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Page d’accueil | Inventaire des publications récentes et pertinentes dans le domaine de la gouvernance des entreprises, rédaction de billets sur ces activités, utilisation d’un outil de recherche très performant en fonction de thèmes et de catégories

Séparation des fonctions de PDG et de président du conseil d’administration | Signe de saine gouvernance !


Selon le modèle de gouvernance des entreprises privées canadiennes et américaines, le PDG (CEO) relève du conseil d’administration (CA) de l’entreprise. En effet, ce sont les actionnaires qui, lors de l’assemblée générale annuelle (AGA), votent pour des administrateurs dont la responsabilité fiduciaire est de les représenter sur le conseil d’administration de l’entreprise.

Ainsi, lors des AGA des entreprises publiques (cotées en bourse), les actionnaires sont appelés à voter sur une recommandation du CA développée par le comité de gouvernance. Il existe également des règles qui permettent aux actionnaires de faire inscrire des candidats sur la liste présentée par le CA.

 

Résultats de recherche d'images pour « michael sabia et »

Michael Sabia, PDG de la Caisse de dépôt et placement et Robert Tessier, président du conseil d’administration

 

Le CA a la responsabilité de veiller aux intérêts supérieurs des actionnaires tout en considérant les intérêts des diverses parties prenantes.

Les actionnaires ne votent pas pour un PDG (CEO) ; ils votent pour des représentants en qui ils ont confiance dans la supervision de leurs affaires, notamment dans le choix du premier dirigeant (PDG – CEO).

Il est clair pour tous que c’est le CA qui a la responsabilité d’embaucher le PDG (CEO), de l’orienter, de le rémunérer, de l’évaluer et de mettre en place un processus de relève et de transition.

Personnellement, je ne crois pas approprié que le PDG soit aussi un administrateur au sein du CA, bien qu’il doive y assister à titre de premier dirigeant, mais sans droit de vote.

Cette prise de position implique, a fortiori, que le PDG ne soit pas désigné comme président (Chairman of the Board) du CA.

Bien que notre mode de gouvernance semble exclure le cumul des fonctions de président du conseil et de PDG, il n’existe aucune obligation juridique à le faire.

Ainsi, comme mentionné dans un billet daté du 5 juillet 2016 (la séparation des fonctions de président du conseil et de président de l’entreprise [CEO] est-elle généralement bénéfique ?), les autorités réglementaires, les firmes spécialisées en votation et les experts en gouvernance suggèrent que les rôles et les fonctions de président du conseil d’administration soient distincts des attributions des PDG (CEO).

En fait, on suppose que la séparation des fonctions, entre la présidence du conseil et la présidence de l’entreprise (CEO), est généralement bénéfique à l’exercice de la responsabilité de fiduciaire des administrateurs, c’est-à-dire que des pouvoirs distincts permettent d’éviter les conflits d’intérêts, tout en rassurant les actionnaires.

Cependant, cette pratique cède trop souvent sa place à la volonté bien arrêtée de plusieurs PDG d’exercer le pouvoir absolu, comme c’est encore le cas pour plusieurs entreprises américaines.

Dans un autre billet daté du 17 novembre (Séparation des fonctions de président du conseil [PCA] et de chef de la direction [PCD] : un retour sur un grand classique !), on note que les études contemporaines démontrent une nette tendance pour la séparation des deux rôles.

Le Canadian Spencer Stuart Board Index estime qu’une majorité de 85 % des 100 plus grandes entreprises canadiennes cotées en bourse a opté pour la dissociation entre les deux fonctions.

Aux États-Unis, en 2013, 45 % des entreprises de l’indice S&P500 dissociaient les rôles de PDG et de président du conseil. Plus de 50 % de ces entreprises combinent les deux fonctions !

L’article d’Yvan Allaire, publié dans le journal Les Affaires du 21 novembre 2016, mentionne « deux arguments invoqués pour appuyer la séparation des rôles » :

1- Le PDG relève du conseil qui doit en évaluer la performance, établir sa rémunération, le remplacer si cette performance est inadéquate, proposer de nouveaux membres pour le conseil ; comment peut-on, comme PDG, présider également le conseil, lequel doit prendre ces décisions critiques pour le PDG ;

Environ 50 % des grandes sociétés américaines sont présidées par un administrateur indépendant, comparativement à 23 % il y a 15 ans.

Toute la question du bien-fondé de la dualité des rôles PDG/Chairman est encore ambiguë, même si les experts de la gouvernance et les actionnaires activistes sont généralement d’accord avec la séparation des fonctions.

2-  En notre époque alors que la gouvernance est plus exigeante, plus prenante de temps et d’énergie pour la société ouverte cotée en Bourse, comment une même personne peut-elle s’acquitter de ces deux rôles sans que l’un soit négligé au profit de l’autre ? Dans le nouveau contexte de gouvernance, postérieur à Sarbanes-Oxley, les exigences pour le PCA sont telles qu’il n’est pas souhaitable qu’une même personne assume ces deux fonctions (PCA et PDG).

En conséquence, 85 % des 100 plus grandes entreprises canadiennes cotées en Bourse se sont donné un président du conseil distinct du PDG, mais dans 38 % des cas ce président du conseil ne se qualifiait pas comme indépendant. (Spencer Stuart, février 2012).

La situation n’est certainement pas limpide, mais la tendance est évidente. L’indépendance du président du conseil ainsi que la séparation du pouvoir entre Chairperson du CA et CEO devrait, selon moi, trouver son application dans tous les types d’organisations : OBNL, sociétés d’État, petites et moyennes entreprises, et coopératives.

Évidemment, chaque organisation a ses particularités, lesquelles sont ancrées dans des pratiques de gouvernance assez diverses. La séparation des rôles n’est pas une panacée; c’est une meilleure assurance d’une saine gouvernance.

Vos commentaires sont les bienvenus

La gouvernance des Cégeps | Le rapport du Vérificateur général du Québec


Nous publions ici un billet de Danielle Malboeuf* qui fait état des recommandations du vérificateur général eu égard à la gouvernance des CÉGEP.

Comme à l’habitude Danielle nous propose son article à titre d’auteure invitée.

Je vous souhaite bonne lecture. Vos commentaires sont appréciés.

 

La gouvernance des Cégeps et le rapport du Vérificateur général du Québec

par

Danielle Malboeuf*  

 

À l’automne 2016, le Vérificateur général du Québec produisait un rapport d’audit concernant la gestion administrative de cinq cégeps. Ses travaux ont porté plus précisément sur la gestion des contrats, la gestion des bâtiments, les services autofinancés ainsi que sur la rémunération du personnel d’encadrement et les frais engagés par celui-ci.

Parmi les recommandations formulées à l’endroit des cégeps audités, on en retrouve une qui concerne plus précisément la gouvernance : « S’assurer que les instances de gouvernance reçoivent une information suffisante et en temps opportun afin qu’elles puissent exercer leur rôle quant aux décisions stratégiques et à la surveillance de l’efficacité des contrôles…»[1]

À la lecture de ce rapport et des constats de ces travaux d’audit, on ne peut qu’être qu’en accord avec cette recommandation qui invite les administrateurs à exercer leur rôle. Mais justement, quel rôle ont-ils ? Du point de vue légal, la Loi sur les collèges d’enseignement général et professionnel est peu éclairante à ce sujet.  Contrairement à la Loi sur la gouvernance des sociétés d’État qui précise clairement les fonctions qui sont confiées au conseil d’administration (CA), dont l’obligation d’évaluer l’intégrité des contrôles internes. On y exige également la création de trois sous-comités dont le comité de vérification ou d’audit à qui on confie entre autres, la responsabilité de mettre en place des mécanismes de contrôle interne. De plus, ce sous-comité doit compter sur la présence d’au moins une personne ayant une compétence en matière comptable ou financière.

À mon avis, la gouvernance d’un cégep devrait s’apparenter à celle des sociétés d’État. À ce sujet, dans son rapport publié en mai 2011 soumettant un bilan de l’implantation de la Loi sur la gouvernance des sociétés d’État, l’auteur de ce rapport, l’Institut sur la gouvernance des organismes publics et privés (IGOPP) allait dans le même sens. Il formulait comme première recommandation : « Imposer les nouvelles règles de gouvernance aux nombreux organismes du gouvernement qui ne sont pas inclus dans la loi actuelle sur la gouvernance. »[2]

Malgré le fait que les cégeps n’ont pas l’obligation légale de créer un comité d’audit, plusieurs l’ont fait dans un souci de transparence et afin d’être soutenu par les administrateurs dans leur effort pour assurer une utilisation optimale des ressources financières de l’organisation. Toutefois, le mandat qui leur est confié se limite dans la majorité des cas à une analyse des prévisions budgétaires et des états financiers. Ce n’est pas suffisant !

Considérant la recommandation du vérificateur général, il serait tout à fait approprié d’élargir ce mandat. En plus d’examiner les états financiers et d’en recommander leur approbation au CA, le comité d’audit devrait entre autres, veiller à ce que des mécanismes de contrôle interne soient mis en place et de s’assurer qu’ils soient adéquats et efficaces ainsi que de s’assurer que soit mis en place un processus de gestion des risques.[3] Sachant que les cégeps ne comptent pas de vérificateur interne, il est d’autant plus important de mettre en place un tel comité et de lui confier des fonctions de contrôle financier et de gestion des risques.

Une fois le comité d’audit mis en place, il devrait se pencher prioritairement sur la surveillance du processus de gestion contractuelle. Rappelons que les étapes du processus de gestion contractuelle sont : l’établissement des besoins et l’estimation des coûts, la préparation de l’appel d’offres et la sollicitation des fournisseurs, la sélection du fournisseur et l’attribution du contrat, le suivi du contrat et l’évaluation des biens et des services reçus[4].

À ce sujet, le Vérificateur général, dans son rapport, nous fait part de ses préoccupations. Il a identifié des lacunes dans les modes de sollicitation et constaté des dépassements de coûts et des prolongations dans les délais d’exécution, et ce, sans pénalité. Il précise que «Des activités prévues dans le processus de gestion contractuelle des cégeps audités ne sont pas effectuées de façon rigoureuse.»[5] En jouant son rôle, le comité d’audit du CA pourrait s’assurer que le processus mis en place et le partage des responsabilités retenu sont adéquats et efficaces. Il ne devrait d’ailleurs pas hésiter à faire appel à des ressources externes pour évaluer la performance du Cégep à l’égard de sa gestion contractuelle, le cas échéant.

En terminant, rappelons l’importance de retrouver sur le comité d’audit des administrateurs compétents qui ont une connaissance approfondie de la structure, des politiques, directives et exigences réglementaires. Ils doivent avoir la capacité d’assurer l’efficacité des mécanismes de contrôle interne et de la gestion des risques (un sujet que je développerai dans un article ultérieur).

En présence de telles compétences, il sera plus facile d’assurer la crédibilité du CA et de ses décisions. Il s’agit d’un atout précieux pour toutes institutions collégiales.

_____________________________________

[1] Rapport du Vérificateur général du Québec à l’Assemblée nationale pour l’année 2016-2017, p.35.

[2] Gouvernance des sociétés d’État, bilan et suggestions, IGOPP, p.48.

[3] Loi sur la gouvernance des sociétés d’État, art 24, 3.

[4] Rapport du Vérificateur général du Québec à l’Assemblée nationale pour l’année 2016-2017, annexe 4.

[5] Rapport du Vérificateur général du Québec à l’Assemblée nationale pour l’année 2016-2017, p.9.

_____________________________________

*Danielle Malboeuf est consultante et formatrice en gouvernance ; elle possède une grande expérience dans la gestion des CÉGEPS et dans la gouvernance des institutions d’enseignement collégial et universitaire. Elle est CGA-CPA, MBA, ASC, Gestionnaire et administratrice retraitée du réseau collégial et consultante.


Articles sur la gouvernance des CÉGEPS publiés sur mon blogue par l’auteure :

(1) LE RÔLE DU PRÉSIDENT DU CONSEIL D’ADMINISTRATION (PCA) | LE CAS DES CÉGEPS

(2) Les grands enjeux de la gouvernance des institutions d’enseignement collégial

(3) L’exercice de la démocratie dans la gouvernance des institutions d’enseignement collégial

(4) Caractéristiques des bons administrateurs pour le réseau collégial | Danielle Malboeuf

(5) La gouvernance des CÉGEPS | Une responsabilité partagée

L’éthique attendue et l’éthique réfléchie | Un billet de René Villemure


Aujourd’hui, je poursuis notre habitude de collaboration avec des experts avisés en matière de gouvernance et d’éthique.

Ainsi, je partage avec vous un excellent billet de René Villemure* publié le 6 février 2017.

L’article nous invite à ne pas repousser notre réflexion sur l’éthique à demain. Il convient donc de se doter d’objectifs en matière d’éthique pour 2017.

Voici donc la réflexion que nous propose René. Vous pouvez visiter son site à www.ethique.net pour mieux connaître ses intérêts.

Vos commentaires sont appréciés. Bonne lecture.

L’éthique attendue et l’éthique réfléchie

 

Conférence de René Villemure au Club Premier de Bell Helicopter

Conférence de René Villemure au Club Premier de Bell Helicopter

 

Le temps est une fraction de la durée, un moment entre deux autres moments.

La chenille ne peut se transformer en papillon plus rapidement parce qu’on lui crie de le faire plus vite.  La Nature a son propre rythme;  elle prend quelques semaines pour faire un papillon, toute une vie pour faire un adulte, et encore, disait Malraux….

Malheureusement, depuis quelques années, on tente d’aller toujours plus vite, on tente de réduire à presque rien ce moment entre deux moments ; avec la vitesse, nous  sommes passés du temps réel à l’instantané, cette imitation du temps, croyant ne rien perdre ce faisant.

Pourtant, réagissant dans l’instant plutôt qu’agir dans le temps, on oublie qu’il faut du temps pour se faire une tête, qu’il faut plus de temps pour lire un livre que pour consulter un résumé sur Internet, qu’il faut également du temps pour se cultiver, pour se faire une opinion, pour être en mesure de penser par soi-même ou pour créer. Rien de valable ou de durable ne se fait dans l’instant.

En conséquence, ayant décidé par avance que nous n’avions plus le temps, on évacue la réflexion et on tente de créer du nouveau en copiant du vieux, croyant ainsi faire illusion.

Choisissant trop souvent de ne pas prendre le temps nécessaire à la réflexion, face à un problème éthique on cherche une norme ou une règle sur un site web, on va voir ce que d’autres ont fait, on va voir ce que nos compétiteurs ont comme valeurs en termes d’éthique, on copie et on colle. Voilà ! Travail terminé. Réflexion, zéro. Niveau éthique de la décision ? On ne sait pas, on espère…

C’est ce que l’on appelle l’éthique prétendue, celle qui est constituée de généralités souvent pensées par un grand cabinet de consulting spécialisé en tout, pour une autre entreprise que la vôtre, dans un contexte qui n’est pas le vôtre. L’éthique prétendue n’est qu’une recette.

