IR studies via IR Papers: Quiz edition, 29 Jun 2011. I missed 3 out of 9 questions but guessed at several.
New research from Cesare Fracassi of the Department of Finance at the University of Texas at Austin and Geoffrey Tate of the Department of Finance at the University of California, Los Angeles finds that board composition should be a continuing target of regulatory reforms.
Our results suggest that having directors with external network ties to the CEO may undermine the effectiveness of corporate governance.
We find that firms in which a high percentage of independent directors have external network ties to the CEO make more frequent acquisitions than firms with fewer CEO-director connections. Moreover, these acquisitions destroy shareholder value on average, particularly in firms which also have weak shareholder rights..
We find evidence that external governance mechanisms can substitute for weak internal governance. The negative reaction to merger bids among firms with many network ties between independent directors and the CEO and the reduction in Tobin’s Q are strongest in firms with weak shareholder rights.
More at External Networking and Internal Firm Governance, HLS Forum on Corporate Governance and Financial Regulation, June 29, 2011.
The IRRC Institute announced a competition for research that examines the interaction of the real economy with investment theory. Two papers – one academic and one practitioner – will receive the new “IRRC Institute Research Award” along with a $10,000 award. Of course, we would like both prizes to go to CorpGov.net readers. One of many books you might want to read in preparing your paper is Corporate Valuation for Portfolio Investment: Analyzing Assets, Earnings, Cash Flow, Stock Price, Governance, and Special Situations by Robert A. G. Monks and Alexandra Reed Lajoux.
The following panel of renowned judges with broad finance and investment experience will carefully review submissions and select two winning papers: Continue Reading →
Like many, I read that a proposal at McDonalds to halt marketing to kids, retire Ronald McDonald, and report on links between fast food and children’s health, failed… winning only 6% of shares voted. Every change has to start somewhere.
However, I also learned from a reliable source that a proposal submitted by Florida SBA, with the assistance of the American Corporate Governance Institute (ACGI) to declassify the board won 77%. It was a real cooperative effort, with Dan Nielsen, the Director of Socially Responsible Investing at Christian Brothers Investment Services, presenting the proposal at the meeting.
It is great to see shareowners working together and even more exciting to learn about ACGI, which I see Nell Minow already discussed a bit back on May 10. Minow writes a little on the evolution of classified boards, cites a study that finds they insulate directors while providing no apparent benefit and discusses the campaign by Florida SBA and the Nathan Cummings Foundation to address many of the 10% of large Continue Reading →
From Enron to Lehman Brothers and the subprime financial disaster, we’ve seen the worst decade ever in my lifetime for equities, down 3.3%. Is it time to start stuffing our money into the mattress or is it time to learn something about corporate valuation from two experts?
Corporate Valuation for Portfolio Investment: Analyzing Assets, Earnings, Cash Flow, Stock Price, Governance, and Special Situations by Robert A. G. Monks and Alexandra Reed Lajoux will inevitably be compared with Security Analysis: The Classic 1934 Edition by Benjamin Graham and David Dodd. Corporate Valuation comes out favorably.
Yes, we have learned a lot during the last seventy years; Monks and Lajoux take readers on a tour Continue Reading →
Ralph Ward publishes a great little newsletter with quick bites of information for corporate directors. His Boardroom Insider is one of the few publications I always read cover to cover. (It helps that it is usually about 4-6 pages.) In the latest issue, among other articles, he reviews Julie Garland McLellan’s Presenting to Boards. I also reviewed McLellan’s book here but thought it worthy of a second opinion from Ward, especially since he has writtenfour books for directors. I skip his brief introduction.
Here’s a taste, looking at a particularly tricky board situation — how do you present to the board when it’s “acting up?” Since the board is at the peak of the company, and its outside members tend to have pretty impressive egos, getting everyone to focus, work as a team, and stick to the rules can be like herding cats. McLellan pinpoints the top “unproductive behaviours” that can make boardroom presentations a misery:
- Confidentiality. Is there a member of the board who tends to prove leaky to outside sources? If you’re presenting highly-sensitive info, it may be wise to ask the chair to give a quick comment to the full board on their fiduciary duty to maintain the privacy of board info. If you’re a non-employee presenting info to this board from the outside, you have every right to stress the importance of confidentiality of what you’re sharing.
- One conversation. “Sidebar”whispering or even discussions among directors during the presentation, if done at all, should be very brief and quiet. If a chat continues, McLellan advises the presenter “look to the chairman to see if he or she will say something.” Should this fail, just stop talking until the chatters get the point (don’t try to out-shout them). Boardrooms may be intense at times, but should never be rude.
- Personal animosity. This director and that director just don’t play well together, and your presentation gives them a chance to squabble. Perhaps you’re trying to make your case to differing factions on the board, who agree on nothing. Maybe a director makes clear he just doesn’t like you. “This is definitely the chairman’s job to sort out,” writes McLellan.
- Harping on. You may have a tightly planned presentation, but a member of the board can easily derail it with repetitive, off-topic, or ill-timed questions. Or, perhaps, one point in your spiel leads the board off into a 10- minute digression on why the company’s delivery trucks are painted blue rather than white. In any case, appeal to the chair to put discussion and questions off until the end. Since the board chair is the director most acutely aware of covering a full agenda with limited time, expect results.
Corporate Governance and the Business Life Cycle (Corporate Governance in the New Global Economy), Igor Filatotchev (Editor)
Most of the empirical literature on corporate governance is rooted in agency theory. While the principle-agent relationship and monitoring play a central role, governance is also concerned with entrepreneurship and contextual issues. The editor has chosen a good cross section of articles to help develop a framework to understand organizational governance and its life-cycle evolution. Part 1 addresses general interrelationships; part 2 moves us to IPOs; part 3 more mature firms; and part 4 declining firms and buy-outs.
One of the more interesting chapters is by Matthew D. Lynall, Brian R. Golden and Amy J. Hillman, which points to the importance of dominate power at the time of board formation. Path dependence suggests a board composition that meets environmental needs at one Continue Reading →
Corporate Governance: An International Review has been one of our “stakeholders” from the beginning. The July issue, which I just got around to reading, provides excellent articles around the general theme of research on shareholder action.
Antecedents of Shareholder Activism in Target Firms: Evidence from a Multi-Country Study, by William Q. Judge, Ajai Gaur, and Maureen I. Muller-Kahle, looked at shareholder activism targeted at firms located in three common law countries (i.e., USA, UK, and Australia) and three civil law countries (Japan, Germany, and South Korea) during the 2003–07 time period.
