Judicial Independence: Conflicts of Interest was the primary focus of last week’s first Rock Center / SVDX program of the academic year. It was titled Condos on Lanai, Private Planes, and Electric Cars: Judicial Views of Purported Conflicts Among Silicon Valley Director. Continue Reading →
Tag Archives | Rock Center
Cultural Risks: As Advertised
The spotlight often shines on cultural risks only after an organizational crisis or incident. But forward-looking leaders are shifting to a proactive approach to cultural risk management. Macro business issues—cost and regulatory pressures, digital disruption, cyber threats, talent shortages, and others—have clear cultural implications. Corrosive cultures can pose significant challenges, making the organization more vulnerable to a wide range of potential risks. So is assessing an organization’s culture the responsibility of the board? If so, how can they be a change agent? Where does the board’s role end and management’s begin? And finally, how can a board objectively examine its own culture?
Robotics and AI: How will Boards Embrace Tomorrow’s Technologies?
As advertized: AI and Robotics are coming. There is no question that disruptive technologies are going to dominate not only what is introduced into the marketplace but also how our businesses are operated internally. Two evolving, and already disruptive forces, are robotics and artificial intelligence (AI). From the Board’s viewpoint, how do you get smart on these topics and understand their value to you? What are the implications of enabling a digital workforce within organizations? Are their opportunities for the governance process itself to leverage these technologies? Could you soon be joined in the Boardroom by an AI Bot? The future is already here at some boards. Continue Reading →
Today’s lead director and non-executive chair face a seemingly never-ending set of risks, governance decisions and strategic initiatives as a result of investors’ growing emphasis on board transparency, accountability, and independence. This insightful panel focused on the evolving roles of board leaders, specifically, the independent chair and lead director. Drive higher-performing boards through improved processes, strengthened director evaluation, recruitment efforts, and more effective shareholder engagement.
This was yet another great event sponsored by SVDX and Stanford’s Rock Center for Corporate Governance. I am so glad I only live 120 miles away, so can easily participate in these events. These are my notes, with no guarantee of accuracy. This one was more packed than usual with lots of on-point participation from the audience. Like a good lead director, Ms. Gomez-Russum did an excellent job moderating. Her job was made a little easier, since none of the panelists seemed compelled to dominate. Each had interesting insights.
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Governance, Liquidity, and Employee Retention in an Era of Capital Abundance was the full title of last Thursday’s morning event sponsored by the Silicon Valley Directors Exchange and Stanford’s Rock Center for Corporate Governance. As billed, we were to hear
a panel of experts discuss the role of the board of directors in addressing challenges of governance, liquidity, and employee retention in an era of capital abundance. The discussion will cover trends in venture capital investments in private companies, including increased funding levels and the rising number of unicorns, the length of time companies are staying private (which is generally longer now than in the past), and exit strategy and valuation trends in acquisitions versus IPOs.
In addition, the panelists will debate the governance implications and the consequences for employees of companies staying private with relatively unlimited access to capital, including:
Companies, and in particular boards, can no longer rely on ad hoc interaction with proxy advisory firms to “check the box” on stockholder engagement on governance issues. This SVDX/Rock Center panel addressed the evolving landscape of stockholder communications in light of increased profiles of institutional governance departments. What are best practices for board and company engagement with stockholders? How can the company proactively think about topics of particular attention, such as proxy access, board diversity and tenure, exclusive forum bylaws, director nominations/elections and executive compensation?
The Rock Center Program for Journalists: A Primer in Corporate Governance is a one-day program intended to educate journalists who cover these issues. The program is scheduled for Thursday, June 9 at the New York Offices of Skadden, Arps, Slate, Meagher & Flom LLP. Applications are due May 20.
How should directors prepare for shareholder activism? That was the underlying question addressed by last week’s SVDX / Rock Center for Corporate Governance joint event – Shareholder Activism: The Good, the Bad or Just Ugly. Shareholder activism is in the news almost every day. How does it play out in Silicon Valley? Is activism beneficial to (some) shareholders in the short-term but harmful to the company (especially Silicon Valley companies) in the long-term?
As I reported in Replacing Board Members: The Elephant in the Room, SVDX and Stanford University’s Rock Center put on another great event last week that just about packed the house! These events are always top notch. A few nibbles and coffee or tea for breakfast, excellent company and a great program — what more could you want on third Thursdays.
If the video does not come up after several seconds, try reloading the page.
As noted in the promo for the event:
Board membership is difficult enough these days, even when the relationship between board and management functions well. But when faced with runaway management teams, the situation can quickly devolve, increasing business and legal risks for the company and its board members. What key principles should guide directors and their advisors when a management team ignores the board’s advice or refuses to keep the board fully informed on important business developments and strategic issues? What practical steps should board members consider when facing management teams who will not heed strategic advice? That elevate their own interests above those of the company? Or that engage in questionable and self-serving practices? Should a board member take control of the situation? Call a litigator? Fire the CEO? Resign?
The second annual Kirkland & Ellis Law Forum at Stanford’s Rock Center for Corporate Governance, brought together a leading academic, legal practitioners, and an investment banker to discuss recent trends in activist investing and their impact on the M&A market. What follows are my cryptic notes. The Center will probably post the video at some point, so view that if interested.