En 2017, sur le plan de l’éthique, au lieu de réfléchir et de créer on est encore à copier ou à emprunter sur le web des éléments d’éthique. L’expérience nous a enseigné que peu d’organisations choisissent de faire une réflexion critique ou éclairée sur l’éthique, sur les valeurs ou sur les outils éthiques dont elles ont réellement besoin et qui sont adaptés à leur culture et leur contexte d’affaires. Quelle en est la raison ? Simple : les décideurs ne réalisent pas le potentiel que recèle l’éthique. Ils ne voient celle-ci que comme une contrainte.

Il faut arrêter de prétendre que l’on a réfléchi en empruntant du contenu éthique sur le web ou en appliquant une recette toute faite ; ces actions ne sont que poudre aux yeux.

L’éthique réfléchie est celle qui permet à l’entreprise de naviguer à travers les mers déchaînées des conflits d’intérêts ou des traditionnelles fautes éthiques, générant à terme un capital de confiance qui consolide sa réputation. À l’heure actuelle, les dirigeants visionnaires s’appuient sur l’éthique réfléchie en tant qu’élément central à la stratégie de leur entreprise, un élément qui permettra à leur entreprise de durer, de dépasser ses compétiteurs en évitant les pièges de la non-éthique.

Les dirigeants visionnaires misent sur l’éthique réfléchie, qui est adaptée à la culture et au contexte de leur entreprise ils en font un avantage stratégique et distinctif. Au même moment, l’éthique prétendue fait croire à une gestion éthique et tente de panser les blessures prévisibles encourues par le manque de réflexion éthique.

L’éthique prétendue est celle de la vitrine alors que l’éthique réfléchie est celle de l’éthique dans les circonstances.

La distinction entre les deux est immense : c’est la différence  entre la conformité de façade et la justesse, entre avoir l’air d’être éthique et l’être.

Si vous n’êtes pas certain de tout comprendre, rappelez-vous Volkswagen, qui avait pourtant paraphé toutes les ententes de conformité attendues tout en évitant la sincérité éthique.

Reporter la réflexion sur l’éthique à demain, c’est encourir sa perte à petit feu dès aujourd’hui. IL convient de réfléchir avant d’agir.

Quels seront vos objectifs en éthique pour 2017?


*RENÉ VILLEMURE EST ÉTHICIEN ET CHASSEUR DE TENDANCES. IL A FONDÉ L’INSTITUT QUÉBÉCOIS D’ÉTHIQUE APPLIQUÉE EN 1998, ETHIKOS EN 2003 ET L’ÉTHIQUE POUR LE CONSEIL EN 2014.

Les administrateurs doivent susciter le débat sur l’avenir de l’entreprise


Je vous recommande la lecture de l’article de Stuart Jackson publié dans la Harvard Business Review de janvier 2017.

L’auteur suggère, qu’en général, les conseils d’administration ne font pas suffisamment preuve de combativité et qu’ils ne jouent pas leur rôle principal, soit d’offrir une vision à long terme et de se concentrer sur la création de valeur.

Les administrateurs doivent offrir diverses perspectives de changement et proposer des stratégies propres à pérenniser l’organisation.

Les administrateurs doivent faire preuve de courage et apprendre à formuler des critiques positives envers le PDG. Le conseil d’administration est essentiellement un lieu de débat sur le futur de l’entreprise.

Les membres du conseil doivent être capables de réfléchir à l’évolution du modèle d’affaires et prévoir un plan d’action opérationnel pour un changement à long terme.

L’auteur propose une limitation de la durée des mandats des administrateurs afin d’éviter la complaisance susceptible de se manifester avec le temps. Également, on doit viser le choix d’administrateurs indépendants, capables de questionner et de contester les actions de la direction.

À cet égard, il me semble que les administrateurs devraient suivre une solide formation en gouvernance, notamment une formation telle que celle offerte par le Collège des administrateurs de sociétés (CAS) qui propose une simulation des débats autour de la table du conseil.

On constate que le rôle d’un administrateur est très exigeant et que celui-ci doit penser en termes de compétitivité de l’entreprise.

Bonne lecture ! Vos commentaires sont les bienvenus.

 

Boards Must Be More Combative

 

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Boards of directors play two roles. They must protect value by helping companies avoid unnecessary risks, and they must build value by ensuring that companies change quickly enough to address emerging competitive threats, evolving customer preferences, and disruptive technologies.

With technology and business model cycles becoming shorter and companies facing unrelenting pressure to innovate or suffer the consequences, more and more boards need to focus on the second of these roles. To do so, they must be willing to challenge executive teams and stress-test their strategies to ensure they go far enough and fast enough. For boards used to preserving the status quo, this shift can be uncomfortable. Here are four ways boards can become better challengers and champions of change.

Confront Unwelcome News and Trends

Changing strategy is extremely difficult, especially for successful businesses. In the early 1990s Blockbuster commissioned a study on the future of video-on-demand technologies and how they would impact traditional video rentals. The report concluded that expanded cable offerings and broadband internet would begin to impact video rentals around 2000, and would grow rapidly thereafter. The good news was that Blockbuster had a good 10 years to prepare for the new environment. But the shift never happened: Management ignored the study’s findings and continued with the same strategy, supported by the board. In September 2010 Blockbuster filed for bankruptcy protection. In this case, value protection was not enough. The company had clear advance notice that seismic change was coming.

The board’s role was to acknowledge the warning signs and challenge management’s lack of action — even if it meant contention and dispute in the boardroom.

Make Sure You Have Challengers in Your Midst

Boards will be far more effective in their challenger role if they offer seats to individuals with professional experiences and viewpoints that are very different from those of the executive team. Directors can learn to be more direct with management, but it’s hard to fake contrarianism when everyone is of the same mind. When a board resembles the CEO in mindset and outlook, it’s a recipe for a gatekeeper board, not a challenger board. But when boards mix it up by bringing in members with different perspectives, they can effect powerful strategic changes, something I have seen many times in my work with corporate boards.

Often, these “challengers” will be tech-savvy young executives from digitally disruptive companies who can press their fellow directors and senior management about potential blind spots related to digital disruption. But disruption is not always about technology. For example, one highly successful, privately-held producer of canned foods actively sought a board member who could challenge management to think differently but who would still fit with the company’s family-oriented governance culture. The successful candidate was the CEO of a well-known, family-owned California wine business that catered to consumers who would not dream of buying canned food. The board member helped the company “think outside the can” to identify new product forms that would broaden their customer base and appeal to health-conscious consumers.

In another instance, a leading chain of retail pharmacies appointed as vice chair someone with a background in health care manufacturing and pharmacy benefit management. The new board member helped management better understand the efficiency advantages of mail-order pharmacies, which rely on automation. As a result, the company added low-cost automated pharmacy services to its existing retail outlets, giving it a competitive advantage over traditional retail pharmacies.

Stay Fresh with Term Limits and Checks and Balances

Beyond accessing the right expertise, boards can maintain a challenger perspective by ensuring they don’t become complacent and drift toward an approver role. One of the most effective ways to do this is to establish mandatory term limits as a part of the board’s bylaws. Term limits can help boards maintain a level of independence between the outside directors and executive leadership.

Moreover, if the CEO and chair roles are separated, the chair can take more active responsibility for ensuring that alternative views and perspectives are brought before the board. Separating the roles is a common practice in Europe, and it’s becoming more so in the United States. Another option is to appoint an independent lead director, a less drastic change that can have a similar effect. In fact, the New York Stock Exchange essentially requires listed companies with nonindependent chairs to appoint one of their independent directors as lead director. The lead position, among other duties, is responsible for scheduling and helming board meetings that take place without management. Today the majority of S&P companies with combined CEO and chair roles have chosen to counterbalance this arrangement by appointing an independent lead director.

Turn Courage and Candor into Core Competencies

Having directors with valuable insights is worthless if they do not feel comfortable sharing their perspectives and debating issues with management. A recent study by Women Corporate Directors and Bright Enterprises found that more than three-quarters (77%) of director respondents believed that their boards would make better decisions if they were more open to debate, and 94% said that criticism can help bring about change when it is used properly.

Nevertheless, board members are often hesitant to offer criticism, especially to CEOs. The same survey found that only about half (53%) of respondents felt that the CEOs of their companies take criticism well. This is not surprising. As a board member it is much easier to empathize with a CEO under pressure than with an abstract group of shareholders. One way to address this issue is to offer board members training in giving and receiving constructive criticism. Board members need to understand that failing to confront difficult issues will not help the CEO. If a CEO’s first indication that the board is dissatisfied is hearing they are searching for his or her replacement, then the board is not fulfilling its responsibilities.

Challenger boards are those with the strength to put the hard questions to management and to poke holes in suboptimal strategies. They bring a diversity of perspective that can help management understand the company’s vulnerabilities and how to overcome them. For companies struggling to exist in a world where disruption is rapidly becoming a business constant, challenger boards may well be one of their most important survival tools.

Priorité à la diversité sur les conseils d’administration | Les entreprises à un tournant !


Selon David A. Katz et Laura A. McIntosh, associés de la firme Wachtell, Lipton, Rosen & Katz, les entreprises américaines ont franchi un point de non-retour eu égard à l’acceptation de la contribution de la diversité à la profitabilité des sociétés.

En effet, il est de plus en plus acquis que l’accroissement de la diversité a des effets positifs sur les deux rôles majeurs du conseil d’administration : (1) la surveillance (oversight) et (2) la création de valeur des entreprises.

Ce court article, publié sur le site du Harvard Law School Forum, décrit les progrès réalisés dans la mise en œuvre de la diversité sur les CA et montre que les entreprises en sont à un tournant dans ce domaine.

Bonne lecture ! Vos commentaires sont appréciés.

 

Corporate Governance Update: Prioritizing Board Diversity

 

In what has been called a “breakout year” for gender diversity on U.S. public company boards, corporate America showed increasing enthusiasm for diversity-promoting measures during 2016. Recent studies have demonstrated the greater profitability of companies whose boards are meaningfully diverse. In many cases, companies have collaborated with investors to increase the number of women on their boards, and a number of prominent corporate leaders have publicly encouraged companies to prioritize diversity. The Business Roundtable, a highly influential group of corporate executives, recently released a statement that explicitly links board diversity with board performance in the two key areas of oversight and value creation. Likewise, a group of corporate leaders—including Warren Buffett, Jamie Dimon, Jeff Immelt, and Larry Fink, among others—published their own “Commonsense Principles of Corporate Governance,” (discussed on the Forum here) an open letter highlighting diversity as a key element of board composition.

board-diversity_forbes

Momentum toward gender parity on boards is building, particularly in the top tier of public corporations. Pension funds from several states have taken strong stances intended to encourage meaningful board diversity at the 25 percent to 30 percent level. Last year, then-SEC Chair Mary Jo White cited the correlation of board diversity with improved company performance and identified board diversity as an important issue for the Commission, signaling that it may be a priority for regulators going forward. Boards should take note of the evolving best practices in board composition and look for ways to improve, from a diversity standpoint, their candidate search, director nomination, and board refreshment practices. We recommend that boards include this issue as part of an annual discussion on director succession, similar to the annual discussion regarding CEO succession.

Diversity and Performance

A board of directors has two primary roles: oversight and long-term value creation. This year, the Business Roundtable released updated governance guidelines (discussed on the Forum here) that link a commitment to diversity to the successful accomplishment of both goals. Its 2016 guidelines include a statement on diversity that reads, in part, “Diverse backgrounds and experiences on corporate boards … strengthen board performance and promote the creation of long-term shareholder value.” In a statement accompanying the guidelines, Business Roundtable leader John Hayes noted that a “diversity of thought and perspective … adds to good decision-making” and enables “Americans, as well as American corporations, to prosper.” Board success and competence thus is recast to include diversity as an essential element rather than as an afterthought or as a concession to special interests.

Similarly, the “Commonsense Principles of Corporate Governance” (discussed on the Forum here) outlined over the summer by a group of corporate leaders highlights diversity on boards—multi-dimensional diversity—and correlates that diversity with improved performance. The signers of the principles, including an activist investor, a pension plan, and various chief executives, stated unequivocally in their accompanying letter that “diverse boards make better decisions.” A consensus seems to be emerging among corporate leaders that, as stated by the Business Roundtable, boards should include “a diversity of thought, backgrounds, experiences, and expertise and a range of tenures that are appropriate given the company’s current and anticipated circumstances and that, collectively, enable the board to perform its oversight function effectively.” With regard to oversight, a recent study by Spencer Stuart and WomenCorporateDirectors Foundation (discussed on the Forum here) found that female directors generally are more concerned about risks, and are more willing to address them, than are their male colleagues. Boards should, where possible, develop a pipeline of candidates whose career paths are enabling them to acquire the relevant professional expertise to be valuable public company directors in their industry.

In order to promote diversity in board composition, boards should become familiar with director search approaches to identify qualified candidates that would not otherwise come to the attention of the nominating committee. Executive search firms, public databases, and inquiries to organizations such as 2020 Women on Boards are a few of the ways that boards can find candidates that may be beyond their typical field of view. Organizations exist to help companies in their recruitment efforts. Crain’s Detroit Business, for example, has compiled a database of qualified female director candidates in Michigan, who are invited to apply and are vetted for inclusion. Boards may wish to commit to including individuals with diverse backgrounds in the pool of qualified candidates for each vacancy to be filled.

The Future of Diversity

In 2016, shareholder proposals on board diversity met with increased success. The numbers are still small: Nine proposals made it onto the ballot last year, nearly double the total in 2015 and triple the total in 2014. Nonetheless, support reached unprecedented levels in certain cases: A diversity proposal—which was not opposed by management—at FleetCor Technologies received over 70 percent shareholder support. Another diversity proposal—which was opposed by management—at Joy Global received support from 52percent of the voting shares (though the proposal did not pass due to abstentions). Diversity proposals are generally supported by the proxy advisory firms, including Institutional Shareholder Services and Glass Lewis.

Perhaps more significantly, shareholder proposals in several cases resulted in increased board diversity without ever coming to a vote. The pension fund Wespath submitted proposals this year seeking to increase diversity at three major corporations, and in each case withdrew the proposals when the subject companies agreed to add women to their boards. A spokesperson for Wespath stated that the fund had privately communicated their desire for increased diversity and had filed proposals as a “last resort” to spur change.

In a similar effort, CalSTRS recently submitted 125 letters to boards at California corporations whose boards had no women directors; in response, 35 of the companies appointed female board members. CalSTRS has indicated that if its private approaches are unsuccessful, it will proceed with shareholder proposals. The Wespath and CalSTRS examples are valuable for boards. Listening to investors, being responsive, and staying out in front of issues to forestall shareholder proposals is far better than reacting to frustrated investors who feel compelled to resort to extreme measures to get corporate attention. It is also greatly preferable to a situation in which activist investors press for legislative actions such as quotas or other mandatory board composition requirements, as we have seen in other countries.

2017 is likely to be a year in which progress toward greater board diversity significantly accelerates. Indeed, it is becoming clear that gender diversity—if not gender parity—one day will be a standard aspect of board composition. While the process of realizing that future should not be artificially or counterproductively hastened, it should be welcomed as a state of affairs that will be beneficial to all corporate constituents and, beyond, to the greater good of U.S. business and American culture.

