Volume 1:Issue #25 Friday, November 6, 2009
Edited by Francis H.Byrd
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The Altman Interview

The Altman Interview – Holly J. Gregory of Weil, Gotshal & Manges, LLP – Part II

This week we bring you the second installment in our “The Altman Interview” with attorney Holly J. Gregory. This installment covers questions 6 through 10 on hot button issues for 2010.

Ms. Gregory is a well-known and highly respected figure in the world of corporate governance. As a partner at Weil, Gotshal & Manges, Ms. Gregory counsels corporate directors, executives and investors on the full range of governance issues and best practices. She played a key role in drafting the OECD Principles of Corporate Governance and advised the Internal Market Directorate of the European Commission on corporate governance regulation. Ms. Gregory has also served as an advisor to the World Bank and the joint OECD/World Bank Global Corporate Governance Forum on governance policy for developing and emerging markets.

In addition to her legal practice, Ms. Gregory has helped organize governance-related programs for the SEC, OECD, World Bank, Yale’s Millstein Center for Corporate Governance and Performance, Transparency International and Columbia University School of Law’s Institutional Investor Project.

Question 6
FH Byrd:  Excise tax gross-ups received a lot of attention in 2009, primarily due to RiskMetrics taking a harder stance on them.  Do you think there are any other pay practices that corporations should be leery of? 
Holly Gregory: Compensation committees and boards need to develop greater understanding of and sensitivity to the concerns about executive compensation that have resulted in such intense popular and political backlash.  Many of these issues are not new, but at times boards and managements have exhibited tone-deafness or an unwillingness to set forth in plain and rational terms the legitimate justifications for certain pay practices.  It is no longer enough to simply cite competition and retention concerns to justify large packages and grants.

Question 7
FH Byrd: Senator Schumer’s legislation proposes mandatory risk committees for U.S. corporations. Should boards be getting in front of this by establishing risk committees or reviewing their present risk mitigation and oversight structure?   
Holly Gregory: The idea that independent risk committees of the board should be mandated for every public company is one reform idea that simply defies logic.  Risk committees may provide efficient oversight structures for some boards but there is no reason to think that they are a universal solution.  Only about 7% of public companies currently have risk committees -- and the industry in which they are most prevalent is   financial services.  There is no evidence that I'm aware of to show that financial services companies are better than other companies with respect to risk management or the oversight of risk management.  Indeed, the anecdotal evidence appears to draw into question the ability of the financial services industry to manage certain risks.  So it is difficult to understand why the committee structure relied on in that industry should be mandated for all other public companies.  Undoubtedly boards need to spend considerable energy and attention on understanding risk and the processes management has in place to identify and manage risk, since this is fundamental to the board's ability to provide strategic guidance.  The National Association of Corporate Directors’ recent Blue Ribbon Commission Report on Risk Governance:  Balancing Risk and Reward, reflects a private sector effort to raise the level of understanding among directors about their responsibilities for risk oversight.  In all of this, however, I think it is especially important that we recognize the growing gap between expectations about what boards can do and the reality of their limitations.  Boards are neither positioned nor expected by the law to identify company-specific risks that executives have missed, let alone system-wide risks that regulators and central banks have missed. 

Question 8
FH Byrd: In this environment of changing shareholder influence and pending reforms, do you have any concerns that companies considering adopting a majority voting standard may be voluntarily impeding the ability to have their directors elected? 
Holly Gregory: The majority of S&P 500 companies have already adopted some form of majority voting, whether through actual charter or bylaw amendments or policies that require directors to tender their resignations if they fail to receive more "for" votes than "withhold" votes.  There is a certain amount of nervousness about how all the reforms will play out in a majority vote system, and it appears that the momentum for companies to adopt majority voting has slowed.  I think many companies are now adopting a "wait and see" posture given the high level of uncertainty in the current regulatory and legislative reform environment.

Question 9
FH Byrd: There has been a recent uptick in the amount of criticism leveled at proxy advisory firms, in particular RiskMetrics.  Do you feel this criticism is well-founded? 
Holly Gregory: There are legitimate concerns about the power of certain of the proxy advisory firms and about their capacity to provide the kind of nuanced company-specific analysis that will only become more important to our economic system as shareholders gain power.   As shareholders gain influence on the actual composition of boards, the recommendations that proxy advisors make about voting in director elections gain importance.  In particular, the propensity of certain proxy advisors to recommend against directors for any single item on a long list of one-size-fits-all governance no-no's, rather than on a broader view of the director's skills and qualifications and contributions,  needs to be adjusted in the new world of heightened shareholder influence.  Director elections will be too important to use as vehicles to protest what in the scheme of things are often relatively minor decisions the board makes about how it can best govern. 

Question 10
FH Byrd: You recently chaired an ABA Task Force on the distinct shareholder and board roles.   Will the reforms on the table change the roles of shareholders and boards in any meaningful way? 
Holly Gregory: I think that the reform proposals if enacted in whole certainly will increase shareholder power, and will change the balance of shareholder and board power.  Whether the roles change in meaningful ways will depend on how shareholders use their new power in the real world and how their use of their power interacts with other forces (such as the power of proxy advisors and their propensity to recommend protest votes against directors).  At the extreme, we may see directors coerced to abandon their own judgment in certain circumstances to buy peace with a small but powerful and vocal set of shareholders.   That would be unfortunate.  As our Task Force Report emphasized, there is value to our economic system in allocating to boards the power and discretion to manage and direct the affairs of the corporation, while enabling shareholders to participate as passive investors with the benefit of limited liability for the actions of the corporation and the ability to freely enter and exit from their investments.
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