Activism has become a key catalyst for merger and acquisition (M&A) activity and corporate spin-offs (especially in the technology industry), while activist opposition has impacted announced deals.
On January 12, 2015, Stanford’s Rock Center for Corporate Governance hosted a panel discussion called “The Rise of Controlled Corporations.” Unfortunately, this is one program at the Rock Center that I missed.
With Alibaba’s recent IPO on NYSE (instead of Hong Kong or China), the “one-share, one-vote” corporate governance standard has once again been challenged. Continue Reading →
On October 14, 2014, Stanford Law School’s Arthur and Toni Rembe Rock Center for Corporate Governance hosted the discussion “Corporate Inversions: Desertion or Value Maximization?”
Unfortunately, I missed this one but at least the Center caught it on video. Now we can watch at our leisure.
Thanks again to Authur and Toni Rembe Rock for a great Center.
Two important surveys are now underway. If you are a board member (director) with a nonprofit, please respond to the first survey request below. If you attended the SRI 2014 Conference in Colorado Springs last week, please find details in the second survey request below. Continue Reading →
How will 2025 be different from today? What should you innovate, invent, create or build? What steps should you take today to position yourself and your company to flourish in tomorrow’s world? Those were some of the questions that were asked and at least somewhat answered on Tursday, October 16, 2014, as the Silicon Valley Directors Exchange (SVDX) and the Arthur and Toni Rembe Rock Center for Corporate Governance (Rock Center) sponsored a morning conversation with your directors, senior executives, academics and others in the corporate governance industrial complex. Continue Reading →
For his last show, five-year host, TK Kerstetter, reminisces with Scott Cutler about the key moments of the show and introduces the new hosts who will carry the torch forward. Kerstetter had a great run with lots of interviews with interesting people in corporate governance. Now, apparently, he looks forward to going back to being a board director. I wish him all the best. Thanks for all the good videos. Click to watch TK’s last show. Continue Reading →
Should boards reexamine stock buybacks? That was the subject addressed by a distinguished panel during a recent SVDX program hosted at Stanford’s Rock Center for Corporate Governance. What follows is the SVDX meeting pitch, with issues and brief bios, followed by a few of my observations at the event. Watch the video wrap-up (below) from WMS media Inc.
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Have you heard of “Big Data,” but aren’t sure what it really means (or how much it has to do with your industry)? Do you keep seeing articles about cyber-security, but couldn’t describe the difference between SQL-injection and a brute-force (hacking) attack, if your life depended on it? Have you seen the Google self-driving car, but wonder how that could possibly matter to your company (especially in the next five years)? Are you, as they say, somewhat “technically challenged,” but good at what you do and feel content to rely on one of your fellow directors to be the digital media and/or technology guru for the board? Continue Reading →
Bob Frisch is the managing partner of Strategic Offsites Group. He has more than 29 years of experience working with executive teams and boards worldwide on their most critical strategic issues. He has published three articles on teams and decision making in the Harvard Business Review: “Who Really Makes the Big Decisions in Your Company” (12/11), “When Teams Can’t Decide” (11/08) and “Off-Sites That Work” (6/06). Bob’s work has been profiled in publications from Fortune to CFO to the Johannesburg Business Report. He is a regular contributor to Bloomberg Business Week and The Wall Street Journal and his blog appears at HBR.org. Continue Reading →
Mason Morfit, a partner at ValueAct Capital and one of the most successful shareholder activists in the US, according to the Rock Center announcement, and Abe Friedman, of CJB Capital Management (former Global Head of Corporate Governance & Continue Reading →
The Rock Center Program for Journalists: A Primer in Corporate Governance brings together a small group of media fellows, selected from leading writers in business and finance, to attend an educational event in New York City, May 23-24, 2012. Continue Reading →
Why are corporate employees unwilling to report serious misconduct? Why are they also frequently unwilling to share good ideas for improving products, services and business processes? Fear of retaliation is most often cited for the failure to report misconduct; a sense of futility for the failure to suggest improvements. All too often, employees have a low level of trust in both management and the board.
The new 2011 Corporate Board of Directors Survey from Stanford University’s Rock Center for Corporate Governance and Heidrick & Struggles has uncovered surprises about who makes the best board directors: it’s not necessarily the current CEOs that most companies seek out.
“The popular consensus is that active CEOs make the best board members because of their current strategic and leadership experience,” says David Larcker, professor at the Stanford Graduate School of Business. However, when asked about Continue Reading →
UK-based proxy voting and research firm Manifest Information Services, which numbers the Swedish AP buffer funds among its clients, is planning to enter US market.
Manifest, whose US partner Proxy Governance International (PGI) withdrew from the market late last year, will begin marketing in the US shortly, said Chief Executive Sarah Wilson.
Manifest’s move comes at an interesting time, with the Securities and Exchange Commission’s new proxy access rules facing a legal challenge from the US Business Roundtable and Chamber of Commerce. (UK proxy firm Manifest planning to enter US market, Responsible Investor, 1/24/2011).
