Bob's Upticks

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One of the hottest topics in governance today is director refreshment. (No, that doesn’t refer to what your board members have for lunch.)  Boards comprised of long-serving directors do, in fact, tend to be “pale, male and stale” – i.e., comprised of old white men. Self-perpetuating boards are less likely to be diverse, and there is increasing evidence that companies with diverse boards tend to perform better (the evidence demonstrates correlation rather than causation, but it’s still evidence). There is also a plausible argument that self-perpetuating boards are less likely to challenge long-standing assumptions and practices, leading to board (and corporate) stagnation.

Perhaps it’s a poorly kept secret, but companies and boards have been concerned about this for years if not decades. Even boards that don’t engage in much introspection are often aware that some directors do not contribute much. As a result, companies and boards have tried all sorts of devices to force board refreshment – term limits and/or age limits having been the most common. Unfortunately, these devices have not worked very well, perhaps because they may be inherently ineffective, and no doubt also because companies often move the goalposts – age limits are waived (because keeping director X is deemed to be “in the best interests of the company”, whatever that means) or creep upward, term limits force good directors to retire, etc. And so, corporate America continues to search for the right approach. Some companies have adopted extremely long term limits (15 years), and others have said that average tenure may not exceed X years, but it’s too soon to tell whether these or other newer approaches will succeed.Continue Reading Governance by the numbers

Two news items from the front lines:

First, you may recall my mentioning that the Council of Institutional Investors was considering adopting a new policy that would limit newly public companies’ ability to include “shareholder-unfriendly” provisions in their organizational documents (see “Caveat Issuer“, posted on February 13).  I just came back from Washington,…

According to SEC Chair White, regulators are looking – and not happily – at companies’ increasing use of customized financial disclosures.  In fact, her recent remarks suggest that additional regulation is not being ruled out to curb the use of such “bespoke” data.

For some of us it may seem like only yesterday – though it was actually in 2003 – that the SEC adopted Regulation G to address the then-growing concern that companies were developing odd ways of communicating financial information to make their numbers look better.   In general, Reg G says that companies

  1. cannot make non-GAAP disclosures more prominent than GAAP disclosures;
  2. need to explain why they use non-GAAP disclosures; and
  3. must provide a reconciliation showing how each non-GAAP measure derives from the GAAP financial statements.

So far, so good.  However, some companies give little more than lip service to these requirements.  For example, it’s not unusual to see Item 2 addressed by a statement along the lines of “investors who follow the company use this measure to assess its performance.”  And, more recently, companies seem to be developing more peculiar ways of showing performance, such as excluding the effects of some taxes but not others.  This creativity may not be as arch as excluding recurring items or turning losses into gains, but it still makes regulators uneasy.Continue Reading Bespoke financial data?

Despite the wave of corporate governance reform that began after the enactment of Sarbanes-Oxley in 2002 – and that continues pretty much unabated today – companies going public have gotten a pass. Whether the process of going public takes the form of a spin-off or a conventional IPO, newly public companies have been able to emerge into the world with a full (or nearly full) arsenal of defensive weapons that can help them stave off an unwanted acquisition.

The rationale for this leniency is that newly public companies are like tadpoles that need to be given time to turn into frogs (or princes) before they are gobbled up.

That seems to be changing.Continue Reading Caveat issuer

This time I’m not writing about disclosure or governance. Rather, I’m posting my annual list of my 10 favorite books. For those of you who haven’t seen these lists before, (1) I apologize if this seems hubristic (or “braggadocious”, if you will) – I do it because some folks have told me they like it; and (2) the list involves books that I happened to read (or re-read) in 2015, not necessarily books that were published in 2015.

I didn’t encounter lots of great fiction last year; for me, the great books were non-fiction. Let’s see if the trend continues in the New Year.

So here goes (in order of preference):Continue Reading My top 10 for 2015

Those of you who’ve been following my postings know that I’m not a fan of Congressional interference in the workings of the SEC. Well, those same wonderful folks who’ve garnered the lowest opinion ratings in history are at it again.

