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When a company issues bad or less-than-good news on a Friday or the eve of a major holiday, say just before July 4th, investors and the media generally squawk like the proverbial stuck pig.  And there is some justification for that squawking.  After all, good news and bad news should be treated in a similar manner, and IMHO it’s too cute by half when a company tries to sneak something past the public at an odd time in the hopes that it won’t be noticed.

However, it appears that Institutional Shareholder Services does not regard itself as subject to the same concerns.  Specifically, on November 2, the eve of what was arguably one of the most newsworthy if not significant elections in recent history, ISS snuck out an announcement that, effective January 2, 2021, it would no longer provide draft proxy voting reports to the S&P 500.  Apparently, ISS – which has long been criticized for limiting the distribution of draft voting reports to the S&P 500 – has decided that the way to eliminate that criticism is not to send out draft reports at all.

Instead, ISS will send out proxy voting reports to its clients — i.e., investors — earlier and will send reports to all issuers at the same time at no cost.  Thus (according to ISS), companies will have the time to provide feedback, and we’re assured that its “formal ‘Alert’ process” will enable companies to correct any errors and investors to change their votes.  Anyone who’s gone head-to-head with ISS knows how well that process works; corrective alerts can get lost in the shuffle, votes don’t get changed, etc.  And this new policy will almost surely lead to a big increase in the number of alerts.
Continue Reading ISS Tries to Hide in Not-So-Plain Sight

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One of the principal duties of corporate directors and officers is the duty of confidentiality.  That’s not just my personal opinion; it’s supported by case law, corporate governance treatises, law review articles, and more.  Generally viewed as a subset of the duty of loyalty, the duty of confidentiality means that directors and officers are expected to keep their knowledge of the company to themselves or, at a minimum, to disseminate it on a strict “need to know” basis.

My conviction (all puns intended) was reinforced some years ago, when Rajat Gupta, the former CEO of McKinsey and a member of the board of Goldman Sachs, among others, was convicted of insider trading for spilling secrets he learned in Goldman’s board room to Raj Rajaratnam.  Following his conviction, there was a flurry of activity among corporate governance nerds (present company included) as to the appropriateness and reasonability of asking directors and officers to enter into confidentiality agreements with the companies they served.  It seemed to me at the time that asking a member of your board – a person charged with oversight of your company, and effectively your boss – to sign a confidentiality agreement might be viewed as insulting or worse.

Events, both recent and not-so-recent, are changing my mind.  To start with the not-so-recent, in my many years of in-house practice, I came across the occasional director or officer who, to put it bluntly, was a media whore.   They love seeing their names in the paper and being quoted as authorities.  I get that; I’ve been quoted in some publications, and it’s very nice.  However, in at least one case, a director’s leaks to a reporter resulted in my getting calls from that reporter, literally demanding that I provide information, some of which was clearly privileged, arguing that if it was good enough for a board member it was good enough for me.  (I declined.)
Continue Reading Shhh!

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For both public and private companies, it’s important to determine the skills and other attributes needed to form a good or, hopefully, great board.  Of course, there are basics that always apply, such as integrity, intelligence, and a good mix of collegiality and candor.  However, once you get past those basics, it’s desirable to figure out what the organization really needs.  If the company has a consumer-facing business, you probably want to have a director or two with experience in that and related fields, such as marketing.  If it’s a defense contractor, you likely need someone with expertise in government relations.  And so on. However, in searching for and, hopefully, finding those board members, it’s also desirable to find individuals whose abilities extend beyond a single area of experience or expertise.

The notion of avoiding such “one-trick ponies” came to me while reading an article in a recent article in the Financial Times.  Since a subscription may be needed to access the article, the headline reads “US companies urged to appoint Covid-19 experts to boards.”  In fairness, the headline was a bit misleading; the article itself said that “the dean of Harvard’s school of public health has called on companies to put public health professionals [i.e., not Covid-19 experts] on their boards… to manage a pandemic threat that could hang over businesses for years.”
Continue Reading One-trick ponies and hordes of directors

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From where I sit, the SEC under the chairmanship of Jay Clayton has generally done a good job for public companies.  It has adopted a number of rules and amendments that make disclosure more effective without appreciably adding to – and in some cases reducing – the burdens on public companies.  Examples include streamlining financial disclosure requirements, rationalizing the definitions of “smaller reporting company”, “accelerated filer”, and “large accelerated filer”, and revising the rules governing financial statements of acquired and disposed businesses (although the latter do not take effect until 2021). And let’s not forget the very recent rule changes affecting proxy advisory firms, including a critical requirement that those firms provide companies with their voting recommendations.

While I wish that the SEC had also focused on proxy plumbing, it’s still a pretty good record, and it’s only a partial listing.

However (you knew there would be a “however”), I’m profoundly disappointed in the SEC’s proposal to “fix” Form 13F – the form on which large investment managers report their equity holdings of public companies.  While it’s nice that the SEC has turned its attention to a form that has long been in need of updating, the proposal seems to me to be unacceptable in at least two major respects.
Continue Reading 13F proposal — the SEC can (and should) do better

In my last post, I expressed some thoughts about the need to address our history and continuing practice of racial discrimination and inequality.  I’m still thinking about specific actions that I can take to put my actions where my mouth is.  However, in the meantime, I want to share a communication I received today

Readers of this blog know that my posts tend to be on the light side – even when addressing subjects I regard as important, I find it hard to avoid at least a touch of sarcasm or irony.  Each posting also includes a picture intended to be humorous.

