“One Share, One Vote? A Debate on Dual Class Share Structures” was the title of this year’s Morrison & Foerster Lecture in honor of Marshall L. Small, held at Stanford Law on May 20, 2019. The side favoring a ban, or at least sunset provisions, on dual class shares was slightly more convincing in their arguments. Continue Reading →
Tag Archives | Stanford
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?
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.
Continue Reading →
Tone at the Bottom: Governance Lessons from Wells Fargo
That was the advertised title for the program co-sponsored by the Rock Center for Corporate Governance and the Silicon Valley Directors Exchange. (Sign up to be on the SVDX mailing list.) After the program, I am still not convinced the real governance lesson from Wells Fargo (ticker: WFC) is not more about lack of oversight from the top, rather than the tone at the bottom.
It was another great panel of corporate governance, legal, and public relations experts for the deep dive into what went wrong. As usual, it was Chatham House Rule, so I’m mostly providing a little more background and some commentary on the presentations. I am sure others drew different conclusions than I did. The panel focused on issues ranging from public disclosure requirements, whistleblower policies and mechanics, compensation policies (including the board’s use of claw-back provisions), company policies regulating employee conduct, and the negative publicity suffered by the bank. Here were some of the advertised questions:
What happens when you have a well-meaning and talented board and a CEO who was regarded within the industry as one of the best managers with a stellar reputation? Was it inevitable that the CEO would be forced to step down by an outraged Congress and populist sentiment? What governance lessons from Wells Fargo are applicable to the non-banking industry, with special attention to Silicon Valley-based tech companies?
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 →
All directors are keenly aware of their responsibility in setting executive and CEO compensation. Increased external pressure on — and opinions about — CEO pay and more crowded meeting agendas limit the available time for meaningful discussion and make this role more challenging than ever. The stakes in getting executive compensation right are high, with real opportunities to engage leadership and drive business results, but also with real risks of poor outcomes. Continue Reading →
I thought the title of the program referred to heads I win, tails you lose. Now, I’m thinking ‘art’ is one side of the compensation committee coin, ‘science’ the other. Titles that keep us on our toes – just like the programs held by the Silicon Valley Directors Exchange and the Rock Center for Corporate Governance at Stanford Law. The stakes in getting executive compensation right are high, with real opportunities to engage leadership and drive business results, but also with real risks of poor outcomes. As advertized: Continue Reading →
On January 14th I attended another great event at the Rock Center for Corporate Governance. It was a dialogue between Professor Dan Siciliano, Faculty Director of the Rock Center and Brad Stone, author of The Everything Store: Jeff Bezos and the Age of Amazon. There was plenty of opportunity for audience participation… many getting in two questions. 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.
Continue Reading →
This book follows the theme of Corporate Governance Matters: A Closer Look at Organizational Choices and Their Consequences also by David Larcker and Brian Tayan. Larcker is the James Irvin Miller Professor of Accounting, Stanford Graduate School of Business. Brian Tayan is a member of the Corporate Governance Research Program at the Stanford Graduate School of Business. While Corporate Governance Matters (see my review) focuses on debunking “best practices” in corporate governance, A Real Look at Real World Corporate Governance takes more of an abbreviated case study approach, delving into how several decisions were made by boards at specific companies. Continue Reading →
Alan Olsen interviewed corporate governance expert Douglas Park for his radio program, American Dreams: Keys to Life’s Success radio show. Each week expert guests join Alan as they discuss how to make businesses thrive during challenging economic times and overcoming adversity.
