La responsabilité des administrateurs eu égard aux risques climatiques


Les responsabilités des conseils d’administration ne cessent de s’accroître. La gestion du risque est une activité essentielle qui relève des fonctions de surveillance dévolues aux administrateurs de sociétés.
L’article ci-dessous, publié par Richard Howitt dans Board Agenda, présente clairement les devoirs et les responsabilités des administrateurs eu égard aux changements climatiques.
Pour la plupart des entreprises, il s’agit du risque le plus déterminant quoique souvent le plus sous-estimé. L’auteur montre toute l’ampleur du problème et suggère plusieurs manières d’exercer un leadership éclairé dans la considération des risques de cette nature.
À mon avis, chaque administrateur devrait être bien au fait de la situation et réfléchir aux mesures à prendre. L’auteur note que les entreprises qui divulguent leurs plans concernant les risques climatiques sont perçues de façon positive par les investisseurs.

The necessity for “climate competence” to be a core skill for corporate boards had already been underlined through the publication of guidance for Effective Climate Governance on Corporate Boards at the World Economic Forum in January.

Bonne lecture !

TCFD summit confirms climate risk should be your board’s priority

 

The Task Force on Climate-related Financial Disclosure (TCFD) has set a pathway for climate risk to become an integral part of corporate governance.

climate, climate change, ice melting

Image: Bernhard Staehli/Shutterstock

The recent global summit of the Task Force on Climate-related Financial Disclosure (TCFD) made it clear that companies will increasingly be subject to challenge on management of climate risk by regulators, investors and wider stakeholders.

The necessity for “climate competence” to be a core skill for corporate boards had already been underlined through the publication of guidance for Effective Climate Governance on Corporate Boards at the World Economic Forum in January.

There was a call for increased quality and quality of TCFD reporting, now standing at 800, in the Task Force’s last Status Report in June.

But as climate protests fill news bulletins around the world, this month’s summit in Tokyo is potentially far more significant, in setting a pathway for climate risk to become integral and unavoidable for mainstream corporate governance in all economic sectors.

A major push

If the original TCFD recommendations were a call to action, the summit charted an action plan through which they will be implemented.

Bank of England Governor Mark Carney used the summit to warn that regulation requiring TCFD reporting is probably two years away, appealing to businesses present to develop their own reporting in the meanwhile, to ensure mandatory measures are shaped to be most effective for business itself.

The veiled threat is that companies who delay on climate disclosure will find themselves subject to costly burden.

Full integration of TCFD recommendations in the EU’s Non-Financial Reporting Directive guidelines is a further sign that Europe may lead mandatory reporting requirements as part of its major push towards sustainable finance, also in the next two years.

Investors are themselves now rewarding and penalising companies on how far they are genuinely integrating climate risk

The UK’s own Green Finance Strategy is hardly less ambitious, setting a target for all listed companies and large asset owners to disclose their climate-related risks and opportunities by 2022 at the latest. And the capital markets regulator in Australia has issued guidance to company directors on addressing climate risk.

But the global summit was notable for its recognition that investors, not simply regulators, are themselves now rewarding and penalising companies on how far they are genuinely integrating climate risk.

One tangible initiative from the summit was new green investment guidance published by Japan’s own TCFD consortium. The effect will be a significant increase in investor engagement with companies on climate issues.

Companies present at the summit reporting anecdotal evidence of increased investor engagement on the issue included Shell, Total and Sumitomo Chemical.

A PwC report cited in Tokyo shows positive correlation between stock or share price and the quantity of TCFD disclosures made by the company, with research from the Commonwealth Climate and Law Initiative quantifying that that the risk of non-disclosure is a bigger liability for the company than of disclosure itself.

Meanwhile, during the 2019 proxy season shareholder activists pressed disclosure resolutions including climate risk at no fewer than 64 company AGMs in the US alone.

An opportunity for leadership

The summit heard TCFD reporting is being adopted by companies valued at a combined market capitalisation of $118trn—an important challenge to organisations that have not yet made the shift.

Already we know that climate-related financial risk should be treated by directors as a core part of their duty to promote the success of the company. Failure to do so could expose directors to legal challenge.

But the action required is now clear. The board should ensure that material climate-related risks and opportunities are not simply reported, but fully integrated in to the company’s strategy, risk-management process and investment decisions.

Climate-related financial risk should be treated by directors as a core part of their duty to promote the success of the company

Among the actions required are ensuring board and committee structures incorporate climate risk and opportunity; recruitment of new directors with the requisite knowledge and skills; incorporating management of climate risk into executive remuneration; and fully integrating it in the company’s own risk management.

Board members must provide the leadership for the company to engage with relevant experts and stakeholders to tackle the challenge, and should ensure they are sufficiently informed themselves to maintain adequate oversight.

Lastly, boards should recognise that climate risk may involve addressing timescales beyond conventional board terms, but are within mainstream investment and planning horizons accorded to every other financial risk and opportunity.

A board responsibility

The summit underlined how existing TCFD reporting is still falling short of being decision-useful, in demonstrating strategic resilience of the company and in incorporating targets for transition to net zero.

It also enabled further discussion of the measurements required for reporting, including clarifying what is green revenue, and the definition of terms such as “environmentally sustainable”.

But as work from the Corporate Reporting Dialogue shows, almost all of the necessary indicators are already available in existing frameworks. It is not whether they are available, but how they are used.

Ultimately this is a responsibility that must reside in the boardroom itself

Plentiful assistance for board members is on hand through online resources like the TCFD Knowledge Hub organised by the Climate Disclosure Standards Board, training offered by organisations such as Competent Boards, or detailed guidance for specific sectors through specific TCFD preparer forums.

But ultimately this is a responsibility that must reside in the boardroom itself. Every company board has its own responsibility to consider where its own business model stands in relation to that transition.

And with finance ministries, central banks and regulators in the top 20 economies of the world concluding that climate change is a risk to the stability of the entire global financial system, no company can ignore this task.

______________________________

Richard Howitt is a strategic adviser on corporate responsibility and sustainability, and former CEO at the International Integrated Reporting Council.

Un nouveau paradigme consensuel en gouvernance


 

Voici un article de Martin Lipton et de William Savitt, associés de la firme Wachtell, Lipton, Rosen & Katz, qui se spécialise dans les questions se rapportant à la gouvernance des organisations.

Les auteurs  montrent clairement la grande convergence  des principes de gouvernance eu égard à la considération des parties prenantes dans l’exercice du leadership et de la mission des entreprises publiques.

L’article montre clairement qu’il est maintenant temps d’officialiser un nouveau paradigme en gouvernance, à la suite de l’adoption de mesures concrètes de la part :

    • The UK Stewardship Code 2020,
    • The UK Financial Reporting Council
    • The World Economic Forum
    • The Statement of the Purpose of a Corporation adopted by the Business Roundtable

Le Code de la Grande-Bretagne stipule que les entreprises publiques doivent s’assurer de considérer le point de vue de toutes les parties prenantes, notamment des employés. Notons cependant que ces mesures sont sujettes au fameux Comply and Explain si familier à l’approche britannique ! On propose de suivre l’une des voies suivantes afin d’actualiser cette règle de gouvernance :

    1. Un administrateur nommé par les employés ;
    2. La mise sur pied d’un groupe de travail formel ;
    3. La nomination d’un membre de la direction au conseil d’administration qui représente le point de vue des employés.

Je vous invite à lire ce bref article et à consulter le texte It’s Time to Adopt The New Paradigm.

Bonne lecture !

The New Paradigm

 

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With the adoption this week of The UK Stewardship Code 2020, to accompany The UK Corporate Governance Code 2018, the UK Financial Reporting Council has promulgated corporate governance, stewardship and engagement principles closely paralleling The New Paradigm issued by the World Economic Forum in 2016.

While the FRC codes are “comply and explain,” they fundamentally commit companies and asset managers and asset owners to sustainable long-term investment. As stated by the FRC:

The new Code sets high expectations of those investing money on behalf of UK savers and pensioners. In particular, the new Code establishes a clear benchmark for stewardship as the responsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society (emphasis added).

There is a strong focus on the activities and outcomes of stewardship, not just policy statements. There are new expectations about how investment and stewardship is integrated, including environmental, social and governance (ESG) issues ….

The FRC Corporate Governance Code builds on the stakeholder governance provisions of Sec. 172 of the UK Company Law 2006 by requiring a company’s annual report to describe how the interest of all stakeholders have been considered. Of special interest is the Code’s provision with respect to employees:

For engagement with the workforce, one or a combination of the following methods should be used:

  • a director appointed from the workforce;
  • a formal workforce advisory panel;
  • a designated non-executive director.

If the board has not chosen one or more of these methods, it should explain what alternative arrangements are in place and why it considers that they are effective.

In broad outline, the FRC codes would fit very well in implementation of the World Economic Forum’s The New Paradigm: A Roadmap for an Implicit Corporate Governance Partnership Between Corporations and Investors to Achieve Sustainable Long-Term Investment and Growth.

The Statement of the Purpose of a Corporation adopted by the Business Roundtable in August of this year is likewise consistent with the FRC codes and The New Paradigm. Each of these initiatives recognizes that private-sector action is necessary to create a corporate governance regime suited to the challenges of the twenty-first century. And each recognizes that such action is possible within the structure of prevailing corporate law. The convergence of the FRC codes, the BRT statement of purpose, the 2016 BRT Principles of Corporate Governance, and the New Paradigm strongly suggest that the time is right for the BRT and the Investor Stewardship Group (which has similar principles) to create a joint version of The New Paradigm that could be adopted universally. See, It’s Time to Adopt The New Paradigm (discussed on the Forum here).

Les critères de benchmarking d’ISS eu égard aux guides de saine gouvernance


Les auteurs* de cet article, paru dans le Forum du Harvard Law School, présentent les résultats d’un survey sur quatre grandes dimensions de la gouvernance des sociétés cotées.

Les sujets touchent :

(1) board composition/accountability, including gender diversity, mitigating factors for zero women on boards and overboarding;

(2) board/capital structure, including sunsets on multi-class shares and the combined CEO/chair role;

(3) compensation ; and

(4) climate change risk oversight and disclosure.

Les points importants à retenir de cet article sont indiqués en bleu dans le sommaire.

Bonne lecture !

ISS 2019 Benchmarking Policy Survey—Key Findings

 

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[On Sept. 11, 2019], Institutional Shareholder Services Inc. (ISS) announced the results of its 2019 Global Policy Survey (a.k.a. ISS 2019 Benchmark Policy Survey) based on respondents including investors, public company executives and company advisors. ISS will use these results to inform its policies for shareholder meetings occurring on or after February 1, 2020. ISS expects to solicit comments in the latter half of October 2019 on its draft policy updates and release its final policies in mid-November 2019.

