Volume 1:Issue #5
Edited by Francis H.Byrd
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The Way We See It – Commentary from The Altman Group

By Francis H. Byrd, Managing Director, Corporate Governance Practice Co-Leader

“May you live in interesting times”

While it is not clear whether the above quote is a blessing or a curse, it accurately describes our present circumstances. These are difficult and interesting times for those of us involved in corporate governance. Difficult, in that we are recovering from (and still suffering through) the worst financial crisis since the Great Depression.  Interesting, in that the old rules and perspectives are being pushed aside for new policy prescriptions and processes designed, we are told, to prevent us from running off the rails in the future.  Imagine if you will the anticipation and uncertainty felt by the representatives of the 50 countries that met in San Francisco in 1945 to draft the UN charter.  Our time meets that characterization, as all of us wait in anticipation or dread of change.

Change, some dramatic, some minor, is on the way. The Securities and Exchange Commission and the Congress are exploring different mechanisms for empowering investors and giving them more responsibility for holding directors accountable for the quality of board oversight of management.  What is clear is that no one will be left untouched or unchanged.  The nature of the board-management-shareholder relationship will be transformed.

Over the last three weeks, I have had an opportunity to participate in a number of director roundtable venues, through Directors and Boards Magazine and the NACD-Directorship Global Forum, and last week I attended the two-day annual governance conference at the Millstein Center for Corporate Governance and Performance at Yale. Each of these events operated under Chatham House rules, so I can’t give you direct, attributed quotes. But I can give you a sense of the concerns and three key takeaways from these substantive forums.

The Three Key Takeaways:

  • Managing Risk and Risk Committees

At each venue I attended there was much discussion over the Washington proposals to require standing risk committees.  Some directors felt that the establishment of a formal committee would provide a powerful focus for the board and shake management out any complacency.  Other directors were concerned about splitting the role of the audit committee, where discussions of risk normally reside.  My take is that most companies do not necessarily need a standing risk committee; however, for certain industries such as banking and financial services, they provide a venue for discussion with management.  Some of our failed and troubled financial institutions had separate risk committees, but so did many of the survivors. Outside of the financial and energy sectors, where the failure of large players pose terrible systemic risks to the global (or domestic) ecosystem, most non-financial companies can manage risk as a full board issue.

Another issue with the risk committee proposals is that no one can explain what qualifications directors on the risk committee should possess. According to Senator Schumer’s staff on the Joint Economic Committee, his bill provides the SEC with discretion in determining what criteria directors would need to meet.  The directors who ultimately serve on risk committees will be, at some companies, in instant hot seats.  Taking and managing risks is what capitalism is all about. That is an idea for directors, investors, regulators and politicians to keep in mind in the approaching debates on corporate governance.

  • Proxy Access and Shareholder Engagement

This was certainly a major topic of conversation, because of Commissioner Schapiro and Senator Schumer having each proposed versions of proxy access that could create a difficult director election environment and hamper board effectiveness.

Many directors are resigned to there being some form of proxy access and believe that a combination of outreach and open-mindedness to activists’ suggestions need not be problematic.  Some directors have experienced first hand the hybrid board effect described in a recent IRRC Institute report (add link from previous issue) and as a result are much less concerned about activist intervention. But all are concerned about the nature of future director elections and whether they will become more like political contests.  The quality of this discourse will depend on the type of disclosure the SEC will seek for director nominees.  While the current disclosure of director biographical information appears insufficient to some, it is not clear exactly what type of information would best assist shareholders in determining their support for a director nominee or a board slate.  This we believe will prove to be a concern for both management and dissident slates.

  • Are institutional investors ready for their close-up?

From voting on ‘Say on Pay’ proposals to withholding votes for directors, institutional investors are gearing up for the prospect of seeing their long time wish list being enacted.  Discussions touched on engagement with company CEOs and directors (such activity more than doubled this year according to some investors), pushing for greater adoption of the majority voting standard for all U.S. domestic corporations, and debating whether ‘Say on Pay’ is the right tool for communicating dissatisfaction with executive pay.

As I stated in an earlier essay (Issue 2) the big public funds and labor unions are not planning wide- ranging campaigns to unseat directors and take over companies.  Actually, some are focused on the need to expand their circle to include other smaller public funds, thereby limiting the dependency of smaller state and municipal funds on the recommendations of proxy advisory services.

Even as the activist institutions sort through their prospective powers, they are very focused on engagement with management – and directors.  Investors are interested in understanding the structure and processes of board oversight and they want to hear about it from directors (non-executive chairs, lead directors, & audit and compensation committee chairs).  A panel echoed two of my recommended key steps for management and directors to take:  first, don’t wait until you have a difficult shareholder resolution or a controversial management compensation plan to pass before picking up the phone to call your investors; second, do your homework and know your investors and their guidelines before picking up the phone to make contact – so you have a better idea of the issues that they are concerned about.  Keep in mind that the activist institutions are being deputized by regulators and Congress (Issue 2) to provide shareholder oversight of boards of directors. Remember they are the new sheriffs and it always good to know your sheriff.

The Legal Opinion

A review of the Treasury Department’s new standards for executive compensation and corporate governance for TARP Recipients.

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Skadden reviews and critiques the SEC’s proposed rules on Proxy Access and its potential impact on public companies.

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