What is corporate governance and what should startups be doing to use it to their advantage? “Actively manage the relationship with the board” says Dr. Douglas Park or Rimon Law Group. “Prepare for board meetings, not only in terms of what’s going to go on in the board meeting but even before and after” Learn more from Dr. Park as he reviews how corporate governance can help or harm your company. 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 →
The Shareholder Rights Project (SRP) and each of eight institutional investors it represents announced their collaboration for the 2013 proxy season to encourage 74 S&P 500 and Fortune 500 public companies to move to annual elections. Continue Reading →
M&A activity is on the rise, and recent decisions by the Delaware Chancery Court make the stakes for directors higher than ever. The businesspersons and lawyers on this panel offered plenty of insights about the life-cycle of a current M&A transaction from initial market check to consummation and then follow-up litigation, pointing out the all-too-frequent pitfalls for directors. Continue Reading →
Aligning CEO pay with shareowner value is key for many. A new tool (at least new to me), the Compensation and Wealth Calculator, from the Stanford Graduate School of Business, Corporate Governance Research Program, allows users to see how the compensation of CEOs and other NEOs, which they have already received over the years in the form of stock and stock options, aligns with share price. Continue Reading →
This was the second in a three part overview of shareholder activism, beginning with the history and an overview of the key players in the space; continuing with a behind-the-scenes look at non-contentious shareholder engagement and how its impacting companies and the market; and ending with an overview of proxy fights, PR wars and activist defense. 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 →
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 Rock Center for Corporate Governance at Stanford University is hosting a panel discussion on May 6th with SEC Commissioner Troy A. Paredes and relevant constituencies to discuss the SEC’s proxy access proposal and how it will play out.
A summary of the SEC proposal, highlighting the principal controversies raised by various commentators and interest groups, and prepared by a group of Stanford Law School students in conjunction with Davis Polk & Wardwell LLP, is available, along with the SEC proposal here.
Professor Joseph A. Grundfest will moderate the discussion. Speakers include:
- The Hon. Troy A. Paredes, Commisioner of the U.S. Securities and Exchange Commission
- Francis S. Currie, Partner, Davis Polk & Wardwell LLP
- Abe M. Friedman, Global Head of Corporate Governance and Responsible Investment, BlackRock, Inc.
- Anne Sheehan, Director of Corporate Governance, California State Teachers’ Retirement System
This event is free and open to the public; registration is requested. The background paper speculates on potential outcomes, including the following:
- The one-way versus two-way opt-out debate has become the primary remaining ideological battle before the SEC as it considers the structure of its final rule. An alternative opt-out proposal advanced by a number of opt-in proponents is to suspend operation of the SEC’s proxy access rule for companies who agree to pay for the cost of independent director solicitations by qualifying shareholders.
- It would not be surprising if the SEC increased some ownership thresholds in its final rule.
- The SEC may well adopt a two-year holding period in its final rule.
- It is expected the SEC may require or permit related disclosure requirements so that shareholders are presented more complete information.
- We expect the “first-to-file” aspect of the proposal to change to some variation of a “largest shareholder” rule.
- The final Rule 14a-11 could have a single nominee per shareholder requirement.
- We expect that the SEC may adopt suggested modifications to bar shareholders from making nominations for a period of 1 to 3 years if their candidates fail to 10% to 30% of the vote in order to prevent them from repeatedly forcing the company “into an expensive contested election or governance proposal, even if the vast majority of other shareholders opposed such actions.”
I certainly hope the SEC doesn’t yield to an opt out provision. The ownership levels proposed are already onerous, especially at small companies where institutional investors are scarce and entrenched boards are not uncommon. I expect a two-year holding period and for the SEC to move from first to file to something like the “lead plaintiff” provisions of the Private Securities Litigation Act of 1995, which favors large shareowners. Regarding the need to require additional disclosures, that tactic was used previously… to require more information for a short slate than for an actual contest. Any additional requirements should be minimal.
I don’t recall previously seeing the argument that shareowners be limited to a single nominee. No logic is provided for this recommendation, other than “Corporations, corporate law firms, and publicly traded companies have generally maintained that each nominating shareholder or shareholder group should only have one nominee.” That certainly isn’t compelling to me and I don’t expect Commissioners to find it so either. Allowing a single shareowner or group to nominate more than one director is more likely to result in a board with balanced talent, because qualifications can be better weighed in context.
Regarding the need to set voting thresholds and/or to bar resubmissions because of a fear of wasting corporate assets on expensive elections, a better solution would be to severely limit the amount that both sides can spend on such contests. Decades ago Lewis Gilbert recommended limiting the amount a company and insurgents can spend on a proxy fight, based on size of the company and number of shareowners, so as to not drain corporate treasuries. Nothing “forces” management to make these short slate contests, which don’t change control of boards, into “expensive contested elections.” Since the money they spend to entrench themselves comes out of the corporate treasury and potentially reduces shareowner value, both shareowner sponsors and the companies facing such “contests” should be barred from hiring solicitors to create expensive contests. Let shareowners decide based on the information contained in the proxy and on respective websites. Your thoughts?