Findings: Activists target firms with two motives (a) to improve the financial performance, and (b) to improve the social performance of the firm. Firm size is unrelated to financial activism, but positively related to social activism; ownership concentration is negatively related to both financial and social activism; and prior profitability is negatively related to financial activism, but positively related to social activism. These relationships in the case of financial activism are generally stronger in common law legal systems, whereas those in the case of social activism are generally stronger in environments with a greater level of income inequality.
Takeaway: Boards need to understand the motivations of shareowners and open two-way lines of communication. Expect social activism to rise with growing income inequality. Continue Reading →
CalPERS. A report from consultant Wilshire Associates found that activist involvement by CalPERS increased returns at many of the 142 “Focus List” companies. Prior to the pension’s involvement, the companies’ returns averaged 83.3% below their various benchmarks; afterward they yielded returns 12.7% above the benchmarks. Although the cumulative 12.7% is not as high as past results, their corporate governance program still much more than pays for itself. From the report:
Most investment resources in the industry continue to be focused on identifying small misvaluations in publicly traded stocks. This is, perhaps, unfortunate since investors are not earning a satisfactory return on the manager fees and brokerage costs they pay, given the evidence showing that the public stock markets are fairly efficiently priced. However, the evidence is equally clear that many corporate assets are poorly managed and that resources spent on identifying and rectifying those cases can create substantial opportunity and premium returns for active shareholders.
CalPERS announced several actions to address concerns raised by the City of Bell salary controversy, including:
- Posting audit reviews of public agency membership and payroll data submitted to the retirement system
- Highlighting significant findings of public agency reviews and regularly report them to the CalPERS Board
- Establishing procedures and guidelines for CalPERS working-level staff to notify supervisors and senior management of unusually high compensation and salary increases such as those that occurred in Bell
In addition, CalPERS helped establish the Public Employee Compensation and Benefits Task Force, which includes CalPERS staff and representatives public employer organizations, League of California Cities, California State Association of Counties, employee and labor organizations, legislative staff and other, focusing on:
- Options for providing greater public disclosure of public employee compensation, benefits, and other information related to total employee compensation and benefits
- Options regarding caps on total compensation that can be considered for retirement purposes
- Options for mitigating the impact of excessive salaries on the retirement costs of a public employee’s previous public employers and other public agencies in the same liability risk pool
CalPERS had previously announced plans to review the compensation of CalPERS-covered employees who earn $400,000 or more per year in salary. Phase two of the review will look at CalPERS member salaries of $245,000 per year and above.
On September 7, 2010, from 6:00 p.m. – 7:30 p.m., the Sacramento Central Labor Council and PERSWatch.net will host a “CalPERS Candidates’ Forum,” moderated by the League of Women Voters of Sacramento County. The forum will be held in the CalSTRS Boardroom at 100 Waterfront Place in West Sacramento, next to the pyramid. We’re trying to arrange for free parking but haven’t confirmed that yet. This is your opportunity to meet and question the candidates. A video of the forum will be archived on the CalPERS website.
Citigroup. Nice item by David Reilly in the WSJ (Citigroup’s Paltry Debt Penalty, 8/17/10) He sides with U.S. District Judge Ellen Segal Huvelle who refused the SEC’s proposed $75 million settlement with Citigroup over the bank’s failure in 2007 to disclose sub-prime mortgage risks. Goldman Sachs recently paid $550 million for a lesser offense but the SEC only wants $75 million from Citigroup. Why go after only two Citigroup executives for the paltry sums of $100,000 and $80,000 and why should shareowners pay for the execs alleged missteps?
The problem is Citigroup shareholders, under current rules, couldn’t necessarily oversee their company. That is partly due to the difficulty in challenging board directors… For shareholders to be held accountable, the SEC has to let them act more like owners.
Unfortunately, even under the SEC’s most probable proxy access rules shareowners may just have a better view of wrong doing and their money sliding away, since even under the best of circumstances they will only get to nominate 1/4 of the board.
Climate Change. With extreme weather mounting and Congress dithering, WRI report outlines what we can do now to reduce GHGs. The summary, “Everything You Need to Know About Global Warming in 5 Minutes,” by Boston investment manager Jeremy Grantham of GMO does a great job of ticking off the causes, consequences, and controversies surrounding climate change. (The Go-Getter Approach to Climate Change, 17 August 2010, MurninghanPost.com.
Cooperatives. If sustainable technologies are about the what of the living economy, local and shared ownership designs are about the who: who will own the productive capacity of the nation, who will control it, and who will benefit from the wealth created. Minwind Energy is an example of shared ownership, an emerging, broad category of ownership design in which ownership is shared among individuals (as in cooperatives or employee-owned firms) or between individuals and a community organization (as in a community land trust, where families own their homes while a nonprofit owns the land they stand on). (A Different Kind of Ownership Society, via Yes! Magazine, Marjorie Kelly and Shanna Ratner, 8/3/10)
Corporate Governance. It is no longer realistic to look to government to rectify problems caused in the private sector, or to simply ignore such problems and their broader consequences. We all need to look for innovative ways to avoid such problems, such as using the governance process to do so. (Why Corporate Governance Matters to Everyone, Marty Robins, The Huffington Report, 8/17/10)
With the specter of dramatic regulatory changes hovering over them, U.S. public companies have been acting aggressively to streamline corporate governance practices and establish their executive compensation priorities, according to Shearman & Sterling’s eighth annual Corporate Governance Surveys of the 100 largest U.S. public companies. Key corporate governance findings include:
- Majority voting in uncontested director elections has been implemented in some form by 82 of the 100 largest companies, up from 75 last year and from just 11 as recently as 2006.
- Despite amendments to NYSE Rule 452 implemented last year (eliminating broker discretionary voting in director elections), no director standing for reelection at one of the 100 largest companies failed to receive majority support this year.
- The number of Top 100 Companies at which the CEO is the only member of the board of directors who is not independent increased significantly, rising to 59 this year from 49 last year.
- The number of Top 100 Companies with classified boards, of which there were 54 in 2004, declined to only 20, and of those 20, more than one-third were either in the process of declassifying their boards or received approval from their shareholders this year to do so.
- Seventy-one companies disclose they maintain an executive compensation clawback policy (an increase from 56 companies in 2009 and 35 in 2007 — representing a 103% increase in four years). This will become increasingly significant, as the new Dodd-Frank Act mandates clawbacks if a material restatement would have affected the amount received.
- There was a decrease in the overall number of compensation-related shareholder proposals; however, advisory say-on-pay policies continued to be the most prevalent proposal. In addition, the survey suggests that companies cannot assume that their say-on-pay advisory resolutions will pass. For example, three public companies (including one Top 100 Company) failed to win majority support in the 2010 proxy season.