While the survey included questions targeting both global and designated geographic markets, the key questions affecting the U.S. markets fell into the following categories: (1) board composition/accountability, including gender diversity, mitigating factors for zero women on boards and overboarding; (2) board/capital structure, including sunsets on multi-class shares and the combined CEO/chair role; (3) compensation; and (4) climate change risk oversight and disclosure. We previously provided an overview of the survey questions.

The ISS report distinguishes responses from investors versus non-investors. Investors primarily include asset managers, asset owners, and institutional investor advisors. In contrast, non-investors mainly comprise public company executives, public company board members, and public company advisors.

Key Takeaways

Only 128 investors and 268 non-investors (85% were corporate executives) participated in the survey. While the results overall are not surprising for the survey questions relating to board diversity, overboarding, inclusion of GAAP metrics for comparison in compensation-related reports and climate change matters, the level of support for multi-class structures with sunsets was surprisingly high.

Summary

1. Board Composition/Accountability

a. Board Gender Diversity Including Mitigating Factors for Zero Women on Boards: Both investors (61%) and non-investors (55%) indicated that board gender diversity is an essential attribute of effective board governance regardless of the company or its market. Among respondents who do not believe diversity is essential, investors tended to favor a market-by-market approach and non-investors tended to favor an analysis conducted at the company level.

Another question elicited views on ISS’s diversity policy that will be effective in 2020. Under the new policy, ISS will recommend voting against the nominating committee chair (or other members as appropriate) at Russell 3000 and/or S&P 1500 companies that do not have at least one female director. Before ISS issues a negative recommendation on this basis, ISS intends to consider mitigating factors.

The survey questioned what other mitigating factors a respondent would consider besides a company’s providing a firm commitment to appointing a woman in the near-term and having recently had a female on the board. The survey provided the following three choices and invited respondents to check all that apply: (1) the Rooney Rule, which involves a commitment to including females in the pool of new director candidates; (2) a commitment to actively searching for a female director; and (3) other.

Results show that investors were more likely than non-investors to answer that no other mitigating factors should be considered (46% of the investors compared to 28% of the non-investors) besides a recent former female director or a firm commitment to appoint a woman. With regard to willingness to consider mitigating factors, 57 investors and 141 non-investors checked at least one answer. More non-investors found a company’s observance of the Rooney Rule to be a mitigating factor worth considering (selected by 113 non-investors) than the company’s commitment to conduct an active search (selected by 85 non-investors). These two factors were each selected by 34 investors.

b. Director Overboarding: The survey responses show investors and non-investors appear to hold diverging positions on director overboarding. On a plurality basis, investors (42%) preferred a maximum of four total board seats for non-executive directors while they (45%) preferred a maximum of two board seats (including the “home” board) for CEOs. In comparison, on a plurality basis, about one third of non-investors preferred to leave the determination to the board’s discretion for both non-executive directors and CEOs.

2. Board/Capital Structure

a. Multi-Class Structures and Sunset Provisions: Results reveal that 55% of investors and 47% of non-investors found a seven-year maximum sunset provision appropriate for a multi-class structure. Among respondents who indicated that a maximum seven-year sunset provision was inappropriate, 36% of non-investors replied that a longer sunset (10 years or more) was appropriate and 35% of investors objected to any form of multi-class structure.

b. Independent Chair: Currently, ISS generally supports shareholder proposals that request an independent board chair after taking into consideration a wide variety of factors such as the company’s financial practices, governance structure and governance practices. ISS asked participants to indicate which factors the respondent considers and listed factors for respondents to choose from, such as a weak or poorly defined lead director role, governance practices that weaken or reduce board accountability to shareholders, lack of board refreshment or board diversity, and poor responsiveness to shareholder concerns. Respondents were instructed to check all that applied.

The results unsurprisingly suggest that investors prefer an independent board chair more than non-investors. Investors chose poor responsiveness to shareholder concerns most often whereas non-investors selected the factor relating to a weak or poorly defined lead director role.

Investors’ second highest selection was governance practices that weaken or reduce board accountability to shareholders (such as a classified board, plurality vote standard, lack of ability to call special meetings and lack of a proxy access right). For non-investors, poor responsiveness to shareholder concerns was the second highest selection.

3. Compensation

a. Economic Value Added (EVA) and GAAP Metrics: Beginning in 2019, ISS research reports for the U.S. and Canadian markets started to include additional information on company performance using an EVA-based framework. Survey results showed that a strong majority of respondents still want GAAP metrics to be provided in the research reports as a means of comparison.

4. Climate Change Risk Oversight & Disclosure

a. Disclosures and Actions Relating to Climate Change Risk: The ISS survey asked respondents whether climate change should be given a high priority in companies’ risk assessments. ISS questioned whether all companies should be assessing and disclosing their climate-related risks and taking actions to mitigate them where possible.

Results show that 60% of investors answered that all companies should be assessing and disclosing climate-related risks and taking mitigating actions where possible. Roughly one third of investors indicated that “each company’s appropriate level of disclosure and action will depend on a variety of factors including its own business model, its industry sector, where and how it operates, and other company-specific factors and board members.” In addition, 5% of investors thought the possible risks related to climate change are often too uncertain to incorporate into a company-specific risk assessment model.

b. Shareholder Action in Response to a Company’s Failure to Report or Mitigate Climate Change Risk: Investors and non-investors indicated that the most appropriate actions to consider when a company fails to effectively report or address its climate change risk are (a) engaging with the company, and (b) voting for a shareholder proposal seeking increased climate-related disclosure.

 


*Betty Moy Huber is counsel and Paula H. Simpkins is an associate at Davis Polk & Wardwell LLP.

Changement de perspective en gouvernance de sociétés !


Yvan Allaire*, président exécutif du conseil de l’Institut sur la gouvernance (IGOPP) vient de me faire parvenir un nouvel article intitulé « The Business Roundtable on “The Purpose of a Corporation” Back to the future! ».

Cet article, qui doit bientôt paraître dans le Financial Post, intéressera assurément tous les administrateurs siégeant à des conseils d’administration, et qui sont à l’affût des nouveautés dans le domaine de la gouvernance.

Le document discute des changements de paradigmes proposés par les CEO des grandes corporations américaines. Les administrateurs selon ce groupe de dirigeants doivent tenir compte de l’ensemble des parties prenantes (stakeholders) dans la gouverne des organisations, et non plus accorder la priorité aux actionnaires.

Cet article discute des retombées de cette approche et des difficultés eu égard à la mise en œuvre dans le système corporatif américain.

Le texte est en anglais. Une version française devrait être produite bientôt sur le site de l’IGOPP.

Bonne lecture !

 

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CEOs in Business Roundtable ‘Redefine’ Corporate Purpose To Stretch Beyond Shareholders

The Business Roundtable on “The Purpose of a Corporation” Back to the future!

Yvan Allaire, PhD (MIT), FRSC

 

In September 2019, CEOs of large U.S. corporations have embraced with suspect enthusiasm the notion that a corporation’s purpose is broader than merely“ creating shareholder value”. Why now after 30 years of obedience to the dogma of shareholder primacy and servile (but highly paid) attendance to the whims and wants of investment funds?


Simply put, the answer rests with the recent conversion of these very funds, in particular index funds, to the church of ecological sanctity and social responsibility. This conversion was long acoming but inevitable as the threat to the whole system became more pressing and proximate.

The indictment of the “capitalist” system for the wealth inequality it produced and the environmental havoc it wreaked had to be taken seriously as it crept into the political agenda in the U.S. Fair or not, there is a widespread belief that the root cause of this dystopia lies in the exclusive focus of corporations on maximizing shareholder value. That had to be addressed in the least damaging way to the whole system.

Thus, at the urging of traditional investment funds, CEOs of large corporations, assembled under the banner of the Business Roundtable, signed a ringing statement about sharing “a fundamental commitment to all of our stakeholders”.

That commitment included:

Delivering value to our customers

Investing in our employees

Dealing fairly and ethically with our suppliers.

Supporting the communities in which we work.

Generating long-term value for shareholders, who provide the capital that allows companies to invest, grow and innovate.

It is remarkable (at least for the U.S.) that the commitment to shareholders now ranks in fifth place, a good indication of how much the key economic players have come to fear the goings-on in American politics. That statement of “corporate purpose” was a great public relations coup as it received wide media coverage and provides cover for large corporations and investment funds against attacks on their behavior and on their very existence.


In some way, that statement of corporate purpose merely retrieves what used to be the norm for large corporations. Take, for instance, IBM’s seven management principles which guided this company’s most successful run from the 1960’s to 1992:

Seven Management Principles at IBM 1960-1992

  1. Respect for the individual
  2. Service to the customer
  3. Excellence must be way of life
  4. Managers must lead effectively
  5. Obligation to stockholders
  6. Fair deal for the supplier
  7. IBM should be a good corporate citizen

The similarity with the five “commitments” recently discovered at the Business Roundtable is striking. Of course, in IBM’s heydays, there were no rogue funds, no “activist” hedge funds or private equity funds to pressure corporate management into delivering maximum value creation for shareholders. How will these funds whose very existence depends on their success at fostering shareholder primacy cope with this “heretical nonsense” of equal treatment for all stakeholders?

As this statement of purpose is supported, was even ushered in, by large institutional investors, it may well shield corporations against attacks by hedge funds and other agitators. To be successful, these funds have to rely on the overt or tacit support of large investors. As these investors now endorse a stakeholder view of the corporation, how can they condone and back these financial players whose only goal is to push up the stock price often at the painful expense of other stakeholders?

This re-discovery in the US of a stakeholder model of the corporation should align it with Canada and the UK where a while back the stakeholder concept of the corporation was adopted in their legal framework.

Thus in Canada, two judgments of the Supreme Court are peremptory: the board must not grant any preferential treatment in its decision-making process to the interests of the shareholders or any other stakeholder, but must act exclusively in the interests of the corporation of which they are the directors.

In the UK, Section 172 of the Companies Act of 2006 states: “A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, among which the interests of the company’s employees, the need to foster the company’s business relationships with suppliers, customers and others, the impact of the company’s operations on the community and the environment,…”

So, belatedly, U.S. corporations will, it seems, self-regulate and self-impose a sort of stakeholder model in their decision-making.

Alas, as in Canada and the UK, they will quickly find out that there is little or no guidance on how to manage the difficult trade-offs among the interests of various stakeholders, say between shareholders and workers when considering outsourcing operations to a low-cost country.

But that may be the appeal of this “purpose of the corporation”: it sounds enlightened but does not call for any tangible changes in the way corporations are managed.

 

Répertoire des articles en gouvernance publiés sur LinkedIn


L’un des moyens utilisés pour mieux faire connaître les grandes tendances en gouvernance de sociétés est la publication d’articles choisis sur ma page LinkedIn.

Ces articles sont issus des parutions sur mon blogue Gouvernance | Jacques Grisé

Depuis janvier 2016, j’ai publié un total de 43 articles sur ma page LinkedIn.