The Rock Center for Corporate Governance at Stanford University makes available case studies used in teaching corporate governance. Listings are on SSRN. Typical issues covered include: Say on Pay, activist investing, Netflix and their compensation packages that allow employees to determine their own mix of cash and equity-based awards, 10b5-1 plans providing a safe haven from insider trading laws, comparison of executive compensation at grocers, and Gretchen Morgenson advocacy of shareholder democracy.
As an exercise to contemplate before the session, SVNACD asked prospective attendees to “consider the following question: what would a skeptical activist shareholder think if they knew exactly how many emails you sent and how many minutes you spent reading on your blackberry during your last board committee meeting?”
Lionel M. (Lon) Allan (right), Board Chair of the Silicon Valley Chapter of the National Association of Corporate Directors, introduced the panelists, F. Daniel Siciliano and Eric Finseth. Although he retreated to the back of the room, Lon peppered the panelists with informative chatter, adding a bit of informality and humor to what some directors may have viewed a scary topic. Electronic breadcrumbs could document more than you ever dreamed. Better start thinking a little more like a plaintiff’s attorney.
Getting right to the homework assignment, Dan informed us that litigation might well ensue around the issue of how much attention you paid when the big decision the board got wrong was made. Yes, you were pretending to pay attention, but you were using your smart phone during the meeting and the ability to multi-task is a myth. A recent Stanford study by Eyal Ophir, Clifford Nass and Anthony Wagner provides what Dan believes might be admissible scientific evidence. People who are regularly bombarded with several streams of information do not pay attention, control their memory or switch from one job to another as well as those who complete one task at a time. Dan suggests, “if you aren’t 100% engaged, then leave the room.”
Recent developments in Delaware law (perhaps brought about in part through papers such as Elizabeth Nowicki’s) now provide that directors acting in bad faith don’t have the protections of business judgment law. Inattention = bad faith. That could throw you to the mercies of your D&O insurance, which might be already be tapped out. Simple negligence isn’t a problem. However, recklessness is an aggravated form of negligence and amounts to acting in bad faith. Red flags put you on a higher duty of inquiry. Failure to follow-up might be considered “conscious disregard of a known and unjustifiable risk.”
Deliberately not wanting to know. That’s when you shift out of the innocent category to reckless disregard. Technology now makes it easier to document. So much more is now discoverable. It becomes very easy to assemble the evidence through a trail of electronic breadcrumbs because we know when the Fedex was delivered, when you opened an e-mail and and when or if you opened attachments. Secured systems may offer some protection against hackers, but because every step of the way is documented through logs, really good security might yield less privacy in discovery.
Maybe it is better to have video conferences, rather than phone conferences, because those on the call might be less likely to multitask when people see them. There was some discussion around the widely known cases of Enron and Worlcom where directors had to pay out of their own pockets. The real case to look to might be Just for Feet, where the out of pocket expense to directors was $41.5 million. D&O insurance was exhausted by shareholder class action litigation filed two years before the bankruptcy trustee’s lawsuit commenced. Directors with particularized skill sets are more vulnerable to a higher expectation regarding diligence in their specialized field.
What constitutes a red flag? Not so much a pure business decision but clear violations of law (such as option back dating, false claims, payments to doctors for referrals). Where the board learns of such violations but fails to shut it down is the main problem…. not making reasonable efforts to avail yourself of information flow. Did they put a system in place to inform themselves? To actually get stung, it appears that not only do you have to nap at the board meeting, you have to know you were napping and that the meeting was important. However, those electronic records, even the meta data that’s left after you thought you erased it, can provide evidence of virtual napping through inattention.
Discussion shifted to the fact that with majority voting at many companies, directors might engage in more discussions with institutional investors to ensure reelection. You obviously have an incentive to keep those folks happy. Watch out for the record re Reg FD (not publicly available information), inconsistency between what you say and what the company’s SEC filings say. Inadvertent disclosure, can be cured by filing a form 8-K. Immediate disclosure must be made public within 24 hours. Map out your communications in advance. It is often better to listen to shareowner concerns and ask questions about there questions, rather than answering and running perhaps running afoul. (CorpGov.net: reference The SEC’s Reg FD: some lessons for public company executives after nine years of practice, The Deal, 10/18/09)
The panelists discussed deliberate violations to conceal violations but shifted to failure to discharge duties… like a member of the audit committee who didn’t know they were on the audit committee… another example of acting in bad faith, I think. They can go after you on basic pieces of knowledge that everyone on a given committee should know. Did you ask anyone how it works? Did you ask the expert to explain it to you? Not being allowed to accidentally do stupid things might be the next bar. Not bad faith now but might be in the future.