 

Compte rendu hebdomadaire de la Harvard Law School Forum on Corporate Governance | 27 janvier 2017


Voici le compte rendu hebdomadaire du forum de la Harvard Law School sur la gouvernance corporative au 27 janvier 2017.

J’ai relevé les principaux billets.

Bonne lecture !

 

harvard_forum_corpgovernance_small

 

  1. Why Do Managers Fight Shareholder Proposals? Evidence from No-Action Letter Décisions
  2. Bridging the Data Gap through Shareholder Engagement
  3. Top 10 Topics for Directors in 2017
  4. Mutual Funds As Venture Capitalists? Evidence from Unicorns
  5. Broadening the Boardroom
  6. 2016 Year in Review: Securities Litigation and Regulation
  7. Bebchuk Leads SSRN’s 2016 Citation Rankings
  8. Do Director Elections Matter?
  9. White Collar and Regulatory Enforcement: What to Expect in 2017
  10. Financial Regulatory Reform in the Trump Administration
  11. Dealing with Activist Hedge Funds and Other Activist Investors

 

Départ du PDG de CPR | 100 millions $ pour mettre son expertise à contribution dans l’opération des chemins de fer aux É.U. !


Ce matin, je partage avec vous un autre excellent article d’Yvan Allaire* et de François Dauphin publié dans le Financial Post le 24 janvier.

Les auteurs reviennent sur le parcours unique de l’ex-président du CN et du CP dans le domaine de la gestion des entreprises de chemins de fer.

Il ressort de ce portrait que le PDG possède une expérience sans pareil, liée à des processus de gestion inimitables.

C’est tellement le cas que M. Harrison a décidé de quitter un emploi très rémunérateur à CP pour accepter l’offre de 118 millions $ d’un Hedge Fund.

On compte sur sa solide expertise pour réorganiser et optimiser les opérations d’une autre entreprise dans le même domaine.

Cet article fait suite à un précédent billet qui portait sur le succès d’une démarche d’activisme (A “Successful” Case of Activism at the Canadian Pacific Railway: Lessons in Corporate Governance)

Cette situation montre clairement que les fonds activistes sont continuellement à la recherche de talents uniques et qu’ils sont prêts à miser des fortunes pour bénéficier de l’expertise incontestable d’un PDG.

Et vous, quelles leçons en retirez-vous ?

Bonne lecture !

 

Someone just hired Hunter Harrison for $100 million — and there’s an excellent reason why

In an unexpected turn of events, Canadian Pacific Railway announced the early departure of its CEO, Hunter Harrison, a few minutes before a conference call planned for analysts on Jan. 18. Instead of retiring as planned, Harrison leaves CP at age 72 for a new challenge, running another railway company (almost certainly CSX) on behalf of Mantle Ridge LP, a newly established hedge fund run by Paul Hilal. In his prior role at Pershing Square Capital, Hilal was instrumental in backing its investment in CP and installing Harrison’s management team.
sans-titre-hunter-harrison

CSX: Hunter Harrison Wants to Run His Fourth Railroad

Harrison thus forfeited all benefits and perquisites that he was entitled to receive from CP, including his pension, and he has agreed to surrender for cancellation almost all of his vested and unvested equity awards. Evidently the hedge fund will make him whole for the loss of this package, valued at approximately $118 million.

What makes Hunter Harrison so valuable? In the enchanted world of finance, there are of course no limits to what someone gets paid as long as it is a fraction of what the payer will gain. Still, one would think that a hedge fund manager looking for someone capable of turning around a poorly performing U.S. company would have an abundance of candidates to choose from. After all, the operating tricks that Harrison has come up with to make railroads more efficient have been described in minute detail in books he’s written. Dozens of seasoned railroad executives have worked with him and for him over the years. They must have learned quite a bit about Harrison’s recipe.

The answer to the $118-million question appears to reside in the fact that the successful transformation of these railroads (CN and CP) was the result, yes, of operational improvements, but more so of a fundamental cultural change. Harrison is a formidable change agent, a transformational leader in the truest meaning of that tired expression.

He claims to have invented a principle called “precision railroading,” which he implemented at three major railroads: Illinois Central, CN, and CP, the last with spectacular results, bringing the operating ratio (operating costs as a percentage of revenue, with a lower ratio being better) to 58.6 per cent for fiscal year 2016, down from 81.3 per cent in 2011, the last full year before Harrison’s took over.

Precision railroading, if it was easily learned from a book and replicated, would have been applied with success long ago at every North American railroad. Yet Harrison still seems to bring something that can make a difference over and above the techniques he developed and implemented. That something seems to be his skill at changing the culture of the railroad, a most difficult skill to imitate.

As a lifetime railroader himself, his decisions and actions display a deep understanding of the daily reality of the operators. He spends time meeting with the workers on the field and communicates profusely about the importance of asset optimization and the control of costs. At CP, he took many symbolic actions to instill in the whole organization the need to think and act like a railroader. For example, he relocated the corporate glass-towered headquarters to a rail yard, a move that was meant partly to cut costs but mostly to keep the employees’ focus on freight operations, and remind them daily of what the business is all about.

Managing a strategic turnaround is not an easy task. The softer, cultural element of it is often neglected, overlooked, and difficult to implement. That is where Harrison excels and why a hedge fund manager is prepared to pay big bucks to get that talent working for him.

But is money really the sole motivation for Harrison to start over at another railroad company at 72? In fact, at this stage of his career, he has more to lose reputation-wise if he fails than anything he can really earn in monetary terms.

The Memphis, Tenn. native, whose career began over five decades ago as an 18-year-old carman-oiler, may be driven by the determination to prove that the theory he has developed is replicable, no matter where. And determined to push his legacy to a new level — that of a railroad industry legend.

__________________________________

*Yvan Allaire est professeur émérite de stratégie à l’Université du Québec à Montréal (UQAM) et président exécutif de l’Institut de la gouvernance des organisations privées et publiques (IGOPP), François Dauphin est directeur de la recherche à l’IGOPP et chargé d’enseignement à l’UQAM.

Attentes réciproques | C.A. et direction


Vous trouverez ci-dessous les grandes lignes d’un article publié par Richard Leblanc* dans la revue mensuelle de Governance Centre of excellence à propos de ce que le conseil d’administration attend de la direction, et vice-versa.

Ce sont des questions qui me sont fréquemment posées.

L’auteur a su présenter les réponses à ces questions en des termes clairs. Je vous invite à télécharger ce court article.

Bonne lecture !

What Management Expects from the Board

Management, in turn, has expectations of the board. They are:

  1. Candor
  2. Integrity and Independence
  3. Direction
  4. React in a Measured Way
  5. Trust and Confidence
  6. Knowledge of the Business
  7. Meeting Preparation
  8. Asking Good Questions

Dix thèmes majeurs pour les administrateurs de sociétés en 2017


Aujourd’hui, je partage avec vous la liste des dix thèmes majeurs en gouvernance que les auteurs Kerry E. Berchem* et Rick L. Burdick* ont identifiés pour l’année 2017.

Vous êtes assurément au fait de la plupart de ces dimensions, mais il faut noter l’importance accrue à porter aux questions stratégiques, aux changements politiques, aux relations avec les actionnaires, à la cybersécurité, aux nouvelles réglementations de la SEC, à la composition du CA, à l’établissement de la rémunération et aux répercussions possibles des changements climatiques.

sans-titre-gump

Afin de mieux connaître l’ampleur de ces priorités de gouvernance pour les administrateurs de sociétés, je vous invite à lire l’ensemble du rapport publié par Akin Gump.

Bonne lecture !

Dix thèmes majeurs pour les administrateurs de sociétés en 2017

 

top-10

 

1. Corporate strategy: Oversee the development of the corporate strategy in an increasingly uncertain and volatile world economy with new and more complex risks

Directors will need to continue to focus on strategic planning, especially in light of significant anticipated changes in U.S. government policies, continued international upheaval, the need for productive shareholder relations, potential changes in interest rates, uncertainty in commodity prices and cybersecurity risks, among other factors.

2. Political changes: Monitor the impact of major political changes, including the U.S. presidential and congressional elections and Brexit

Many uncertainties remain about how the incoming Trump administration will govern, but President-elect Trump has stated that he will pursue vast changes in diverse regulatory sectors, including international trade, health care, energy and the environment. These changes are likely to reshape the legal landscape in which companies conduct their business, both in the United States and abroad.

With respect to Brexit, although it is clear that the United Kingdom will, very probably, leave the European Union, there is no certainty as to when exactly this will happen or what the U.K.’s future relationship, if any, with the EU will be. Once the negotiations begin, boards will need to be quick to assess the likely shape of any deal between the U.K. and the EU and to consider how to adjust their business model to mitigate the threats and take advantage of the opportunities that may present themselves.

3. Shareholder relations: Foster shareholder relations and assess company vulnerabilities to prepare for activist involvement

The current environment demands that directors of public companies remain mindful of shareholder relations and company vulnerabilities by proactively engaging with shareholders, addressing shareholder concerns and performing a self-diagnostic analysis. Directors need to understand their company’s vulnerabilities, such as a de-staggered board or the lack of access to a poison pill, and be mindful of them in any engagement or negotiation process.

4. Cybersecurity: Understand and oversee cybersecurity risks to prepare for increasingly sophisticated and frequent attacks

As cybercriminals raise the stakes with escalating ransomware attacks and hacking of the Internet of Things, companies will need to be even more diligent in their defenses and employee training. In addition, cybersecurity regulation will likely increase in 2017. The New York State Department of Financial Services has enacted a robust cybersecurity regulation, with heightened encryption, log retention and certification requirements, and other regulators have issued significant guidance. Multinational companies will continue implementation of the EU General Data Protection Regulation requirements, which will be effective in May 2018. EU-U.S. Privacy Shield will face a significant legal challenge, particularly in light of concerns regarding President-elect Trump’s protection of privacy. Trump has stated that the government needs to be “very, very tough on cyber and cyberwarfare” and has indicated that he will form a “cyber review team” to evaluate cyber defenses and vulnerabilities.

5. SEC scrutiny: Monitor the SEC’s increased scrutiny and more frequent enforcement actions, including whistleblower developments, guidance on non-GAAP measures and tougher positions on insider trading

2016 saw the Securities and Exchange Commission (SEC) award tens of millions of dollars to whistleblowers and bring first-of-a-kind cases applying new rules flowing from the protections now afforded to whistleblowers of potential violations of the federal securities laws. The SEC was also active in its review of internal accounting controls and their ability to combat cyber intrusions and other modern-day threats to corporate infrastructure. The SEC similarly continued its comprehensive effort to police insider trading schemes and other market abuses, and increased its scrutiny of non-GAAP (generally accepted accounting principles) financial measure disclosures. 2017 is expected to bring the appointment of three new commissioners, including a new chairperson to replace outgoing chair Mary Jo White, which will retilt the scales at the commissioner level to a 3-2 majority of Republican appointees. 2017 may also bring significant changes to rules promulgated previously under Dodd-Frank.

6. CFIUS: Account for CFIUS risks in transactions involving non-U.S. investments in businesses with a U.S. presence

Over the past year, the interagency Committee on Foreign Investment in the United States (CFIUS) has been particularly active in reviewing—and, at times, intervening in—non-U.S. investments in U.S. businesses to address national security concerns. CFIUS has the authority to impose mitigation measures on a transaction before it can proceed, and may also recommend that the President block a pending transaction or order divestiture of a U.S. business in a completed transaction. Companies that have not sufficiently accounted for CFIUS risks may face significant hurdles in successfully closing a deal. With the incoming Trump administration, there is also the potential for an expanded role for CFIUS, particularly in light of campaign statements opposing certain foreign investments.

7. Board composition: Evaluate and refresh board composition to help achieve the company’s goals, increase diversity and manage turnover

In order to promote fresh, dynamic and engaged perspectives in the boardroom and help the company achieve its goals, a board should undertake focused reassessments of its underlying composition and skills, including a review and analysis of board tenure, continuity and diversity in terms of upbringing, educational background, career expertise, gender, age, race and political affiliation.

8. Executive compensation: Determine appropriate executive compensation against the background of an increased focus on CEO pay ratios

Executive compensation will continue to be a hot topic for directors in 2017, especially given that public companies will soon have to start complying with the CEO pay ratio disclosure rules. Recent developments suggest that such disclosure might not be as burdensome or harmful to relations with employees and the public as was initially feared.
The SEC’s final rules allow for greater flexibility and ease in making this calculation, and a survey of companies that have already estimated their ratios indicates that the ratio might not be as high, on average, as previously reported.

9. Antitrust scrutiny: Monitor the increased scrutiny of the antitrust authorities and the implications on various proposed combinations

Despite the promise of synergies and the potential to transform a company’s future, antitrust regulators have become increasingly hostile toward strategic transactions, with the Department of Justice and Federal Trade Commission suing to block 12 transactions since 2015. Although directors should brace for a longer antitrust review, to help navigate the regulatory climate, work upfront can dramatically improve prospects for success. Company directors should develop appropriate deal rationales and, with the benefit of upfront work, allocate antitrust risk in the merger agreement. Merger and acquisition activity may also benefit from the Trump administration, taking, at least for certain industries, a less-aggressive antitrust enforcement stance.

10. Environmental disasters and contagious diseases: Monitor the impact of increasingly volatile weather events and contagious disease outbreaks on risk management processes, employee needs and logistics planning

While the causes of climate change remain a political sticking point, it cannot be debated that volatile weather events, environmental damage and a rise in the diseases that tend to follow, are having increasingly adverse impacts on businesses and markets. Businesses will need to account for, or transfer the risk of, the increasing likelihood of these impacts. The SEC recently announced investigations into climate-risk disclosures within the oil and gas sector to ensure that they adequately allow investors to account for these effects on the bottom line. The growing number of shareholder resolutions and suits addressing climate change confirm that investors want this information, regardless of the position of the next administration.

The complete publication is available here.


*Kerry E. Berchem is partner and head of the corporate practice, and Rick L. Burdick is partner and chair of the Global Energy & Transactions group, at Akin Gump Strauss Hauer & Feld LLP.

Compte rendu hebdomadaire de la Harvard Law School Forum on Corporate Governance | 19 janvier 2017


Voici le compte rendu hebdomadaire du forum de la Harvard Law School sur la gouvernance corporative au 19 janvier 2017.

J’ai relevé les principaux billets.

Bonne lecture !

 

harvard_forum_corpgovernance_small

 

  1. Playing It Safe? Managerial Preferences, Risk, and Agency Conflicts
  2. Shareholder Challenges Pay Practice at Apple, Inc.
  3. Corporate Donations and Shareholder Value
  4. Delaware Supreme Court Rules on Director Independence
  5. Proxy Access Reaches the Tipping Point
  6. Acquisition Financing: the Year Behind and the Year Ahead
  7. Say on Pay Laws, Executive Compensation, CEO Pay Slice, and Firm Value around the World
  8. The Importance of the Business Judgment Rule
  9. 2016 Year-End FCPA Update
  10. Delaware Court of Chancery Dismissal of Complaint Based on Post-Closing Disclosure Claims

Pourquoi un haut dirigeant devrait-il faire appel à un coach professionnel ?