Aujourd’hui, je vous propose la liste des 10 articles que j’ai publiés à ce jour en 2019 :

 

Liste des 10 articles publiés à ce jour en 2019

 

Image associée

 

 

1, Les grandes firmes d’audit sont plus sélectives dans le choix de leurs mandats

2. Gouvernance fiduciaire et rôles des parties prenantes (stakeholders)

3. Problématiques de gouvernance communes lors d’interventions auprès de diverses organisations – Partie I Relations entre président du CA et DG

4. L’âge des administrateurs de sociétés représente-t-il un facteur déterminant dans leur efficacité comme membres indépendants de CA ?

5. On constate une évolution progressive dans la composition des conseils d’administration

6. Doit-on limiter le nombre d’années qu’un administrateur siège à un conseil afin de préserver son indépendance ?

7. Manuel de saine gouvernance au Canada

8. Étude sur le mix des compétences dans la composition des conseils d’administration

9. Indice de diversité de genre | Equilar

10. Le conseil d’administration est garant de la bonne conduite éthique de l’organisation !

 

Si vous souhaitez voir l’ensemble des parutions, je vous invite à vous rendre sur le Lien vers les 43 articles publiés sur LinkedIn depuis 2016

 

Bonne lecture !

Gouvernance fiduciaire et rôles des parties prenantes (stakeholders)


Je partage avec vous l’excellente prise de position de Martin Lipton *, Karessa L. Cain et Kathleen C. Iannone, associés de la firme Wachtell, Lipton, Rosen & Katz, spécialisée dans les fusions et acquisitions et dans les questions de gouvernance fiduciaire.

L’article présente un plaidoyer éloquent en faveur d’une gouvernance fiduciaire par un conseil d’administration qui doit non seulement considérer le point de vue des actionnaires, mais aussi des autres parties prenantes,

Depuis quelque temps, on assiste à des changements significatifs dans la compréhension du rôle des CA et dans l’interprétation que les administrateurs se font de la valeur de l’entreprise à long terme.

Récemment, le Business Roundtable a annoncé son engagement envers l’inclusion des parties prenantes dans le cadre de gouvernance fiduciaire des sociétés.

Voici un résumé d’un article paru dans le Los Angeles Times du 19 août 2019 : In shocking reversal, Big Business puts the shareholder value myth in the grave.

Among the developments followers of business ethics may have thought they’d never see, the end of the shareholder value myth has to rank very high.

Yet one of America’s leading business lobbying groups just buried the myth. “We share a fundamental commitment to all of our stakeholders,” reads a statement issued Monday by the Business Roundtable and signed by 181 CEOs. (Emphasis in the original.)

The statement mentions, in order, customers, employees, suppliers, communities and — dead last — shareholders. The corporate commitment to all these stakeholders may be largely rhetorical at the moment, but it’s hard to overstate what a reversal the statement represents from the business community’s preexisting viewpoint.

Stakeholders are pushing companies to wade into sensitive social and political issues — especially as they see governments failing to do so effectively.

Since the 1970s, the prevailing ethos of corporate management has been that a company’s prime responsibility — effectively, its only responsibility — is to serve its shareholders. Benefits for those other stakeholders follow, but they’re not the prime concern.

In the Business Roundtable’s view, the paramount duty of management and of boards of directors is to the corporation’s stockholders; the interests of other stakeholders are relevant as a derivative of the duty to stockholders,” the organization declared in 1997.

Bonne lecture. Vos commentaires sont les bienvenus !

 

Stakeholder Governance and the Fiduciary Duties of Directors

 

Jamie Dimon
JPMorgan Chase Chief Executive Jamie Dimon signed the business statement disavowing the shareholder value myth.(J. Scott Applewhite / Associated Press)

 

There has recently been much debate and some confusion about a bedrock principle of corporate law—namely, the essence of the board’s fiduciary duty, and particularly the extent to which the board can or should or must consider the interests of other stakeholders besides shareholders.

For several decades, there has been a prevailing assumption among many CEOs, directors, scholars, investors, asset managers and others that the sole purpose of corporations is to maximize value for shareholders and, accordingly, that corporate decision-makers should be very closely tethered to the views and preferences of shareholders. This has created an opportunity for corporate raiders, activist hedge funds and others with short-termist agendas, who do not hesitate to assert their preferences and are often the most vocal of shareholder constituents. And, even outside the context of shareholder activism, the relentless pressure to produce shareholder value has all too often tipped the scales in favor of near-term stock price gains at the expense of long-term sustainability.

In recent years, however, there has been a growing sense of urgency around issues such as economic inequality, climate change and socioeconomic upheaval as human capital has been displaced by technological disruption. As long-term investors and the asset managers who represent them have sought to embrace ESG principles and their role as stewards of corporations in pursuit of long-term value, notions of shareholder primacy are being challenged. Thus, earlier this week, the Business Roundtable announced its commitment to stakeholder corporate governance, and outside the U.S., legislative reforms in the U.K. and Europe have expressly incorporated consideration of other stakeholder interests in the fiduciary duty framework. The Council of Institutional Investors and others, however, have challenged the wisdom and legality of stakeholder corporate governance.

To be clear, Delaware law does not enshrine a principle of shareholder primacy or preclude a board of directors from considering the interests of other stakeholders. Nor does the law of any other state. Although much attention has been given to the Revlon doctrine, which suggests that the board must attempt to achieve the highest value reasonably available to shareholders, that doctrine is narrowly limited to situations where the board has determined to sell control of the company and either all or a preponderant percentage of the consideration being paid is cash or the transaction will result in a controlling shareholder. Indeed, theRevlon doctrine has played an outsized role in fiduciary duty jurisprudence not because it articulates the ultimate nature and objective of the board’s fiduciary duty, but rather because most fiduciary duty litigation arises in the context of mergers or other extraordinary transactions where heightened standards of judicial review are applicable. In addition, Revlon’s emphasis on maximizing short-term shareholder value has served as a convenient touchstone for advocates of shareholder primacy and has accordingly been used as a talking point to shape assumptions about fiduciary duties even outside the sale-of-control context, a result that was not intended. Around the same time that Revlon was decided, the Delaware Supreme Court also decided the Unocal and Household cases, which affirmed the board’s ability to consider all stakeholders in using a poison pill to defend against a takeover—clearly confining Revlonto sale-of-control situations.

The fiduciary duty of the board is to promote the value of the corporation. In fulfilling that duty, directors must exercise their business judgment in considering and reconciling the interests of various stakeholders—including shareholders, employees, customers, suppliers, the environment and communities—and the attendant risks and opportunities for the corporation.

Indeed, the board’s ability to consider other stakeholder interests is not only uncontroversial—it is a matter of basic common sense and a fundamental component of both risk management and strategic planning. Corporations today must navigate a host of challenges to compete and succeed in a rapidly changing environment—for example, as climate change increases weather-related risks to production facilities or real property investments, or as employee training becomes critical to navigate rapidly evolving technology platforms. A board and management team that is myopically focused on stock price and other discernible benchmarks of shareholder value, without also taking a broader, more holistic view of the corporation and its longer-term strategy, sustainability and risk profile, is doing a disservice not only to employees, customers and other impacted stakeholders but also to shareholders and the corporation as a whole.

The board’s role in performing this balancing function is a central premise of the corporate structure. The board is empowered to serve as the arbiter of competing considerations, whereas shareholders have relatively limited voting rights and, in many instances, it is up to the board to decide whether a matter should be submitted for shareholder approval (for example, charter amendments and merger agreements). Moreover, in performing this balancing function, the board is protected by the business judgment rule and will not be second-guessed for embracing ESG principles or other stakeholder interests in order to enhance the long-term value of the corporation. Nor is there any debate about whether the board has the legal authority to reject an activist’s demand for short-term financial engineering on the grounds that the board, in its business judgment, has determined to pursue a strategy to create sustainable long-term value.

And yet even if, as a doctrinal matter, shareholder primacy does not define the contours of the board’s fiduciary duties so as to preclude consideration of other stakeholders, the practical reality is that the board’s ability to embrace ESG principles and sustainable investment strategies depends on the support of long-term investors and asset managers. Shareholders are the only corporate stakeholders who have the right to elect directors, and in contrast to courts, they do not decline to second-guess the business judgment of boards. Furthermore, a number of changes over the last several decades—including the remarkable consolidation of economic and voting power among a relatively small number of asset managers, as well as legal and “best practice” reforms—have strengthened the ability of shareholders to influence corporate decision-making.

To this end, we have proposed The New Paradigm, which conceives of corporate governance as a partnership among corporations, shareholders and other stakeholders to resist short-termism and embrace ESG principles in order to create sustainable, long-term value. See our paper, It’s Time to Adopt The New Paradigm.


Martin Lipton * is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy; Karessa L. Cain is a partner; and Kathleen C. Iannone is an associate. This post is based on their Wachtell Lipton publication.

Comment les firmes de conseil en votation évaluent-elles les efforts des entreprises eu égard à leur gestion environnementale et sociale ?


Les auteurs* de cet article expliquent en des termes très clairs le sens que les firmes de conseil en votation Glass Lewis et ISS donnent aux risques environnementaux et sociaux associés aux pratiques de gouvernance des entreprises publiques (cotées).

Il est vrai que l’on parle de ESG (en anglais) ou de RSE (en français) sans donner de définition explicite de ces concepts.

Ici, on montre comment les firmes spécialisées en conseils aux investisseurs mesurent les dimensions sous-jacentes à ces expressions.

Les administrateurs de sociétés ont tout intérêt à connaître sur quoi ces firmes se basent pour évaluer la qualité des efforts de leur entreprise en matière de gestion environnementale et de considérations sociales.

J’espère que vous apprécierez ce court extrait paru sur le Forum du Harvard Law School.

Bonne lecture !

 

 

Glass Lewis, ISS, and ESG

 

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With some help from leading investor groups like Black Rock and T. Rowe Price, environmental, social, and governance (“ESG”) issues, once the sole purview of specialist investors and activist groups, are increasingly working their way into the mainstream for corporate America. For some boards, conversations about ESG are nothing new. For many directors, however, the increased emphasis on the subject creates some consternation, in part because it’s not always clear what issues properly fall under the ESG umbrella. E, S, and G can mean different things to different people—not to mention the fact that some subjects span multiple categories. How do boards know what it is that they need to know? Where should boards be directing their attention?

A natural starting place for directors is to examine the guidelines published by the leading proxy advisory firms ISS and Glass Lewis. While not to be held up as a definitive prescription for good governance practices, the stances adopted by both advisors can provide a window into how investors who look to these organizations for guidance are thinking about the subject.