Economy. Biflation, generally defined as inflation and deflation occurring simultaneously in different parts of the economy—specifically, rising prices for commodities that trade in global markets and falling prices for things bought with credit domestically, like homes and automobiles. (Is ‘Biflation’ Real?, Newsweek, 8/16/10)
Electronic Board Meetings. Despite the obvious advantages of using technology and moving to electronic meeting management, few companies have achieved buy-in and taken board meetings to an electronic platform. Some have, however – and South Jersey Industries (SJI) is one such early adopter. (Best practice: establishing an electronic meeting management process, Corporate Secretary, 8/17/10)
Global Corporate Citizenship. Prof. Surinder Pal Singh outlines how global corporate citizenship rests on four pillars: values; value protection; value creation; and evaluation. These four pillars not only underpin the long-term success and sustainability of individual companies, but are also a major factor in contributing to broader social and economic progress in the countries and communities in which these companies operate. Along with good governance on the part of governments, they offer one of our greatest hopes for a more prosperous, just and sustainable world. (The Concept of Corporate Citizenship in a Global Environment, Political Wag, 8/17/10)
As the US markets continue to debate whether we are still in a recession, on the road to recovery, or headed for a double recession, the Indian government is busy imposing regulations to boost corporate philanthropy and social responsibility. In an economy that continues to post steady growth despite upheavals across Europe and the U.S., India Inc. is increasingly facing scrutiny for its role—or notable absence—in the social and environmental growth of the country. (Forcing CSR in India: Is Regulation the Answer?, The CSR Blog, 8/16/10)
Green Chemistry. Two California departments within Cal/EPA are working to identify “chemicals of concern” in consumer products. Eventually, they will push companies to substitute less toxic chemicals and maybe even ban some of those that are killing us now.
Greenest Campuses. 162 American colleges and universities rated by the Sierra Club. Also includes first steps on Chinese campuses.
Proxy Plumbing. The Shareholder Communications Coalition consisting of the Business Roundtable, National Association of Corporate Directors, National Investor Relations Institute, Society of Corporate Secretaries and Governance Professionals, and the Securities Transfer Association prepared a PowerPoint presentation to explain its recommendations for reforming the proxy voting and shareholder communications rules. “This presentation document is intended to help public companies, investors, and other interested parties understand how the proxy system can be improved to benefit all stakeholders.” This is an important initial assessment of feedback on the SEC’s proxy plumbing concept release. I suspect I will disagree with several parts but I heartily endorse their call to:
- Do away with the VIF and replace it with a proxy card.
- Pass voting authority directly to beneficial owners.
- Enable beneficial owners to transfer their proxy authority back to their brokers or bank (e.g. client directed voting) or to another third-party.
Research in Progress. Stanford’s Rock Center for Corporate Governance and the Corporate Secretary’s organization are conducting a survey “to get some hard data and research on what companies are actually doing and hopefully figure out once and for all what elements of governance reform actually lead to improvements and which do not.”
SEC. Rebecca Files finds that cooperation with the SEC through forthright disclosure of a restatement (e.g., disclosures reported in a timely and visible manner) increases the likelihood of being sanctioned, perhaps because it improves the SEC’s ability to build a successful case against the firm. However, both cooperation and forthright disclosures are rewarded by the SEC through lower monetary penalties. (SEC Enforcement: Does Forthright Disclosure and Cooperation Really Matter?, SSRN, 7/14/10)
The SEC settled its suit with New Jersey over securities fraud by issuing a cease-and-desist order, which the state accepted without admitting or denying the findings. No penalties were imposed. According to the SEC NJ claimed it had been properly funding public workers’ pensions when they had not. The SEC has a special unit looking into more public pension disclosures. (Pension Fraud by New Jersey Is Cited by S.E.C., NYTimes, 8/19/10)
The S.E.C. said the fraud began in 2001, when New Jersey increased retirement benefits for teachers and general state employees. New Jersey did not have the money to put behind the new benefits, but every year after that, the state treasurer certified that the pensions were being funded according to the plan.
The SEC finally confirmed they will consider adopting proxy access rules on 8/25. Still no word on threshold, holding period, small issuer exemption. next Wednesday, August 25th at an open Commission meeting. No word on how the big question marks – the ownership threshold and holding period – will be resolved. Sunshine notice. The U.S. Chamber of Commerce has retained Eugene Scalia, the son of U.S. Supreme Court Justice Antonin Scalia, to review the forthcoming SEC rules for a potential legal challenge. (SEC Plan to Pry Open Corporate Boards May Face Challenge, Bloomberg, 8/11/10) J. W. Verret of the George Mason University School of Law has already proposed more than a dozen way to circumvent the law in his paper Defending Against Shareholder Proxy Access: Delaware’s Future Reviewing Company Defenses in the Era of Dodd-Frank.
Shareowner Engagement. With the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, power has shifted to shareholders. The 2011 proxy season is a game-changer as the rules require boards to seek shareholder support for compensation programs and even directorship candidates. (Directors, Do You have a Shareholder Engagement Program?, Karen Kane Consulting, 8/12/10)
United States Proxy Exchange (USPX). The USPX is a non-government organization dedicated to facilitating shareowner rights, primarily through the proxy process. They are structured as a chamber of commerce but unlike a typical chamber of commerce—which represents corporate executives—the USPX represents shareowners. Membership includes both institutional investors and sophisticated retail investors—many of whom have finance, corporate or legal expertise from their careers. Together, they work to promote an environment where engaged shareowners create value through the corporations they own. Check out their new website. Please join me; sign up for membership.
Back in July I posted a question on Compiled Audio/Video Files of Conference Calls: Does anyone know of a resource that contains video and audio files for company conference calls, annual meetings, etc.? I was following up on the potential next phase Stanford University researchers could take in their study of lying CEOs, Detecting Deceptive Discussions in Conference Calls by David F. Larcker and Anastasia A. Zakolyukina. Readers came through and I added a short subsection called “Earnings/Conference Call Research” to the Wall Street Research section on the Links Page.
Earnings/Conference Call Research
- BestCalls.com – earnings call transcripts and audio
- FactSet – see CallStreet Reports for transcripts
- Xignite – earnings call transcripts
- Yahoo! Finance – earnings calls audio
Thanks for your responses. Since then, the WSJ picked up on the research with the cleverly titled, How Can You Tell If A CEO Is Lying? (8/11/10), which of course, elicited comments like
- He is employed?
- His lips are moving?
- he is still breathing!
Humor aside, the researchers found that answers of deceptive executives during conference calls:
have more references to general knowledge, fewer non-extreme positive emotions, and fewer references to shareholders value and value creation. In addition, deceptive CEOs use significantly fewer self- references, more third person plural and impersonal pronouns, more extreme positive emotions, fewer extreme negative emotions, and fewer certainty and hesitation words…
We find that our linguistic classification models based on CEO or CFO narratives per- form significantly better than a random classifier by 4% – 6% with the overall accuracy of 50% – 65%…
In terms of future research, it would be useful to refine general categories to business communication. It would also be desirable to adapt natural language processing approaches to capture the context of word usage for identifying deceptive executive behaviors. Finally, it would be interesting to determine whether portfolios formed on the basis of our word-based measure of deception generate future excess returns (alpha) and/or help eliminate extreme losers from a portfolio selection.