Voici un excellent article de Ray B. Williams, paru dans Psychology Today, sur les raisons qui devraient inciter les présidents et chefs de direction (PCD – CEO) à faire appel à un coach.

C’est un article de vulgarisation basé sur plusieurs recherches empiriques qui fait la démonstration de la quasi nécessitée, pour un haut dirigeant, d’avoir les conseils d’un professionnel du coaching.

Voici quelques références sur le coaching professionnel des dirigeants :

  1. Coaching exécutif de leaders et dirigeants
  2. Diriger un cabinet de coaching pour hauts dirigeants c’est avant tout… être coach
  3. Le coaching du dirigeant
  4. Coaching d’entreprise: Définition de coach de dirigeants, management, coaching d’entreprise
  5. L’accompagnement des managers et des dirigeants
  6. Coaching de gestion

Vous serez étonné d’apprendre que c’est probablement l’un des secrets les mieux gardés et que c’est l’une des raisons qui expliquent le succès de plusieurs grands gestionnaires. À lire.

Bonne lecture !

Why Every CEO Needs a Coach ?

 

« Paul Michelman, writing in the Harvard Business Review Working Knowledge, cites the fact that most major companies now make coaching a core part of their executive development programs. The belief is that one-on-one personal interaction with an objective third party can provide a focus that other forms of organizational support cannot. A 2004 study by Right Management Consultants found 86% of companies used coaches in their leadership development program.

Eric Schmidt, Chairman and CEO of Google, who said that his best advice to new CEOs was « have a coach. » Schmidt goes on to say « once I realized I could trust him [the coach] and that he could help me with perspective, I decided this was a great idea…

this-bromantic-moment-between-barack-obama-and-joe-biden-may-make-you-feel-better-about-the-us-election-136411183440603901-161109211037

Douglas McKenna, writing in Forbes magazine, argues that the top athletes in the world, and even Barack Obama, have coaches. In his study of executive coaching, McKenna, who is CEO and Executive Director for the Center for Organizational Leadership at The Oceanside Institute, argues that executive coaches should be reserved for everyone at C-level, heads of major business units or functions, technical or functional wizards and high-potential young leaders.

Despite its popularity, many CEOs and senior executives are reluctant to report that they have a coach, says Jonathan Schwartz, one-time President and CEO of Sun Microsystems, who had an executive coach himself. Steve Bennett, former CEO of Intuit says, “At the end of the day, people who are high achievers—who want to continue to learn and grow and be effective—need coaching.”

John Kador, writing in CEO Magazine, argues that while board members can be helpful, most CEOs shy away from talking to the board about their deepest uncertainties. Other CEOs can lend a helping ear, but there are barriers to complete honesty and trust. Kador writes, “No one in the organization needs an honest, close and long term relationship with a trusted advisor more than a CEO.”

Kador reports conversations with several high profile CEOs: “Great CEOs, like great athletes, benefit from coaches that bring a perspective that comes from years of knowing [you], the company and what [you] need to do as a CEO to successfully drive the company forward,” argues William R. Johnson, CEO of the H.J. Heinz Co., “every CEO can benefit from strong, assertive and honest coaching.”

The cost of executive coaches, particularly a good one, is not cheap, but “compared to the decisions CEOs make, money is not the issue,” says Schwartz, “if you have a new perspective, if you feel better with your team, the board and the marketplace, then you have received real value.”

Compte rendu hebdomadaire de la Harvard Law School Forum on Corporate Governance | 12 janvier 2017


Voici le compte rendu hebdomadaire du forum de la Harvard Law School sur la gouvernance corporative au 12 janvier 2017.

J’ai relevé les principaux billets.

Bonne lecture !

 

harvard_forum_corpgovernance_small

 

  1. Global and Regional Trends in Corporate Governance for 2017
  2. Compensation Season 2017
  3. Sustainability Practices: 2016 Edition
  4. The Ivory Tower on Corporate Governance
  5. Constitutionality of SEC’s Administrative Law Judges Headed to Supreme Court?
  6. Moving Beyond Shareholder Primacy: Can Mammoth Corporations Like ExxonMobil Benefit Everyone?
  7. Mergers and Acquisitions—A Brief Look Back and a View Forward
  8. Top 250 Report on Long-Term Incentive Grant Practices for Executives
  9. Corporate Governance: The New Paradigm
  10. A Strategic Cyber-Roadmap for the Board
  11. 2016 Year-End Activism Update
  12. Short-Termism and Shareholder Payouts: Getting Corporate Capital Flows Right

Principales tendances en gouvernance à l’échelle internationale en 2017


Voici un excellent résumé des principales tendances en gouvernance à l’échelle internationale. L’article paru sur le site de la Harvard Law School Forum est le fruit des recherches effectuées par Rusty O’Kelley, membre de CEO and Board Services Practice, et Anthony Goodman, membre de Board Effectiveness Practice de Russell Reynolds Associates.

Les auteurs ont interviewé plusieurs investisseurs activistes et institutionnels ainsi que des administrateurs de sociétés publiques et des experts de la gouvernance afin d’appréhender les tendances qui se dessinent pour les entreprises cotées en 2017.

Parmi les conclusions de l’étude, notons :

  1. Le besoin de se coller plus étroitement à des normes de gouvernance universellement acceptées ;
  2. La nécessité de bien se préparer aux nouveaux risques et aux nouvelles opportunités amenées par la montée des gouvernements populistes de droite ;
  3. Une responsabilité accrue des administrateurs de sociétés pour la création de valeur à long terme ;
  4. L’importance d’une solide compréhension des changements globaux eu égard à l’exercice d’une bonne gouvernance, notamment dans les états suivants :

–  États-Unis

–  Union européenne

–  Japon

–  Inde

–  Brésil

Cette lecture nous donne une perspective globale des défis qui attendent les administrateurs et les CA de grandes sociétés publiques en 2017.

Bonne lecture !

 

Global and Regional Trends in Corporate Governance for 2017

 

Russell Reynolds Associates recently interviewed numerous institutional and activist investors, pension fund managers, public company directors and other governance professionals about the trends and challenges that public company boards will face in 2017. Our conversations yielded a wide array of perspectives about the forces that are driving change in the corporate governance landscape.

 

accesaumarche

 

 

The changing pressures and dynamics that boards will face in the coming year are diverse and significant in their impact. Institutional investors will continue their push for more uniform standards of corporate governance globally, while also increasing their expectations of the role that boards should play in responsibly representing shareholders. Political uncertainty and the surprise results of the US Presidential and “Brexit” votes may require that boards take a more active role in scenario planning and helping management to navigate increasingly costly risks. The movement for companies and investors to adopt a more long-term orientation has gained momentum, with several large institutional investors now pressuring boards to demonstrate that they are actively involved in guiding a company’s strategy for long-term value creation.

Higher Expectations and Greater Alignment Around Corporate Governance Norms

Continuing the trend from last year, large institutional investors and pension funds are pushing for more aligned approaches to corporate governance across borders to support long-term value creation. Regulators are responding, particularly in emerging economies and those with nascent corporate governance regimes. Recent reforms in Japan, India and Brazil have borrowed heavily from the US or UK models. Where regulators have not yet caught up to or agreed with investor expectations, institutional investors are engaging companies directly to advocate for the governance reforms they want to see. These investors also expect more from their boards than ever before and are increasingly willing to intervene when they do not feel they are being responsibly represented in the boardroom.

Corporate Governance in an Era of Political Uncertainty

Populist political movements have gained broad support in several countries around the world, contributing to uncertainty about the future regulatory and political environments of two of the world’s five largest economies. In the UK, the Conservative government has signaled potential support for shareholder influence over executive pay and disclosure of the CEO-employee pay ratio. In the US, President-elect Trump has demonstrated a willingness to “name and shame” specific companies that he perceives to have benefited unfairly from trade deals or moved jobs overseas. Boards must be prepared to navigate these new reputational risks and intense media scrutiny, and review management’s assumptions about the political implications of certain decisions.

Increasing Board Accountability for Long-Term Value Creation

Efforts to encourage a more long-term market orientation have intensified in recent years, with several prominent business leaders and investors, most notably Larry Fink, Chairman and CEO of BlackRock, urging companies to focus on sustained value creation rather than maximizing short-term earnings. In his 2016 letter to chief executives of S&P 500 companies and large European corporations, Mr. Fink specifically called for increased board oversight of a company’s strategy for long-term value creation, noting that BlackRock’s corporate governance team would be looking for assurances of this oversight when engaging with companies.

Global and Regional Trends in Corporate Governance in 2017

Based on our global experience as a firm and our interviews with experts around the world, we believe that public companies will likely face the following trends in 2017:

  1. Increasing expectations around the oversight role of the board, to include greater oversight of strategy and scenario planning, investor engagement, and executive succession planning.
  2. Continued focus on board refreshment and composition, with particular attention being paid to directors’ skill profiles, the currency of directors’ knowledge, director overboarding, diversity, and robust mechanisms for board refreshment that go beyond box-ticking exercises.
  3. Greater scrutiny of company plans for sustained value creation, as concerns increase that activist settlements and other market forces are causing short-term priorities to compromise long-term interests.
  4. Greater focus on Environmental, Social and Governance (ESG) issues, and in particular those related to climate change and sustainability, as industries beyond the extractive sector begin to feel investor pressure in this area.

We explore these trends and their implications for five key regions and markets: the United States, the European Union, India, Japan and Brazil.

United States

The surprise election of Donald Trump has increased regulatory and legislative uncertainty. Certain industries, such as financial services, natural resources and healthcare, may face less pressure and government scrutiny. We expect nominees to the Securities and Exchange Commission (SEC) to be less supportive of the increased disclosure requirements around executive pay and diversity. However, public pension funds and institutional investors will continue to push governance issues through increased specific engagement with individual companies.

  1. Investors continue to push boards to demonstrate that they are taking a strategic and proactive approach to board refreshment. In particular, they are looking for indicators that boards are adding directors with the skill sets necessary to complement the company’s strategic direction, and ensuring a diversity of backgrounds and perspectives to guide that strategy. Some investors see tenure and age limits as too blunt an instrument, preferring internal or external board evaluations to ensure that every director is contributing effectively. Several large institutional investors will continue to push boards to conduct external board evaluations by third parties to increase the quality of feedback and improve governance.
  2. Ongoing fallout from the Wells Fargo scandal will increase pressure on boards to split the CEO/Chair role, particularly in the financial services sector. Given investor pressure, particularly from pension funds, we also anticipate increased demand for clawbacks, a trend that is likely to go beyond the banking sector.
  3. We expect that 2017 will be a significant year for ESG issues, and in particular those related to climate change and sustainability. Industries beyond the extractive sector will begin to feel investor pressure in this area. While this pressure is being exerted by a number of stakeholder groups, the degree to which the baton has been picked up by mainstream institutional investors is notable.
  4. Increased attention on climate risk is also changing the way many companies and investors think about materiality and disclosure, which will have significant implications for audit committees. Michael Bloomberg is currently leading the Financial Stability Board’s Task Force on Climate-related Financial Disclosures, which will seek to develop consistent, voluntary standards for companies to provide information about climate-related financial risk. The Task Force’s recommendations are expected in mid-2017.
  5. Boards will increasingly be expected to ensure sufficient succession planning not just at the CEO level but in other key C-suite roles as well, as investors want to know that boards are actively monitoring the pipeline of talent. Additionally, there is a relatively new trend of some boards conducting crisis management exercises as a supplement to the activism risk assessment we have seen over the past couple of years.
  6. In the event that all or parts of the Dodd-Frank regulations are repealed, investors will likely turn to private ordering—seeking to persuade companies to change their by-laws—to keep the elements that are most important to them (e.g. “say on pay”). Current SEC rules require that companies begin disclosing their CEO-employee pay ratio in 2018, but we believe this to be a likely target for repeal.

European Union

Across many countries in Europe, the push for board and management diversity will continue apace in 2017. Executive pay continues to be the focus of government, investor and media attention with various proposals for reining in compensation. Work being done in the UK on board oversight of corporate culture has the potential to spill across European borders and travel farther afield over the next few years.

  1. Many countries in Europe continue to push ahead with encouraging gender diversity at the board level, as national laws regulating the number of female directors proliferate. In the UK, the Hampton-Alexander Review recommended that the Corporate Governance Code be amended to require FTSE 350 companies to disclose the gender balance of their executive committees in their annual report.
  2. After ebbing slightly in 2014, activism has made a comeback in Europe: whereas 51 companies were targeted in 2014, 64 were targeted in the first half of 2016 alone. We anticipate that European activists will continue to apply less aggressive and more collaborative tactics than those seen in the US. Additionally, we expect to see US and European institutional investors to be supportive of European activist investors, particularly those who are self-described “constructive activists”, who take a less aggressive approach than their US counterparts.
  3. The EU is expected to amend its Shareholder Rights Directive in 2017 to include an EU-wide “say on pay” framework that would give shareholders the right to regular votes on prospective and retrospective remuneration. While these votes are not expected to be binding, the directive does require that pay be based on a shareholder-approved policy and that issuers must address failed votes. Germany saw a sharp increase in dissents on “say on pay” proposals this year, jumping from 8% to over 20%. In France, the government is currently debating whether to make “say on pay” votes binding, spurred by the public outcry about the Renault board’s decision to confirm the CEO’s 2015 compensation, despite a rejection by a majority of shareholders.
  4. The UK government is expected to continue its push for compensation practice reform in 2017, having recently published a series of proposed policies, including mandatory disclosure of the CEO pay ratio, employee representation in executive compensation decisions, and making shareholder votes on executive compensation binding. We also expect continued strong media coverage and related public opposition to large public company pay packages, which could put UK boards in the spotlight.
  5. In Germany, the ongoing fallout from the Volkswagen scandal is the likely impetus for proposed amendments to the corporate governance code that would underscore boards’ obligations to adhere to ethical business practices. The proposed amendments also acknowledge the increasingly common practice of investor engagement with the supervisory board, and recommend that the supervisory board chair be prepared to discuss relevant topics with investors.
  6. In the UK, boards will be focused on implementing the recommendations of the recent Financial Reporting Council (FRC) report on corporate culture and the role of boards, which makes the case that long-term value creation is directly linked to company culture and the role of business in society.

India

Indian boards continue to struggle with the implementation of many of the major changes to corporate governance practices required by the 2013 Companies Act, but reform is progressing. While the complete fallout from the recent Tata leadership imbroglio is not yet clear, it will almost certainly reverberate through the Indian corporate governance landscape for years to come.