 

Institutional Shareholder Services (ISS)

 

In February of 2018, ISS launched an Environmental & Social Quality Score which they describe as “a data-driven approach to measuring the quality of corporate disclosures on environmental and social issues, including sustainability governance, and to identify key disclosure omissions.”

To date, their coverage focuses on approximately 4,700 companies across 24 industries they view “as being most exposed to E&S risks, including: Energy, Materials, Capital Goods, Transportation, Automobiles & Components, and Consumer Durables & Apparel.” ISS believes that the extent to which companies disclose their practices and policies publicly, as well as the quality of a company’s disclosure on their practices, can be an indicator of ESG performance. This view is not unlike that espoused by Black Rock, who believes that a lack of ESG disclosure beyond what is legally mandated often necessitates further research.

Below is a summary of how ISS breaks down E, S, & G. Clearly the governance category includes topics familiar to any public company board.

 

iss-esg-quality-score-table

 

ISS’ E&S scoring is based on answers to over 380 individual questions which ISS analysts attempt to answer for each covered company based on disclosed data. The majority of the questions in the ISS model are applied to all industry groups, and all of them are derived from third-party lists or initiatives, including the United Nations’ Sustainable Development Goals. The E&S Quality Score measures the company’s level of environmental and social disclosure risk, both overall and specific to the eight broad categories listed in the table above. ISS does not combine ES&G into a single score, but provides a separate E&S score that stands alongside the governance score.

These disclosure risk scores, similar to the governance scores companies have become accustomed to seeing each year, are scaled from 1 to 10 with lower scores indicating a lower level of risk relative to industry peers. For example, a score of 2 indicates that a company has lower risk than 80% of its industry peers.

 

Glass Lewis

 

Glass Lewis uses data and ratings from Sustainalytics, a provider of ESG research, in the ESG Profile section of their standard Proxy Paper reports for large cap companies or “in instances where [they] identify material oversight issues.” Their stated goal is to provide summary data and insights that can be used by Glass Lewis clients as part of their investment decision-making, including aligning proxy voting and engagement practices with ESG risk management considerations.

The Glass Lewis evaluation, using Sustainalytics guidelines, rates companies on a matrix which weighs overall “ESG Performance” against the highest level of “ESG Controversy.” Companies who are leaders in terms of ESG practices (or disclosure) have a higher threshold for triggering risk in this model.

 

glass-lewis-risk-model-chart

 

The evaluation model also notes that some companies involved in particular product areas are naturally deemed higher risk, including adult entertainment, alcoholic beverages, arctic drilling, controversial weapons, gambling, genetically modified plants and seeds, oil sands, pesticides, thermal coal, and tobacco.

Conclusion

 

ISS and Glass Lewis guidelines can help provide a basic structure for starting board conversations about ESG. For most companies, the primary focus is on transparency, in other words how clearly are companies disclosing their practices and philosophies regarding ESG issues in their financial filings and on their corporate websites? When a company has had very public environmental or social controversies—and particularly when those issues have impacted shareholder value—advisory firm evaluations of corporate transparency may also impact voting recommendations on director elections or related shareholder proposals.

Pearl Meyer does not expect the advisory firms’ ESG guidelines to have much, if any, bearing on compensation-related recommendations or scorecards in the near term. In the long term, however, we do think certain hot-button topics will make their way from the ES&G scorecard to the compensation scorecard. This shift will likely happen sooner in areas where ESG issues are more prominent, such as those specifically named by Glass Lewis.

We are recommending that organizations take the time to examine any ESG issues relevant to their business and understand how those issues may be important to stakeholders on a proactive basis, perhaps adding ESG policies to the list of sunny day shareholder outreach topics after this year’s proxy season. This does take time and effort, but better that than to find out about a nagging ESG issue through activist activity or a negative voting recommendation from ISS or Glass Lewis.

 

References

1. https://www.issgovernance.com/iss-announces-launch-of-environmental-social-qualityscore-corporate-profiling-solution/

2. https://www.glasslewis.com/understanding-esg-content/

_________________________________________________________

* David Bixby is managing director and Paul Hudson is principal at Pearl Meyer & Partners, LLC. This post is based on a Pearl Meyer memorandum. Related research from the Program on Corporate Governance includes Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here).

Le rôle du CA dans le développement durable et la création de valeur pour les actionnaires et les parties prenantes


Aujourd’hui, je présente un article publié par Azeus Convene qui montre l’importance accrue que les entreprises doivent apporter au développement durable.
L’article insiste sur le rôle du conseil d’administration pour faire des principes du développement durable à long terme les principales conditions de succès des organisations.
Les administrateurs doivent concevoir des politiques qui génèrent une valeur ajoutée à long terme pour les actionnaires, mais ils doivent aussi contribuer à améliorer le sort des parties prenantes, telles que les clients, les communautés et la société en général.
Il n’est cependant pas facile d’adopter des politiques qui mettent de l’avant les principes du développement durable et de la gestion des risques liés à l’environnement.Dans ce document, publié sur le site de Board Agenda, on explique l’approche que les conseils d’administration doivent adopter en insistant plus particulièrement sur trois points :

 

  1. Un leadership capable de faire valoir les nombreux avantages stratégiques à tirer de cette approche ;
  2. Des conseils eu égard à l’implantation des changements
  3. Le processus de communication à mettre en œuvre afin de faire valoir les succès des entreprises

 

L’article qui suit donne plus de détails sur les fondements et l’application de l’approche du développement durable.

 

Bonne lecture ! Vos commentaires sont appréciés.

 

Le développement durable, la création de valeur et le rôle du CA

 

 

 

Businesses everywhere are developing sustainability policies. Implementation is never easy, but the right guidance can show the way.

When the experts sat down to write the UK’s new Corporate Governance Code earlier this year, they drafted a critical first principle. The role of the board is to “promote the long-term sustainable success of the company”. Boardroom members should generate value for shareholders, but they should also be “contributing to wider society”.

It is the values inherent in this principle that enshrines sustainability at the heart of running a company today.

Often sustainability is viewed narrowly, relating to policies affecting climate change. But it has long since ceased to be just about the environment. Sustainability has become a multifaceted concern embracing the long-term interests of shareholders, but also responsibilities to society, customers and local communities.

Publications like Harvard Business Review now publish articles such as “Inclusive growth: profitable strategies for tackling poverty and inequality”, or “Competing on social purpose”. Forbes has “How procurement will save the world” and “How companies can increase market rewards for sustainability efforts”. Sustainability is a headline issue for company leaders and here to stay.

But it’s not always easy to see how sustainability is integrated into a company’s existing strategy. So, why should your company engage with sustainability and what steps can it take to ensure it is done well?

…one of the biggest issues at the heart of the drive for sustainability is leadership. Implementing the right policies is undoubtedly a “top-down” process, not least because legal rulings have emphatically cast sustainability as a fiduciary duty.

The reasons for adopting sustainability are as diverse as the people and groups upon which companies have an impact. First, there is the clear environmental argument. Governments alone cannot tackle growing environment risk and will need corporates to play their part through their strategies and business models.

The issues driving political leaders have also filtered down to investment managers who have developed deep concerns that companies should be building strategies that factor in environmental, social and governance (ESG) risk. Companies that ignore the issue risk failing to attract capital. A 2015 study by the global benchmarking organisation PRI (Principles for Responsible Investment), conducted with Deutsche Bank Asset Management, showed that among 2,200 studies undertaken since 1970, 63% found a positive link between a company’s ESG performance and financial performance.

There’s also the risk of being left behind, or self-inflicted damage. In an age of instant digital communication news travels fast and a company that fails on sustainability could quickly see stakeholder trust undermined.

Companies that embrace the topic can also create what might be termed “sustainability contagion”: businesses supplying “sustainable” clients must be sustainable themselves, generating a virtuous cascade of sustainability behaviour throughout the supply chain. That means positive results from implemented sustainability policies at one end of the chain, and pressure to comply at the other.

Leadership

But perhaps one of the biggest issues at the heart of the drive for sustainability is leadership. Implementing the right policies is undoubtedly a “top-down” process, not least because legal rulings have emphatically cast sustainability as a fiduciary duty. That makes executive involvement and leadership an imperative. However, involvement of management at the most senior level will also help instil the kind of culture change needed to make sustainability an ingrained part of an organization, and one that goes beyond mere compliance.

Leaders may feel the need to demonstrate the value of a sustainability step-change. This is needed because a full-blooded approach to sustainability could involve rethinking corporate structures, processes and performance measurement. Experts recognise three ways to demonstrate value: risk, reward and recognition.

“Risk” looks at issues such as potential dangers associated with ignoring sustainability such as loss of trust, reputational damage (as alluded to above), legal or regulatory action and fines.

A “rewards”-centred approach casts sustainability as an opportunity to be pursued, as long as policies boost revenues or cut costs, and stakeholders benefit.

Meanwhile, the “recognition” method argues that sharing credit for spreading sustainability policies promotes long-term engagement and responsibility.

Implementation

Getting sustainability policies off the ground can be tricky, particularly because of their multifaceted nature.

recent study into European boards conducted by Board Agenda & Mazars in association with the INSEAD Corporate Governance Centre showed that while there is growing recognition by boards about the importance of sustainability, there is also evidence that they experience challenges about how to implement effective ESG strategies.

Proponents advise the use of “foundation exercises” for helping form the bedrock of sustainability policies. For example, assessing baseline environmental and social performance; analysing corporate management, accountability structures and IT systems; and an examination of material risk and opportunity.

That should provide the basis for policy development. Then comes implementation. This is not always easy, because being sustainable can never be attributed to a single policy. Future-proofing a company has to be an ongoing process underpinned by structures, measures and monitoring.
Policy delivery can be strengthened by the appointment of a chief sustainability officer (CSO) and establishing structures around the role, such as regular reporting to the chief executive and board, as well as the creation of a working committee to manage implementation of policies across the company.

Proponents advise the use of “foundation exercises” for helping form the bedrock of sustainability policies.

Sustainability values will need to be embedded at the heart of policies directing all business activities. And this can be supported through the use of an organisational chart mapping the key policies and processes to be adopted by each part of the business. The chart then becomes a critical ready reckoner for the boardroom and its assessment of progress.

But you can only manage what you measure, and sustainability policies demand the same treatment as any other business development initiative: key metrics accompanying the plan.

But what to measure? Examples include staff training, supply chain optimisation, energy efficiency, clean energy generation, reduced water waste, and community engagement, among many others.

Measuring then enables the creation of targets and these can be embedded in processes such as audits, supplier contracts and executive remuneration. If they are to have an impact, senior management must ensure the metrics have equal weight alongside more traditional measures.

All of this must be underpinned by effective reporting practices that provide a window on how sustainability practices function. And reporting is best supported by automated, straight-through processing, where possible.