Soon after the WSJ article appeared, John Palizza posted Using Computers to Predict if a CEO is Lying at Investor Relations Musings, 8/12/10.
It will be interesting to see if investors pick up on any of this while parsing conference call answers. The Q & A session is already the portion of the call that gets the most scrutiny, and this research will only help to bring more focus to the area.
Then Dominic Jones posted a very informative How hedge funds analyze your earnings calls on his IR Web Report (8/13/19). Seems the CIA and Goldman Sachs are out ahead:
And that’s exactly what firms like Goldman Sachs and S.A.C. Capital Advisors have done for years, using experts trained in CIA-style deception detection techniques and advanced software developed in Israel that analyzes executives’ voices for signs of stress.
Jones goes on to note that Broker, Trader, Lawyer, Spy: The Secret World of Corporate Espionage, by CNBC reporter Eamon Javers, explains how Business Intelligence Advisors get hired for as much as $800,000 a year by some of the biggest names on Wall Street. BIA claims that since 2001, they have analyzed over 50,000 Q&As, over 4,000 earnings calls across more than 1,500 companies in more than 30 countries using their model, which also takes tone into account, something you can’t get in a transcript.
Jones goes on to cite an earlier study, The Power of Voice: Managerial Affective States and Future Firm Performance by William J. Mayew and Mohan Venkatachalam, which found that negative emotions detected in executive’s voices predict that companies are more likely to miss consensus forecasts during the next three quarters than they did in the previous three.
In a somewhat related post, CEO’s online video mea culpa boosts investment — study (8/16/10), Jones cites another study that found when CEOs take responsibility for financial restatements via online video, investors’ trust in management rises and they recommend larger investments in the firm. (Using Online Video to Announce a Restatement: Influences on Investor Trust and Investment Decisions by professors Brooke Elliott, Frank Hodge, and Lisa Sedor)
I’m hoping all this will be fodder for a couple of young linguistic students I know, one studying in Sweden and the other in Canada. Maybe if they apply themselves during the next decade or so I can visit them in their future mansions… or at least they might be able to pay off those college loans they’re accumulating.
On December 31, 2007, the Wall Street Journal reported that Ameriquest Mortgage and Countrywide Financial spent respectively $20.5 million and $8.7 million in political donations, campaign contributions, and lobbying activities from 2002 through 2006 to defeat of anti-predatory lending legislation. Such anecdotal evidence suggests that the political influence of the financial industry contributed to the 2007 mortgage crisis, which, in the fall of 2008, generalized in the worst bout of financial instability since the Great Depression.
Using detailed information on lobbying and mortgage lending activities, Deniz Igan, Prachi Mishra, and Thierry Tressel find that lenders lobbying more on issues related to mortgage lending (i) had higher loan-to-income ratios, (ii) securitized more intensively, and (iii) had faster growing portfolios. Ex-post, delinquency rates are higher in areas where lobbyist’ lending grew faster and they experienced negative abnormal stock returns during key crisis events. The findings are robust to (i) falsification tests using lobbying on issues unrelated to mortgage lending, (ii) a difference-in-difference approach based on state-level laws, and (iii) instrumental variables strategies.
These results show that lobbying lenders engage in riskier lending. The authors conclude their study provides some support to the view that the prevention of future crises might require weakening political influence of the financial industry or closer monitoring of lobbying activities to understand the incentives behind better.
Igan, Deniz, Mishra, Prachi and Tressel, Thierry, A Fistful of Dollars: Lobbying and the Financial Crisis (December 2009). IMF Working Papers, Vol. , pp. 1-71, 2009. Available at SSRN: http://ssrn.com/abstract=1531520
The Modern Firm, Corporate Governance and Investment (New Perspectives on the Modern Corporation), edited by Per-Olof Bjuggren and Dennis C. Mueller, explores developments in the theory of the firm, as well as how ownership structure and institutional frameworks impact performance. Below, I look at a small sample of the contributions contained in this stimulating reader.
As a demonstration of the book’s timeliness, the author of chapter 2, Oliver Williamson, was awarded the Nobel prize in economics while I was reading the book… always nice when that happens. In the essay included in this volume, Williamson argues that contract/governance is an instructive way of opening the black box of the firm, especially with regard to antitrust matters. He examines the application of a contractual approach to various forms, such as lateral integration, pricing, scaling, horizontal mergers, and conglomerates.
Dennis Mueller reviews the development of the firm, focusing on constraints (or their lack) on managerial discretion, finding constraints weak but developing. I a 1993 study with Elizabeth Reardon he found agency costs high. “Cumulative over the 19-year period, the 699 companies have collectively destroyed roughly $1 trillion by investing in projects with returns less than their costs of capital.” General Motors alone contributed $150 billion of the total. It would be interesting to see an update. The merger wave, growing competitive markets and the increased proportion of institutional investors increased constrains but the later weren’t as effective as some think, since institutional investors also got swept up in the euphoria of the bull market.
Kristen Foss examines managerial authority in the knowledge economy and finds changes are likely to be as dramatic as many suppose. “Although knowledge workers may have more bargaining power… they too will be subject to authority, as long as productive activities are characterized by uncertainty and measurement costs which make complete contracting prohibitively costly.”
Johan Eklund examines ownership concentration and dual-class equity structures in Scandinavia. He finds that dual-class shares drive a wedge between cash-flow rights and control rights. “Firms with only on equity class are, on average, investing efficiently, whereas firms with dual-class equity structure are over-investing… Vote-differentiation creates massive entrenchment and destroys large values.” “On average, ‘entrenched’ firms have returns on investments that are approximately 30 percent below the cost of capital.” “Separation of cash-flow rights from control appears to distort the incentive of the controlling owner by significantly reducing the incentive effect.”
Deakin and Singh look at the market for corporate control and conclude that takeovers are a very expensive way of changing management because of huge transaction costs. Lack of a market for corporate control in Japan, Germany and France avoids these costs but has not imposed hardship on their economies because of other mechanisms to discipline managers. Additionally, many acquiring firms do not impose discipline, since they are motivated by empire-building or asset-stripping.
Daniel Wiberg examines the relationship between institutional ownership and dividends. He finds that institutional ownership has a positive effect on dividend payout policies and disciplines free cash flow to management. Control instruments, such as vote-differentiated share, “induce investors to demand higher levels of dividends as compensation for increased agency costs.”
