Archive for the ‘Governance, proxy & pay’ Category

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?


Get ready for new regulation

April 6, 2009

Wondering what new wave of regulation is coming our way? Chairman Mary Schapiro of the Securities and Exchange Commission today offered an outline in a speech to the Council of Institutional Investors.

Schapiro’s agenda for the SEC in 2009 includes proposals for new disclosure requirements, proxy and compensation changes, and other ideas that investor relations teams will want to watch closely.

The initiatives will focus on strengthening the hand of shareholders in electing boards of directors and holding them accountable:

  • In May, the SEC will consider a proxy access regulation to ensure that shareholders “have a meaningful opportunity to nominate directors.” Details to come, but one option was considered before. As MarketWatch reports: “A similar approach was introduced by ex-SEC Chairman William Donaldson in 2003, however it was never approved. Labor-backed investors and activist hedge funds have pushed for the authority; however corporations have opposed it arguing that investors with special interests such as labor unions would push their agenda at the expense of the company’s effort to improve share-value.”
  • The SEC will consider requiring more disclosure on board nominees – data on a candidate’s experience, qualifications and skills, beyond the current brief description of recent experience.
  • The Commission may require boards to disclose reasons for using a particular leadership structure — such as an independent chair, non-independent chair, or combined CEO and chairmanship.
  • Schapiro will seek more compensation disclosure, such as how executive pay drives management’s behavior, including risk-taking. She also wants companies to explain their overall comp approach, beyond highest-paid officers, and reveal consultants’ conflicts of interest.
  • In risk management, the chairman has asked the staff to develop a proposal “that looks to providing investors, and the market, with better insight into how each company and each board addresses these vital tasks.”

In addition, the SEC tomorrow will consider alternatives for limiting short selling – a thorn in the financial side for some companies and IR teams.

The devil is always in the details, and regulatory expansions can be especially devilish when they spring from political outcry. The media are describing the public’s current attitude, especially in Washington, as a “rage” brought on by bear-market investor losses and corporate scandals.

No doubt, securities lawyers will continue to have plenty of work ahead. IR practitioners should keep an eye on the SEC to prepare for what’s coming.

Toxic compensation is catching on

December 20, 2008

My one contribution to the 2008 financial bailout was an idea back in September to motivate members of Congress, Treasury bosses and Fed honchos to fix the markets by paying them in mortgage-backed securities. If the bailouts fizzle, the compensation is worthless. If the economic fix works, the power brokers are in the money.

Uncle Sam hasn’t adopted this scheme, but toxic compensation seems to be catching on in the private sector. At least, the eminent Credit Suisse is on board, according to Thursday’s online Wall Street Journal:

ZURICH — Credit Suisse Group said Thursday it will use up to $5 billion of its own illiquid assets such as mortgage securities to pay senior staff year-end bonuses at its investment bank, a move meant to spread risk more evenly between the bank and its employees.

The Zurich-based bank plans to pool commercial mortgage-backed securities and leveraged loans it can’t sell because demand has seized up, then dole out units in the entity to managing directors and directors as part of this year’s pay, according to a memo made available by a spokesman.

I don’t imagine investment bankers accustomed to stacks of cash will be celebrating this New Year’s over the new-fangled paper scrip. But maybe financial innovators, suitably motivated, can figure out how to get the markets unstuck. And toxic compensation may be better accepted on Main Street than the cash still being paid to some executives on Wall Street.