Reliable reporting has the added benefit of allowing comparison and benchmarking with peers, if the data is available. The use of globally accepted standards—such as those provided by bodies like the Global Reporting Initiative—build confidence among stakeholders. And management must stay in touch, regularly consulting with the CSO and other stakeholders—customers, investors, suppliers and local communities—to ensure policies are felt in the right places.

Communication

Stakeholders should also hear about company successes, not just deliver feedback. Communicating a sustainability approach can form part of its longevity, as stakeholders hear the good news and develop an expectation of receiving more.

Companies are not expected to achieve all their sustainability goals tomorrow. Some necessarily take time. What is expected is long-term commitment and conviction, honest reporting and steady progress.

Care should be taken, however. Poor communication can be damaging, and a credible strategy will be required, one that considers how to deliver information frequently, honestly and credibly. It will need to take into account regulatory filings and disclosures, and potentially use social media as a means of reaching the right audience.

And that’s because successful sustainability policies are something to shout about. There is enormous pressure on companies to think differently, to reject a blinkered focus only on the bottom line and develop strategies that enable their companies to provide value, not only for shareholders but other stakeholders—society, customers, and suppliers—alike.

Companies are not expected to achieve all their sustainability goals tomorrow. Some necessarily take time. What is expected is long-term commitment and conviction, honest reporting and steady progress. The landscape on which businesses function is changing. They must change with it.

This article has been produced by Board Agenda in collaboration with Azeus Convene, a supporter of Board Agenda.

Dix sujets « hots » pour les administrateurs en 2019


Voici dix thèmes « chauds » qui devraient préoccuper les administrateurs en 2019.

Ils ont été identifiés par Kerry BerchemChristine LaFollette, et Frank Reddick, associés de la firme Akin Gump Strauss Hauer & Feld.

Le billet est paru aujourd’hui sur le forum du Harvard Law School.

Bonne lecture ! Quels sont vos points de vue à ce sujet ?

 

Top 10 Topics for Directors in 2019

 

 

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1. Corporate Culture

The corporate culture of a company starts at the top, with the board of directors, and directors should be attuned not only to the company’s business, but also to its people and values across the company. Ongoing and thoughtful efforts to understand the company’s culture and address any issues will help the board prepare for possible crises, reduce potential liability and facilitate appropriate responses internally and externally.

2. Board Diversity

As advocates and studies continue to highlight the business case for diversity, public companies are facing increasing pressure from corporate governance groups, investors, regulators and other stakeholders to improve gender and other diversity on the board. As a recent McKinsey report highlights, many successful companies regard inclusion and diversity as a source of competitive advantage and, specifically, as a key enabler of growth.

3. #MeToo Movement

A responsible board should anticipate the possibility that allegations of sexual harassment may arise against a C-suite or other senior executive. The board should set the right tone from the top to create a respectful culture at the company and have a plan in place before these incidents occur. In that way, the board is able to quickly and appropriately respond to any such allegations. Any such response plan should include conducting an investigation, proper communications with the affected parties and the implementation of any necessary remedial steps.

4. Corporate Social Responsibility

Corporate social responsibility (CSR) concerns remained a hot-button issue in 2018. Social issues were at the forefront this year, ranging from gun violence, to immigration reform, to human trafficking, to calls for greater accountability and action from the private sector on issues such as climate change. This reflects a trend that likely foretells continued and increased focus on environmental, social and governance issues, including from regulatory authorities.

5. Corporate Strategy

Strategic planning should continue to be a high priority for boards in 2019, with a focus on the individual and combined impacts of the U.S. and global economies, geopolitical and regulatory uncertainties, and mergers and acquisitions activity on their industries and companies. Boards should consider maximizing synergies from recent acquisitions or reviewing their companies’ existing portfolios for potential divestitures.

6. Sanctions

During the second year of the Trump administration, U.S. sanctions expanded significantly to include new restrictions that target transactions with Iran, Russia and Venezuela. Additionally, the U.S. government has expanded its use of secondary sanctions to penalize non-U.S. companies that engage in proscribed activities involving sanctioned persons and countries. To avoid sanctions-related risks, boards should understand how these evolving rules apply to the business activities of their companies and management teams.

7. Shareholder Activism

There has been an overall increase in activism campaigns in 2018 regarding both the number of companies targeted and the number of board seats won by these campaigns. This year has also seen an uptick in traditionally passive and institutional investors playing an active role in encouraging company engagement with activists, advocating for change themselves and formulating express policies for handling activist campaigns.

8. Cybersecurity

With threats of nation-states infiltrating supply chains, and landmark laws being passed, cybersecurity and privacy are critical aspects of director oversight. Directors must focus on internal controls to guard against cyber-threats (including accounting, cybersecurity and insider trading) and expand diligence of third-party suppliers. Integrating both privacy and security by design will be critical to minimizing ongoing risk of cybersecurity breaches and state and federal enforcement.

9. Tax Cuts and Jobs Act

A year has passed since President Trump signed the Tax Cuts and Jobs Act (TCJA) into law, and there will be plenty of potential actions and new faces on the tax landscape in 2019. Both the Senate Finance Committee and the Ways and Means Committee will have new chairs, and Treasury regulations implementing the TCJA will be finalized. President Trump will continue to make middle-class tax cuts a priority heading into next year. Perennial issues, such as transportation, retirement savings and health care, will likely make an appearance, and legislation improving the tax reform bill could be on the table depending on the outcome of the Treasury regulations.

10. SEC Regulation and Enforcement

To encourage public security ownership, the Securities and Exchange Commission (SEC) has adopted and proposed significant revisions to update and simplify disclosure requirements for public companies. It has taken steps to enhance the board’s role in evaluating whether to include shareholder proposals in a company’s proxy statement. It has also solicited comments on the possible reform of proxy advisor regulation, following increasing and competing calls from corporations, investor advocates and congressional leaders to revise these regulations. Boards and companies should monitor developments in this area, as well as possible changes in congressional and administration emphasis following the 2018 midterm elections.

Bonus: Midterm Elections

The 2018 midterm elections are officially over. Americans across the country cast their ballots for candidates for the House of Representatives and the Senate in what was widely perceived to be a referendum on President Trump’s first two years in office. With Democrats taking control of the House, and Republicans maintaining control of the Senate, a return to divided government will bring new challenges for effective governance. Compromise and bipartisanship will be tested by what is expected to be an aggressive oversight push from House Democrats. However, areas where there may be possible compromise include federal data privacy standards, infrastructure development, criminal justice reform and pharmaceutical drug pricing initiatives.

The complete publication is available here.

Éléments susceptibles d’influer sur les décisions relatives à la gouvernance des grandes entreprises en 2019


L’article ci-dessous brosse un portrait de ce qui attend les grandes entreprises en 2019. Le billet de Holly J. Gregory, associé de la firme Sidley Austin, a été publié sur le site de Harvard Law School Forum aujourd’hui.

Quelles sont les variables susceptibles d’influer sur les décisions relatives à la gouvernance ainsi que sur les relations avec les actionnaires ?

L’auteur fait ressortir les éléments critiques suivants :

  1. Le maintien des caractéristiques du rôle du conseil et des devoirs des administrateurs;
  2. L’examen approfondi de la primauté des actionnaires et de leur influence;
  3. La réforme du vote par procuration et la réglementation des conseillers en vote;
  4. La poursuite de la convergence des idées sur les pratiques de gouvernance d’entreprise;
  5. Un accent encore plus affirmé sur les questions environnementales, sociales et de gouvernance (ESG);
  6. Une demande continue d’engagement des actionnaires et d’attention envers les investisseurs activistes.

 

Bonne lecture !

 

Looking Ahead: Key Trends in Corporate Governance

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Board’s Role and Director Duties Remain Durable

 

While the corporate governance environment is always changing, board responsibilities and the fiduciary duties of directors under state corporate law have proven remarkably durable. Directors must:

Manage or direct the affairs of the company and cannot abdicate that responsibility by deferring to shareholder pressure.

Act with due care, without conflict, in good faith, and in the company’s best interest.

Delegate and oversee management of the company (for example, by selecting the CEO, monitoring the CEO’s performance, and planning for succession), and oversee strategy and risk management.

Ensuring that the day-to-day management of the company is in the right hands, providing management with forward-looking strategic guidance, and monitoring management’s efforts to identify and manage risk, including risks that pose an existential threat, remain at the heart of the board’s role. To accomplish this, boards need to understand and address disruptive risks. Boards should be mindful that adequate time is reserved on the agenda for these matters, with less focus on formal management presentations and more focus on the problems and concerns management is grappling with.

The National Association of Corporate Directors (NACD) Blue Ribbon Commission recently provided guidance on oversight of risks that pose an existential threat (NACD, Adaptive Governance: Board Oversight of Disruptive Risks (Oct. 2018), available at nacdonline.org). The Commission recommends that boards prioritize certain actions, including:

Understanding and addressing disruptive risks “in the context of the [company’s] specific circumstances, strategic assumptions, and objectives.”

Allocating oversight of disruptive risks between and among the full board and its committees, and clarifying the allocation of responsibilities in committee charters.

Recognizing that enterprise risk management processes may not capture disruptive risks.

Evaluating board culture regularly for “openness to sharing
concerns, potential problems, or bad news; response to mistakes; and acceptance of nontraditional points of view.”

Assessing “leadership abilities in an environment of disruptive risks” in CEO selection and evaluation processes.

Aligning the company’s “talent strategy” with “the skills and structure needed to navigate disruptive risks.”

Refraining from automatically re-nominating directors as a “default decision.”

Treating board diversity as “a strategic imperative, not a compliance issue.”

Requiring continuing learning of all directors, and assessing that factor in the board’s evaluation process.

Ensuring risk reports provide “forward-looking information about changing business conditions and potential risks in a format that enables productive dialogue and decision making.”

Holding a substantive discussion, at least annually, of the company’s vulnerability to disruptive risks, “using approaches such as scenario planning, simulation exercises, and stress testing to inform these discussions.”

Shareholder Primacy and Shareholder Influence Under Scrutiny

 

While it is prudent for directors to listen to and engage with shareholders and understand their interests, directors must apply their own business judgment and determine what course is in the best interests of the company. This means that they cannot merely succumb to pressures from activist investors and other shareholders (see, for example, In re PLX Tech., Inc. Stockholders Litig., 2018 WL 5018535, at *45 (Oct. 16, 2018) (an activist “succeeded in influencing the directors to favor a sale when they otherwise would have decided to remain independent” and the incumbent directors improperly deferred to the activist and allowed him “to take control of the sale process when it mattered most”)).

However, shareholders have gained considerable power relative to boards over the last 20 years, making it difficult to resolve shareholder pressures that conflict with director viewpoints regarding the best course for the company. The forces that have strengthened shareholder influence include:

Concentration of shareholding in the hands of powerful institutional investors (with institutions owning 70% of US public company shares in 2018).

The activation of institutional investors regarding proxy voting (with institutional voting participation at 91% compared to retail shareholder participation at 28%).