  1. Recent regulatory changes have increased the scope of responsibilities for the Nomination and Remuneration Committee, requiring boards to ensure that directors have the right set of skills to deliver on these new responsibilities. Increased emphasis on CEO succession planning and board evaluations have necessitated that Committee members become more fluent in these governance processes and methodologies, particularly as the requirement to report on them annually has increased the spotlight on the board’s role in these processes.
  2. The introduction in 2013 of a mandatory minimum of at least one female director for most listed companies has increased India’s gender diversity at the board level to one of the highest rates in Asia, with 14% of all directorships currently held by women. However, concerns persist about the potential for “tokenism”, as a sizeable portion of the women appointed come from the controlling families of the company.
  3. India has also attempted to integrate ESG and Corporate Social Responsibility (CSR) issues at the board level, having mandated that every board establish a CSR committee and that the company spend 2% of net profits on CSR activities. However, companies will need to ensure that their approach to CSR amounts to more than a box-ticking exercise if they want to attract the support of the growing cadre of ESG-focused investors.
  4. Boards are increasingly expected to take a more active role in risk management, particularly cybersecurity risks. Boards should also ensure that their companies are adequately anticipating and responding to cybersecurity threats.
  5. Changes to the 2013 Companies Act have considerably enhanced the duties and liabilities of directors, along with strict penalties for any breach of these duties and the potential for class action lawsuits against individual directors. While potentially helpful in increasing director accountability, these changes also significantly increase the personal risk that a director assumes when joining a board.

Japan

Japan’s Corporate Governance Code was reformulated in 2015, as part of the “Abenomics” push for structural reforms. Japanese companies continue to implement the corporate governance principles resulting from the new regulations, with many hoping that the adoption of more Western norms will help prompt the return of foreign investors.

  1. The overhaul of Japan’s corporate governance model in 2015 has begun to yield significant results, as 96% of Japanese boards now have at least one outside director and 78% have at least two. However, Japan’s famously deferential corporate culture may make it difficult for boards to unlock the value of these independent perspectives, as seniority and family ownership often still take precedence.
  2. Increasing investor interest in the Japanese market is likely to increase pressure on boards to adopt more Western norms of corporate governance. CalPERS, the California public pension fund, recently began an explicit program of engagement in Japan, their second-largest equity market, in order to encourage the adoption of more Western norms, including increased board independence and diversity, defining narrower standards of independence, and increasing the disclosure of director qualifications.
  3. Gender diversity remains a challenge for Japanese boards, with only 3% of directorships held by women. However, women account for 22% of outside directors, suggesting that gender diversity on boards will likely continue to increase as the appointment of independent directors becomes more common. A new law, introduced in April 2016, now requires companies with more than 300 employees to publish data on the number of women they employ and how many hold management positions. We anticipate this increased scrutiny at all levels of the company to have a knock-on effect for boards.
  4. While other elements of the new Corporate Governance Code have seen near unanimous compliance, only 55% of listed companies have complied with the stipulation to conduct formal board evaluations. Moreover, the quality and format of the evaluations that are occurring vary significantly, with many adopting a self-evaluation process that amounts to little more than a box-ticking exercise.
  5. The common Japanese practice of former executives and chairs remaining in “advisor” roles beyond the end of their formal tenure is now coming under increasing scrutiny. ISS will now generally vote against amendments to create new advisory positions, unless the advisors will serve on the board and therefore be held accountable to shareholders.

Brazil

Brazil’s corporate governance regime has evolved significantly in the last decade, as various regulatory entities have sought to apply greater protections for minority shareholders and better align standards with other Western models to attract greater foreign investment.

  1. As Brazil continues to navigate the fallout of the Petrobras scandal, many are questioning how the mechanisms for encouraging and enforcing investor stewardship and corporate governance can be strengthened.
  2. AMEC, Brazil’s association of institutional investors, recently released the country’s first Investor Stewardship Code, calling on investors to adhere to seven principles, including implementing mechanisms to manage conflicts of interest, taking ESG issues into account, and being active and diligent in the exercise of voting rights.
  3. In an effort to address the high levels of absenteeism among institutional investors at general meetings, Brazil’s Security and Exchange Commission (CVM) will, beginning in 2017, require that listed companies allow shareholders to vote by mail or email, rather than requiring that they (or their proxy) be physically present to cast their vote. Brazilian companies, and their boards, should be prepared for the increased requests for investor engagement that are likely to result from the more active participation of institutional investors in the voting process.
  4. New regulations for the country’s Novo Mercado segment of listed companies will be announced in 2017. Highlights of the proposed changes include the required establishment of audit, compensation and appointment committees, a minimum of two independent directors, and more stringent disclosure of directors’ relationships to related companies and other parties.

Compte rendu hebdomadaire de la Harvard Law School Forum on Corporate Governance | 5 janvier 2017


Voici le compte rendu hebdomadaire du forum de la Harvard Law School sur la gouvernance corporative au 5 janvier 2017.

Bonne lecture !

 

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  1. Are Directors Really Irrelevant to Capital Structure Choice?
  2. 2017 Board Priorities Report
  3. The Life (and Death?) of Corporate Waste
  4. Progress in Understanding Proxy Access and the Shareholder Proposal Process
  5. Rethinking Compensation Philosophies: Top 5 Questions for Boards
  6. Controlling Stockholder M&A Does Not Automatically Trigger Entire Fairness Review
  7. Are Shareholder Votes Rigged?
  8. Jury Verdict in “Spread Bet” Insider Trading Case: A Reminder of U.S. Long-Arm Regulatory Risk
  9. REIT M&A, Governance and Activism—Themes for 2017
  10.  Activism, Strategic Trading, and Liquidity
  11. The Delaware General Corporation Law, Simplified
  12. Gender Parity on Boards Around the World

L’activisme de Bill Ackman a du succès dans le cas de CP Rail | Quelles leçons en retirer ?


Yvan Allaire*, président exécutif de l’Institut de la gouvernance des organisations privées et publiques (IGOPP), vient de me transmettre une synthèse de l’analyse de la saga CP-Ackman-Pershing Square, portant sur les leçons à tirer de cet épisode d’agression par un fonds « activiste ».

Cet article a été publié sur le site du Harvard Law School Forum on Corporate Governance and Financial Regulation le 23 décembre 2016.

Comme le disent les auteurs, l’une des leçons à retirer de cette saga est que les conseils d’administration de l’avenir doivent agir comme des activistes, en ce sens qu’ils doivent être continuellement à la recherche d’informations susceptibles de questionner leurs stratégies et leur modèle d’affaires. Sinon, certains fonds activistes seront bien tentés par l’aventure…

Le texte complet du cas est accessible en cliquant sur « here » en fin de texte.

Pershing Square Capital Management, an activist hedge fund owned and managed by Bill Ackman, began hostile maneuvers against the board of CP Rail in September 2011 and ended its association with CP in August 2016, having netted a profit of $2.6 billion for his fund. This Canadian saga, in many ways, an archetype of what hedge fund activism is all about, illustrates the dynamics of these campaigns and the reasons why this particular intervention turned out to be a spectacular success… thus far.

Et vous, quelles leçons en retirez-vous ?

Bonne lecture !

 

A “Successful” Case of Activism at the Canadian Pacific Railway: Lessons in Corporate Governance

In 2009, the Chairman of the board of the Canadian Pacific Railway (CP) asserted that the company had put in place the best practices of corporate governance; that year, CP was awarded the Governance Gavel Award for Director Disclosure by the Canadian Coalition for Good Governance. Then, in 2011, CP ranked 4th out of some 250 Canadian companies in the Globe & Mail Corporate Governance Ranking. [1] Yet, this stellar corporate governance was no insurance policy against shareholder discontent.

Pershing Square began purchasing shares of CP on September 23, 2011. They filed a 13D form on October 28th showing a stock holding of 12.2%; by December 12, 2011, their holding had reached 14.2% of CP voting shares, thus making Pershing Square the largest shareholder of the company.

screen-shot-2013-06-04-at-12_22_02-am

On February 6, 2012, Ackman, with Hunter S. Harrison (retired CEO of CN—direct competitor of CP and leader in efficiency among Class 1 North American railways—and his candidate for CEO of CP) by his side, made a fact-based presentation about the shortcomings and failings of the CP board and management. Harrison and Ackman stated that their goal for CP was to achieve an operating ratio of 65 for 2015 (down from 81.3 in 2011—the lower the ratio, the better the performance).

The Board qualified Harrison’s (and Ackman’s) targets of “shot in the dark”, showing a lack of research and a profound misunderstanding of CP’s reality. Relying on an independent consultant report (Oliver Wyman Group), Green mentioned that Harrison’s target for CP’s operating ratio was not achievable since CP’s network was characterized by steeper grades and greater curvature thus adding close to 6.7% to the operating ratio compared to its competitors. [2]

On April 4th 2012, Bill Ackman came out swinging in a scathing letter to CP shareholders disparaging CP’s Board of directors in general, and its CEO, Fred Green, in particular. According to Mr. Ackman, “under the direction of the Board and Mr. Green, CP’s total return to shareholders from the inception of Mr. Green’s CEO tenure to the day prior to Pershing Square’s investment was negative 18% while the other Class I North American railways delivered strong positive total returns to shareholders of 22% to 93%.” [3] Thus, according to him, “Fred Green’s and the Board’s poor decisions, ineffective leadership and inadequate stewardship have destroyed shareholder value.” [4]

A few hours before the annual meeting, CP issued a press release in which it stated that Fred Green had resigned as CEO, and that five other directors, including the Chairman of the Board, John Cleghorn, would not stand for re-election at the company’s shareholder meeting.

Pershing Square had won the proxy fight; all the nominees proposed by Ackman were elected.

Almost exactly five years after first buying shares of CP, Ackman confirmed in August 2016 that Pershing Square would sell its remaining shares of CP, thus formally exiting the “target.” Over those five years, CP has generated a compounded annualized total shareholder return of 45.39% (between September 23, 2011 and August 31, 2016), a performance well above the CN and the S&P/TSX 60 index (CP is a constituent of that index). Pershing Square pocketed an estimated $2.6 billion in profits for its venture into CP.

With massive reductions in the workforce, a transformation of the operations and a radical change of the CP’s organizational culture, CP is undoubtedly a different company from what it was before the proxy fight. In early September 2016, Bill Ackman resigned from CP’s Board, officially concluding this episode.

Lessons in corporate governance

In this day and age, the CP case teaches us that no matter its size or the nature of its business, a company is always at risk of being challenged by dissident shareholders, and most particularly by those funds which make a business of these sorts of operations, the activist hedge funds. Of course, a number of critical features of this saga can be singled out to explain the particular success of this intervention, but this is not the focal point of this post. [5] After all, a widely held company with weak financial results and a stagnating stock price will inevitably attract the attention of these funds.

But the puzzling question and it is an unresolved dilemma of corporate governance remains: how come the board did not know earlier what became apparent very quickly after the Ackman/Harrison takeover? Why would the board not call on independent experts to assess management’s claim that structural differences made it impossible for CP to achieve a performance similar to that of other railroads? The gap in operating ratio between CP and CN had not always been as wide. In fact, as shown in Figure 1, CP had a lower operating ratio than CN during a period of time in the 1990s (Of course, CN was a Crown corporation at that time). The gap eventually widened, reaching unprecedented levels during Fred Green’s tenure (the last full year of operating ratios attributable to Green was in 2011).

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Figure 1. Evolution of the operating ratio (%—left scale) for the CP and CN (1994-2015)

How could the board have known that performances far superior to those targeted by the CEO could be swiftly achieved?

Lurking behind these questions is the fundamental flaw of corporate governance: the asymmetry of information, of knowledge and time invested between the governors and the governed, between the board of directors and management. In CP’s case, the directors, as per the norms of “good” fiduciary governance, relied on the information provided by management, believed the plans submitted by management to be adequate and challenging, and based the executives’ lavish compensation on the achievement of these plans. The Chairman, on behalf of the Board, did “extend our appreciation to Fred Green and his management team for aggressively and successfully implementing our Multi-Year plan and creating superior value for our shareholders and customers.” [6] That form of governance is being challenged by activist investors of all stripes.

Their claim, a demonstrable one in the case of CP, is that with the massive amount of information now accessible about a publicly listed company and its competitors, it is possible for dedicated shareholders to spot poor strategies and call for drastic changes. If push comes to shove, these funds will make their case directly to other shareholders via a proxy contest for board membership.

Corporate boards of the future will have to act as “activists” in their quest for information and their ability to question strategies and performances.

The full paper is available for download here.

Endnotes

1The Board Games, The Globe & Mail’s annual review of corporate governance practices in Canada.(go back)

2Deveau, S. “CP Chief Fred Green Defends his Track Record.” Financial Post, March 27, 2012.(go back)

3Letter addressed by William Ackman to Canadian Pacific Railway shareholders, Proxy Circular from April 4th, 2012.(go back)

4Ibid.(go back)

5The case analysis identified four factors that are rarely present in other cases of activism, a fact which explains why few of these interventions achieve the level of success of the CP case.(go back)

6Cleghorn, John. Chairman’s letter to shareholders, CP’s Annual Information Form 2011.(go back)

__________________________________

*Yvan Allaire is Emeritus professor of strategy at Université du Québec à Montréal (UQAM) and Executive Chair of the Institute for Governance of Private and Public Organizations (IGOPP); François Dauphin is Director of Research of IGOPP and a lecturer at UQAM. This post is based on their recent paper.

Le rôle du conseil d’administration dans les procédures de conformité


Voici un cas de gouvernance, publié en décembre sur le site de Julie Garland McLellan* qui illustre comment la direction d’une société publique peut se retrouver en situation d’irrégularité malgré une culture du conseil d’administration axée sur la conformité.

L’investigation du vérificateur général (VG) a révélé plusieurs failles dans les procédures internes de la société. De ce fait, Kyle le président du comité d’audit, risque et conformité, est interpellé par le président du conseil afin d’aider la direction à trouver des solutions durables pour remédier à la situation.

Même si Kyle est conscient qu’il ne possède pas l’autorité requise pour régler les problèmes constatés par le VG, il comprend qu’il est impératif que son message passe.

Le cas présente la situation de manière assez succincte, mais explicite ; puis, trois experts en gouvernance se prononcent sur le dilemme qui se présente aux personnes qui vivent des situations similaires.

Bonne lecture ! Vos commentaires sont toujours les bienvenus.

Le rôle du conseil d’administration dans les procédures de conformité

 

Business audit concept . Flat design vector illustration

Kyle is chairman on the Audit, Risk and Compliance committee of a government authority board which is subject to a Public Access to Information Act. The auditor general has just completed an audit of several authorities bound by that Act and Kyle’s authority was found to have several breeches of the Act, in particular;

–  some contracts valued at $150,000 or more were not recorded in the contracts register

–  some contracts were not entered into the register within 45 working days of the contracts becoming effective

–  there were instances where inaccurate information was recorded in the register when compared with the contracts, and

–  additional information required for certain classes of contracts was not disclosed in some registers.

The Board Chairman is rightly concerned that this has happened in what all directors believed to be a well governed authority with a strong culture of compliance. The Board Chairman has asked Kyle to oversee management’s response to the Auditor General and the development of systems to ensure that these breeches do not reoccur. Kyle is mindful that he remains a non-executive and has no authority within the chain of management command. He is keen to help and knows that the CEO is struggling with the complexity of her role and will need assistance with any increase in workload.

How can Kyle help without getting embroiled in management affairs?