Lawrence E. Mitchell just published a very thoughtful paper, The Legitimate Rights of Public Shareholders. He argues that shareholders don’t contribute capital to finance industrial production but are, instead, net consumers. Since their investment incentives "significantly distort the behavior of corporate managers," leading CEOs to value stock price at the expense of long-term business health, shareowner rights should be eliminated, instead of expanded or enhanced.
The article reminds me a of Marjorie Kelly’s The Divine Right of Capital, which argued that instead of maximizing the return to shareholders, corporations should maximize total return …a concept I have been advocating at CorpGov.Net since 1995. Total return implies the long term efficient use of all resources, both natural and human.
I agree with both Mitchell and Kelly that, generally, stockowners aren’t providing capital to a company. We are buying shares from another stockowner, gambling the price will rise. We aren’t really investing, in the traditional sense. We’re buying the right to extract wealth in the future. I liked Kelly’s argument that efficiency is best served when gains go to those who create wealth. That puts an emphasis on brain power and knowledge workers.
Of course, the revelation that shareholders don’t contribute much isn’t new. Back in the 1960s Louis Kelso asserted that 99.5% of corporate capital came through internal earnings and debt. This insight led him to advocate employee stock ownership plans (ESOPs). Norm Kurland took up the cause with a call for a Capital Homestead Act. Kelly endorsed a similar idea and a renewed look at charters and other stakeholder reforms. Making every citizen a shareowner, especially in a broad-based basket of stocks, has appeal. Everyone would benefit from the wealth corporations develop. Yet, if ownership were universal, there would be little incentive for owners to externalize costs onto society.
Mitchell is less imaginative in this paper. He’s not sure if the problems can be solved by electing directors for five-year terms, letting creditors also vote, or by eliminating shareowner votes on all but except directors. This contribution is worthy, not in recommendations, which he says are beyond its scope, but rather in documenting a dramatic increase in off-balance sheet debt, the rise of stock buybacks, the fall in dividends and retained earnings and, more generally, the shift from "achieving gains from production to using the corporate machinery to manipulate stock price."
Yes, the shift from dividends to capital gains has distorted incentives in a way that "encourages managers to harm the long-term health of their corporations’ businesses in order to satisfy current shareholder demands." Yes, many forces have moved investors to think of themselves as simple gamblers based on speculative future value, rather simply extracting dividends from actual earnings. Yes, interested parties pushed more churning because it meant more commissions and fees.
However, I don’t think it follows that we should now begin to rely more heavily on the market for corporate control, especially one where shareowners are given less power. As an article in the FT points out, in the US overall debt reached an all-time peak of just under 350% of GDP, 85% of it private, up from 160% in 1980. (Seeds of its own destruction, 3/9/09) Like global climate change, we need to develop more sustainable models, both for corporations and for a salubrious environment.
Doing away with shareowner proposals under Rule 14a-8 won’t make companies more responsible. Shareowners raising issues through such resolutions serve as a better proxy for the public than reinforced insulation of CEOs and boards. After all, if the market had listened to ICCR’s warnings over many years and 120 resolutions on subprime lending and securitization, we probably wouldn’t be in the current financial mess. The fact that only 5% of retail shareowners are now voting under e-proxy is a sign that proxy voting must be made more meaningful, not less meaningful.
We should be looking at how to address short-termism and conflicts of interest that lead to gaming of numbers and the entire system. Perhaps long-term shareowners should have more voting rights. Maybe if more employees were shareowners we’d have a few employees on boards who are more likely to take a longer term perspective than day trading investors. Additional fiduciary duties on boards for the welfare of employees, the economy in general or for a salubrious environment might add a bit of stability and long-term thinking.
Why not look at the increase in off-balance sheet debt, the rise of stock buybacks, the fall in dividends and retained earnings and other shifts to manipulate stock price and address them directly? Mitchell had a better idea in The Speculation Economy: How Finance Triumphed Over Industry. There, he proposed the terms of capital gains taxes be tied to industry. For the auto industry that might be a tax on 90% of gains if sold in the first month, tapering to tax-free after seven years. "Perhaps the right time period is two years in the software industry, or four years in computer hardware." At least that solution actually attempted to address fundamental problems. Disenfranchising shareowners does not.
Andrea Romi, a doctoral candidate at the University of Arkansas’ Sam M. Walton College of Business, examined the SEC filings of 309 companies that received notice from the Environmental Protection Agency between 1996 and 2005 that they should expect to pay at least $100,000 in fines – the minimum amount required for disclosure by SEC Regulation S-K, Item 103.
Romi found that 72% omitted this information on their filing forms, a violation of federal law. Companies that did follow the law and publicly announced the EPA sanction saw the value of their stock fall by an average of 1.6%.
Since those that omit the information are unlikely to suffer any consequences, it is clear that more enforcement is needed. (Accounting Study Reveals Firms’ Failure to Disclose Environmental Sanctions, 2/17/09) At minimum, the SEC should fine these identified companies and award a finders fee to Ms. Romi. Unfortunately, the SEC awards no such finders fees.
The conference opened with a great dinner and a fascinating keynote speech by Jim Chanos, founder and managing partner of Kynikos Associates, the world’s biggest short-seller. In introducing him, conference co-host Larry Stambaugh proudly held up a copy of the Financial Times from two days earlier that had Chanos’ picture not only above the fold but above the headlines. (View from the Top, 1/26/09) In the FT interview Chanos said of the banks, "there is still a lot of damage on these balance sheets that has not come out." Asked if America’s financial shift is moving from New York to Washington, he said, "power is beginning to shift… anyone who doesn’t see that is kidding themselves." He thinks the next target for regulation is likely to be private equity funds.
Short positions represent only a small portion of hedge fund activity, according to Chanos. Take out 3-6% being arbitraged and that leaves only about 0.5-1% of pure shorts. Although short-sellers are often viewed as "skunks at the garden party," "we’re not your enemy." In fact, short sellers are needed for efficient markets. He told of the case of three Irish banks that lost 40% of their value and had to be nationalized when short-sellers were required to disclosure their positions.
Short sellers are "real-time financial accountants," whereas the SEC reviews are more like "archeology." He advised that when short-sellers attack, directors should ask their CEO or CFO why. If they don’t know, they’d better find out, because they are usually doing so based on real evidence of problems. He questioned why the SEC has so few staff with real world experience, suggesting that at least one commissioner should be someone with trading desk experience. He thought it was a good time to short the rating agencies and questioned how senior executives of Wall Street banks could be so clueless. Perhaps they weren’t, because many were shorting their peers.
Chanos sees that any company still distributing analog products is likely to be in trouble, given the marginal costs of distribution over the Internet. Expect a shakeout of firms as the giants go digital. On a more global scale, he seems to be shorting Mexico, seeing a crisis coming. He covered an enormous amount of ground and took lots of questions. No, he’s never been called by a director to find out why he is shorting a company. Ask your CEO or CFO. He’s usually found some accounting issues that show bad judgment.
