Posts Tagged ‘Governance’

Gift bags and a chat with shareholders

December 13, 2016

Gift bag. Isolated

A nice feature on the Estée Lauder annual meeting ritual – a gathering of mostly older ladies dressed to a T, gathering for a continental breakfast “beautifully displayed,” a gift bag of cosmetics, and genteel conversation – lightens up p.1 of The Wall Street Journal today.

It is a nostalgic image, of a time when shareholders formed bonds of loyalty and companies cultivated that. As today’s headline says, “Estée Lauder’s Annual Meeting Is a Pampered Affair.” The shareholders’ questions, of course, dealt with issues of makeup.

I’m a fan of annual meetings and have attended many. A few, mostly consumer companies, offered product samples or showed off their wares. Some had the atmosphere of a reunion, including firms with many retiree-shareholders, where the focus was more internal than external. Some have been family affairs, revealing sons and daughters of the founder as mid-level executives (that tells you something). An occasional meeting has brought confrontation between activists and a CEO. Some at company locations have included tours. Coffee, or even breakfast, is a nice touch.

To me, the more personal events are nice. I can’t argue that these affairs pay for themselves, but they make a kind of statement, “We care about you, our shareholders, our owners. We report to you.”

Of course, the investor relations team is likely to provide planning and logistical help for the annual meeting. This brings me to my point: Whether large or small, all-business or old-home-days, an annual meeting is about reporting to shareholders, answering their questions and receiving any input. It is like a one-on-one with the big institution, but democratized.

I think it’s too bad when companies, noting that only a handful of investors will attend, reduce the annual meeting to a reading of the lawyers’ script, going through the motions of voting on board seats and executive pay, and then adjourning after 10 minutes. They say it’s because no one attends but, then, why would anyone? It’s a vicious circle – and becomes a pointless date on the corporate calendar.

In my experience, annual meetings also can bring out the deepest concerns of shareholders. “Are you planning to cut the dividend?” was the first question at one I attended. “What’s your plan to turn around declining sales?” “Is the strategy failing?” “Will this acquisition destroy value?” Real questions. Investor relations in the relationship sense.

So I say, bring on the gift bags, a video of the new plant – but, above all, an explanation of the strategy for next year and how we are going to build the value of the business for the future. What do you think?

© 2016 Johnson Strategic Communications Inc.

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Shareholders & ‘the ADD society’

October 14, 2011

Andrew Ross Sorkin, the New York Times M&A columnist, CNBC “Squawk Box” co-host and author of Too Big to Fail, says we’re kidding ourselves when we say we want corporate leaders to think long-term. The problem, he says, is all of us.

“We are the ultimate ADD society,” Sorkin said today in a speech to the Association for Corporate Growth Kansas City chapter. Patience is nowhere to be found, and that goes for the stock market and demands it places on managements, he said:

We keep saying we want more shareholder democracy because we want executives to think long-term. The problem is not that the people in power are short-termists, it’s that we are short-term thinkers.

As Exhibit A, Sorkin cited the statistic that the average shareholder holds onto a stock for only 2.8 months. Less than one quarter. Of course, high-frequency automated trading turns stocks over in milliseconds, and multiple times every day. But even individual investors can be fast-moving and fickle:

I would love to find a way to get our country back to being an investing society, not a trading society.

Sorkin acknowledged there’s no sign of that happening anytime soon. (Coverage of the rest of what Sorkin had to say is here or here.)

The investor relations person in search of a patient investor, in this environment, is something like a mythical but tragic hero. Solutions, anyone?

© 2011 Johnson Strategic Communications Inc.

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.

After the proxy fight (and before)

April 4, 2011

The April 2011 Harvard Business Review is “The Failure Issue” – with lots of good stories and lessons. In one, former Blockbuster CEO John Antioco  talks about his run-in with activist investor Carl Icahn – and Icahn responds (both available here).

Two different views emerge, as you might guess, from the corporate raider who calls Blockbuster “the worst investment I ever made” and the video-store CEO whose eject button got pushed. Blockbuster is still being sorted out in bankruptcy.

Proxy fights are appropriate for HBR‘s Failure Issue because, usually, a proxy fight is itself a sign of some failure in the business (speaking of a real battle for control, as opposed to those political proxy proposals arguing for societal reforms).

Antioco and Icahn’s comments on dealing with each other – especially early on – may provide some wisdom for investor relations people. We all face the possibility of some future encounter with an activist investor. Antioco begins:

When my assistant came into my office in early 2005 and told me that Carl Icahn was on the phone, it was a complete surprise. I knew, of course, that Icahn was an “activist shareholder,” but I had no idea why he might be calling. Icahn told me he’d bought nearly 10 million shares of Blockbuster … I didn’t know what kind of play he saw in Blockbuster.