First, you may recall that Congress acted a few weeks ago to avoid another federal government shutdown. Well, a few interesting provisions were added to that legislation and – you guessed it – one of them was precisely the kind of thing that sets me off; in this case, it was a prohibition against any SEC rulemaking requiring disclosure of political contributions.Continue Reading They're back…

A week or two ago I was asked to speak at a meeting of the Small- and Mid-Cap Companies Committee of the Society of Corporate Secretaries and Governance Professionals. That’s not unusual or even noteworthy, as I’m a long-time, active member of the Society and often speak at Society functions.

What was unusual and perhaps noteworthy is the topic on which I was asked to speak and the reason I was asked to speak on it. Specifically, one of the Committee members had asked the Chair if someone could give a general primer on shareholder proposals, because his/her company had received its first shareholder proposal ever.Continue Reading Be scared…be very scared

My favorite quote of the week seems to have gone largely unnoticed, despite the fact that I tweeted about it and told several people about it. The quote, attributed to former Congressman Barney Frank, was “people expect too much from boards”. If you don’t believe me, you can find it here – in the venerable New York Times, no less.

Am I the only one who thinks that the statement, particularly considering the source, is offensive? Am I the only one who thinks that the co-sponsor of the legislation that bears his name, and the author and/or instigator of many of its provisions that imposed extensive obligations on boards, saying that we expect too much from boards is similar to the child who kills his parents throwing himself on the mercy of the court because he is an orphan?

In fairness to Mr. (no longer Congressman) Frank (not that I feel compelled to be fair to him), he is also quoted to have said that the most important oversight of financial companies comes not from its directors but from regulators. If that’s the case, however, why does the eponymous legislation bother to impose so many burdens on boards? Why not leave it all to the regulators (or would that leave the plaintiffs’ bar in the lurch)? Alternatively, why not expand the concept of mandatory say on pay votes (which the Dodd-Frank Act imposes upon most publicly held companies) to everything a board does and do away with the board entirely? Need a new plant? Put it to a shareholder vote! Want to think about entering new line of business? How about a say on that?Continue Reading Politician, heal thyself

It’s done. On August 5, the SEC adopted final rules that will require publicly traded companies to disclose the ratio of the CEO’s “total compensation” to that of the “median employee.” We’re still wending our way through the massive (294 pages) adopting release, but one piece of good news (possibly the only one) is that it appears that pay ratio disclosures won’t be needed until 2018 for most companies.

I’ve already posted my views on this rule (see “CEO pay ratios: ineffective disclosure on steroids”), so it’s no surprise that I’m not happy. However, what is surprising are the myths and madness that the mandate has already created. First, there’s the “median employee,” who may be a myth in and of him/herself. But that’s not all; the media (notably The New York Times) have begun to tout the rule and make all sorts of predictions about how it will impact CEO pay, many of which involve myths and madness of their own.

Myth: In an August 6 column, Peter Eavis wrote about the rule, saying “the ratio, cropping up every year in audited financial statements, could stoke and perhaps even inform a debate over income inequality”. Really? In the audited financial statements? I haven’t finished reading the rule, despite its being such a page-turner, but I didn’t see that in there and don’t think I will. Someone better tell the audit firms – and also tell Mr. Eavis that the ratio is not auditable.Continue Reading Pay ratio disclosure: Myths and madness

Governance wonks can rest easy. In fact, we can all go home and think about another career. The reason? CalSTRS – California State Teachers’ Retirement System – has issued a “fact sheet” entitled “Best Practices in Board Composition”.

It’s interesting that CalSTRS calls it a fact sheet, since much if not most (if not all) of what it says is opinion, belief or aspiration rather than fact. However, I suppose calling it an “opinion sheet” or an “aspiration sheet” would have resulted in fewer hits.

The document lists five “best practices” (though the fifth has four sub-items; perhaps that means there are nine best practices?). No indication is given as to whether the practices are listed in order of their best-ness. However, it’s notable that the first practice is “independent leadership” – in other words, having “an independent chair that is separate from the Chief Executive Officer”.   I’ve done lots and lots of research on this point, and the most that can be said is that there is no conclusive evidence of any connection between an independent board chair and performance. Again – that’s the most that can be said. (If you don’t believe me, take a look at this Yale study.)Continue Reading Why I hate "best practices"