Everyone I talked to learned a lot from Chanos. He wasn’t a "skunk at the party" at all, at least not at Directors Forum 2009. Those of you who were unable to attend might glean the much of essential message from Short Sellers Keep the Market Honest. (WSJ, 9/22/09) Of course, you’ll have missed a great deal of wit and charm. See also, IIROC releases two studies on marketplace trends related to short sales.
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Cynthia Richson moderated the first panel of the Forum’s program on the topic "Shareholder Hot Topics." Richson co-founded the Directors Forum and has been a dynamic figure in corporate governance well before creating the Directors’s Summit for the State of Wisconsin Investment Board, which the Forum used as something of a model. Panelists were among the most distinguished in the field: Richard Ferlauto, Peggy Foran, Mike McCauley and Pat McGurn. The auditorium was modern and comfortable. (right) Here, I’m not going to report individual comments either here or as I discuss other panels, since that could stifle frank debate at future Forums.
Needless to say, there was a lot of speculation concerning the role the Federal government will take at financial companies coming under the TARP. Shareowners will be taking a laser light to executive compensation, especially repricing. There are expectations that holding periods will extend beyond tenure. Investors expect stronger succession planning. Compensation should be built around developing and meeting strategic plans and leadership expectations.
Shareowners will be more proactive. Corporations should talk to their major investors before taking controversial actions. Companies expect investors to talk with them before submitting resolutions. Panelists expressed concern over both short-term shareowners and CEOs. They briefly discussed recommendations of the Group of Thirty, the Aspen Institute’s Principles, the shift to independent chairs, and many other issues. One colorful bit of advice that I think all would agree with came from Pat McGurn. "Engagement is critical. Don’t get in a defensive fetal position."
John Wilcox, Chairman of Sodali, previously with TIAA-CREF and Georgenson, moderated the panel, "Do You Know Who Your Shareholders Are? The Changing Face of Activism." Distinguished panelists included William Ackman, Brian Breheny, John Olson and Frank Partnoy. Short-selling was again discussed, including the issues of disclosure, share lending, voting by short-sellers, etc. Readers might want to review ICGN’s best practices from 2007.
Another topic discussed was the fact that so many investors are short-term holders, rather than long-term owners. Panelists appeared to agree that companies shouldn’t take action to placate shareowners by generating short-term gains that would impair long-term value. However, they couldn’t agree on requiring something like a one year holding period before being eligible to vote.
Again, it was another far-ranging discussion about disclosures, the need to create forward looking risk models, the problem of real property prohibitions against foreign ownership above 5%, the desire of shareowners to be able to talk with their elected representatives (directors), the use of Reg FD as an improper excuse not to engage (see interpretive release), and much more.
The final Monday morning session was on "The Future of Corporate Governance: the Next Five Years?" Henry duPont Ridgely, Steven A. Rosenblum, Richard Ferlauto, and Sara Teslik were moderated by James Hale. (picture on right) Again, lots of disagreement among this group. However, they all appeared to agree that technology is leveling the playing field. Just as it helped Obama win office, it is changing the way corporate governance is pursued.
Another development that could have lasting impact is the Delaware Supreme Court’s agreement to accept questions certified to it by the SEC. The first questions involved AFSCME’s proposal to CA, Inc. The Court knocked that decision out in twenty days. There was general agreement that dialogue is needed but disagreement as to how big of a stick shareowners need to get into the conversation. Majority vote provisions for director elections have been tremendously effective. Future actions may focus more on directors, rather than symptomatic issues that are often addressed in shareowner resolutions. When shareowners can speak with one voice, that facilitates agreements.
Directors need to focus on process with regard to risk. Bad outcomes don’t equal bad faith but bad documentation can certainly lead to trouble. There was a good discussion around split chair/CEO movement, including mention of Millstein’s recent attention to the topic. Yet, when the chair wants to actually be the CEO, the split might not work as well.
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Almost on cue, the keynote speaker for lunch, Rex D. Adams, discussed their transition to separating out the role of chairman. At that time Invesco was a UK company and the idea was pushed by investor groups, such as the Association of British Insurers. Invesco kept the structure when the moved to a New York Stock Exchange listing but is now reexamining their position. He acknowledged good arguments that a single position strengthens the focus of accountability on one person and ensures against distraction. However, he thinks the split provides greater transparency with respect to roles and puts the board in a better position to evaluate the CEO and management team. As chairman, he sets the board agenda and governs allocation of the board’s time but does so in close collaboration with the CEO. There were several questions from the audience and Adams did a good job of detailing his experience with split roles.
The afternoon broke into concurrent sessions. I missed "IFRS: Sound Principles — Or More Room for Manipulation?" Here’s a recent update from Business Finance – Regulatory Strategy 2009: What to Watch Right Now. Instead, I opted for the more popular, "Compensation: Pay Practices Under Fire, with panelists Karin Eastham, Charles Elson (left), JoAnn Lublin, Robert McCormick, and Anne Sheehan, moderated by David Swinford. Much of the discussion centered around repricing options, most of which are currently underwater. Movement now is to rethink the base vs bonus with more emphasis on restricted shares.
Directors were warned to tread carefully. Investors have a sense of betrayal and compensation packages may be the best place to regain trust… or lose it altogether. A good explanation goes a long way. I heard it in the panel and elsewhere that more investors are focusing on pay equity within the enterprise. Does the comp committee even look at it? Too often, CEO pay is driven totally by comparisons with other companies with no look within the organization. Employees won’t be motivated if CEO pay gets too far out of alignment. Few boards appear to be cutting back on board pay… maybe because directors are putting in so much more time and effort.
Of course, CEO pay remains the hot button issue and Forum panelists are in the news commenting. "This is different. The arguments against curbs don’t make sense any longer. My friends will bring up the issue even before I do. Opinion has been galvanized," said Robert McCormick. (CEO pay cuts: Not just for banks, CNNMoney.com, 2/4/09)
I then missed "Risk Assessment: Questions Directors SHOULD be Asking." Here are materials on that subject from Deloitte. Instead, I attended a session on "Corporate Governance "Lite" for Smaller Companies." The panel consisted of Janet Dolan, Gregory P. Hanson, William McGinis and Deborah Rieman, moderated by Scott Stanton. Panelist discussed some issues common to small companies, like too often trying to rely on board members as adjunct staff experts. Again, there was discussion of split chair/CEO positions and at what stage that transition might take place. They discussed SOX, the fact that small companies have thin or no coverage from analysts and their stock price is more vulnerable to attack on shareholder bulletin boards. The most fascinating discussion for me was of founders who don’t want to let go of the reins. What made it even more so, was discussion from audience members in that position.