The United Nations Global Compact has expelled more than 2,000 companies for “repeated failure” to communicate their progress in integrating its sustainability principles into their operations.
The move reflects a stricter enforcement procedure against firms. The Global Compact said it has now booted out a total of 2,048 firms – the number was reached following the recent expulsion of more than 200 companies. This was at the end of a 2010 moratorium on expulsions in less developed countries. That leaves 6,066 active Global Compact participants in 132 countries. The target is for 20,000 participants by 2020.
The Global Compact is a framework for businesses that are committed to aligning their operations with 10 principles covering human rights, labor, environment and anti-corruption. (UN Global Compact expels more than 2,000 companies in enforcement drive, Responsible Investor, 1/24/2011). If you’re near Standard, you may want to attend the following discussion: The U.N. Global Compact: Principles for Businesses in Human Rights, Labor, Environment and Anti-Corruption, Sponsored by the Arthur and Toni Rock Center for Corporate Governance, Thursday, February 2nd, 2011, 12:45 PM – 2:00 PM, Room 190, Stanford Law School.
Diversity On Corporate Boards: When Difference Makes A Difference: The Arthur and Toni Rembe Rock Center for Corporate Governance at Stanford.
Speaker: The Honorable Luis Aguilar, Commissioner, United States Securities and Exchange Commission
Speaker: Joseph A. Grundfest, W. A. Franke Professor of Law and Business, Stanford Law School; Senior Faculty, Rock Center for Corporate Governance, Stanford University
Speaker: Mary B. Cranston, Senior Partner, Pillsbury Winthrop Shaw Pittman LLP
On November 1, 2010, I attended an event sponsored by the Rock Center for Corporate Governance at Paul Brest Hall, Stanford University. I’ve noted a few times that students don’t seem to be taking advantage of Rock Center events. This time the hall was comfortably crowded.
Background: Enacted in July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”) reshapes the regulatory framework for the US financial system. Its goal is to “create a sound economic foundation to grow jobs, protect consumers, rein in wall street and big bonuses, end bailouts and too big to fail, and prevent another financial crisis.” Continue Reading →
The last time I covered an event sponsored by the Arthur and Toni Rembe Rock Center for Corporate Governance at Stanford I complained that it was just attended by a few Stanford students. Such a program would have packed the house at Harvard, with students coming from all over the Boston area. (Stanford Rock Center Proxy Access Forum) This time I don’t know where they came from but the auditorium was packed… standing room only. Maybe it was the featured speaker who may just have more influence on corporate governance than anyone else in the whole world. (Disclaimer: These are my recollections of the event. I don’t type quickly and I didn’t record it, so there are bound to be errors. Let me know if you spot any. Oh, and sorry about the poor quality photos; I lost most in a download glitch.
Ronald Gilson introduced the Honorable Leo E. Strine, Jr., Vice Chancellor of the Delaware Court of Chancery, noting the Chancery is the closest to a common law court that we have in the US. He praised the court for linking experience and logic. Judges at the Chancery come over time to deeply understand their subject matter and many of the leading cases have been written by Strine over his 12 years at the Court. Not only is he widely known and respected for the opinions he has rendered, he is also one of leading scholars on corporate governance based on published articles.
Gilson also likened Strine to Groucho Marx. I don’t recall if Gilson elaborated on that comparison but I presume it is based on Strine’s quick wit and rapid fire monologue. Strine welcomed the comparison, saying he had just watched Duck Soup (a political farce) again the other night. He played to his audience with quips, such as Harvard being “Stanford East.” He made cultural references from Leave it to Beaver and Gilligan’s Island to current rock tune lyrics. Weaving humor and popular culture references into his talk gave a light tone to an important subject that impacts us all.
Strine began talking about the long tradition in the Delaware Chancery of being immersed in both the academic and real world. He related a story or two that conveyed to the audience that he believes government has an important role to play. Water, the Internet, etc. allow commercial exploitation of public technology. Government does make a contribution.
The generation of durable wealth is (or should be) the primary goal of for-profit business. The law provides investors limited liability to encourage wealth generating innovative behaviors that involve risk. Isn’t technology great. You can look at beautiful people on your laptops or iPad at the same time you listen to me speak, he said.
Strine made it clear that he favors a republican model of corporate governance over a democratic model, that is corporations are representative democracies, as opposed to direct democracies. In corporate governance, shareowners elect the board and the board represents the shareowner’s interests in their relationship with management. Shareowners may be required to vote on mergers and in other rare circumstances but primary authority is left to directors. The investor’s firm specific risk can then be diversified through many investments, which take only minimal involvement.
Direct democracy would refocus management’s attention from the actual business to meeting shareowner demands. Managers would become politicians. (Sidebar: See Toward A True Corporate Republic: A Traditionalist Response To Bebchuk’s Solution For Improving Corporate America, Harvard Law Review, 2006, which is written by Strine but “should not be confused” as representing his own opinion. It is offered as the perspective of “an open-minded corporate law ‘traditionalist.’ My description of this perspective attempts to describe fairly a school of thought about the American corporate governance system that not only has many adherents among investors, but also pervades the two major political parties whose members populate Congress and state legislatures,” says Strine. So, although the viewpoint is disclaimed as Stine’s, it appears he believes it is held by just about everyone else of any importance, except Lucian Bebchuk.)
