Corporate Governance

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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

Image by succo from Pixabay

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

Image by Sumanley xulx from Pixabay

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.)

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

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Image by Holger Schué from Pixabay

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.

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

Image by Ron Porter from Pixabay

Although Dodd-Frank was enacted in 2010, the rule needed to implement one of its provisions – the requirement to disclose hedging policies – only recently took effect.  In fact, for calendar-year companies, 2020 will be the first year in which the proxy statement will have…

Image by succo from Pixabay

A few years ago, a wonderfully outspoken member of the institutional investor community congratulated me on a corporate governance award I’d received.  She apologized for not being able to make it to the awards ceremony, referring to it – very aptly, IMHO – as the “nerd prom.”

Well, we’ve progressed from the nerd prom to a nerd war – specifically, the nasty fight over the August 19 Statement on the Purpose of the Corporation, signed by 181 CEO members of The Business Roundtable.  The Statement suggested that the shareholder-centric model of the modern American corporation needs to be changed and that “we share a fundamental commitment to all of our stakeholders.”  The stakeholders listed in the Statement were customers, employees, suppliers, and the communities in which the companies operate; however, other stakeholders were referred or alluded to, such as the environment.  And the final bullet point in the list stated that the signers were committed to:

“Generating long-term value for shareholders, who provide the capital that allows companies to invest, grow and innovate. We are committed to transparency and effective engagement with shareholders.”

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Continue Reading The war of the nerds

I recently came across an article reporting that the interim president of a state university system had failed to report a number of corporate board seats on his ethics forms.  That got me thinking about the forms he may have been asked to complete, which in turn got me thinking about D&O questionnaires.

Getting directors and officers to accurately complete and return questionnaires in a timely manner is one of the most frustrating tasks faced by corporate secretaries.  Years ago, I was speaking at a program for aspiring corporate governance nerds, when a young aspirant asked me if I had the secret to getting this task done.  If memory serves me correctly, my response was to the effect that if I had the answer to her question, I could retire.

However, I sometimes think that people who circulate questionnaires are their own worst enemies.  For example, a recent study reported that D&O questionnaires averaged 40 pages and 65 questions.  That means that some, perhaps many, questionnaires are far longer.  It’s unrealistic to expect someone with a life – much less a day job – to devote the amount of time necessary to complete a 40-page (or longer) questionnaire, particularly when many questions don’t lend themselves to simple “yes” or “no” answers.…
Continue Reading The lowly D&O questionnaire

For those of you who’ve heard me sing, rest easy – I’m not going to break into “As Time Goes By.”  But the lyric I’ve quoted in the title is worth noting.  In fact, it was noted, albeit in substance rather than form, in the June 18 opinion of the Delaware Supreme Court in Marchand v. Barnhill.  The opinion, written by soon-to-retire Chief Justice Leo Strine (more on that below) addressed two fundamental matters – director independence and the board’s oversight responsibilities.

The case resulted from a listeria outbreak caused by contaminated ice cream.  (The thought of contaminated ice cream is too upsetting, but that’s for another day.)  The key holdings referred to above were as follows:

  • Director Independence: The trial court had dismissed the complaint for failing to make a pre-suit demand on the board, based on its conclusion that the a majority of the board – albeit the slimmest majority of one director – was independent. However, when the Supreme Court considered the background of that one director, it determined that he was not independent.  Thus, the slim majority went away.  The relevant facts included that the director had worked for the company in question for 28 years, including as its CFO and a director, and that the company’s founding family had helped to raise more than $450,000 for a local college that named a building after the director.  The fact that the director had supported a proposal that the founding family opposed – i.e., separating the chair and CEO positions – was deemed by the Supreme Court to be insufficient to support a finding of independence.
  • Board Oversight: The Delaware Supreme Court found that the board had breached its fiduciary duty of loyalty by failing to oversee a significant risk – product contamination – leading to the conclusion that the board had demonstrated bad faith. As is usually the case, Chief Justice Strine says it better than I possibly could.  Citing the landmark 1996 Caremark decision, he writes:

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Continue Reading The fundamental things apply…

“Where was the board?”  It’s a question we hear whenever something – anything – goes wrong at a public company.  The question has been asked in all sorts of circumstances, ranging from failing jet systems, to networks being hacked, to harassment allegations, and so on.

Don’t get me wrong – there are most assuredly cases in which the question needs to be asked. Without naming names, there have been numerous instances where it seems apparent (and in some cases has been proven) that the board elected not to see or hear evil and thus hadn’t a clue that there was a problem, and other cases where the board created or fostered a rotten culture that seemed to beg for problems.  However, what concerns me is that society at large seems to think that the board is or should be responsible for every sin of commission or omission by the company.  And that just seems wrong.

Boards are charged with oversight.  And while the definition of that word can be difficult to pin down, it seems clear that the board was never supposed to be a guarantor.  Yet that’s precisely where we are headed – or perhaps where we’ve arrived.  You even see it in articles and treatises by governance nerds who should know better: “The board should ensure that…”.  Boards cannot “ensure” anything.  They are part-time consultants, and even the best boards cannot possibly know everything that a company does.

As a result, we’ve seen an upswing in suggestions as to how to help boards, including the following:…
Continue Reading The board is dead! Long live the [to be provided]!