Archive for the ‘Governance, proxy & pay’ Category

Having your say on pay

May 19, 2011

As the new reality of “say on pay” votes by shareholders settles in, a guiding strategy for companies should be to have your own say. Investor relations professionals (and senior execs) need to learn how to communicate more clearly and proactively on pay and governance.

By last week, 20 U.S. companies had lost (failed to get 50% support in) say on pay votes so far in 2011, according to a posting today on the CFA Institute blog by Matt Orsagh. He notes that say on pay votes are essentially a communication tool:

The institutional investors we talk to — and it is institutional voters who cast the vast majority of these votes — tell us that they have no interest in setting pay, that compensation committees should do that.  What they do want is to be listened to when they feel there is a disconnect between pay and performance, and to have constructive conversations with companies about how to set things right.

But why wait until shareholders slap you in the face over a disconnect? The “Across the Board” column in the NYSE Magazine second-quarter edition suggests three areas of pre-emptive action on executive compensation issues:

  • Publish readable proxies. “Too often proxy statements are viewed as – and written like – legal documents,” NYSE quotes Ken Bertsch, president of the Society of Corporate Secretaries and Governance Professionals. “… too many companies still try to cram too much information into too few pages with very little explanation about compensation policies and how they were developed.” Bertsch cites the CD&A in General Electric’s proxy as a model of clarity.
  • Launch a campaign. More companies are taking their governance and executive compensation stories on the road – meeting with big investors or holding conference calls on pay issues. Stephen Brown, TIAA-CREF’s governance guru, says companies like Avon Products are sending senior governance officers or independent board members to these meetings. (TIAA-CREF has published extensive policies and advice to companies here.)
  • Welcome shareholder views. Communication is, after all, two-way. Patrick McGurn of Institutional Shareholder Services cites the example of Pfizer inviting portfolio managers in to meet with execs for open-ended discussions on governance, pay and compliance issues. PFE has a Contact Our Directors page on its website, too. McGurn also suggests a “fifth analyst call” every year – to discuss governance issues rather than quarterly numbers.

My experience has been that corporate lawyers often guide the strategy on governance issues – and micromanage tactics like the wording of proxy statements. IR professionals, whose job is to communicate, should be more involved.

What’s your thought? Any best practices or examples of how to interact with institutional investors (or retail, for that matter) on governance and pay issues?

© 2011 Johnson Strategic Communications Inc.

Why Delaware?

January 29, 2011

As a non-lawyer I’ve wondered why so many companies – regardless of where they do business or actually are located – incorporate in Delaware.

The little state that is barely a whistle-toot on a fast New York-to-Washington train ride practically makes an industry of playing host to corporations. More than 850,000 companies make their home there, including the majority of US publicly traded companies, according to the Delaware Division of Corporations.

So I was intrigued by “Boardroom Justice,” an interview with William B. Chandler III, chancellor (top judge) of Delaware’s Court of Chancery, in the December-January issue of Directorship, the National Association of Corporate Directors magazine.

The Court of Chancery – and the Delaware Corporation Law it interprets – have a lot to do with why lawyers tell companies to incorporate there. Delaware law gives flexibility to companies in governance matters, and the court itself has a long history of case law on issues like fiduciary responsibilities of directors.

What’s more, the judges (a chancellor and four vice-chancellors) on the Court of Chancery specialize full-time in corporate matters. And they decide the cases, with no jury trials. Chandler explains:

The reason Delaware is viewed as the center of the universe for corporate law is that a defendant (or a plaintiff) can be guaranteed—no matter which judge you get—to have a jurist acutely familiar with this body of law; a judge who works with corporate law issues day in and day out, seven days a week. That’s the uniqueness of the Court of Chancery.

Contrast that with, say, Texas or California: A complex shareholder lawsuit may be presided over by a judge with more experience in bank robbery or debt collection cases than corporate law – and it may be decided by a jury of folks who, well, aren’t really the peers of the CEO, members of the Board of Directors or the shareholders.

I’m sure I’ve oversimplified. But if you’re curious, have a look at your 10-K or your client’s and see where the company is incorporated. Then ask a lawyer why.