The rise of proxy advisory firms that serve to coordinate proxy voting.

The dismantling of classic corporate defenses, such as classified boards and poison pills.

The rise in shareholder engagement and negotiation (or “private ordering”) of governance processes. (Broadridge, 2018 Proxy Season Review (Oct. 2, 2018), available at broadridge.com.)

While there is no sign that shareholder influence will dissipate, recent legislative developments suggest that shareholder primacy (the premise that a company is run for the benefit of its shareholders in the first instance) is under some pressure. For example, in August 2018, US Senator Elizabeth Warren proposed the Accountable Capitalism Act, which among other things would require directors of US companies with $1 billion or more in annual revenues to obtain a charter as a “United States Corporation” and consider the interests of all corporate stakeholders, including employees, customers, and communities, in their decision-making, in addition to the interests of shareholders. (S. 3348, 115th Cong. § 5(c)(1)(B) (2017–2018); for more information, search Looking Ahead: Key Trends in Corporate Governance on Practical Law.)

In addition, there are increasing calls for the responsible use of power by large institutional investors, which have a considerable and growing influence on the companies in which they invest. The underlying concern is the responsible use of significant economic power, given the substantial impact on society that large institutional investors and companies have. For example, in January 2018, BlackRock CEO Larry Fink wrote to the CEOs of BlackRock portfolio companies that “society increasingly is turning to the private sector and asking that companies respond to broader societal challenges. … To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate” (Annual Letter to CEOs from Larry Fink, Chairman and CEO, BlackRock, available at blackrock.com).

This broader view of a company’s purpose recognizes that, while social interests and shareholder interests are often viewed as in tension, outside of a short-term perspective social interests and shareholder interests tend to align. For pension funds and many other institutional investors, the interests of their beneficiaries are aligned with the successful performance of healthy companies over a period of years.

Given the size of institutional investors’ portfolios, they face challenges in applying their influence on a company-specific basis. While some of the largest institutional investors are investing in the human resources and technology needed to make informed voting decisions on a case-by-case, company-specific basis, with respect to a large number of companies in their portfolios, many institutional investors still apply set policies on a one-size-fits-all basis, without nuanced analysis of the circumstances, in voting their shares. Institutional investors should assess whether they:

Are well positioned to vote their shares on an informed basis.

Have designed screens that consider company performance and other factors that may support a change from standard policy, if relying on the application of pre-set policies.

When institutional investors turn to proxy advisory firms to make voting decisions, they should evaluate how the proxy advisor is positioned to make sophisticated and nuanced case-by-case determinations, and whether resource constraints require the proxy advisor to rely heavily on the use of set policies (see below Convergence of Ideas on Corporate Governance Practices Continues).

In January 2017, a group of institutional investors launched the Investor Stewardship Group (ISG) and issued Stewardship Principles and Corporate Governance Principles that took effect on January 1, 2018 (available at isgframework.org). The Stewardship Principles set forth a stewardship framework for institutional investors that includes the following principles:

Principle A: Institutional investors are accountable to those whose money they invest.

Principle B: Institutional investors should demonstrate how they evaluate corporate governance factors with respect to the companies in which they invest.

Principle C: Institutional investors should disclose, in general terms, how they manage potential conflicts of interest that may arise in their proxy voting and engagement activities.

Principle D: Institutional investors are responsible for proxy voting decisions and should monitor the relevant activities and policies of third parties that advise them on those decisions.

Principle E: Institutional investors should address and attempt to resolve differences with companies in a constructive and pragmatic manner.

Principle F: Institutional investors should work together, where appropriate, to encourage the adoption and implementation of the Corporate Governance Principles and Stewardship Principles.

Reform of Proxy Voting and Regulation of Proxy Advisors Under Consideration

 

The Securities and Exchange Commission (SEC) staff recently held a roundtable to assess whether the SEC should update its rules governing proxy voting mechanics and the shareholder proposal process, and strengthen the regulation of proxy advisory firms. These issues have been under consideration since the SEC solicited public comment on the proxy system in 2010. (SEC, November 15, 2018: Roundtable on the Proxy Process, available at sec.gov; Concept Release on the U.S. Proxy System, 75 Fed. Reg. 42982-01, 2010 WL 2851569 (July 22, 2010).)

Topics discussed at the roundtable included:

Proxy voting mechanics and technology. Panelists agreed that the current proxy voting system needs to be modernized and simplified, for example, by:

implementing a vote confirmation process so that shareholders may verify, before the vote deadline, that voting instructions were followed and their votes were counted;

using technology to encourage wider participation and reduce costs and delays in the voting process;

studying why retail shareholder participation has fallen and whether more direct communication channels would improve information flow and participation; and

mandating use of universal proxy cards in proxy contests.

The shareholder proposal process. Some panelists asserted that the current shareholder proposal process functions well, while others identified areas for reform, including:

revisiting the ownership thresholds and holding period required to submit a shareholder proposal (currently, the lesser of $2,000 or 1%, and one year);

increasing resubmission thresholds to address reappearance of a proposal even though a majority of shareholders voted it down year after year;

providing more SEC guidance on no-action decisions and rationales;

requiring proxy disclosure of the name of the shareholder proponent (and its proxy, if any) and its level of holdings; and

requiring disclosure of preliminary vote tallies.

The role and regulation of proxy advisory firms. While no significant consensus emerged regarding whether proxy advisory firms should be subject to further SEC regulation, areas under discussion included:

improving accuracy of proxy advisor reports and affording all companies opportunities to review and verify information in advance of publication; and

improving procedures to monitor and manage, and enhancing disclosure of, conflicts of interest.

The Corporate Governance Reform and Transparency Act

 

The Corporate Governance Reform and Transparency Act, H.R. 4015, would require proxy advisory firms to register with the SEC, which would require:

Sufficient staffing to provide voting recommendations based on current and accurate information.

The establishment of procedures to permit companies reasonable time to review and provide meaningful comment on draft proxy advisory firm recommendations, including the opportunity to present (in person or telephonically) to the person responsible for the recommendation.

The employment of an ombudsman to receive and timely resolve complaints about the accuracy of voting information used in making recommendations.

Policies and procedures to manage conflicts of interest.

Disclosure of procedures and methodologies used in developing proxy recommendations and analyses.

Designation of a compliance officer responsible for administering the required policies and procedures.

Annual reporting to the SEC on the proxy advisory firm’s recommendations, including the number of companies that are also consulting division clients, as well as the number of proxy advisory firm staff who reviewed and made recommendations.

The bill would also direct the SEC staff to withdraw two no-action letters issued by the SEC in 2004, which the fact sheet suggests “have led to overreliance on proxy advisory firm recommendations.” (The SEC rescinded those two no-action letters in September 2018.)

The bill is supported by both Nasdaq and the New York Stock Exchange, as well as leading business groups and the Society for Corporate Governance. It is opposed by the Council of Institutional Investors, the Consumer Federation of America, and many public pension fund managers.

(See, for example, Nelson Griggs, Nasdaq, U.S. House of Representatives Passes Proxy Advisory Firm Reform Legislation (Dec. 16, 2017), available at nasdaq.com; Council of Institutional Investors, CII Urges Members to Contact Congressional Reps, Opposing Proxy Advisors Bill (Jan. 13, 2018), available at cii.org.) The bill is unlikely to be passed into law before the current congressional term ends, but may be reintroduced during the following congressional term.

It remains to be seen whether the SEC will incorporate input from the roundtable into future rulemaking or new SEC staff guidance or practice. The SEC is more likely to focus on proxy reform as a priority than on regulation of proxy advisory firms absent pressure from Congress.

Two bills seeking SEC regulation of proxy advisory firms were introduced in the 115th Congress:

The Corporate Governance Reform and Transparency Act, H.R. 4015. In June 2018, the Senate Committee on Banking, Housing, and Urban Affairs held a hearing on this bill, which was sent by the House of Representatives to the Senate in December 2017 for consideration. (See Box, The Corporate Governance Reform and Transparency Act.)

The Corporate Governance Fairness Act, S. 3614. In November 2018, this bill was introduced in the Senate to amend the Investment Advisers Act of 1940 (Advisers Act) to expressly require proxy advisory firms to register as investment advisers under the Advisers Act, thereby subjecting them to enhanced fiduciary duties and SEC oversight, including regular SEC staff examinations into their conflict of interest policies and programs, and whether they knowingly have made false statements to clients or have omitted to state material facts that would be necessary to make statements to clients not misleading.

Both bills would subject proxy advisory firms to SEC regulation, and focus on policies and procedures regarding conflicts of interest and accuracy. H.R. 4015 goes further by mandating
maintenance of certain staffing levels and annual reporting relating to recommendations. Neither bill is likely to be passed into law by the end of the current session of Congress.

 

Convergence of Ideas on Corporate Governance Practices Continues

 

Proxy advisory firms are often criticized for imposing a one-size-fits-all view of corporate governance on public companies in the US. However, the divide is narrowing between what investors and their proxy advisors, on the one hand, and corporate directors and CEOs, on the other hand, think are good corporate governance practices.

Recently, a high-profile group of senior executives from major public companies and institutional investors issued the Commonsense Principles 2.0 to revise corporate governance principles that the group published in 2016 (available at governanceprinciples.org). The Commonsense Principles 2.0 describe corporate governance practices that have become widely accepted among leading companies and their institutional investors, including in previously controversial areas such as majority voting in uncontested director elections and proxy access. A majority of S&P 500 companies already practice most of the recommendations, and many of the recommendations are requirements for publicly traded companies under SEC regulations or stock exchange listing rules. For example, the Commonsense Principles 2.0 provide that:

One-year terms for directors are generally preferable, but if a board is classified, the reason for that structure should be explained.

The independent directors should decide whether to have combined or separate chair and CEO roles based on the circumstances. If they combine the chair and CEO roles, they should designate a strong lead independent director. In any event, the reasons for combining or separating the roles should be explained clearly.

A director who fails to receive a majority of votes in uncontested elections should resign and the board should accept the resignation or explain to shareholders why it is not accepted.

These recommendations are in line with evolving practices.

The Commonsense Principles 2.0 address some recommendations to institutional investors and asset managers, and call on them to use their influence transparently and responsibly. Among other things, they urge asset managers to disclose their proxy voting guidelines and reliance on proxy advisory firms, and be satisfied that the information that they are relying on is accurate and relevant.

Notably, the Commonsense Principles 2.0 reflect the convergence of viewpoints through agreement among a coalition of high-profile leaders of well-known public companies, institutional investors, and one activist hedge fund. Signatories include Mary Barra of General Motors, Ed Breen of DowDupont, Warren Buffet of Berkshire Hathaway, Jamie Dimon of JPMorgan Chase, Larry Fink of BlackRock, Bill McNabb of Vanguard, Ronald O’Hanley of State Street, and Jeff Ubben of ValueAct Capital. The Council of Institutional Investors and the Business Roundtable have expressed support for or endorsed the Commonsense Principles 2.0.