Raz’s Answer

The issue I spot here, is one which I’ve encountered myself – as a seasoned professional, you have the internal urge to roll your sleeves and get right into it, and solve the problem. From the details disclosed in this dilemma, there’s evidence that the authority’s internal culture is compliant, therefore it’s hard to believe there’s foul play which caused these discrepancies in the reports. I would have guessed that there are some legacy processes, or even old technology, which needs to be looked at and discover where the gap is.

The CEO is under immense pressure to fix this issue, being exposed to public scrutiny, but with the government’s limited resources at her disposal, the pressure is even higher. Making decisions under such pressure, especially when a board member, the chair of the Audit, Risk and Compliance Committee is looking over her shoulder, will likely to force her to make mistakes.

Kyle’s dilemma is simple to explain, but more delicate to handle: « How do I fix this, without sticking my nose into the operations? »

As a NED, what Kyle needs to be is a guide to the CEO, providing a calm and supportive environment for the CEO to operate in. Kyle needs to consult with the CEO, and get her on side, to ensure she’ll devote whichever resources she does have, to deal with this issue. This won’t be a Band-Aid solution, but a solution which will require collaboration of several parts of the organisations, orchestrated by the CEO herself.

Raz Chorev is Partner at Orange Sky and Managing Director at CXC Global. He is based in Sydney, Australia.

Julie’s Answer

The Auditor General has asked management to respond and board oversight of management should be done by and through the CEO.

Kyle cannot help without putting his fingers (or intellect) into the organisation. To do that without causing upset he will need to inform the CEO of the Chairman’s request, offer to help and make sure that he reports to her before he reports elsewhere. Handled sensitively the CEO, who appears to be struggling, should welcome any assistance with the task. Handled insensitively this could be a major issue because the statutory definitions of directors’ roles in public sector companies are less fluid than those in the private sector.

Kyle should also take this as a wake-up call – he assumes a culture of compliance and good governance but that is obviously not correct. The audit committee should regularly review the regulatory and legislative compliance framework and verify that all is as it should be; that has clearly not happened and Kyle should work with the company secretary or chief compliance/legal officer to review the entire framework and make sure nothing else is missing from the regular schedule of reviews. The committee must ask for what it needs to oversight effectively not just read what they are given.

The prevailing attitude should be one of thankfulness that the issue has been found and can be corrected. If Kyle detects a cultural rejection of the need to comply and cooperate with the AG in establishing good governance then Kyle must report to the whole board so remedial action can be planned.

Once management have responded to the AG with their proposed actions to remedy the matter. The audit committee should review to check that the actions have been implemented and that they effectively lead to compliance with the requirements. Likely remedies include amending the position descriptions of staff doing tendering or those setting up vendors in the payments system to include entry of details to the register, training in compliance, design of an internal audit system for routine review of registers and comparison to workloads to ensure that nothing has ‘dropped between the cracks’, and regular reporting of register completion and audit to the board audit committee.

Sean’s Answer

The Audit Risk and Compliance Committee (« Committee ») is to assist the Board in fulfilling its corporate governance and oversight responsibilities in relation to the bodies’ financial reporting, internal control structure, risk management systems, compliance and the external audit function.

The external auditors are responsible for auditing the bodies’ financial reports and for reviewing the unaudited interim financial reports. The Financial Management and Accountability Act 1997 calls for auditing financial statements and performance reviews by the Auditor General.

As Committee Chairman Kyle must be independent and must have leadership experience and a strong finance, accounting or business background. So too must the CEO and CFO have appropriate and sufficient qualifications, knowledge, competence, experience and integrity and other personal attributes to undertake their roles.

It should be the responsibility of the Committee to maintain free and open communication between the Committee, external auditors and management. The Committee’s function is principally oversight and review.

The appointment and ongoing assessment, mentoring and discipline of the CEO rests with the board but the delegation of this authority in relation to compliance often rests with the Committee and Board Chairs.

Kyle may invite members of management (CFO and maybe the CEO) or others to attend meetings  and the Committee should have  authority, within the scope of its responsibilities, to seek information it requires, and assistance  from any employee or external party. Inviting the CFO and or CEO to the Committee allows visibility and a holistic and independent forum where deficiencies may be isolated and functions (but not responsibility) delegated to others.

There is a disconnect or deficiency in one or more functions; Kyle should ensure that the Committee holistically review its own charter, discuss with management and the external auditors the adequacy and effectiveness of the internal controls and reporting functions (including the Bodies’s policies and procedures to assess, monitor and manage these controls), as well as a review of the internal quality control procedures (because these are also suspected to be deficient).

It will rapidly become apparent to management, the Committee, Kyle, the board and the Chairman where the deficiencies lie or did lie, and how they have been corrected. Underlying behavioural problems and or abilities to function will also become apparent and with these appropriately addressed similar deficiencies in other areas of the body may be contemporaneously corrected and all reported to the Auditor General.

Sean Rothsey is Chairman and Founder of the Merkin Group. He is based in Cooroy, Queensland, Australia.


*Julie Garland McLellan is a practising non-executive director and board consultant based in Sydney, Australia. www.mclellan.com.au/newsletter.html

Compte rendu hebdomadaire de la Harvard Law School Forum on Corporate Governance


Voici le compte rendu hebdomadaire du forum de la Harvard Law School sur la gouvernance corporative au 29 décembre 2016.

Bonne lecture !

 

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  1. A “Successful” Case of Activism at the Canadian Pacific Railway: Lessons in Corporate Governance, posted by Yvan Allaire and François Dauphin, IGOPP and UQAM, on Friday, December 23, 2016
  2. U.K. Proposed Enhancements to Corporate Governance: Will the New U.S. Administration Follow?, posted by Cydney S. Posner, Cooley LLP, on Friday, December 23, 2016
  3. Delaware Supreme Court Ruling in Zynga: Reasonable Doubt of Director Independence , posted by Thomson Reuters Practical Law, Corporate & Securities Service, on Saturday, December 24, 2016
  4. Do CEO Bonus Plans Serve a Purpose?, posted by Wayne R. Guay and John D. Kepler, University of Pennsylvania, on Monday, December 26, 2016
  5. 2016 Corporate Governance Annual Summary, posted by Michael McCauley, Florida State Board of Administration, on Monday, December 26, 2016
  6. Areas of Focus for Global Audit Regulators, posted by Steven B. Harris, Public Company Accounting Oversight Board, on Tuesday, December 27, 2016
  7. Rethinking US Financial Regulation in Light of the 2016 Election, posted by Reena Agrawal Sahni, Shearman & Sterling LLP, on Tuesday, December 27, 2016
  8. 2016 Spencer Stuart Board Index, posted by Spencer Stuart, on Wednesday, December 28, 2016
  9. Results of the 2016 Proxy Season in Silicon Valley, posted by David A. Bell, Fenwick & West LLP, on Wednesday, December 28, 2016
  10. Female Directors, Board Committees and Firm Performance, posted by Colin Green and Swarnodeep Homroy, Lancaster University, on Thursday, December 29, 2016
  11. Executive Compensation: Analysis of Recent Incentive Financial Goals, posted by John R. Sinkular and Julia Kennedy, Pay Governance LLC, on Thursday, December 29, 2016

Le Spencer Stuart Board Index | 2016


Voici le rapport annuel toujours très attendu de Spencer Stuart*.

Ce document présente un compte rendu très détaillé de l’état de la gouvernance dans les grandes sociétés publiques américaines (S&P 500).

On y découvre les résultats des changements dans le domaine de la gouvernance aux É.U. en 2016, ainsi que certaines tendances pour 2017.

Les thèmes abordés sont les suivants :

La composition des Boards

L’indépendance du président du CA

Les mandats des administrateurs et les limites aux nombres de mandats

L’âge de la retraite des administrateurs

L’évaluation des Boards

La nature des relations du Boards et de la direction avec les actionnaires

L’amélioration de la performance des Boards

Diverses informations, notamment :

Only 19% of new independent directors are active CEOs, chairs, presidents and chief operating officers, compared with 24% in 2011, 29% in 2006 and 49% in 1998, the first year we looked at this data for S&P 500 companies.

Active executives with financial backgrounds (CFOs, other financial executives, as well as investors and bankers) represent 15% of new independent directors this year, an increase from 12% last year. Another 10% of new directors are retired finance and public accounting executives.

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On average, S&P 500 directors have 2.1 outside corporate board affiliations, although most directors aren’t restricted from serving on more.

The number of boards with no female directors dropped to the lowest level we have seen; six S&P 500 boards (1%) have no women, a noteworthy decline from 2006, when 52 boards (11%) included no female members. Women now constitute 21% of all S&P 500 directors.

Among the boards of the 200 largest S&P companies, the total number of minority directors has held steady at 15% since 2011. 88% of the top 200 companies have at least one minority director, the same as 10 years ago.

Only 43% of S&P 500 CEOs serve on one or more outside corporate boards in addition to their own board, the same as in 2015. In 2006, 55% of CEOs served on at least one outside board.

Boards met an average of 8.4 times for regularly scheduled and special meetings, up from 8.1 last year and 8.2 five years ago. The median number of meetings rose from 7.0 last year to 8.0.

The average annual total compensation for S&P 500 directors, excluding the chairman’s compensation, is $280,389.

Over time, the compensation mix for directors has evolved, with more stock grants and fewer stock options. Today, stock grants represent 54% of total director compensation, versus 48% five years ago, while stock options represent 6% of compensation today, down from 10% five years ago. Cash accounts for 38% of director compensation, versus 39% in 2011.

95% of the independent chairmen of S&P 500 boards receive an additional fee, averaging $165,112. Nearly two-thirds of lead and presiding directors, 65%, receive additional compensation. The average premium paid to lead and presiding directors is $33,354.

2016 Spencer Stuart Board Index

 

Investor attention to board performance and governance continues to escalate, and, increasingly, it’s large institutional investors—so-called “passive” investors—who are making known their expectations in areas such as board composition, disclosure and shareholder engagement. Long-term investors have shifted their posture to taking positions on good governance, and are increasingly demonstrating common ground with activists on governance topics.

Board composition is a particular area of focus, as traditional institutional investors have become more explicit in demanding that boards demonstrate that they are being thoughtful about who is sitting around the board table and that directors are contributing. They are looking more closely at disclosures related to board refreshment, board performance and assessment practices, in some cases establishing voting policies on governance.

Boards are taking notice. Directors want to ensure that their boards contribute at the highest level, aligning with shareholder interests and expectations. In response, boards are enhancing their disclosures on board composition and leadership, reviewing governance practices and establishing protocols for engaging with investors. Here are some of the trends we are seeing in the key areas of investor concern.

Board composition

The composition of the board—who the directors are, the skills and expertise they bring, and how they interact—is critical for long-term value creation, and an area of governance where investors increasingly expect greater transparency. Shareholders are looking for a well-explained rationale for why the group of people sitting around the board table are the right ones based on the strategic priorities of the business. They want to know that the board has the processes in place to review and evolve board composition in light of emerging needs, and that the board regularly evaluates the contributions and tenure of current board members and the relevance of their experience.

Acknowledging investor interest in their composition, more boards are reviewing how to best communicate their thinking about the types of expertise needed in the board—and how individual directors provide that expertise. More than one-third of the 96 corporate secretaries responding to our annual governance survey, conducted each year as part of the research for the Spencer Stuart Board Index, said their board has changed the way it reports director bios/qualifications; among those that have not yet made changes, 15% expect the board to change how they present director qualifications in the future.

What’s happening to board composition in practice after all of the talk about increasing board turnover? In 2016, we actually saw a small decline in the number of new independent directors elected to S&P 500 boards. S&P 500 boards included in our index elected 345 new independent directors during the 2016 proxy year—averaging 0.72 new directors per board. Last year, S&P 500 boards added a total of 376 new directors (0.78 new directors per board).

Nearly one-third (32%) of the new independent directors on S&P 500 boards are serving on their first outside corporate board. Women account for 32% of new directors, the highest rate of female representation since we began tracking this data for the S&P 500. This year’s class of new directors, however, includes fewer minority directors (defined as African-American, Hispanic/Latino and Asian); 15% of the 345 new independent directors are minorities, a decrease from 18% in 2015.

With the rise of shareholder activism, we’ve also seen an increase in investors and investment managers on boards. This year, 12% of new independent directors are investors, compared with 4% in 2011 and 6% in 2006.

Independent board leadership

Boards continue to feel pressure from some shareholders to separate the chair and CEO roles and name an independent chairman. And, indeed, 27% of S&P 500 boards, versus 21% in 2011, have an independent chair. An independent chair is defined as an independent director or a former executive who has met applicable NYSE or NASDAQ rules for independence over time. This actually represents a small decline from 29% last year. Meanwhile, naming a lead director remains the most common form of independent board leadership: 87% of S&P 500 boards report having a lead or presiding director, nearly all of whom (98%) are identified by name in the proxy.

In our governance survey, 12% of respondents said their board has recently separated the roles of chairman and CEO, while 33% said their board has discussed whether to split the roles within the next five years. Among boards that expect to or have recently separated the chair and CEO roles, 72% cite a CEO transition as the reason, while 20% believe the chair/CEO split represents the best governance.

In response to investor interest in board leadership structure—and sometimes demands for an independent chairman—more boards are discussing their leadership structure in their proxies, for example, explaining the rationale for maintaining a combined chair/CEO role and delineating the responsibilities of the lead director. Among the lead director responsibilities boards highlight: approving the agenda for board meetings, calling meetings and executive sessions of independent directors, presiding over executive sessions, providing board feedback to the CEO following executive sessions, leading the performance evaluation of the CEO and the board assessment, and meeting with major shareholders or other external parties, when necessary. Some proxies include a letter to shareholders from the lead independent director.

Tenure and term limits

Director tenure continues to be a hot topic for some shareholders. While some rating agencies and investors have questioned the independence of directors with “excessive” tenure, there are no specific regulations or listing standards in the U.S. that speak to director independence based on tenure. And, in fact, most companies do not have governance rules limiting tenure; only 19 S&P 500 boards (4%) set an explicit term limit for non-executive directors, a modest increase from 2015 when 13 boards (3%) had director term limits.

Just 3% of survey respondents said their boards are considering establishing director term limits, but many boards are disclosing more in their proxies about director tenure. Specifically, boards are describing their efforts to ensure a balance between short-tenured and long-tenured directors. And several companies have included a short summary of the board’s average tenure accompanied by a pie chart breaking down the tenure of directors on the board (e.g., directors with less than five years tenure, between five and 10 years, and more than 10 years tenure on the board).

Among S&P 500 boards overall, the average board tenure is 8.3 years, a slight decrease from 8.7 five years ago. The median tenure has declined as well in that time, from 8.4 to 8.0. The majority of boards, 63%, have an average tenure between six and 10 years, but 19% of boards have an average tenure of 11 or more years.

We also looked this year at the tenure of individual directors: 35% of independent directors have served on their boards for five years or less, 28% have served for six to 10 years, and 22% for 11 to 15 years. Fifteen percent of independent directors have served on their boards for 16 years or more.