© 2011 Johnson Strategic Communications Inc.
(oddly enough, a Kansas corporation)

Governance is still about people

September 10, 2010

Effective corporate governance springs not so much from lists of rules as from the human element of relationships between boards of directors and top managers, according to a veteran director of companies such as Ford Motor and Estée Lauder.

Irv Hockaday, former president and CEO of Hallmark Cards (and Kansas City Southern before that), spoke today at the Association for Corporate Growth in Kansas City. Besides Ford and Estée Lauder, Hockaday is on Crown Media Holdings’ board and is a former director of Dow Jones (before its 2007 sale), Sprint Nextel and Aquila (before its 2008 sale). He’s seen plenty of corporate ups and downs.

While acknowledging the benefits of diversity and other ideals for boards, Hockaday said people who try to codify good governance will fall short:

The corporate nannies, those who tell us how boards should govern companies, have all sorts of rules of the road and advice that appears to me to be gratuitous. … There is a lot to board dynamics and corporate governance that cannot be put down in a rulebook.

Governance at Ford, for example, includes things some people don’t like – family involvement in management and the board, plus disproportionate voting rights for the family’s stock. But Hockaday describes a strong relationship between Ford’s independent directors, the family represented by Bill Ford, and CEO Alan Mullally.

While General Motors and Chrysler succumbed to recession and filed Chapter 11 in 2009, Hockaday credits the human side at Ford – and actions by the board and management – for sustaining Ford as the only one of the Big Three not to file.

None of this is to say that the watchdogs are wrong about best practices for accountability and transparency. But truth is, governance is still about people making good decisions for their businesses – not just minding the nannies.

© 2010 Johnson Strategic Communications Inc.

IR evolves along with the CEO

July 22, 2010

As the role of the CEO changes in 21st Century corporations, the mission of investor relations and corporate communications also evolves. These staff functions often support the chief executive in achieving success – or fall short along with the boss. We ought to take note of subtle and not-so-subtle shifts in the corner office.

Cliff Kalb, a longtime marketer and strategist for drug companies, cites a spate of recent changes at the top level of Big Pharma in a column called “Splitting Image” in the July 2010 Pharmaceutical Executive. His thoughts apply across industries.

First on Kalb’s list is the splitting of the titles of Chairman of the Board, President and CEO. Five of the world’s largest pharma companies have recently divided the jobs and given different people the responsibilities of chairman and CEO, he notes.

Some institutional shareholders have long viewed separating the chairman and CEO jobs as best practice in governance (here’s a RiskMetrics page showing various groups’ policies on chairman and CEO roles).

As leader of an outside board, the chairman sees it as his or her job to oversee broad issues of ethics, policy and operating principles – and safeguard the shareholders’ interests – Kalb says. “And in the c-suite, the chairman of the board is boss,” he says. The idea of checks and balances to the CEO’s power  is, in fact, the reason shareholder activists often push for splitting the titles.

Meanwhile, the chief executive is becoming ever more visible. Kalb observes:

The CEO function is also morphing. Traditional internal roles include setting the visions and mission, elucidating a clear strategy and assuring proper management, allocating resources and developing synergies and alignment across a broad portfolio of businesses.

Now, however, the CEO’s external roles are becoming more prominent. Quarterbacking a team of c-suite players in communications with the press, the investment community, government and other key stakeholders is becoming a bigger line on this job description. Unfortunately, the duty of crisis management has been dropped on this doorstep as well.

So there it is. The CEO must interface with the outside world – press, investors, government and other stakeholders – as the face of the company in good times or bad. We’ve seen a few CEOs in crisis lately on the evening news.

IR and Corp Comm staff (and consultants) should be right beside the CEO, serving as “eyes and ears” to alert the boss to what stakeholders are thinking and guiding him or her in “telling the story” based on experience in communication disciplines.

Summer may be a good time for each of us to pause and reconsider our mission – including how our jobs tie in with the changing demands on the boss.

© 2010 Johnson Strategic Communications Inc.

Shareholders don’t own companies?

April 1, 2010

The Harvard Business Review offers a provocative thought in its April 2010 issue: According to two professors at overseas universities (which may be relevant), shareholders are not the owners of corporations – and boards of directors shouldn’t feel so compelled to make decisions in the shareholders’ interest.