Permanence is an assumed part of electronic information. The 20th century’s gift to law enforcement is e-mail. Pick up the phone and talk, rather than e-mail. Instant messaging isn’t secure. Some systems keep lots of records, including what you didn’t send, by keeping a record of everything you type, even if you erase it. Voice mail. If you delete it, the system may keep it for 90 days in some corporate backup. Some videoconferencing systems capture meta data. On some, the host can tell if you’re not on their screen during the meeting. On the other hand, you might accidentally have records destruction cycles that are inappropriate. Ask and find out what your system features. Set some policies and pay attention on a recurring basis.
At some point in the conversation, Eric dropped the real e-discovery nightmare… SOX, section 802, codified as 18 USC 1519. Whoever knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or makes a false entry in any record, document, or tangible object with the intent to impede, obstruct, or influence the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States or any case filed under title 11, or in relation to or contemplation of any such matter or case, shall be fined under this title, imprisoned not more than 20 years, or both.
F. Daniel Siciliano is the Faculty Director of the Arthur and Toni Rembe Rock Center for Corporate Governance, Associate Dean for executive education and special programs at Stanford Law School, and co-director of Stanford’s Directors’ College. He is also the co-originator of the OSCGRS (Open Source Corporate Governance Reporting System) Project and the senior research fellow with the Immigration Policy Center. His work has included expert testimony in front of both the U.S. Senate and House of Representatives. Dan has launched and led several successful businesses, including the software automation and design company LawLogix Group—named three times to the Inc. 500/5000 list. Dan was recently named to the Directorship 100, a list of the most influential people in corporate governance. He holds a BA from University of Arizona and a JD from Stanford Law School.
Eric Finseth is a corporate and securities partner with Mayer Brown LLP. In addition to a broad spectrum of transactional types, his practice includes particular emphasis on technical securities law compliance matters and disclosure obligations applicable to publicly traded companies, their insiders, and other participants in the public markets such as banks and hedge funds. Eric is a Lecturer in Corporate Governance at the law school at UC Berkeley, covering Sarbanes-Oxley, the stock exchange corporate governance listing standards, shareholder activism, the duties of directors, officers and so-called “gatekeepers,” as well as DOJ criminal and SEC civil enforcement actions. Prior to joining Mayer Brown, Eric was an Attorney Fellow with the Securities and Exchange Commission in Washington, D.C., in the Division of Corporation Finance, Office of Chief Counsel. In that capacity, he oversaw and administered the agency’s shareholder proposal review program for the 2006 proxy season, the central corporate governance battleground between institutional shareholders and incumbent boards of directors.
CorpGov.net’s supplemental reading list in no particular order or citation style:
- Listen to the podcast: How Technology Impacts the Boardroom, Lon Allan’s Interview with Dan Siciliano, Associate Dean, Stanford Law School Faculty Director, Arthur and Toni Rembe Rock Center for Corporate Governance. If you are a director using a smart phone, you might want to take a listen to this very short piece.
- E-Discovery Issues With Digital Voicemail, Mark S. Sidoti and Paul E. Asfendis, New York Law Journal, October 09, 2009.
- The SEC’s Reg FD: some lessons for public company executives after nine years of practice, The Deal, 10/18/09.
- Electronic Discovery and Evidence in Criminal Actions, BNA Audioconference September 23, 2009.
- Ignore Sarbanes-Oxley at Your Peril, Robert D. Brownstone, Catherine Kevane and J. Carlos Orellana, The National Law Journal, March 20, 2008.
- Stop the Shredding: Document Retention after U.S. v. Andersen, Donald K. Joseph, The Professional Lawyer.
- Electronic Discovery, United States Attorneys’ Bulletin, May 2008 Volume 56, Number 3.