Icahn’s response article offers a raison d’etre for activist investors, which also hints at what was in the background when he placed that call to Blockbuster:

The fact that I can make so much money as an activist investor [Forbes estimates Icahn’s net worth at $11 billion] shows that something’s wrong with governance in most of corporate America. There’s no accountability for CEOs. There are good CEOs and good boards, but too many directors don’t care. Activist investors provide some accountability and can be important catalysts for change.

As Antioco tells the story, Blockbuster was troubled by the shift from videotapes to DVDs, the rise of online rental firm Netflix and the prospect of eventually watching movies online. His turnaround strategy involved spending $400 million to change Blockbuster’s business model – and that was an invitation to an activist investor.

Icahn and two other independents won election to the board in 2005. Before getting to what might have led to a more amicable solution, here is how Antioco describes dealing with activists once they’re in the boardroom:

Having contentious directors was a nightmare; as management, we spent much of our time justifying everything we did. One of them had a bunch of ideas, such as putting greeting cards in the stores, carrying adult movies, and making a deal with Barnes & Noble to add a book section. Mostly, though, they questioned our strategy …

Ah, the strategy. A few years later, Icahn is willing to admit that Antioco’s strategy was at least partly OK and he was doing a good job implementing it. But …

The biggest issue was his excessive compensation package. Investors were outraged that he’d get $50 million if there was a change of control. That was the nail in his coffin.

And so it went: contentious. In December 2006, management was due big bonuses because Blockbuster’s results were better – but pay was still an issue. The board asked Antioco to step out of a meeting, then slashed his bonus. Things got worse, until Icahn and Antioco hashed out a deal for the CEO to leave in June 2007.

In 2010, still struggling, Blockbuster filed Chapter 11. Failure all the way around.

Before that point, before the contentious board meetings and before the proxy fight – maybe even before Carl Icahn’s call to John Antioco – you have to wonder if astute management and an alert board might have taken actions to avoid failure.

Sure, it’s a game of “What if …” In this case, Antioco wonders if he should have met with Icahn earlier to communicate – to lay out his strategy – before the fight began. Icahn might have bought in, or decided to sell his stock and go away. Icahn wonders if the board should have let the ’06 bonuses go through, avoided a blowup and kept management focused on a strategy that seemed to be working.

Before the battle lines even formed, maybe management could have recognized the fierce competitive challenges and come up with solutions that didn’t involve betting $400 million of shareholders’ money on a couple of risky ideas. The best way to avoid activist shareholders, after all, is for management to be the activist.

What’s your take on avoiding that nasty phone call and a subsequent proxy fight?

© 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.

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.”

Social media, reputation & IR

August 17, 2009

There’s a gap in many corporations – and among investor relations people – between recognizing the growing influence of social media (on one hand) and hesitating (on the other) to engage proactively to support company reputations.

In a guest post today on the “Full Disclosure” Big Fat Finance blog, Sharon Allen, Chairman of Deloitte LLP, talks about the firm’s recent “Ethics & Workplace” survey of 500 executives and 2,000 employees. Bosses and workers take different tacks:

  • Although 60% of executives believe companies have a right to know what employees are saying about themselves and their employers, the majority of workers say posts on networking sites are none of management’s business.
  • While most employees recognize that online posts affect their companies’ reputations, a third say they don’t consider bosses or customers’ possible reactions before posting on social networking platforms. 41% of employees say they wouldn’t change their online behavior “even if there were a clear corporate policy about social networking use.”
  • In any case, only 17% of the companies “have programs in place to monitor and mitigate the possible reputational risks related to social network use.”

Allen comments:

As we’ve seen all too often recently, offensive Internet postings and viral videos can race across networks at the speed of light. Left in their wake are damaged brands and shattered reputations …

Establishing policies — or assuring that existing core policies extend to include employee behavior on social networking sites — is crucial to helping everyone understand what constitutes acceptable behavior, especially when our survey results indicate that so few companies have addressed the issue.

Because of the reputational risks, boards of directors should be addressing social media, the Deloitte exec suggests. She says companies should establish policies on use of social networking – and integrate new media into their cultures.

Allen doesn’t address potential risks in investor relations – such as employees leaking financial information on Facebook or tweeting about business trends (whether optimistically or negatively) on Twitter. These risks are good reason for IROs to help management incorporate social media into disclosure policies, implement monitoring of chatter, and develop a strategy for active engagement to support corporate reputation, in addition to individual brand marketing online.