 

Shifting Focus of Private Ordering to ESG Issues

 

The convergence of views among corporate leaders and large institutional investors on corporate governance practices reflects to a significant degree the success shareholders have had in influencing corporate governance reforms through engagement with boards, or private ordering. Shareholders are continuing to engage companies and press for reforms in the areas of shareholder rights and board composition and quality, but they are also increasing their focus on ESG issues, such as climate change, diversity, and board effectiveness, and the impact of ESG issues on companies’ financial performance. ESG is no longer a fringe issue of interest only to special issue investors. Mainstream institutional investors are recognizing that attention to ESG and corporate social responsibility impacts portfolio company financial performance.

The rising interest in ESG among investors is apparent in the sharp rise in US-domiciled assets under management using ESG strategies ($12.0 trillion at the start of 2018, up 38% since 2016 and an 18-fold increase since 1995, as reported by the US SIF Foundation), increasing support for shareholder proposals relating to ESG issues, as well as in the focus of engagement efforts. According to Broadridge, institutional investor support for social and environmental proposals increased from 19% in 2014 to 29% in 2018 (Broadridge, 2018 Proxy Season Review (Oct. 2, 2018), available at broadridge.com).

 

Continuing Demand for Shareholder Engagement and Attention to Activist Investors

 

In this era of enhanced shareholder influence, directors need to be especially attuned to the interests and concerns of significant shareholders, while continuing to apply their own judgment about the best interests of the company. This requires active outreach and engagement with the company’s core shareholders and, in particular, the persons responsible for voting proxies and setting the governance policies that often drive voting decisions. Caution, balance, and effective communication are also necessary to ensure that director judgment is not replaced with shareholder appeasement.

In the first half of 2018, record numbers of hedge fund activist campaigns were launched, backed by record levels of capital. Activist investors are having greater success in negotiating board seats and in winning seats in contested elections. The general level of vote support for directors is falling. For example, 416 directors failed to receive majority shareholder support in the 2018 proxy season (an 11% increase over 2017) and 1,408 directors failed to attain at least 70% shareholder support (a 14% increase over 2017) (Broadridge, 2018 Proxy Season Review (Oct. 2, 2018), available at broadridge.com).

Understanding key shareholders’ interests and developing relationships with long-term shareholders can help position the company to address calls by activist investors for short-term actions that may impair long-term value. However, boards also should view the input they receive from activist investors as valuable, because it could help identify potential areas of vulnerability. Moreover, establishing an open and positive dialogue with activist investors, and engaging with them in meaningful discussions, can assist boards in avoiding a public shareholder activist campaign in the future. This requires:

Identifying the company’s key shareholders and the issues about which they care the most.

Objectively assessing strategy and performance from the perspective of an activist investor, including proactively identifying areas in which the company may be subject to activism.

Monitoring corporate governance benchmarks and trends in shareholder activism to keep abreast of “hot topic” issues.

Comparing the company’s corporate governance practices to evolving best practice.

Attending to potential vulnerabilities in board composition. Activist investors scrutinize the tenure, age, demographics, and experience of each director. They will target directors whose expertise is arguably outdated, who have poor track records as officers or directors of other companies, or who have served on the board for long tenures. They will also look for gaps in the expertise needed by the board given the current dynamic business environment, and for a lack of gender or ethnic diversity. Boards should monitor developments in these areas (see, for example, Institutional Shareholder Services Inc. (ISS), 2019 ISS Americas Policy Updates (Nov. 19, 2018), available at issgovernance.com (announcing that, beginning in 2020, ISS will oppose the nominating committee chair at Russell 3000 or S&P 1500 companies when there are no women on the board); 2018 Cal. Legis. Serv. ch. 954 (S.B. 826) (to be codified at Cal. Corp. Code §§ 301.3, 2115.5) (mandating gender quotas for boards of US public companies that are headquartered in California)).

Addressing potential vulnerabilities in CEO compensation, including disparity with respect to peer companies and other named executive officers. Activist investors could claim that this signals a culture in which too much deference is given to the CEO and there is a lack of team emphasis in the compensation of management.

Reviewing structural defenses with the assistance of seasoned proxy fight and corporate governance counsel. Many companies have not reviewed their charter and bylaws recently, and in a proxy contest the language of many bylaw provisions can take on a different meaning. Boards should be aware that proxy advisory firm ISS recently announced that it will generally oppose management proposals to ratify a company’s existing charter or bylaw provisions, unless the provisions align with best practice (2019 ISS Americas Policy Updates, at 11).

Effectively communicating long-term plans with respect to strategy and performance pressures, defending past performance, and addressing calls for an exploration of strategic alternatives.

Preparing a response plan for engaging with activist investors to ensure that the board and management convey a measured and unified position.

Tendances globales en gouvernance et « Trends » régionaux


À l’occasion de la nouvelle année 2019, je partage avec vous une étude de la firme Russell Reynolds Associates sur les tendances en gouvernance selon différentes régions du monde.

L’article a été publié sur le site de Harvard Law School Forum par Jack « Rusty » O’Kelley, III, Anthony Goodman et Melissa Martin.

Ce qu’il y a de particulier dans cette publication ,c’est que l’on identifie cinq (5) grandes tendances globales et que l’on tente de prédire les Trends dans plusieurs régions du monde telles que :

(1) Les États-Unis et le Canada

(2) L’Union européenne

(3) La Grande-Bretagne

(4) Le Brésil

(5) l’Inde

(6) Le Japon

Les grandes tendances observées sont :

(1) la qualité et la composition du CA

(2) le degré d’attention apportée à la surveillance de la culture organisationnelle

(3) les activités des investisseurs qui limitent la primauté des actionnaires en mettant l’accent sur le long terme

(4) la responsabilité sociale des entreprises qui constitue toujours une variable critique et

(5) les investisseurs activistes qui continuent d’exercer une pression sur les CA.

Je vous recommande la lecture intégrale de cette publication pour vous former une opinion réaliste de l’évolution des saines pratiques de gouvernance. Les États-Unis et le Canada semblent mener la marche, mais les autres régions du globe ont également des préoccupations qui rejoignent les tendances globales.

C’est une lecture très instructive pour toute personne intéressée par la gouvernance des sociétés.

Bonne lecture et Bonne Année 2019 !

 

2019 Global & Regional Trends in Corporate Governance

 

 

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Institutional investors (both active managers and index fund giants) spent the last few years raising their expectations of public company boards—a trend we expect to see continue in 2019. The demand for board quality, effectiveness, and accountability to shareholders will continue to accelerate across all global markets. Toward the end of each year, Russell Reynolds Associates interviews a global mix of institutional and activist investors, pension fund managers, proxy advisors, and other corporate governance professionals regarding the trends and challenges that public company boards may face in the coming year. This year we interviewed over 40 experts to develop our insights and identify trends.

Overview of Global Trends

 

In 2019, we expect to see the emergence or continued development of the following key global governance trends:

 

1. Board quality and composition are at the heart of corporate governance.

Since investors cannot see behind the boardroom veil, they have little choice but to rely on various governance criteria as a stand-in for board quality: whether the board is truly independent, whether its composition is deliberate and under regular review, and whether board competencies align with and support the company’s forward-looking strategy. Directors face increased scrutiny around how equipped the board is with industry knowledge, capital allocation skills, and transformation experience. Institutional investors are pushing to further encourage robust, independent, and regular board evaluation processes that may result in board evolution. Boards will need to be vigilant as they consider individual tenure, director overboarding, and gender imbalance—all of which may provoke votes against the nominating committee or its chair. Gender diversity continues to be an area of focus across many countries and investors. Companies can expect increased pressure to disclose their prioritization of board competencies, board succession plans, and how they are building a diverse pipeline of director candidates. Norges Bank Investment Management, the world’s largest sovereign wealth fund, has set a new standard for at least two independent directors with relevant industry experience on each of their 9,000 investee boards.

2. Deeper focus on oversight of corporate culture.

Human capital and intangible assets, including organizational culture and reputation, are important aspects of enterprise value, as they directly impact the ability to attract and retain top talent. Culture risk exists when there is misalignment between the values a company seeks to embody and the behaviors it demonstrates. Investors are keen to learn how boards are engaging with management on this issue and how they go about understanding corporate culture. A few compensation committees are including culture and broader human capital issues as part of their remit.

3. Investors placing limits on shareholder primacy and emphasizing long-termism.

The role of corporations in many countries is evolving to include meeting the needs of a broader set of stakeholders. Global investors are increasingly discussing social value; long-termism; and environment, social, and governance (ESG) changes that are shifting corporations from a pure shareholder primacy model. While BlackRock CEO Larry Fink’s 2018 letter to investee companies on the importance of social purpose and a strategy for achieving long-term growth generated discussion in the US, much of the rest of the world viewed this as further confirmation of the focus on broader stakeholder, as well as shareholder, concerns. Institutional investors are more actively focusing on long-termism and partnering with groups to increase the emphasis on long-term, sustainable results.

4. ESG continues to be a critical issue globally and is at the forefront of governance concerns in some countries.

Asset managers and asset owners are integrating ESG into investment decisions, some under the framework of sustainability or integrated reporting. The priority for investors will be linking sustainability to long-term value creation and balancing ESG risks with opportunities. ESG oversight, improved disclosure, relative company performance against peers, and understanding how these issues are built into corporate strategy will become key focus areas. Climate change and sustainability are critical issues to many investors and are at the forefront of governance in many countries. Some investors regard technology disruption and cybersecurity as ESG issues, while others continue to categorize them as a major business risk. Either way, investors want to understand how boards are providing adequate oversight of technology disruption and cyber risk.

5. Activist investors continue to impact boards.

Activist investors are using various strategies to achieve their objectives. The question for boards is no longer if, but when and why an activist gets involved. The characterization of activists as hostile antagonists is waning, as some activists are becoming more constructive with management. Institutional investors are increasingly open to activists’ perspectives and are deploying activist tactics to bring about desired change. Activists continue to pay close attention to individual director performance and oversight failures. We are seeing even more boards becoming “their own activist” or commissioning independent assessments to preemptively identify vulnerabilities. Firms such as Russell Reynolds are conducting more director-vulnerability analysis, looking at the strengths and weaknesses of board composition and proactively identifying where activists may attack director composition. In the following sections, we explore these trends and how they will impact the United States and Canada, the European Union and the United Kingdom, Brazil, India, and Japan.

 

The United States and Canada

Investor stewardship.