- Henning, Peter J., The Changing Atmospherics of Corporate Crime Sentencing in the Post Sarbanes-Oxley Act Era. Wayne State University Law School Research Paper No. 08-09; Journal of Business and Technology Law, Vol. 3, No. 2, March 18, 2008.
Behind the scenes Thomas Wohlmut videotapes Lon Allen questioning Dan Siciliano for a brief overview of the meeting.
On November 16, 2009, the Arthur and Toni Rembe Rock Center for Corporate Governance at Stanford University presented a lunch-time lecture with Mark Latham, Director of VoterMedia.org and ProxyDemocracy.org. Latham is also a member of the SEC’s Investor Advisory Committee, as a representative of individual investors. He has written extensively on how the internet can be used to allocate resources to facilitate voter education using a democratic marketplace model. Previously, Latham was a professor at UC Berkeley and a money manager with Salomon Brothers and Merrill Lynch.
Mark Latham has spent the last seven years developing new tools for voters (investors and citizens) to hold elected leaders accountable in corporations and democracies. The financial crisis, changes at the SEC and the decline of mainstream media are opening doors for implementing these ideas. Latham’s lunch-time talk at Stanford’s law school attracted mostly a young crowd of students to a presentation that was much more discussion than lecture.
Latham briefly discussed his role on the SEC Investor Advisory Committee and some of the recent developments that have laid fertile ground for his ideas, including:
- the financial crisis and our poor systems of accountability,
- 25% of the stock market is held directly by individuals but the other 75% held through institutions is also held for our benefits. We should have more input into how proxies are voted
- broker voting no longer applies to director nominees
- most large companies have instituted majority voting requirements for electing directors and that is now filtering down to medium and small companies, and
- proxy access will bring more focus on proxy voting and the need to facilitate more intelligent voting with minimal effort.
He described something of the developing battle for the hearts and minds of investors as proxy "plumbing" or "mechanics" issues are explored by the SEC and interested parties. The Business Roundtable is lobbying hard for a system that allows management to communicate directly with shareowners. One component they have been pushing is client directed voting, CDV. Various proposals by Stephen Norman, the corporate secretary of American Express, have outlined that under CDV, investors would give their brokers general instructions on how they wanted their shares cast on all matters, routine and not routine. One frequently cited variant involves five options, including:
- always voting as management recommends;
- always voting against management recommendations;
- abstaining on all matters;
- voting according to the brokerage firm’s voting policies; or,
- voting shares in proportion to the way the brokerage’s other clients have voted their shares.
If investors did not declare a preference, the default choice would be proportional voting, and investors could always override these choices with their own. Latham noted the need to expand the concept of CDV to include options provided by ProxyDemocracy.org, TransparentDemocracy.org, MoxyVote.com and others as they develop.
A lively discussion ensued on issues such as:
- Why should we think recommendations by these groups, or indeed the current advisors to institutional investors are any good?
- How important is making money and what part would other values play in CDV options?
- Would these organizations not only lead to greater participation by retail shareowners but also greater financial literacy?
- Are there various legal issues that need to be addressed around free speech, fiduciary duties, and/or proxy solicitation? (download, for example, a request to the SEC re guidance)
- How will these sites drive the selection of mutual funds and the limited options available to most workers through 401(k) type plans?
I spotted Kim Cranston, President of TransparentDemocracy.org, in the back of the room and had a few minutes to chat with him after the event. Their site covers both civil and corporate elections and is designed to will help you…
- Learn more about the contests on your ballot,
- See how organizations and individuals recommend that you vote,
- Create a printed ballot based on your opinions that you can use to mark your real ballot,
- Share your opinions with friends.
A video recording of the session with Mark Latham will be posted on the Arthur and Toni Rembe Rock Center site by early December. The next stop for Latham was the Institute of Governmental Studies at the University of California at Berkeley.
"We can support public interest journalism with our tax funds, by letting voters allocate the funding to competing media organizations. This would prevent the government from controlling the publicly funded media and their messages. Such a system has been implemented for three years at the University of British Columbia’s student union, and tested in Vancouver’s 2008 civic election. Each voter community can fund its own media: each municipality, state, country, student union, labor union, corporation etc. The city of Berkeley may be a good fit for the next implementation."