Because corporations are republics, we have an interest in the fairness of elections, especially the election of directors. Indexed funds have no option to exit; they hold bad companies all the way down, until they’re out of the index. Investors are (or should be) looking for boards to ensure a sound corporate strategy, avoiding imprudent risk. There are collective action problems. Affordable challenges to management and entrenched boards (he didn’t use that term) are important in letting the market work. Strine appears to approve of an enhanced Rule 14a-8(i)(8), opt-in option for shareowner director nominees… not surprising, since that’s what Delaware adopted. (see SEC Commissioner Troy A. Paredes’ 5/20/09 speech on the subject) Strine believes the rules regarding shareowner nominees should be “investor driven,” rather than mandated by government. That would make better use of the corporate treasury by avoiding nuiscance campaigns. Investors should decide issues like when challengers would get a subsidy. Majority (of shares) should decide for themselves.
Then Strine took aim at investors with short time horizons. It isn’t just managers and directors who have a role to play if the system is to work. Shareowners must also fulfill their role with their own long-term interests in mind, based on their usual time-frame for investing, saving for the college expenses of their children and for their own retirement. Strine talked about the “separation of ownership from owners,” with more and more stock being held through intermediaries.
What are the most widely held companies in America? They’re not companies that actually make something, they’re funds like Fidelity and Vanguard. Here, as I recall, he made an indictment central to the whole talk; the more rights have been given to “alienated shares” (since they’re owned indirectly through funds), the more we are driven to short-term strategies of investing and governance.
His points then began to come in rapid succession, so I started taking them in bullet form.
- stockholders who make substantive proposals should have substantial long-term interests… $2,000 threshold far too low
- disclosure requirements should be updated regularly, 13D requirements are a joke; the English have figured this out
- Adolf Berle – embraced by right wing-nuts. Strange reinterpretations out of Chicago. Adolph Berle discussed separation of ownership from management and control but now we have separation of ownership from ownership. Too many fund managers are looking out for their own interests, rather than those of beneficial owners. He doesn’t believe in an unregulated market. Concerned about dispersed weak stockholders. Managerial class could become dominant (but now we should be more concerned with fund managers?). We’re obsessed with agency costs… could be “part of a drinking game.” Separation of ownership from ownership is one of the very big problems.
- Vanguard, Fidelity and other funds have the most stockholders (implication, with very little voice)
- 70% stock controlled by institutional investors…. subsidized by tax breaks…. limited choice through your typical 401(k) plan
- mountains of money flowing to these funds.
- hedge funds – good news you may get to invest in them through your pension fund because they’re “sophisticated investors.” But your pension trustees are not and they’re investing in hedge funds with an average 300% turnover.
- Mutual funds – 100% turnover a year turnover… pension funds similar
- 138% turnover in 2008 but then I thought he said 300% in 2008 across all exchanges. Anyway, point is too much turnover.
- High speed trading strategies are inconsistent with likelihood of beating the market…. Strine’s an indexed investor.
- Unfortunately, the time horizon of many institutional investors is one year or shorter.
- Owning Intel 10 times in 8 years isn’t long-term investing.
- The most rational investors are the least represented.
- Hedge funds, pressured to deliver 30% returns, are going to focus on short-term.
- Fund families normally vote together. Indexed funds within family echo the voice of family’s active funds, even though time horizon longer.
- Easy to press for votes because of internet.
- Excessive leveraging, accounting, managing risk (Says, won’t find these as corporate governance strategies — but actually I think TCL and GMI have been strong in these areas)
- Got CEO link to pay only after pressure from institutional investors and pay then soared.
- Reduction in takeover defenses, pill, majority voting (70% of largest firms now have)
- Short-term investors pressed for stock buy-backs, CEO turnover.
- Strong market for corporate control. Boards have never been more responsive. Excessive risk, under investment in firm.
- Contradictory to fight for shareowner rights and long-term growth since 100% turnover each year.
- Also fueled by ISS, which has a 2 year time-frame for their policy.
- Capital gain tax policy based on 1 year equated with long-term holding.
- If given more clout, it is vital that institutional investors be more accountable to beneficiaries and fund holders.
- Fund managers must compete on qtrly basis, since we buy into what’s hot and trade out of those that are prudent.
Strine ended by quickly throwing out some reform ideas to consider. (some of these may have been from a keynote at Directors Forum 2010) I didn’t get them all down but here are a few:
- Pricing and tax to discourage short-termism and fund hopping.
- Informed voting mandate has been potent. Unfortunately, there has been no informed investing mandate. Fundamental risk should be factored in. Build fundamental risk analysis into corporate governance measures. We need balance in risk compared to voting.
- Compensation of investment managers should be based on the horizons of beneficiaries and beneficial owners. Incentives should be based on long-term holding.
- 401(k) and college plans consistent with those time horizons. Stop mixing altogether. Create funds that focus on those objectives
- Indexes should act and vote consistent with long-term — stop giving vote to short-term buybacks and other strategies that temporarily bump up stock but actually rob from the company’s future.