No, this isn’t an April Fool’s Day joke – at least, I’m pretty sure it’s not.

Citing the recent Kraft Foods takeover of Cadbury, a case of M&A not welcomed on the British side of the Atlantic, the article asks whether the Cadbury board could have said no – or said it more emphatically – and stood its ground.

Loizos Heracleous, a professor of strategy and organization at the University of Warwick, UK, and Luh Luh Lan, associate professor of law at the National University of Singapore, offer companies what has to be a contrary opinion:

Oddly, no previous management research has looked at what the legal literature says about the topic, so we conducted a systematic analysis of a century’s worth of legal theory and precedent. It turns out that the law provides a surprisingly clear answer: Shareholders do not own the corporation, which is an autonomous legal person.

The two go on to say that boards can put their own judgment ahead of shareholder interests in making decisions such as whether to be acquired:

What’s more, when directors go against shareholder wishes – even when a loss of value is documented – courts side with directors the vast majority of the time.

Directors are mostly misinformed about their obligations, the profs write.

As an investor relations practitioner (and small shareholder of a few companies), I disagree with the academics. My core philosophy of IR is that management and boards should treat shareowners as exactly that – the owners of the company.

In the cultural funk that seems to follow the pain of each recession or financial crisis, we are once again hearing voices that declare our companies should lay aside the self-interest of shareholders and pursue the greater good.

Harvard and other universities seem to be advocating on this issue: In an HBR article last summer, a Stanford business prof made a similar point, arguing that stakeholders, rather than shareholders, should come first in corporate decision making.

What do you think? Share your comments by clicking below, or vote in this poll:

© 2010 Johnson Strategic Communications Inc.

I-bankers & God’s work

March 18, 2010

A little commentary tucked into today’s Wall Street Journal (p.C4) riffs on Lloyd Blankfein’s statement last fall about investment bankers “doing God’s work” – and may hold a lesson, too, for investor relations professionals and our companies.

John Terrill, who heads the Center for Integrity in Business at Seattle Pacific University, shares his thoughts on i-bankers doing good through their work:

Investment banking, if it meets its objective of capital matchmaking, can move, ought to move, capital around in ways that allow communities to flourish.

Terrill says benefiting society in business is about aligning what you do with broader purposes, realizing, “Hey, my work has a purpose beyond the paycheck.”

Asked how to measure whether investment bankers are contributing to the common good, Terrill focuses on integrity – a oneness between purpose and action. This test also applies to corporations and their messaging for investors.

Terrill says integrity consists of three layers:

The first two layers are associated with damage control – compliance with the law and acting appropriately when there is no law. But, as others have pointed out … there is a third layer that is focused on mission control. Mission control is pursuing the good, aligning the mission of the organization and the good of society.

Disclosure focusing on corporate social responsibility is a growing concern for investor relations staffs – amid regulatory pressures (such as the recent SEC guidance on  climate change disclosure) and interest from institutional investors.

Terrill’s three “layers” suggest a useful framework for reporting on corporate interactions with society:

  1. Compliance with the law,
  2. Standards of conduct that go beyond the law, and
  3. The company’s broad mission in serving customers and providing products or services to society.

Disclosure to investors would tie any specific issues in with business performance – near and longer term – which would include regulatory threats, costs of compliance and effects on customer relationships.

The Terrill essay referenced by the WSJ article, “The Moral Imperative of Investment Banking,” offers additional comments.

© 2010 Johnson Strategic Communications Inc.

Getting real on compensation

November 20, 2009

If you work with the proxy statement or other communications on executive pay, you should read the Nov. 9 speech by Shelley Parratt, deputy director of the SEC Division of Corporation Finance, to the 4th Annual Proxy Disclosure Conference.

Parratt calls on companies to improve the quality of their Compensation Disclosure & Analysis sections – giving clearer, more specific analysis and better explanation of performance targets. She suggests starting over with a blank page, if necessary.

