Category: Corporate Governance
Are companies that follow a stakeholder model more “effective”?
New research from the Drucker Institute, published in the WSJ, applied the Institute’s analytical framework to assess companies’ “effectiveness,” defined for this purpose as “doing the right things well.” Notably, the authors of the article find a harmonious congruence—or is it a “harmonic convergence”?—between the “indicators” of effectiveness that make up their model and the various commitments for the benefit of all stakeholders in the Business Roundtable’s new “Statement on the Purpose of a Corporation.” What’s more, the authors suggest that their own framework was created to promote exactly “the kind of stakeholder mind-set that the Business Roundtable has now endorsed.” With that in mind, the authors highlight the group of companies led by CEOs who signed the BRT Statement to see how well these companies fared. While some have viewed the BRT Statement as mere “virtue signaling” (see the SideBar below), the article sets out to measure the extent to which the signatories put their money where their mouths are. How did they do? “Quite well,” but with “notable room for improvement.”
EY analyzes cybersecurity risk disclosure
What are companies disclosing about their efforts to oversee cybersecurity risk? In this article, Ernst & Young analyzes cybersecurity-related disclosures in the proxy statements and Forms 10-K of Fortune 100 companies from 2018 to 2019, focusing on disclosure regarding board oversight, cybersecurity risk and risk management. Building on its similar analysis conducted for 2018 (see this PubCo post), EY detected “modest” enhancements in disclosures compared to the prior year—most significantly regarding board oversight practices—although the depth, detail and company-specificity of the disclosures continued to vary widely. Nevertheless, based on its observations of companies’ activities in the market, EY found that even these enhanced disclosures sometimes failed to capture all of a company’s oversight activities, such as third-party independent assessments or tabletop exercises designed to enhance preparedness. Given that many stakeholders have interests in cybersecurity risk preparedness and board oversight, EY advises, enhanced disclosure can serve to build “stakeholder confidence and trust as the cybersecurity risk landscape evolves and as technological innovations raise the stakes for data privacy and protections.”
How are companies approaching the new requirement for hedging policy disclosure?
At the end of 2018, the SEC dredged up its 2015 rule proposal regarding hedging disclosure (required by Dodd-Frank) and voted to adopt final rule amendments. The amendments mandate disclosure about the ability of a company’s employees or directors to hedge or offset any decrease in the market value of equity securities granted as compensation to, or held directly or indirectly by, an employee or director. As described in the legislative history of the related Dodd-Frank provision, the purpose of the requirement was to “allow shareholders to know if executives are allowed to purchase financial instruments to effectively avoid compensation restrictions that they hold stock long-term, so that they will receive their compensation even in the case that their firm does not perform.” As required, companies have now begun to include the new hedging disclosure in their proxy statements. To see how companies were approaching their responses to the new rule, comp consultant F.W. Cook examined the first 40 proxies that contained the new disclosure (covering the period from August 23, 2019 to October 4, 2019) and provides us with a number of observations that may well be helpful as we head into the new proxy season.
Are we misunderstanding the elements that lead to good governance?
What does good governance really mean? What does it mean to follow best practices? Are there really best practices that make sense for all companies? Do we tend to latch onto easily identified and measured structural features that may not really be effective for good governance and ignore qualities that may be more effective but are not as easily identified or measured? Do we even have a common understanding of the meaning of concepts central to governance? These are some of the questions addressed in an interesting paper, “Loosey-Goosey Governance Four Misunderstood Terms in Corporate Governance,” from the Rock Center for Corporate Governance at Stanford.
NYC Comptroller’s Office initiates Boardroom Accountability Project 3.0 promoting adoption of the “Rooney Rule”
And speaking of the NYC Comptroller’s Boardroom Accountability Project, as I just did in this PubCo post on the Project’s push for proxy access, on Friday, Stringer announced the newest phase of the Project, Boardroom Accountability Project 3.0, an initiative designed to increase board and CEO diversity. The third phase of the initiative calls on companies to adopt a version of the “Rooney Rule,” a policy originally created by the National Football League to increase the number of minority candidates considered for head coaching and general manager positions. Under the policy requested by the Comptroller’s Office, companies would commit to including women and minority candidates in every pool from which nominees for open board seats and CEOs are selected. The announcement claims that the Project 3.0 represents “the first time a large institutional investor has called for this structural reform for both new board directors and CEOs.” Notably, the announcement also indicates that the Comptroller’s Office will “file shareholder proposals at companies with lack of apparent racial diversity at the highest levels.” The Comptroller’s Office characterizes the new initiative as the “cornerstone” of its Boardroom Accountability Project that “seeks to make meaningful, long-lasting, and structural change in the market practice so that women and people of color are welcomed in the door and considered for every open director seat as well as for the job of CEO.” Given Stringer’s success with his proxy access campaign, companies should pay close attention.