- Limitations on leveraging and disclosure by hedge funds. Decrease ability to push companies into risky business.
- Proxy advisory services – “shouldn’t have to pay for the recipe.’ Should be able to read the cook book (can’t you? — You can at RiskMetrics, they even invited comment before finalizing for season). Can’t rely on voting advice unless their horizon is at least 5 years.
- Fixing the definition of “sophisticated investors.” Many trustees aren’t sophisticated investors and shouldn’t be able to take their funds into unregulated pools. If pools dry up, that may lead hedge funds to disclose, since they need that capital. County pension funds are generally not sophisticated investors…. its your money…. publicly subsidized. They are not effective monitors. Chasing returns is digging deeper holes. Yet, they insist they want access. There aren’t as many personal sophisticated investors…. if they don’t qualify as someone who can easily afford to lose their money, they should be banned or trained and certified.
- We need to know more about hedge funds – positions, voting policies, etc.
Nonbinding annual say on pay (Microsoft proposed a more sensible every three years), election reform, how much further can we go? Further incursions on the republican model create a public forum for pet concerns. Just how much direct democracy do we want? Constititons promote stability. The Senate is the oldest classified board. More important to promote long-term outcome.
Californians should have a special ability to identify with the problems of direct democracy because some of the mess out here (my words) is proposition driven. Companies (management) should have more leeway not less. 14a-8 voice nonbinding plebicite. $2,000 stock, no filing fee. Issues of corporate governance claiming to link to corporate profit should only be introduced in resolutions by shareowners with millions of dollars in holdings and a $2,000 filing fee. The current process ties up directors and officers with issues de jour without substantial benefit to the company or most investors.
Boards are working harder but not on the right things. We’ve mandated too many independent committees. The boards priorities have shifted to accomplish what is legally mandated first. You get what you mandate. New laws and mandates tell boards what more they are required to do but not what they can now do less of. How do we give them time to focus on what’s important?
Humans are fallible, especially when given too much to do. When given more, say what they should be doing less of. They should be focusing on what preserves value long-term. We can’t have everything. There must be tradeoffs. With choices come costs. Stop blaming those who run companies. We can’t expect managers to deliver long-term when the market is driven by gimmicks. People are seeking profits in too many stupid ways. Investors should look in the mirror for what needs fixed.
I think there was an implication that if proxy access is needed anywhere, it is needed at mutual funds. We won’t have optimal corporate governance until institutional investors can be held accountable. Investors should focus less on leverage and gimmicks, more on real cash flow and perfecting business strategies. Let’s get away from checklist proposals.
(Sidebar: See also Overcoming Short-termism: A Call for a More Responsible Approach to Investment and Business Management, The Aspen Institute. Also of note is Governance at Fortune’s 100 Best Companies to Work For, The Corporate Library Blog, 2/5/10. Most of the companies which excel in the employee satisfaction are privately held. Among those that are public, company founders or families have a disproportionate ownership stake. These firms feel less pressure to meet quarterly expectations and can take more of a long-term perspective.)
Q/A: Someone, I think a student, asked about rating agencies – choice A & B. Investor is interested in green rating. Strine answered there is too much risk tolerance for equity investors and the cost of externalities is too high for society, so he seemed to be endorsing a green strategy, other things being equal.
I asked a question about TransUnion or Smith v Van Gorkem. The Chancery had ruled against the board for gross negligence but then the Delaware legislature almost immediately took an action that could be considered overruling the Court because they enacted provisions in their General Corporations Code that allow directors insurance to cover gross negligence (Delaware General Corporation Law, section 102(b)(7)).
Even though I was listening intently, I didn’t hear a direct answer. Maybe criticizing any decision made in the Delaware legislature, even one made 25 years ago, is impolitic for a judge in the Delaware courts. I don’t know. He seemed to say that without such coverage, companies would have a hard time attracting director candidates. Additionally, I think he said something to the effect that protecting against corporate externalities was the more important issue.
Gilson raised the issue that AIG, before it imploded, had one of the best corporate governance ratings. He listed several strong features, including hold until retirement provisions. Strine said that there has been too much emphasis on independent directors and independent committees. We should be anticipating what the investor is looking for. Much of corporate governance standards are noise that only hurt a board’s ability to do its job. The electorate doesn’t want corporations to seek silly risky short-term gains with long term losses but investors aren’t out to protect society… they’re out to get money.
The problem at AIG was a “cult” that owed allegience to one person. Expertise to do exotica is lacking. They didn’t have an extermal monitor. Old style boards may have been fatter, happier, involved more employees, and the community. Board may have included a banker, members from related industries, a lawyer; they worried about the long-term. Now, there is an expertise gap. The need for independent monitors is higher. The derivatives at AIG were so complex they couldn’t be monitored. If you don’t know how your company makes money, you shouldn’t serve on the board.
Gilson followed up with something about the UK’s Walker Commission and how they’d maybe gotten it right, with an emphasis on risk management. I think Strine replied with something about bubble behavior not being new but some of the vehicles are, like credit default swaps. In many states you can’t bet on football but can bet on a company going down. Complexity is a risk in itself. What Lehman could get, now everyone can get.