Mostly, Parratt’s comments offer a philosophy for disclosure on compensation. She notes that companies tend to respond with good disclosure once the SEC reviews their proxies – but don’t pay much attention if the SEC doesn’t come calling. Going forward, tangling with the SEC on the CD&A could hurt corporate reputations:

Any company that waits until it receives staff comments to comply with the disclosure requirements should be prepared to amend its filings if we raise material comments. Now is the time to engage in a rigorous analysis to develop meaningful, coherent and comprehensive executive compensation disclosure.

While the SEC staff may appear to serve as your editor from time to time, the CD&A is your story to tell, not ours. Read our guidance. Read the publicly-available comment letters. Take a fresh look at the disclosure requirements. Pay attention to what the market is looking for. Your disclosure will be better if you do.

Concern about pay levels isn’t limited to SEC officials and politicians with a polulist bent. Even the biggest investors can get upset about compensation – as in today’s Wall Street Journal story on mutual funds that are big holders of Goldman Sachs:

Some of the largest shareholders in Goldman Sachs Group Inc. have urged the Wall Street firm to reduce the size of its bonus pool, arguing that it should pass along more of its blockbuster earnings to investors…

For a lively take on the potential for more asset managers turning activist on pay, watch the Yahoo! “Tech Ticker” commentary by Aaron Task and Henry Blodget.

Take-home message for the 2010 proxy season: Write the CD&A as if you’re sitting across the table explaining your pay policies to one of those concerned investors.

(Thanks to the panelists at the Kansas City NIRI meeting Nov. 17 for calling this SEC staffer’s speech to our attention.)

Watching Washington

September 29, 2009

All eyes are on Washington this fall, as the country watches hope and change take hold through new laws and regulations. When NIRI President and CEO Jeff Morgan briefed a group of investor relations people and corporate lawyers in Kansas City on changes coming our way from DC, “scary” was a word that kept recurring.

Jeff Morgan 9-29-09“There are a lot of scary things happening in Washington, and some potentially good things happening in Washington,” Morgan said Tuesday evening at the NIRI Kansas City chapter meeting.

Motivated by the financial crisis, Morgan noted, politicians have turned from talk to action on regulatory issues that have been around for years. Rightly or wrongly, he added, politicians see only two causes for the financial crisis: corporate greed and lack of adequate regulation. So they are bent on fixing those problems.

Morgan said significant changes in the way corporations are governed are in the works in Congress and at the Securities and Exchange Commission (SEC):

  • “Say on pay” proxy votes and input from a federal “pay czar,” initially targeting financial companies that got bailouts, could be expanded by Congress to all public companies.
  • If say on pay spreads, institutional investors – many of whom lack the staff to examine every executive pay proposal – would outsource the research and perhaps the voting to RiskMetrics Group. RiskMetrics sells governance advice to companies, and chastises those who don’t measure up to its standards.
  • An SEC proxy access proposal to expand shareholders’ ability to nominate board members seems likely to take effect, and Congress could weigh in to expand the mandates. That would empower activist investors such as union pension funds to target companies for changes in governance.
  • An SEC change in Rule 452 to eliminate broker discretionary voting, starting January 2010, seems likely to disrupt voting of retail stockholders’ share.
  • Various proposals are kicking around Congress on board compensation committees, separating the CEO and chairman roles, requiring certification and training for directors, eliminating staggered boards and other issues.

What can companies do? Get senior management to reach out to Congress with the public-company viewpoint on proposals for federal intervention. Take pre-emptive action by implementing compensation and proxy access programs designed to enhance, rather than put a strangle hold on, good governance for companies.

Two good sources on legislative and regulatory changes are Jeff Morgan’s blog on NIRI.org and Broc Romanek’s blog at TheCorporateCounsel.net.

We’d better be watching Washington. Says Morgan: “Corporations are the lifeblood of America, and we’re doing things that are dangerous to those corporations.”

Governance ‘fix’ may be broken

July 16, 2009

Corporate governance “reforms” taking shape in Washington, while aiming to fix the causes of the financial crisis, may in fact add to the problems.

In a memo to clients today, “Corporate Governance in Crisis Times,” the New York law firm Wachtell, Lipton, Rosen & Katz says governance failures of recent years stem from “pressure for short-term performance and quick stock market profits” (greed, you might call it).