Does proxy access create leverage—even if no one uses it?
Thanks to thecorporatecounsel.net for catching this announcement from NYC Comptroller Scott Stringer and the NYC Retirement Systems, which reported that, since the inception of the Comptroller’s “Boardroom Accountability Project,” there has been a 10,000% increase in the number of companies with proxy access. Stringer began the Project in 2014 with proxy access proposals submitted to 75 companies. At the time, Stringer viewed the campaign as having been “enormously successful: two-thirds of the proposals that went to a vote received majority support and 37 of the companies have agreed to enact viable bylaws to date.” (See this PubCo post and this PubCo post.) So effective was the proxy access campaign that Stringer leveraged its success and the “powerful tool” it represented to “demand change” through the Boardroom Accountability Project 2.0, focused on corporate board diversity, independence and climate expertise. Now, five years later, the number of companies with “meaningful” proxy access has climbed from just six in 2014 to over 600—including over 71% of the S&P 500—all as a consequence, Stringer contends, of the Boardroom Accountability Project. But, you say, proxy access has hardly ever been used (see this PubCo post), so what difference it make? In Stringer’s view, it makes a big difference.
Strine proposes to reform the corporate governance system
Who else but Delaware Chief Justice Leo Strine would bid his farewell to the Delaware bench with nothing less ambitious than a “comprehensive proposal to reform the American corporate governance system” laid out in a paper with longest title of any in recorded history: “Toward Fair and Sustainable Capitalism: A Comprehensive Proposal to Help American Workers, Restore Fair Gainsharing Between Employees and Shareholders, and Increase American Competitiveness by Reorienting Our Corporate Governance System Toward Sustainable Long-Term Growth and Encouraging Investments in America’s Future”? Strine offers up his always interesting ideas: for example, he advocates setting up board committees focused on the welfare of the workforce, imposing a tax on most financial transactions to be dedicated to funding infrastructure and research, curbing corporate political spending in the absence of shareholder approval and enhancing the fiduciary duties of institutional investors to consider their ultimate beneficiaries’ economic and human interests. And here’s another idea: Strine believes that the number of proxy votes each year is an “impediment to thoughtful voting” and leads to outsourcing of voting decisions by institutional investors to proxy advisory firms. Say on pay every four years? He has a plan for that too.
How have companies adapted to CAMs?
In this report, Critical Audit Matters: Public company adaptation to enhanced auditor reporting, Intelligize examines data from a survey, conducted by SourceMediaResearch/Accounting Today, of 171 compliance specialists at public companies to examine “how public company compliance officials are adapting their own corporate disclosure and processes to comply with this new regime.” Among the issues considered were the impact of “dry runs,” changes to company disclosures and changes in internal controls. The report includes a 25-page appendix with examples of CAMs, organized by subject matter, which should prove to be valuable reading for those about to embark on the project. Interestingly, the report stressed the importance of lining up the investor relations team to consider how best to communicate the company’s message about CAMs.
Are there clues in the last proxy season about the one to come?
In 2019 Proxy Season Recap and 2020 Trends to Watch from consultant ICR, posted on The Harvard Law School Forum on Corporate Governance and Financial Regulation, the author concludes that, although, initially, the changes in voter behavior during the 2019 proxy season appear marginal, on a closer look, the changes portend an “already-shifting pattern of voter behavior, and contain important clues as to what companies must do to prepare for the 2020 proxy season.” These clues are reinforced by recent developments, such as the new Statement on the Purpose of a Corporation issued by the Business Roundtable (see this PubCo post). In the article, the author analyzes trends in say on pay, director elections, shareholder proposals and ESG and IPO governance issues, and prognosticates about what it all means for 2020.
You must be logged in to post a comment.