There was another question asking if value and stock price are completely disconnected? Strine answered that prices are informative. Unfortunately, too many people trade on the greater fool theory. There’s plenty of evidence of not engaging in long-term investment because of the (hot?) market. Head injured investor behavior, is compounded by empowering them. If you tell people you’re going to get them a 30% return, you’re going to have press for short-term gains.
In the old days boards might tell you to get lost (Strine used stronger language). Now days they don’t stand and fight. Independent directors have become too much like politicians out to make a deal to keep ISS/RMG happy. Better to elect hedge funds to the board. At least it keeps them locked up. “It is the drive by shootings that get me.” There is a tendency that the market will over value what’s hot. Stock option backdating isn’t good idea. People do things (maybe especially bad things?) in herds. When markets reward companies for risk and fail to discipline too often, it distorts everyone’s approach.
The last question came like a bit of a bombshell considering the huge applause Strine had been given (more than I have ever heard for anyone else at these events) and the general deference he had been given. The question was something like, Isn’t it disingenuous to go after institutional investors, as if they were responsible for the recession? You say that shareowners have all this power but they’re only on the cusp of reaching what they’ve been going after, namely proxy access. Strine was essentially being accused of Blaming the Victim.
Strine responded that there is plenty of blame to go around but that institutional investors largely hadn’t faced up to their contribution. If you create an incentive structure built on short-term profits, you’ll get more risk taking than healthy returns. There was a failure of prudential regulation the wrong profit incentives. Investors have been trying to blame managers but they didn’t temper their own risk. Takeover defenses are way down, options were their idea (ed: institutional investors, because options linked pay to performance… but only in one direction). There are more independent directors. Plenty of blame.. bond rating agencies. His main point seemed to be that investors weren’t out there temporing risk, but were instead rewarding it.
I would have loved for the conversation to continue around this core issue but the program had already gone on longer than expected, so another good evening ended too soon. My own assessment is that Strine had many excellent points. Shareowner pressures for higher returns do shift costs to society in the form of externalities. The idea of tying pay to performance has largely backfired. The problem of churn is huge. While I agree with Strine that shareowners have gained power through a number of recent reforms like majority voting at very large companies, it is also true that shareowners have little direct control. Even if they win proxy access, the current proposal is to allow no more than 25% of any company’s nominees to come directly from shareowners.
There’s no question that Strine has emerged as the hardest-working, wittiest and most outspoken judge at the Delaware Chancery. He’s also been very innovative, like when he ordered Tyson to complete a merger with IBP or when he negotiated a deal between PropleSoft and its hostile acquirer, Oracle. However, Strine wants Delaware’s opt-in model, rather than a mandate from the SEC on proxy access. I can’t help thinking that is because his ship is tied to Delaware. Not only do a fifth of their revenues come from franchise taxes on corporations, Delaware also has a substantial revenue stream from unclaimed dividends and abandoned accounts held by brokers incorporated there, which Strine helped to negotiate for a former governor.
Corporate governance expert Charles Elson said the Dodd provisions requiring a majority vote for directors and providing greater legal backup to the SEC’s proxy access proposal could spell “the beginning of the end” for the state. A corporate exodus could leave the state in a “severe fiscal crisis,” searching for new revenue through dramatic increases in income taxes or a new sales tax, he said. “What everybody is worried about is things [getting] chipped away,” said Rich Heffron of the Delaware State Chamber of Commerce. “A company might say, ‘Why do I have to be in Delaware? I could be in Colorado.’ ” (Wall St. reforms could bite Delaware, The News Journal, 5/19/10)
I still tend to think real shareowners have too little, not too much, power. I couldn’t disagree more with his idea that shareowner proposals should be limited to those with millions of dollars in holdings who must pay a fee of $2,000 to get their item on the ballot. What’s next, a poll tax? Some of the most important reforms have been led by so-called gadflies like Lewis Gilbert and John Chevedden.
However, the problem of short-term investment horizons is real. Strine calls on tax policies to discourage short-termism but he certainly didn’t elaborate. Let’s get specific. What about taxing speculative gains (held less than 90 days) at 60%, less than a year at 35%, two years at 25% and thee years or more at the current rate of 15%? Even three years isn’t really long-term, but at least that would head us in the right direction. We could also make use of a Dutch auction system mandatory in IPOs or at least encouraged, so that companies begin public life with more long-term shareowners, rather than speculators.
Strine says risk isn’t factored enough into proxy voting decisions. I agree. One problem is that proxy advisors, like RiskMetrics, don’t have the staff to really dig into most companies. They tend to rely too heavily on governance policies applied broadly to most companies. A proposal recently revised for reintroduction by Mark Latham would allow shareowers to vote funding to advisors, based on the quality of their advice. Since the proposal essentially spreads the cost to all shareowners and avoids free-riders, it should result in far more money being spent, resulting in more in-depth research. (see Ultimate Proxy Advisor Proposal, Voter Media Finance Blog, 5/15/10)
For more from Leo Strine, see Why Excessive Risk-Taking Is Not Unexpected, New York Times DealBook, 10/5/09 and Toward Common Sense and Common Ground? Reflections on the Shared Interests of Managers and Labor in a More Rational System of Corporate, Harvard Law School John M. Olin Center for Law, Economics and Business Discussion Paper Series, 05/2007.