But emerging schemes to fix governance, the lawyers note, focus on empowering investors – these might be mutual fund or hedge fund managers – to overrule company managements and boards of directors in matters of corporate policy and direction. Trouble is, at the risk of generalizing, asset managers are the ultimate short-termists. Desire for quick stock market profits is in their job descriptions.

Instead of “reform” like shareholder proxy access, creating a new right to call for sale of a company or dock the CEO’s pay, the lawyers suggest our policy makers should focus on society’s long-term good, including economic growth:

There is no reason to embrace a plethora of ill-conceived federal regulation and legislation that usurps the traditional role of state law and thereby overturn the fundamental legal doctrines that have formed the bedrock of history’s most successful economic system.  The engine of true economic growth will always be the informed business judgment of directors and managers, and not the hunger of short-term oriented shareholders for quick profits.

A long-term focus would mean encouraging boards and CEOs to pursue strategies for sustainable growth. Empowering boards of directors rather than arming union pension funds or special-situation hedge fund managers. Freeing rather than tying down managements. Designing incentives rather than Damoclean swords.

Lawmakers, regulators and courts need to remember that allowing companies to pursue long-term strategies (lawyers call it the “business judgment rule”) is the path both to shareholder wealth and societal benefits like job creation. Beware of making a fix, they warn, that may break more than it repairs:

Particularly at a time of depressed stock market valuations and the resulting danger of opportunistic attacks to bust up or takeover American companies, directors and managers must remain free to invest in the future and take the long-term view, so as to ensure prosperity for future generations.

These guys are lawyers for big corporations, of course. As a free-market sort, I’m inclined to agree that Washington doesn’t have the best ideas on what will restore business to a healthy growth trend. What’s your opinion?

Stakeholders vs. stockholders?

July 14, 2009

A Stanford University business professor, Jeffrey Pfeffer, takes on “shareholder capitalism” in an article in the July-August issue of Harvard Business Review.

Pfeffer argues in “Shareholders First? No So Fast …” that the pendulum is swinging from stockholders toward stakeholders. Noting the recent political changes and populist backlash after the carnage in financial and credit markets, he says CEOs and the rest of us need to get away from shareholder-driven decision making.

I’m not sure I buy the stakeholder-stockholder dichotomy. But we certainly do need to study the mood of our society as we work out corporate strategies – and craft messages for investor relations and corporate communications.

Pfeffer says companies used to be run (in the 1950s and 1960s) for employees, customers, suppliers and communities, as well as shareholders. In the 1970s and 1980s, he says, faith in the wisdom of financial markets became pre-eminent.

He describes the current shift back to stakeholders:

Now opinions on deregulation, finance, time horizons, and the wisdom of corporate leaders are all shifting, and the logic for putting the creation of shareholder wealth ahead of the creation of stakeholder value is rightfully under fire. Given the political realignment occurring in many countries, and the residue of the worst economic meltdown and destruction of wealth since the Great Depression, the chances are pretty good that stakeholder interests will remain at the top of the list a bit longer this time.

Even while stockholders were king, some of the most successful companies like Southwest Airlines put employees first, customers second and shareholders third, Pfeffer notes. The people who most influence a company’s success – employees and customers – don’t really get fired up by shareholder value, he suggests. Employees want to be valued (and paid), and customers want quality, price and service.

To me, there’s an element of “straw man” in the stakeholder vs. stockholder debate. Most companies I’ve worked with see shareholder value as a long-term outcome of working to motivate employees and excel in meeting the needs of customers. To the extent that any CEOs actually do fit the image of greed-crazed robber barons, I don’t see their behavior as having anything to do with the interests of shareholders.

Pfeffer even suggests that shareholder capitalism contributes to causing recessions. In that, I think he goes beyond economic evidence and joins the political hordes. Not much good can come from taking up torches to burn CEOs at the stake for our current woes. I doubt that shareholders’ interests led to this or any recession.

But stakeholders are the people our companies serve – shareholders, employees, customers, suppliers and communities - whatever order you list them in.

Our message has to do with what leads to business success. So, yes: stakeholders … and stockholders. What’s your view?


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