Corporate Governance

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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

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"

Last week I attended the National Conference of the Society of Corporate Secretaries and Governance Professionals in Chicago. It was a great conference – wonderful, substantive programs and a chance to catch up with many friends and colleagues.

With some exceptions.

One exception was the opening speech by SEC Chair Mary Jo White. Now don’t get me wrong – I’m a fan (particularly when Senator Warren and others go after her – as in my last post). Among other things, I love the fact that she speaks clearly; unlike so many others in Washington, whose statements make me think I know what it must have been like to visit the Delphic Oracle, she’s perfectly straightforward about her views.   It was her views – or at least most of them – that I didn’t like.

Chair White addressed four topics, and on all but one of them she basically told the corporate community to give up. Her topics and views can be summarized as follows:Continue Reading A dispatch from the front lines (with SEC Chair White telling us to wave the white flag)…

I’m a governance nerd. I really believe that corporate governance is important, that it makes a difference, and that there is such a thing as good governance – though I don’t believe that one size fits all.

So it troubles me that in governance, as in life, virtue is usually not its own reward. In…

Committee Rotation
Photo by Justin Kern

Director “refreshment” has become a very hot topic in the governance community.  Investors increasingly are calling for replacing longer-serving board members with newer directors, possibly in order to achieve greater board diversity, possibly to get some fresh blood (or fresh thinking) on the board, or possibly to achieve other goals.  There is also increased talk about the use (and appropriateness) of age limits, term limits and other processes to assure regular board turnover.  For example, Institutional Shareholder Services has suggested that a director serving more than nine years may no longer qualify as independent.  As part of this discussion, questions have also been raised about the need for “committee refreshment” – rotating directors off and on committees to keep them fresh and receptive to new ideas.

Governance practitioners have been grappling with the issue of board and committee refreshment for many years, even though the objective may not have been called “refreshment” until recently.  For example, corporate secretaries and others have scratched their heads as to how to enforce age limits, how to decide when those limits should be waived or raised, how to grapple with the political and personal issues that can arise when the age limit is waived for one director but not for another, and whether term limits would be preferable to age limits.  Recent discussions have also generated pushback from companies and their directors that age and/or long tenure may generate greater, rather than less, independence; after all, a director with 15 or more years of service who has overseen two or more CEOs may feel far less dependent upon the current CEO than a director who has joined the board only recently.

These and other concerns are challenging enough at the board level, but they can be far more challenging at the committee level.  In an era when much of the substantive, detailed work of the board is handled by committees, and committee service increasingly calls for subject matter expertise, refreshing a committee is not as simple as putting Mr. or Ms. X on the committee when Mr. or Ms. Y retires.  The qualifications and abilities – and, in some cases, expertise – of the replacement need to be considered before he or she can be used to fill the vacancy or simply “rotated on” a new committee.


Continue Reading The challenges in ‘refreshing’ board committees

There have been a number of press reports in recent days about attempts by the new Republican majority to repeal all or part of Dodd-Frank.  Depending upon whom you choose to believe (assuming you choose to believe anyone in the current political environment), the Republicans want to eviscerate it, and the Democrats refuse to change…

A few weeks ago – “From the same wonderful folks who brought you conflict minerals (among other things)” – I complained about Senator Blumenthal’s attempt to tell the SEC what to regulate and how to regulate it.  I had an equal and opposite reaction to the recent news that Commissioner Gallagher and former Commissioner Grundfest…