It was great to see a packed house. I hope it set a solid precedent for future events put on by the Arthur and Toni Rembe Rock Center for Corporate Governance at Stanford. See you there next time. In the meantime, check out this and other recorded events as they are posted.
The Arthur and Toni Rembe Rock Center for Corporate Governance at Stanford University has quickly emerged as a focal point for conferences and seminars, research, and the development of new educational and course materials. The May 6th Proxy Access Forum was the latest iteration of the fine work being done at the Center.
My disclaimer: I don’t take notes quickly enough to get quotes. What follows are a few highlights of what I thought were some of the important messages conveyed by each of the panel participants and the moderator. I left them in note taking fashion, so there can be no confusion these are my impressions (and because it is quicker for me), rather than the fully articulated sentences of the speakers. Although there was a great deal of back and forth dialogue, it was easier for me to just place thoughts under the persons name, rather than trying to capture the interactive dynamics. Within a couple of weeks, you’ll be able to watch the event on the Center’s internet site under May 2010. I highly recommend it.
Both Paredes and Friedman provided their own standard disclaimers. They were expressing their own opinions, not those of the Securities and Exchange Commission or the SEC Investor Advisory Committee.
Troy A. Paredes, SEC Commissioner. Voted against proposal. Objected to a-11
(mandatory) not opt-in a-8 (private ordering). Seeks balance between federal and state roles. Disclosure requirements of SEC are complementary to though control through state. Long-standing enabling approach of states vs prescriptive (mandatory one-size-fits-all) under federal. Different governance regimes optimal. Embraces private ordering provisions implemented by DE… Proxy access and expense reimbursement. His other concerns are for workability. Opportunity costs for staff. Proxy access will divert scarce SEC resources. Has some doubt proposal will increase shareowner value. Having input us helpful and gives us a lot to think about. Long history around this issue.
Francis (Frank) S. Currie, Davis Polk & Wardwell LLP – Regrets overly hard
positions taken by the business community against opt-in proposals introduced previously at the SEC under the previous administration. Objects to one-size-fits all approach. While companies are allowed to innovate under a-8, they can’t make access harder. We’ll see if the final regulations are softened. Rumor is the Commission will take a hard line. Concerned with SEC as referee. Explaining how it works at our company will take a lot of time. DE approach much more workable. Use experience of companies to come up with a best process. However, with all the scandals and public anger, the SEC is unlikely to soften.
Advice for companies. Study proposal in great detail. How mechanics effect what company already has in place…. like advance notice provisions. Do they clash? Your own rules on what candidates should look like. How many boards serve on? Rules might only apply to company nominees. Companies will need new timelines, taking into account possible shareowner nominees. Companies should be working on knowing their shareholders. Are they happy, unhappy? Why? Engage in a dialogue. Most are only going to be looking to proxy access as a nuclear weapon. Talk to them about new disclosures in place this year about why candidates selected by nominating are the best qualified. The whole way of running against a short slate makes difference; much more like a contest. Shareowners already have a lot of new weapons… broker votes gone, easier to withhold nomination with majority vote. We’ve already achieved overall balance, since these other corporate governance reforms alredy enable dialogue. High degree of uncertainty is reason for shareowner value going down when proxy access is considered. (reference to “The Regulation of Corporate Governance.”
supportive. The right is critical… no question in my mind. Best place to nominate is in the nominating committee. When you buy, you give up the right to hear decisions made in public. Board sessions are in a competitive market, so are private. Checks and balances slow in government… to make sure rights are protected and deliberative. Our companies, we want them to turn on a dime. In a well functioning company, we want directors nominated in the nominating committee because directors have the information and know what goes on in board meetings.
However, we also know that some boards fail. Not that they tried something that didn’t work, but they’re doing things in the interest of CEO, board member, etc. not in the interest of shareowners. In those cases, shareowners need a new voice. Proxy contests are very expensive and cumbersome. Favors a-11. But think right should be used only when there is some triggering event. That doesn’t seem to be the direction we’re going though. Now we’re pushing for a high enough threshold, 2 years holding to not make proxy access too easy.
RiskMetrics’ power is exaggerated. Most investors take research from multiple firms. Shareowners can’t make a decent proposal within the 500 words limitations, so opt-in procedures for proxy access can only be written by companies. Frank wanst companies to design; Joe wants shareowners to design… but shareowners can’t. The idea that the combination of a-11 and a-8 is only going one way is a red herring because what shareowners are going to vote for reducing their rights? We need to ensure a good basic rule. The cost of private ordering would be enormous… cost of putting it together at each company and litigating.
In response to comment from audience: It isn’t hard to find directors. Lots of people willing to serve. There is no doubt shareowners have made progress. There are fewer interested party transactions. What we need are a few basic rights: majority voting, end to or right to vote on poison pills, inject voice in boardroom. Few things. He doesn’t think say on pay is one of the critical few.