That evening at dinner, we heard from New York Times columnist Joe Nocera. His speech was short and highly entertaining. He took a lot of questions from the audience on wide-ranging topics from the "great unwinding" that would have happened if Bush had been successful in privatizing Social Security, to the likelihood of credit card debt forming the next crater. One thing he was definitely sure of, each generation discovers its own cycle of "fear and greed." The cycles seem to be accelerating.
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Former SEC Chairman Christopher Cox (right) made a plea for an "exit strategy" from government ownership and involvement. The speech was very similar to one he delivered to a joint meeting of the Exchequer Club and Women in Housing and Finance last December. He spent some time on how we got into the mess, explained the economy goes through cycles and although he did not discount the need for intervention, his main message was that we shouldn’t conflate the role of market regulator with market actor. He said Congress does two things well, "nothing and overreacting."
Interestingly, he made no mention of reinstating the leverage limits the SEC removed on 2004 under William Donaldson. For years, financial institutions could lend 12 for every 1 dollar they held in reserve. "Using computerized models, the SEC, under its new Consolidated Supervised Entities program, allowed the broker dealers to increase their debt-to-net-capital ratios, sometimes, as in the case of Merrill Lynch, to as high as 40-to-1." (Ex-SEC Official Blames Agency for Blow-Up of Broker-Dealers, New York Sun, 9/18/08)
The 2004 decision gave the SEC authority to review the banks’ increasingly risky investments in mortgage-related securities but the program was a low priority for Cox. Seven staff, without a director, were assigned to examine the companies, with assets more than $4 trillion. As of September 2008, "the office had not completed a single inspection since it was reshuffled by Cox more than a year and a half ago." "The commission’s decision to effectively outsource its oversight to the companies themselves fit squarely in the broader Washington culture of the past eight years under President George W. Bush" according to U.S. regulator’s 2004 rule let banks pile up new debt, International Herald Tribune, 10/3/08.
Bill George was next up. He’s the type of inspirational leader conferences often put at the beginning to fire up those in attendance, but it works just as well to end on a high note. The themes of his advice to directors have broad appeal:
- Board independence is critical. Executive sessions were the most important thing to come out of SOX.
- Board composition should reflect their customer base — a diversity of life experiences and thought. Strongly favors self-evaluations and a mechanism to ensure directors rotate off.
- The form of board leadership isn’t so important — it doesn’t guarantee results.
- Time and commitment are important. He also favors totaling the location of board meetings for context/access.
- Board chemistry is important and is often improved by offsites or other informal occasions that result in honest conversations and straight talk about values and strategy.
- Increase interactions with management, not just the CEO. The company’s future may depend on it.
- On executive compensation, look internally as well for equity issues. How is pay for performance viewed from the inside?
- Ensure the corporation’s reputation through transparency. Employees should hear it from the company first, not the newspaper.
- Maximizing short-term shareholder value will destroy the company — focus on the next 10 years. Don’t forecast earnings — let the analysts do that.
- Remember that government charters companies to do something of value. Ensure you a fulfilling society’s mission and instill values in those coming up. People are not just motivated by money. Search for meaning and significance, being part of something special.
Continuing the theme of ending with a bang, the last panel of the Forum was "Selecting & Training Directors — the Role of the Governance/Nominating Committee." The moderator was Richard Koppes. Panelists were Bonnie Hill, James Melican and Kristina Veaco. Whereas some might argue that Christopher Cox spoke too long and left too little time for questions, that certainly wasn’t the case here. The audience had every opportunity to ask for advice on issues that concerned them. Hill spoke on lawsuits, risk issues and culture… much around how Home Depot had learned its lessons the hard way with shareowners. Melican talked about working with clients, such as CalPERS, about the needs of a particular board. With proxy access coming, proxy advisors may be placed in such a role on a more routine basis. Veaco got right into the grit of reference binders, policies, contracts, charters, etc., emphasizing the need for new director orientation and the benefits of being assigned a mentor. Plan ahead and get items on an annual calendar… two to three years ahead. Now that’s planning!
They talked about the importance of resources, like The Corporate Library, the Society of Corporate Secretaries and Governance Professionals, and Stanford Directors College. Hill (pictured at right) spoke of the importance of getting to know the directors before you join a board and the need for boards to think ahead, keeping a reserve of potential directors in the pipeline. She stressed the importance of peer evaluations… and the need to shred the written component. Melican suggested evaluations should be conducted by a third party rather than in-house staff. Veaco preferred evaluations have a written component as well as an oral interview and that the most sensitive questions/answers would occur orally, but that in any event the questionnaires would not be kept and only summaries of the results would be provided.
Hill advised shareowners they don’t have to submit a proposal before getting a hearing. Have the conversation prior to submitting proposals. Veaco seconded that, saying discussions should go on all year, not just during proxy season. Corporate secretaries should be reaching out to top shareowners.
Hill spoke of the increased time commitment directors are making and the use of conference calls and tools like BoardVantage. Again, split chair and CEO came up as a topic as it did so often at this year’s Forum. Hill described their use of a lead director at Home Depot. Pay was also touched on again. Home Depot has moved away from a per meeting charge, using a flat retainer. Veaco said in her experience directors are paid meeting fees, even when they are called on to attend a large number of meetings, and the amount is the same for telephonic as for in-person meetings, but companies can handle this differently. Melican stressed the need to look beyond compensation to what shareowners might view as perks. This is not the time for junkets in Paris or to line up the limousines. Look at your charitable contribution match. Think of eliminating meeting fees and address the issues before they hit the press. (see also Nominating/Governance Committee Roundtable)
Of course, much of the essence of the Forum were the encounters that happened outside the formal conference. The beautiful setting, wonderful food, small number of participants to speakers, the high quality of both, and the importance and timeliness of the topics all contributed to a very successful program. I’m sure Linda Sweeney has already begun planning Directors Forum 2010.
This year’s steering committee did a great job. Three cheers to each of the following:
|Larry G. Stambaugh||Cynthia L. Richson||James Hale|
|Linda Sweeney||Annalisa Barrett||David Bergheim|
|Bruce Doyle, III, Ph.D.||Karin Eastham||C. Hugh Friedman|
|Deborah Jondall||Garry Ridge||David Salisbury|
|John C. Stiska||Bill Trumpfheller|
Comments From Attendees
Putting Jim Chanos on the agenda on the first evening was absolutely brilliant. The theme of the meeting was the focus on shareholders. Many of us, including me, had never heard a talk by a short seller! Bill George was very inspirational and a wonderful way to top off the meeting. — Julia Brown, Targacept, Inc.