Mandatory retirement

In the absence of term or tenure limits, most S&P 500 boards rely on mandatory retirement ages to promote turnover. About three-quarters (73%) of S&P 500 boards report having a mandatory retirement age for directors. Eleven percent report that they do not have a mandatory retirement age, and 16% do not discuss mandatory retirement in their proxies.

Retirement ages have crept up in recent years, as boards have raised them to allow experienced directors to serve longer. Thirty-nine percent of boards have mandatory retirement ages of 75 or older, compared with 20% in 2011 and just 9% in 2006. Four boards have a retirement age of 80. The most common mandatory retirement age is 72, set by 45% of S&P 500 boards.

As retirement ages have increased, so has the average age of independent directors. The average age of S&P 500 independent directors is 63 today, two years older than a decade ago. In that same period, the median age rose from 61 to 64. Meanwhile, the number of older boards has increased; 37% of S&P 500 boards have an average age of 64 or older, compared with 19% a decade ago, and 15 of today’s boards (3%) have an average age of 70 or greater, versus four (1%) a decade ago.

Board evaluations

Another topic on which large institutional investors have become more vocal is board performance evaluations. Shareholders are seeking greater transparency about how boards address their own performance and the suitability of individual directors—and whether they are using assessments as a catalyst for refreshing the board as new needs arise.

We have seen a growing trend in support of individual director assessments as part of the board effectiveness assessment—not to grade directors, but to provide constructive feedback that can improve performance. Yet the pace of adoption of individual director assessments has been measured. Today, roughly one-third (32%) of S&P 500 boards evaluate the full board, committees and individual directors annually, an increase from 29% in 2011.

In our survey of corporate secretaries, respondents said evaluations are most often conducted by a director, typically the chairman, lead director or a committee chair. A wide range of internal and external parties are also tapped to conduct board assessments, including in-house and external legal counsel, the corporate secretary and board consulting firms. Thirty-five percent use director self-assessments, and 15% include peer reviews. According to proxies, a small number of boards, but more than in the past, disclose that they used an outside consultant to facilitate all or a portion of the evaluation process.

Shareholder engagement

In light of investors’ growing desire for direct engagement with directors, more boards have established frameworks for shareholders to raise questions and engage in meaningful, two-way discussions with the board. In addition to improving disclosures about board composition, assessment and other key governance areas, some boards include in their proxies a summary of their shareholder outreach efforts. For example, they detail the number of investors the board met with, the issues discussed and how the company and board responded. A few boards facilitate direct access to the board by providing contact information for individual directors, including the lead director and audit committee chair.

Going further, many boards now proactively reach out to their company’s largest shareholders. In our survey, 83% of respondents said management or the board contacted the company’s large institutional investors or largest shareholders, an increase from 70% the year prior. The most common topic about which companies engaged with shareholders was proxy access (52%), an increase from 33% in 2015. Other topics included “say on pay” (51%), CEO compensation (40%), director tenure (30%), board refreshment (27%), shareholder engagement approach (27%) and chairman independence (24%). Survey respondents also wrote in more than a dozen additional topics, including majority/cumulative voting, disclosure enhancements, environmental issues and gender pay equity.

Enhancing board performance

The topic of board refreshment can be a highly charged one for boards. But having the right skills around the table is critical for the board’s ability to provide the appropriate guidance and oversight of management. Furthermore, the capabilities and perspectives that a board needs evolve over time as the business context changes. Boards can ensure that they have the right perspectives around the table and are well-equipped to address the issues that drive shareholder value—which, after all, is what investors are looking for—by doing the following:

Viewing director recruitment in terms of ongoing board succession planning, not one-off replacements. Boards should periodically review the skills and expertise on the board to identify gaps in skills or expertise based on changes in strategy or the business context.

Proactively communicating the skill sets and expertise in the boardroom—and the roadmap for future succession. Publishing the board’s skill matrix and sharing the board’s thinking about the types of expertise that are needed on the board—and how individual directors provide that expertise—signals to investors that the board is thoughtful about board succession.

Setting expectations for appropriate tenure both at the aggregate and individual levels. By setting term expectations when new directors join, boards can combat the perceived stigma attached to leaving a board before the mandatory retirement age. Ideally, boards will create an environment where directors are willing to acknowledge when the board would benefit from bringing on different expertise.

Thinking like an activist and identifying vulnerabilities in board renewal and performance. Proactive boards conduct board evaluations annually to identify weaknesses in expertise or performance. They periodically engage third parties to manage the process and are disciplined about identifying and holding themselves accountable for action items stemming from the assessment.

Establishing a framework for engaging with investors. This starts with proactive and useful disclosure, which demonstrates that the board has thought about its composition, performance and other specific issues. In addition, it is valuable to have a protocol in place enumerating responsibilities related to shareholder engagement.


*Note: The Spencer Stuart Board Index (SSBI) is based on our analysis of the most recent proxy reports from the S&P 500, plus an extensive supplemental survey. The complete publication draws on the latest proxy statements from 482 companies filed between May 15, 2015, and May 15, 2016, and responses from 96 companies to our governance survey conducted in the second quarter of 2016. Survey respondents are typically corporate secretaries, general counsel or chief governance officers. Proxy and survey data have been supplemented with information compiled in Spencer Stuart’s proprietary database.

The complete publication, including footnotes, is available here.

Résumé des activités en gouvernance des sociétés | 2016


Voici un article publié sur le site de la HLS par Michael McCauley* qui montre comment la Florida State Board of Administration (SBA) évalue la gouvernance des entreprises dans laquelle elle investit.

Il m’apparaît utile de comprendre le processus décisionnel des investisseurs institutionnels, si l’on veut connaître les variables de la gouvernance dont elles tiennent compte.

L’auteur explique la méthodologie utilisée par la SBA dans sa quête d’information sur les entreprises visées.

Bonne lecture et joyeux temps des fêtes !

2016 Corporate Governance Annual Summary

 

The Florida SBA’s annual corporate governance summary explains how the Board makes proxy voting decisions, describes the process and policies used to analyze corporate governance practices, and details significant market issues affecting global corporate governance practices at owned companies. The SBA acts as a strong advocate and fiduciary for Florida Retirement System (FRS) members and beneficiaries, retirees, and other non-pension clients to strengthen shareowner rights .and promote leading corporate governance practices at U.S. and international companies in which the SBA holds stock.

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The SBA’s corporate governance activities are focused on enhancing share value and ensuring that public companies are accountable to their shareowners with independent boards of directors, transparent disclosures, accurate financial reporting, and ethical business practices designed to protect the SBA’s investments.

The SBA’s annual corporate governance summary is designed to provide transparency of investment management activities involving responsible investment practices, proxy voting conduct, and engagement with owned companies. The report broadly conforms to the main principles for external responsibilities endorsed by the International Corporate Governance Network’s (ICGN) Global Stewardship Principles, most recently updated in June 2016. The ICGN Global Stewardship Principles provide a framework to implement stewardship practices in fulfilling an investor’s fiduciary obligations to beneficiaries or clients.

In addition to comprehensive data and information on corporate engagement, proxy voting, and regulatory issues, the complete 2016 report includes four topical sections detailed below:

Governance Patterns in the U.S. Banking Sector—market events this year demonstrate how a company’s governance regime can interact with its reputation and value.

CFOs serving on Boards in the UK—why is the British market so conducive for executives, including the CFO, to serve on their own boards?

Rule 14a-8 Governing Shareowner Resolutions—is it time for a more efficient way to make shareowner proposals during annual meetings?

UK Compensation Revolt—along with votes targeted at individual board members, investor votes on executive compensation exhibited high levels of dissent at many UK companies.

Annual Voting Review

During the 2016 proxy season, the SBA cast votes at over 10,300 public companies, voting more than 97,000 individual ballot items. The SBA actively engages portfolio companies throughout the year, addressing corporate governance concerns and seeking opportunities to improve alignment with the interests of our beneficiaries. Highlights from the 2016 proxy season included the continued record adoption of proxy access by U.S. companies, record high votes of dissent on pay packages for executives in the United Kingdom, and strong improvements in the level of independence among Japanese boards of directors. While SBA voting principles and guidelines are not pre-disposed to agree or disagree with management recommendations, some management positions may not be in the best interest of all shareowners. On behalf of participants and beneficiaries, the SBA emphasizes the fiduciary responsibility to analyze and evaluate all management recommendations very closely.

Across all voting items, the SBA voted 76.5 percent “For,” 20.2 percent “Against,” 3.1 percent “Withheld,” and 0.2 percent “Abstained” or “Did Not Vote” (due to various local market regulations or liquidity restrictions placed on voted shares). Of all votes cast, 22.2 percent were “Against” the management-recommended-vote (up from 19.4 percent during the same period last year). Among all global proxy votes, the SBA cast at least one dissenting vote at 7,689 annual shareowner meetings, or 74.6 percent of all meetings.

Director Elections

In uncontested director elections among all companies in the United States that are part of the Russell 3000 stock index, over 16,000 nominees received 96.1 percent average support from investors. This year’s figure was within two tenths of one percent from 2015’s statistic. Only 46 director nominees, or less than 0.3 percent, failed to receive a majority level of support from investors. Only two directors at large-capitalization companies within the Standard & Poor’s (S&P) 500 stock index failed to receive a majority level of support. Board elections represent one of the most critical areas in voting because shareowners rely on the board to monitor management. The SBA supported 78.5 percent of individual nominees for boards of directors, voting against the remaining portion of directors due to concerns about candidate independence, qualifications, attendance, or overall board performance. The SBA’s policy is to withhold support from directors who fail to observe good corporate governance practices or demonstrate a disregard for the interests of investors.

Executive Compensation

During the 2016 proxy season, the SBA utilized compensation research from Equilar, Inc., Glass, Lewis & Co., and Institutional Shareholder Services to assist in evaluating the proxy voting decisions on executive compensation share plans and general say-on-pay ballot items. Across all global equity markets, the SBA voted to approve approximately 55 percent of all remuneration reports, whereas in the U.S. market all other investors provided an average support level of 91.5 percent with only 1.5 percent of all advisory votes failing to achieve a majority. ISS found that over half of all U.S. companies conducting annual pay votes have received investor support of at least 90 percent in each of the last five years since the Dodd-Frank Act instituted advisory say-on-pay shareowner votes.

Among all U.S. companies, the average level of investor support for equity plan proposals stayed about the same year over year at approximately 88 percent. However, the number of individual equity plans that failed to garner majority support rose by 50 percent, from 6 to 9 plans. Given the extremely low number of equity plans that fail each year, investor support for individual plans is almost universal. Less than one percent of equity plans failed during the last year, which also marked a five-year low for the number of compensation-related investor proposals with not a single proposal receiving majority support. Over the last fiscal year, the SBA supported 51.2 percent of all non-salary (equity) compensation items, 60.8 percent of executive incentive bonus plans, and 25.2 percent of management proposals to approve omnibus stock plans in which company executives would participate (and 19.3 percent support for the amendment of such plans). Omnibus stock plan ballot items typically include ratification of more than one equity plan beyond a company’s long-term incentive plan (LTIP).

Asset Owner/Asset Manager Peer Benchmarking

In May 2016, the SBA completed an international benchmarking survey on the costs of corporate governance activities at seventeen large public pension funds and global asset managers. The information helped SBA staff to assess the Investment Programs & Governance (IP&G) unit’s cost structure and service utilization across a large number of direct peers. When total research and voting services costs were calculated, SBA had the second lowest dollar-cost per proxy vote among public fund peers and asset managers. The SBA also ranked among the top three funds and well ahead of the fourteen remaining peers with respect to the proxy votes cast per full-time employee. The benchmarking showed that SBA’s corporate governance program uses similar services to peers, but does so at considerably lower cost and with greater efficacy. Our overall program costs and activity levels, particularly when standardized by assets under management, were very favorable compared to peers.

Active Ownership

The SBA actively engages portfolio companies throughout the year, addressing corporate governance concerns and seeking opportunities to improve alignment with the interests of our beneficiaries. During the 2016 fiscal year, SBA staff conducted engagements with over 100 companies owned within Florida Retirement System portfolios, including Compass Group PLC, Microsoft, Coca-Cola, Prudential, Bank of Yokohama, Chevron, Bank of America, ENI, Amgen, Ethan Allen, Oracle, The Goldman Sachs Group, JPMorgan, RTI Surgical, Boeing, Terna Group SpA, Regions Financial Corporation, Red Electrica, and Time Warner. As part of evaluating voting decisions for several proxy contests, SBA staff also met with a number of activist hedge funds, including Red Mountain Capital (proxy campaign at iRobot), Harvest Capital (proxy campaign at Green Dot), and SilverArrow Capital (proxy campaign at Rofin-Sinar Technologies).

Notable Votes

There were numerous significant votes during the 2016 global proxy season, including proxy contests at iRobot Corporation in May and Ashford Hospitality Prime in June, the Facebook share reclassification in June, and the Stada Arzneimitell AG meeting in August. The SBA makes informed and independent voting decisions at investee companies, applying due care, intelligence, and judgment. The SBA makes all proxy voting decisions independently, casting votes based on written, internally-developed corporate governance principles and proxy voting guidelines that cover all expected ballot issues. More detail on each of these votes and the related SBA analysis is contained in the ‘Highlighted Proxy Votes’ section of the 2016 Annual Summary.

The SBA prepares additional reports on corporate governance topics and significant market developments, covering a wide range of shareowner issues. Historical information can be found within the governance section of the SBA’s website. (www.sbafla.com)

The complete publication is available on the SBA’s website here and can also be viewed here using the Issuu e-reader tool.


*Michael McCauley is Senior Officer, Investment Programs & Governance, of the Florida State Board of Administration (the “SBA”). This post is based on an excerpt from the SBA’s 2016 Corporate Governance Report written by Mike McCauley, Jacob Williams, Tracy Stewart, Hugh Brown, and Logan Rand.

Dix stratégies pour se préparer à l’activisme accru des actionnaires


La scène de l’activisme actionnarial a drastiquement évolué au cours des vingt dernières années. Ainsi, la perception négative de l’implication des « hedge funds » dans la gouvernance des organisations a pris une tout autre couleur au fil des ans.

Les fonds institutionnels détiennent maintenant 63 % des actions des corporations publiques. Dans les années 1980, ceux-ci ne détenaient qu’environ 50 % du marché des actions.

L’engagement actif des fonds institutionnels avec d’autres groupes d’actionnaires activistes est maintenant un phénomène courant. Les entreprises doivent continuer à perfectionner leur préparation en vue d’un assaut éventuel des actionnaires activistes.

L’article de Merritt Moran* publié sur le site du Harvard Law School Forum on Corporate Governance, est d’un grand intérêt pour mieux comprendre les changements amenés par les actionnaires activistes, c’est-à-dire ceux qui s’opposent à certaines orientations stratégiques des conseils d’administration, ainsi qu’à la toute-puissance des équipes de direction des entreprises.

L’auteure présente dix activités que les entreprises doivent accomplir afin de décourager les activistes, les incitant ainsi à aller voir ailleurs !