Anne Sheehan, CalSTRS. Briefly described CalSTRS… teachers. Holdings aren’t
as large as BlackRock but votes 7,000 issuers a year. Ability to nominate is ultimately what this is all about. Average holding is 14 years. Would use it rarely, after massive failure. Now option is to withhold vote from director. Many companies going to majority vote standard. But if a company fails to do anything, we need that access right. We talk to companies. They would have heard from us for years before we are nominating directors. 21 resolutions filed, all but 5 resolved. Ultimate tool in tool chest. We entrust directors to run the business. S&P 500 majority vote, not smaller companies. Last year shareowners voted against directors but boards didn’t accept resignation or allowed them to continue. Companies can already enact proxy access, but few have. CalSTRS is asked by nominating committees for recommendations and, along with CalPERS, they are building a database of potential directors based on a broad diversity of skill sets.
Joe Grundfest, Stanford. In the proxy access debate, I’m a strong agnostic for what type of access should be allowed at each company. Socially optimal result
should allow each group of shareowners to design the best proposal for their company. He almost hopes SEC does adopt a-11 so that he can file a brief questioning rational basis for their decision. If shareowners are smart enough to elect, why not smart enough to set the rules? First thing he will read the final rule for is the basis for the standards a-11. He looks forward to litigating. Six cases challenged at the SEC for setting arbitrary standards, six cases lost.
In response to Sheehen, there are corporations where companies kept directors after losing majority votes but they made changes, like getting rid of a staggered board. Shareowners may have actually wanted to end staggered boards more than they wanted to remove specific directors, so they accomplished something. Life expectancy of CEO at company much reduced when shareowners are ignored. The closer the SEC gets to proxy access, the more stock goes down, so most shareowners don’t view it as a plus. The SEC’s own questions in the rulemaking pointed to the error of their ways. Questions were more concerned with the ease of getting a nominee on the proxy, rather than the need for change at companies. The most obvious thing to do to create more defensible benchmarks in regulations is ask shareowners what they want. The SEC could have then weighed responses based on the size of a respondent’s holdings. A scientifically designed sample would have provided a better starting point and a much more defensible rule.
During the Q&A, I briefly raised some objections to the methodology and conclusions of the event study, “The Regulation of Corporate Governance” by Prof. David Larcker. Although the change in Delaware code to facilitate proxy access, through opt-in, may have been a preemptive strike aimed at weakening the need for the SEC’s rule, I didn’t think it should be seen as an event that would reduce the likelihood of a-11. (Sidebar: I take a very skeptical view of event studies, based on price fluctuations around introducing a bill or initiating a rulemaking because so many of these initiatives fail… maybe I should take a more careful look at the study but even if proxy access is associated with lower stock values in the short-term, that wouldn’t convince me that access wouldn’t be positive in the long run. As a rule is introduced, shareowners are concerned with uncertainty and additional expenses of more contests. Once a rule is in place, it is unlikely to be used with much frequency but the tool yields dividends to shareowners because it has a deterrent effect.)
The real point I tried to raise was the idea that since the business community was so concerned with being forced into expensive proxy contests if proxy access goes through, they should advocate amending the rule limit or eliminate active proxy solicitation. Limits on campaign spending would also be good for shareowners, since expenditures largely come out of corporate treasuries, reducing the money available for dividends or expanding the business. There didn’t seem to be a any takers. Both Currie and Parades seemed to favor reimbursing challengers for their solicitation expenses when they achieve some minimum threshold of the vote.
I also expressed my objection to one of the ideas offered up in the background paper prepared with the Forum. (see Stanford Rock Center Proxy Access Reform Paper)
Corporations, corporate law firms, and publicly traded companies have generally maintained that each nominating shareholder or shareholder group should only have one nominee, as opposed to the SEC’s proposal to permit a qualifying shareholder to have multiple director nominees. Accordingly, the final Rule 14a-11 could have a single nominee per shareholder requirement.
I said that even though I thought I had been following the discussions on proxy access, I hadn’t heard much discussion of this possibility and thought it didn’t make sense, since one investor or group would be more capable to recommending nominees that fit, both with the remaining board and with each other, with regard to skills and experience. Currie clarified that the idea wasn’t necessarily one that would be taken up in Commission amendments but they included it simply because it was contained in a large number of comments.
Another great event, attended mostly by Stanford students who didn’t add much to the dialogue. Maybe Stanford students will take these forums less for granted in the future and will come better prepared with questions based on a more thorough reading of the related materials. I can’t help thinking the event would have packed the house at Harvard, with students coming from all over the Boston area.
When I studied at Boston College, we sometimes had more students at Harvard sponsored events than Harvard did. I suppose our interloping was helped along by something like a precursor to the Boston Consortium. The fact that we could take classes at any member university probably helped. Students from all over the Bay Area should be taking advantage of future events at the Arthur and Toni Rembe Rock Center for Corporate Governance. And other than the panelists, where were the Bay Area investors, directors and CEOs? At least at last night’s event there were a smattering (from Intel and ICGN; both contributed to the dialogue). Hopefully, more will attend over time.