It’s always useful to understand what the latest issues are from a shareholder’s (or shareholder activists’) point of view. That helps us as management to be mindful of those as we make decisions and communicate with the shareholders. And, the exchange of ideas with other attendees was invaluable in helping improve our own companies’ performance on an ongoing basis. — Bruce Crair, Local.com
The planning and organization of the event left nothing to chance making it an outstanding experience. The Forum brought together people with diverse thinking and backgrounds but all dedicated to improving corporate governance throughout the United States. I was proud to attend and be part of the conference. — Richard A. Collato, YMCA of San Diego County; Director Sempra Energy, WD40, Pepperball Technologies and Project Design Consultants
The highlight for me was Bill George’s presentation – concise, insightful and practical. — John F Coyne, Western Digital Corporation
It was the best one yet – I really enjoyed listening to all the speakers — Lynn Turner, former SEC chief accountant
The conversational format, close to the audience, was much better than the usual sitting up high on a stage all lined up on a panel — Kristina Veaco, Veaco Group
My second Director’s Forum – again this year, very worthwhile. — Lou Peoples, Northwestern Corp.
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Pre-Conference Bonus Session
Even before Directors Forum 2009 began, there was a very worthwhile "Pre-Conference Bonus Session," entitled The Latest Research in Corporate Governance, presented by the Corporate Governance Institute at San Diego State University. There were two concurrent sessions. I attended Management and Law reviews. Therefore, I missed Finance and Accounting. All bibliographies and presentations are available on the CGI’s Post Conference Materials page.
Lori Ryan did a great job of touching on some of the highlights of studies published in 2008 on "management" topics. Following are a few of the many findings that struck me.
- The strength of a director’s identification with being a CEO will have a positive relationship with resource provision, but a negative relationship with monitoring. The strength of a director’s identification with shareholders will have a positive relationship with resource provision and monitoring. (Directors’ Multiple Identities, Identification, and Board Monitoring and Resource Provision by Amy J. Hillman, Gavin Nicholson, Christine Shropshire)
- After a large spike in likelihood of taking a board seat in year 1, it drops significantly (deterioration). Former officials better take one of those offers quick, before their currency expires. (Former Government Officials as Outside Directors by Lester, Hillman, Zardkoohi, and Cannella)
- Firms linked to fraudulent firms lost an average 1% of market value within 2 days of fraud allegation announcement, $49B overall. Penalties diminished when the linked firm exhibited certain "effective" corporate governance structures (e.g., heavily independent board, inside director ownership) (Director Interlocks and Spillover Effects of Reputational Penalties from Financial Reporting Fraud by Eugene Kang)
- Fewer women sit on boards in countries with long traditions of female elected political officials. (Female Presence on Corporate Boards)
- While the mere presence of women on boards does not increase firm value, greater gender diversity does (Gender Diversity in the Boardroom and Firm Financial Performance).
- CEOs’ ingratiation and persuasion tactics toward institutional fund managers reduce the effect of institutional ownership on specific changes in board structure and composition, CEO compensation, and corporate strategy that are believed to compromise management’s interests. (The Pacification of Institutional Investors)
- Executives ward off stock downgrades by currying favor with analysts that cover their companies. The greater the earnings shortfall, the more favors. Analysts who downgrade a stock receive significantly fewer favors thereafter. Even analysts who see a fellow analyst receive reduced favors from a firm are less likely to downgrade that firm. (Sociopolitical Dynamics in Relations Between Top Managers and Security Analysts)
- Advice seeking by CEOs increases with CEOs’ stock ownership and performance-contingent compensation, and with board monitoring. (Getting Them to Think Outside the Circle)
- CEOs are more likely to manipulate firm earnings when they have more out-of-the-money options or lower stock ownership, and when firm performance is low. (CEOs on the Edge: Earnings Manipulation and Stock-Based Incentive Misalignment)
- Firm-specific downside risk is strongly correlated with CEOs’ stock divestitures and their magnitude. (Too Risky to Hold? The Effect of Downside Risk, Accumulated Equity Wealth, and Firm Performance on CEO Equity Reduction)
- Only a firm’s largest institutional holder is perceived as having an information advantage, based on an increased buy/ask spread. The greater the percentage of shares held by the largest institutional investor, the greater the perceived information advantage. (Information Advantages of Large Institutional Owners)
- Increases in the size of portfolio holdings, number of portfolio blockholdings, portfolio turnover, and the importance of a particular holding reduce monitoring effectiveness. (Institutional Ownership and Monitoring Effectiveness: It’s Not Just How Much but What Else You Own)
- Firms with outsider-dominated (80%+) boards are more likely to enact shareowner resolutions that pass, as are smaller outsider-dominated boards and larger non-outsider-dominated boards. High levels of CEO ownership reduce the likelihood of enactment. (The Ethical Implications of Ignoring Shareholder Directives to Remove Antitakeover Provisions)
- Commercial ratings are not linked to firm performance. Commercial ratings are not linked to shareholder voting (or ISS voting recommendations), according to a forthcoming study by Professor Ryan.
Professor Paul Graf‘s bibliography highlighted some important recent court decisions and articles but his presentation honed in more on common threads and direction, which I find difficult to summarize. Much of his talk centered around the concept of "good faith," which can’t be indemnified. The duty to act in good faith is "intertwined" with the duty of care, but it is different. It is "shrouded in the fog of hazy jurisprudence, grounded in the duty of loyalty, but it does not involve self dealing." "It is more culpable than a breach of the duty of care—gross negligence."
Sounds a bit like a Zen koan. In Disney, failure to act in good faith is 1) where the fiduciary intentionally acts with a purpose other than that of advancing the best interests of the corporation, 2) where the fiduciary acts with the intent to violate applicable positive law, or 3) where the fiduciary intentionally fails to act in the face of a known duty to act, demonstrating a conscious disregard for his duties. The last was emphasized by Graf, who went on to quote several other attempts to surround the concept of good faith, including Nowicki’s notion that courts are focusing on bad faith, instead of defining good faith. I liked his distillation of Hill and McDonnell. "On the continuum of liability from duty of care to duty of loyalty, good faith occupies the vast middle ground." Apparently, ill defined ground.
From what I gathered, the duty of care is morphing into the duty of good faith in recent cases such as Stone v. Ritter and Ryan v. Lyondell. Plaintiff alleged the directors knew that they had a known duty to act to ensure an offer was the highest available but they chose not to act. Therefore, good faith was implicated for purposes of the motion to dismiss. What was crystal clear was the need to document "actions" taken, even if they would otherwise be viewed as non actions, since if the board "acts," its actions are reviewed under the more favorable business judgment rule.
In sessions I did not attend, David DeBoskey provided a review of 2008 in Accountancy and Nikhil Varaiya reviewed Finance. You can find their bibliographies and presentations on CGI’s Post Conference Materials page.