Voici la liste des étapes à réaliser afin d’être mieux préparé à faire face à l’adversité :

  1. Préparez un plan d’action concret ;
  2. Établissez de bonnes relations avec les investisseurs institutionnels et avec les actionnaires ;
  3. La direction doit entretenir une constante communication avec le CA ;
  4. Mettez en place de solides pratiques de divulgations ;
  5. Informez et éduquez les parties prenantes ;
  6. Faites vos devoirs et analysez les menaces et les vulnérabilités susceptibles d’inviter les actionnaires activistes ;
  7. Communiquez avec les actionnaires activistes et tentez de comprendre les raisons de leurs intérêts pour le changement ;
  8. Comprenez bien tous les aspects juridiques relatifs à une cause ;
  9. Explorez les différentes options qui s’offrent à l’entreprise ciblée ;
  10. Apprenez à connaître le rôle des autorités réglementaires.

 

J’espère vous avoir sensibilisé à l’importance de la préparation stratégique face à d’éventuels actionnaires activistes.

Bonne lecture !

 

Ten Strategic Building Blocks for Shareholder Activism Preparedness

 

Shareholder activism is a powerful term. It conjures the image of a white knight, which is ironic because these investors were called “corporate raiders” in the 1980s. A corporate raider conjures a much different image. As much as that change in terminology may seem like semantics, it is critical to understanding how to deal with proxy fights or hostile takeovers. The way someone is described and the language used are crucial to how that person is perceived. The perception of these so-called shareholder activists has changed so dramatically that, even though most companies’ goals are still the same, the playbook for dealing with activists is different than the playbook for corporate raiders. As such, a corresponding increase in the number of activist encounters has made that playbook required reading for all public company officers and directors. In fact, there have been more than 200 campaigns at U.S. public companies with market capitalizations greater than $1 billion in the last 10 quarters alone. [1]

4858275_3_f7e0_ces-derniers-mois-le-fonds-d-investissement_eccbb6dc5ed4db8b354a34dc3b14c30fIt’s not just the terminology concerning activists that has changed, though. Technologies, trading markets and the relationships activists have with other players in public markets have changed as well. Yet, some things have not changed.

The 1980s had arbitrageurs that would often jump onto any opportunity to buy the stock of a potential target company and support the plans and proposals raiders had to “maximize shareholder value.” Inside information was a critical component of how arbs made money. Ivan Boesky is a classic example of this kind of trading activity—so much so that he spent two years in prison for insider trading, and is permanently barred from the securities business. Arbs have now been replaced by hedge funds, some of which comprise the 10,000 or so funds that are currently trying to generate alpha for their investors. While arbitrageurs typically worked inside investment banks, which were highly regulated institutions, hedge funds now are capable of operating independently and are often willing allies of the 60 to 80 full time “sophisticated” activist funds. [2] Information is just as critical today as it was in the 1980s.

Institutions now occupy a far greater percentage of total share ownership today, with institutions holding about 63% of shares outstanding of the U.S. corporate equity market. In the 1980s, institutional ownership never crossed 50% of shares outstanding. [3] Not only has this resulted in an associated increase of voting power for institutions by the same amount, but also a change in their behavior and posture toward the companies in which they invest, at least in some cases. Thirty years ago, the idea that a large institutional investor would publicly side with an activist (formerly known as a “corporate raider”) would be a rare event. Today, major institutions have frequently sided with shareholder activists, and in some cases privately issued a “Request for Activism”, or “RFA” for a portfolio company, as it has become known in the industry.

It seldom, if ever, becomes clear as to whether institutions are seeking change at a company or whether an activist fund identifies a target and then seeks institutional support for its agenda. What is clear is that in today’s form of shareholder activism, the activist no longer needs to have a large stake in the target in order to provoke and drive major changes.

For example, in 2013, ValueAct Capital held less than 1% of Microsoft’s outstanding shares. Yet, ValueAct President, G. Mason Morfit forced his way onto the board of one of the world’s largest corporations and purportedly helped force out longtime CEO Steve Ballmer. How could a relatively low-profile activist—at the time at least—affect such dramatic change? ValueAct had powerful allies, which held many more shares of Microsoft than the fund itself who were willing to flex their voting muscle, if necessary.

The challenge of shareholder activism is similar to, yet different from, that which companies faced in the 1980s. Although public markets have changed tremendously since the 1980s, market participants are still subject to the same kinds of incentives today as they were 30 years ago.

It has been said that even well performing companies, complete with a strong balance sheet, excellent management, a disciplined capital allocation record and operating performance above its peers are not immune. In our experience, this is true. When the amount of capital required to drive change, perhaps unhealthy change, is much less costly than it is to acquire a material equity position for an activist, management teams and boards of directors must navigate carefully.

Below are 10 building blocks that we believe will help position a company to better equip itself to handle the stresses and pressures from the universe of activist investors and hostile acquirers, which may encourage the activists to instead knock at the house next door.

Building Block 1: Be Prepared

Develop a written plan before the activist shows up. By the time a Schedule 13-D is filed, an activist already has the benefit of sufficient time to study a target company, develop a view of its weaknesses and build a narrative that can be used to put a management team and board of directors on the defensive. Therefore, a company’s plan must have balance and must contemplate areas that require attention and improvement. While some activists are akin to 1980s-style corporate raiders with irrational ideas designed only to bump up the stock over a very short period, there are also very sophisticated activists who are savvy and have developed constructive, helpful ideas. A company’s plan and response protocol need to be well thought through and in place before an activist appears. In some cases, the activist response plan can be built into a company’s strategic plan.

The plan needs inclusion and buy-in from the board of directors and senior management. Some subset of this group needs to be involved in developing the plan, not only substantively, but also in the tactical aspects of implementing the plan and communicating with shareholders, including activists, if and when an activist appears.

This preparatory building block extends beyond simply having a process in place to react to shareholder activism. It should complement the company’s business plan and include the charter and bylaws and consideration of traditional takeover defense strategies. It should provide for an advisory team, including lawyers, bankers, a public relations firm and a forensic accounting firm. We believe that the plan should go to a level of detail that includes which members of management and the board are authorized by the board to communicate with the activist and how those communications should occur.

Building Block 2: Promote Good Shareholder Relations with Institutions and Individual Shareholders

If the lesson of the first block was “put your own house in order,” then the second lesson is, “know your tenants, what they want, and how they prefer to live in your building.” This goes well beyond the typical investor relations function. This is where in-depth shareholder research comes into play. We recommend conducting a detailed perception study that can give boards and management teams a clear picture of what the current shareholder base wants, as well as how former and prospective shareholders’ perceptions of the company might differ from the way management and the board see the company itself.

In a takeover battle or proxy contest, facts are ammunition. Suppositions and assumptions of what management thinks shareholders want are dangerous. It is critical to understand how shareholders feel about the dividend policy and the capital allocation plans, for example. Understand how they view the executive compensation or the independence of the board. Do not assume. Ask candidly and revise periodically.

Building Block 3: Inform, Teach and Consult with the Board

Good governance is not something that can be achieved in a reactive sort of manner or when it becomes known that an activist is building a position. Without shareholder-friendly corporate governance practices, the odds of securing good shareholder relations in a contest for control drops significantly and creates the wrong optics.

There are governance issues that can cause institutional shareholders to act, or at least think, akin to activists. Recently, there have been various shareholder rebellions against excessive executive compensation packages—or say-on-pay votes. In fact, Norges, the world’s largest sovereign wealth fund, has launched a public campaign targeting what it views as excessive executive compensation. The fund’s chief executive told the Financial Times that, “We are looking at how to approach this issue in the public space.” He is speaking for an $870 billion dollar fund. The way those votes are cast can mean the difference between victory and defeat in a proxy contest.

Building Block 4: Maintain Transparent Disclosure Practices

While this building block relates to maintaining good shareholder relations, it also recognizes that activists are smart, well informed, motivated and relentless. If a company makes a mistake, and no company is perfect, the activist will likely find it. Companies have write-downs, impairments, restatements, restructurings, events of change or challenges that affect operating performance. While any one of these events may invite activist attention, once a contest for control begins, an activist will find and use every mistake the company ever made and highlight the material ones to the marketplace.

A company cannot afford surprises. One “whoops” event can be all it takes to turn the tide of a proxy vote or a hostile takeover. That is why it is critical to disclose the good and the bad news before the contest begins rather than during the takeover attempt. It may be painful at the time, but with a history of transparency, the marketplace will trust a company that tells them the activist is in it for its own personal benefit and that the proposal the activist is making will not maximize shareholder value, but will only increase the activist’s short-term profit for its investors. Developing that kind of trust and integrity over time can be a critical factor in any contest for corporate control, especially when research shows that the activist has not been transparent in its prior transactions or has misled investors prior to or after achieving its intended result.

When a company has established good corporate governance policies, has been open and transparent, has financial statements consistent with GAAP and effective internal control over financial reporting and knows its shareholder base cold, what is the next step in preparing for the challenge of an activist shareholder?

Building Block 5: Educate Third Parties

Prominent sell-side analysts and financial journalists can, and do, move markets. In a contest for corporate control, or even in a short slate proxy contest, they can be invaluable allies or intractable adversaries. As with the company’s shareholder base, one must know the key players, have established relationships and trust long before a dispute, and have the confidence that the facts are on the company’s side. But winning them over takes time and research, and is another area where an independent forensic accounting firm can be of assistance.

For example, when our client, Allergan, was fighting off a hostile bid from Valeant and Pershing Square, we identified that Valeant’s “double-digit” sales growth came from excluding discontinued products and those with declining sales from its calculation. This piece of information served as key fodder for journalists, who almost unanimously sided against Valeant for this and other reasons. Presentations, investor letters and analyst days can make the difference in creating a negative perception of the adversary and spreading a company’s message.

Building Block 6: Do Your Homework

Before an activist appears, a company needs to understand what vulnerabilities might attract an activist in the first place. This is where independent third parties can be crucial. Retained by a law firm to establish the privilege, they can do a vulnerability assessment of the company compared to its peers.

This is a different sort of assessment than what building block two entails, essentially asking shareholders to identify perceived weaknesses. Here, a company needs to look for the types of vulnerabilities that institutional shareholders might not see—but that an activist surely will. When these vulnerabilities such as accounting practices or obscure governance structures are not addressed, an activist will use them on the offensive. Even worse are the vulnerabilities that are not immediately apparent. In any activist engagement, it is best to minimize surprises as much as possible.

Building Block 7: Communicate With the Activist

Before deciding whether to communicate, know the other players.

This includes a deep dive into the activist’s history—what level of success has the activist had in the past? Have they targeted similar companies? What strategies have they used? How do they negotiate? How have other companies reacted and what successes or failures have they experienced?

If the activist commences a proxy contest or a consent solicitation, turn that intelligence apparatus on the slate of board nominees the activist is proposing. Find out about their vulnerabilities and paint the full picture of their business record. Do they know the industry? Are they responsible fiduciaries? What is their personal track record? These are important questions that investigators can help answer.

Armed with information about the activist and having consulted with management, the board has to decide whether to communicate with the activist, and if so, what the rules of the road are for doing so. What are the objectives and goals and what are the pros and cons of even starting that communication process? If a decision is made to start communications with the activist, make sure to pick the time to do so and not just respond to what the media hype might be promoting. Poison pills can provide breathing room to make these determinations.

Always keep in mind that communications can lead to discussions, which in turn can lead to negotiations, which may result in a deal.

Before reaching a settlement deal, a company must be sure to have completed the preceding due diligence. More companies seem to be choosing to appease activists by signing voting agreements and/or granting board seats. Although this will likely buy more time to deal with the activist in private, it may simply delay an undesirable outcome rather than circumvent the issue. Whether or not the company signs a voting agreement with the activist, management and the board of directors should know the activist’s track record and current activities with other companies in great detail as the initial step in considering whether to reach any accommodation with the activist.

Building Block 8: Understand the Role of Litigation

Most of the building blocks thus far have involved making a business case to the marketplace and supporting that case with candid communications. But in many activist campaigns—especially the really adversarial ones—there will come a time when the company needs to make its case to a court or a regulator or both.

As with other building blocks, litigation goes to one of the most valuable commodities in a contest for corporate control: TIME. In most situations, the more time the target has to maintain the campaign, the better. The company’s legal team needs to work with the forensic accountants to understand and identify issues that relate to the activist’s prior transactions and business activities, while ensuring that the company is not living in a glass house when it throws stones. Armed with the facts, lawyers will do the legal analysis to determine whether the activist has complied with or broken state, federal or international law or regulation. If there are causes of action, then one way to resolve them is to litigate.

Building Block 9: Factor in Contingencies and Options

Contingencies can include additional activists, M&A and small issues that can become big issues. This building block is about understanding the environment in which the company is operating.

For example, are there hedge funds targeting the same company in a “wolfpack”, as the industry has coldly nicknamed them? If two or more hedge funds are acting in concert to acquire, hold, vote or dispose of a company’s securities, they can be treated as a group triggering the requirement to file a Schedule 13-D as such. Under certain circumstances, the remedy the SEC has secured for violating Section 13(d) of the Williams Act is to sterilize the vote of the shares held by the group’s members. So, if there is evidence indicating that funds are working together which have not jointly filed a Schedule 13-D, the SEC may be able to help. Or better yet, think about building block eight and litigate.

In the case of a hostile acquisition, consider whether there is an activist already on the board of the potential acquirer? Has the activist been a board member in prior transactions? If so, what kind of fiduciary has that activist shown himself to be?

Another contingency is exploring “strategic alternatives.”

Building Block 10: Understand the Role of Regulators

Despite the passage of the Dodd-Frank Act, regulators today may be less inclined to intervene in these kinds of issues than they were 30 years ago.

When an activist is engaging in questionable or illegal practices, contacting regulators should be considered. But this requires being proactive.

The best way to approach the regulators is to present a complete package of evidence that is verified by independent third parties. Determine the facts, apply legal analysis to those facts and have conclusions that show violations of the law. Do not just show one side of the case; show both sides, the pros and the cons of a possible violation. Why? Because if the package is complete and has all the work that the regulator would want to do under the circumstances, two things will happen. First, the regulator will understand that there is an issue, a potential harm to shareholders and the public interest which the regulator is sworn to protect. Second, the regulator will save time when it presents the case for approval to act.

Using forensic accountants before and when an activist appears is one of the major factors that can assist companies today and also help the lawyers who are advising the target company. If other advisors are conflicted, the company needs a reputable, independent third party who can help the company ascertain facts on a timely basis to make informed decisions, and if the determination is made to oppose the activist, make the case to shareholders, to analysts, to media, to regulators and to the courts.

Each of these buildings blocks is important. While they have remained mostly the same since the 1980s, tactics, strategies and the marketplace have changed. Even though activists may appear to act the same way, each is different and each activist approach has its own differences from all the others.

Endnotes

1FactSet, SharkRepellent.(go back)

2FactSet, SharkRepellent.(go back)

3The Wall Street Journal, Federal Reserve and Goldman Sachs Global Investment Research.(go back)

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*Merritt Moran is a Business Analyst at FTI Consulting. This post is based on an FTI publication by Ms. Moran, Jason Frankl, John Huber, and Steven Balet.

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