This is not a usual posting, however.  This time, I’m writing from my heart on a subject that can’t be treated with humor, irony, or sarcasm.  And no pictures this time.  It’s about our country’s heritage and our future, and I’m about as serious as I can be.

The subject in question is race, or race relations.  I know I am not alone in being profoundly upset about recent developments.  But what really upsets me is that where we are today is really not about recent developments.  Rather, our country is coping with what may be its original, 400 year-old sin, slavery, and the legacy of that original sin that even 150 years later we can’t seem to shake.

We can and must do more and do better.  One of the many posters I saw on TV during the protests was one saying “Silence is Violence.”  I agree.  If we stay silent in the face of discrimination, its manifestations, and its consequences, we will at best find ourselves exactly where we are today 150 years from now (assuming that we don’t destroy ourselves or our planet before that).  At worst, we will do just that – destroy ourselves.  We need to examine and change our institutions, our practices and, frankly, our minds and the minds of those around us.
Continue Reading I’m serious

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About two years ago, I wrote a post about director compensation, quoting the old saw that pigs get fat but hogs get slaughtered. Given what I’ve been reading of late, I think it’s time for a refresher, but this time I’m discussing executive, rather than director, compensation.

With the onset of the COVID-19 pandemic, a number of companies or their executives took action to reduce pay.  In some cases, salaries were reduced to $1 a year or eliminated entirely.  So far, so good.  However, there were also cases in which the executives were given so-called mega-grants of equity to make up for their sacrifices.  That may have raised a few eyebrows, but the eyebrow-raising may have been mitigated or overlooked because the grants were made when the stock markets had dropped precipitously and many companies’ shares were trading at 52-week lows.

Of course, what goes down must come up, so when the stock markets rallied (and, in general, have continued to rise to levels that seem absurd in the face of what’s going on these days), the noble executives who sacrificed pay made out like bandits. Or hogs.  No sane person would argue that the stock markets have any rational connection to corporate performance generally, much less to that of a particular company.  However, the rising tide has floated a number of boats, including the holders of those mega-grants.
Continue Reading Of shields and swords, pigs and hogs

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Pandemics may come and go, but governance marches on.  That’s the message BlackRock seems to have sent earlier this week, when it distributed its “Engagement Priorities for 2020.”  Of course, the document was completed well before the onset of the COVID-19 pandemic.  However, you’d think that BlackRock, ordinarily a reasonable player in the governance sandbox, would have added a last-minute addendum to the document or at least made public statements acknowledging that the current situation is extraordinary and might be taken into account in evaluating how companies are doing in that sandbox.

Not so, apparently.  In fact, some BlackRock spokespeople have suggested that the crisis will separate the governance wheat from the chaff.  I suppose that’s true to some extent, but when a company is struggling for its very existence, with many jobs at stake, is it really necessary that it worry about having non-executive board leadership?  (Those of you who’ve read this blog probably know my views on board leadership.  For those of you who have not followed my screeds, I have seen independent board leadership work wonderfully, and I’ve also seen it fail miserably.  So, to me, it’s really not that big a deal.)


Continue Reading Plague, shmague, as long as you have an independent board chair

About a year ago, I was speaking with the governance committee of a prospective client.  One of the committee members asked me what the “best practice” was in a particular area.  I said that I hate the term “best practice,” because one size never fits all, there is almost always a range of perfectly fine practices, and that a company needs to think about how a particular practice would work (or not) given its industry, its history, and its culture, among the many things that make a company unique.  Afterwards, I wondered if my candor would result in not getting the work, but evidently the committee agreed, and the rest is history.

At the time, I’d forgotten about a 2015 blog post I’d written on so-called best practices.  In fact, I continued to forget about it until I recently read a fantastic paper published by the Rock Center for Corporate Governance at Stanford.  Loosey-Goosey Governance discusses four misunderstood governance terms: good governance, board oversight, pay for performance, and sustainability.  Along the way it demonstrates how wrong “conventional” wisdom can be – and is – regarding what companies should and should not do in the governance realm.  Some examples:

  • Independent chairmen: There are those in the institutional investor community, the media, and elsewhere who seem to believe that having an independent chairman (or woman) of the board is the sine qua non of corporate governance.  I’ve long disagreed with this notion (see my earlier blog post), and Loosey-Goosey agrees with my view.  In fact, it points out “that research shows no consistent benefit from requiring an independent chair.”
  • Staggered boards: Similarly, the conventional wisdom holds that staggered boards are the next best thing to satanic. Loosey-Goosey sticks a pin in this balloon by noting that “research shows quite plainly that the impact of a staggered board is not uniformly positive or negative.”
  • Dual-class shares: I am not a fan of dual-class shares, particularly when they prevent boards of directors from having any meaningful role in governance. (As my good friend Adam Epstein has noted, it’s hard to understand why anyone would join a board of a corporation that doesn’t permit him/her to govern.)  However, here again, Loosey-Goosey points out that “[w]hile…research…on dual-class share structures tends to be negative, it is not universally so,” and that a dual-class structure can provide benefits.


Continue Reading “Loosey-Goosey Governance” (or, why I STILL hate “best practices”)