Eighty-eight percent of the S&P 500 companies have either Vanguard, BlackRock, or State Street as the largest shareholder, and together these investors collectively own 18.7 percent of all the shares in the S&P 500. Because the index funds’ creators are obligated to hold shares for as long as a company is included in a relevant index (e.g., Dow Jones, S&P 500, Russell 3000), the institutional investors view themselves as permanent capital. These investors view governance not as a compliance exercise, but as a key component of value creation and risk mitigation. Passive investors are engaging even more frequently with companies to ensure that their board and management are taking the necessary actions and asking the right questions. Investors want to understand the long-term value creation story and see disclosure showing the right balance between the long term and short term. They take this very seriously and continue to invest in stewardship and governance oversight. Several of the largest institutional investors want greater focus on long-term, sustainable results and are partnering with organizations to drive the dialogue toward the long term.

Board quality.

Investors are pushing for improved board quality and view board composition, diversity, and the refreshment process as key elements. There is similarly a push for richer insight into director skill relevancy. The Boardroom Accountability Project 2.0 has encouraged more companies to disclose a “board matrix,” setting out the skills, experiences, and demographic profile of directors. That practice is fast becoming the norm for proxy disclosure. Many more institutional investors want richer disclosure around director competencies and a clearer, more direct link between each director’s skills and the company’s strategy. As one investor noted, “We want to know why this collection of directors was selected to lead the company and whether they are prepared for change and disruption.” Some of the largest US institutional investors are pushing for better board succession and board evaluation processes and the use of external firms to assess board quality, composition, and effectiveness. Institutional investors are even more concerned about board succession processes and the continued use of automatic refreshment mechanisms (retirement ages and tenure limits) rather than a “foundational assessment process over time with a mix of internal and external reviewers.”

Board diversity.

In 2019, directors should expect more investors to vote against the nominating committee or its chair if there are no women on the board (or fewer than two women in some cases). Investors want to see an increased diversity of thought and experiences to better enable the board to identify risks and improve company performance. In the US, gender diversity has become a proxy for cognitive diversity. Institutional Shareholder Services (ISS) has updated its policies on gender diversity for Russell 3000 and S&P 1500 companies and may recommend votes against nominating committee chairs or members beginning in 2020. This follows recent California legislation requiring gender diversity for California-headquartered companies. Some very large investors are starting to take a broader approach to diversity, particularly as it relates to ethnicity and race. In Canada, nearly 40 percent of TSX-listed companies have no women on their boards. Proxy advisors have recently established voting guidelines related to the disclosure of formal gender diversity policies and gender diversity by TSX-listed companies.

ESG.

Investors are pushing companies to consider their broader societal impact—both what they do and how they disclose it. ESG has moved from being a discrete topic to a fundamental part of how investors evaluate companies. They will increasingly focus on how companies explain their approach to value creation, the impact of the company on society, and how companies weigh various stakeholder interests. Other investors will continue to look at ESG primarily through a financial lens, screening for risk identification and measurement, incorporation of ESG into strategy and long-term value creation, and executive compensation. There is continued and growing focus in the US on sustainability and climate change across a range of sectors. In Canada, proactive companies will consider developing and disclosing their own ESG policies and upgrading boards—through both changes in director education and, on occasion, board composition—to ensure that directors are equipped to understand ESG risk.

Oversight of corporate culture.

Given many high-profile failures in corporate culture and leadership over the last few years, investors and regulators will expect more disclosure and will ask more questions regarding how a board understands the company’s culture. When engaging with institutional investors, boards should expect questions regarding how they are understanding and assessing the health of a corporation’s culture. Boards need to reflect on whether they really understand the company culture and how they plan to assess hot spots and potential issues.

Activist investing.

Shareholder activism remains part of the US corporate governance landscape and is continuing to grow in Canada. In Canada, the industries with the highest levels of activism include basic materials, energy, banking, and financial institutions, and emerging sectors with high growth potential (e.g., blockchain, cannabis) could be next. Proxy battles are showing no signs of slowing down, but activists are using other methods to promote change, such as constructive engagement. Canadian companies are also seeing an increase in proxy contests launched by former insiders or company founders. Experts in Canada anticipate this trend will continue and, as a result, increased shareholder engagement will be critical.

Executive compensation.

Investors are looking for better-quality disclosure around pay-for-performance metrics, particularly sustainability metrics linked to risk management and strategy. In the US, institutional investors may vote against pay plans where there is misalignment and against compensation committees where there is “excessive” executive pay for two or more consecutive years. Some investors are uncomfortable with stock performance being a primary driver of CEO compensation since it may not reflect real leadership impact. In Canada, investors are urging companies to adopt say-on-pay policies in the absence of a mandatory vote, even though such adoption rates have been sluggish to date. Investors will likely continue to push for this reform.

Governance codes.

Earlier this year, the Corporate Governance Principles of the Investor Stewardship Group (ISG) went into effect with the purpose of setting consistent governance standards for the US market. Version 2.0 of the Commonsense Principles of Corporate Governance was also published. US companies will want to consider proactive disclosure of how they comply with these sets of principles.

European Union

Investors more active.

Institutional investors are expanding resources for their engagement and stewardship teams in Europe. In 2019, investors will focus on connecting governance to long-term value creation through board oversight of talent management, ESG, and corporate culture. Additionally, some US activists are setting their sights on Europe and raising funds focused on European companies. Institutional investors are more willing to support activist investors if inadequate oversight by the board has led to poor share price and total shareholder return (TSR) performance.

Company and board diversity.

Though EU boards tend to have more women directors due to legislation and regulation, progress on gender diversity has not carried over into the C-suite. Boards can expect to engage with investors on this topic and will need to explain the root causes and plans to address it through talent management processes and diversity and inclusion initiatives. With gender diversity regulations already widely adopted across Europe, Austria has now also stipulated that public company boards have at least 30 percent women directors. However, since board terms are usually for five years, the full impact likely will not be visible until future election cycles.

ESG.

Many investors are encouraging use of the Task Force on Climate-related Financial Disclosures (TCFD) framework for consistent measurement, assessment, and disclosure of ESG risks. Investors are likely to integrate climate-change competency and risk oversight into their voting guidelines in some form, and boards will need to demonstrate that they are thinking strategically about the opportunities, risks, and impact of climate change. A new legislative proposal in France could mandate that companies consider various stakeholders, the social environment, and the nonfinancial outcome of their actions.

Revised governance codes.

A recent study found strong compliance rates for the German Corporate Governance Code, except for the areas of executive remuneration and board composition recommendations. German boards should expect more investor engagement and pressure on these matters, including enhanced disclosure. Next year, the German code may include amendments impacting director independence and executive compensation. The revised governance code in the Netherlands focuses more closely on how long-term value creation and culture are vital elements within the governance framework. Denmark’s code now recommends that remuneration policies be approved at least every four years and bars retiring CEOs from stepping into the chairman or vice chairman role.

Board leadership.

Norges Bank Investment Management (commonly referred to as The Government Pension Fund Global) is pushing globally for the separation of CEO and chairman roles and independent chair appointments. In France, investors are focused on board composition and quality. Boards should expect to see continued pressure on separating the CEO and chairman roles as well as strengthening the role and prevalence of the lead director. Companies without a lead director could see negative votes against the reelection of the CEO/chair.

United Kingdom

Revised code.

Recent legislation and market activity have set the stage for the United Kingdom to implement governance reforms that will continue to influence global markets. The new UK Corporate Governance code will apply to reporting periods starting from January 1, 2019, although many companies have begun to apply it more quickly. The new code was complemented by updated and enhanced Guidance on Board Effectiveness to reemphasize that boards need to focus on improving their effectiveness—not just their compliance. Meanwhile the voluntary principle of “comply or explain” is itself being tested as the Kingman Review reconsiders the Financial Reporting Council’s powers and its twin role as both the government-designated regulator and the custodian of a voluntary code. Proxy advisors, who are growing more powerful, are also frequently voting against firms choosing to “explain” rather than comply. 2019 code changes include guidance around the board’s duty to consider the perspective of key stakeholders and to incorporate their interests into discussion and decisionmaking. Employees can be engaged via designating an existing non-executive director (already on the board), a workforce advisory committee, or a workforce representative on the board.

Board leadership and composition.

Other changes in the code include prioritizing non-executive chair succession planning and capping non-executive chair total tenure at nine years (including any time spent previously as a non-executive director)—a recommendation which could impact over 10 percent of the FTSE 350. Several investors noted that they understand the new tenure rule may cause unintended consequences around board chair succession planning. Investors are likely to focus on skills mix, diversity, and functional and industry experience. While directors can expect negative votes against their reelection if they are currently on more than four boards, better disclosure of director capacity and commitment may help sway investors.

Culture oversight.

The board’s evolving role in overseeing corporate culture—now explicit in the revised code—will be a primary focus for investors in 2019. The Financial Reporting Council has suggested that culture can be measured using several factors, such as turnover and absenteeism rates, reward and promotion decisions, health and safety data, and exit interviews. The code emphasizes that the board is responsible for a healthy culture that should promote delivering long-term sustainable performance. Auditor reform. Given public concern about recent corporate collapses, the role of external auditor and the structure of the audit firm market are under scrutiny. The government is under pressure to improve auditing and increase competition. Audit independence, rigor, and quality are likely to be examined, and boards may face greater pressure to change auditors more regularly. ISS is changing its policies for its UK/Ireland (and Continental European) policies beginning in 2019. ISS will begin tracking significant audit quality issues at the lead engagement partner level and will identify (when possible) any lead audit partners who have been linked to significant audit controversies.

Activist investors.

While institutional investors’ concerns center around the impact of disruption and how companies are responding with an eye toward long-termism and sustainability, activist campaigns continue to act as a potential counterweight. UK companies account for about 55 percent of activist campaigns in Europe, and UK companies will likely continue to be targeted next year.

Company diversity.

Diversity will continue to be a priority for board attention, including gender and ethnic diversity. The revised code broadened the role of the nominating committee to oversee the development of diversity in senior management ranks and to review diversity and inclusion initiatives and outcomes throughout the business.

Brazil

Outlook.

Following the highly polarized presidential election, Brazil is still facing some political uncertainty around the potential business and political agenda the new government will pursue. Despite recent ministry appointments being generally well received, global investors will likely still be cautious about investing in the country given the government’s deep history of entanglement with corporate affairs.

Governance reforms and stewardship.

Governance regulation is still in its early stages in Brazil and continues to be focused on overhauling compliance practices and implementing governance reforms. Securities regulator CVM recently issued guidelines regarding indemnity agreements between companies and board members (and other company stakeholders), which could lead to possible disclosure implications. The guidance serves to warn companies about potential conflicts of interest, and directors are cautioned to pay close attention to these new policies. Brazilian public companies are now required to file a comply-or-explain governance report as part of the original mandate stemming from the 2016 Corporate Governance Code, with an emphasis on the quality of such disclosures. Stewardship continues to be of growing importance, and boards are at the center of that discussion. The Association of Capital Market Investors is focusing on ensuring that the CVM and other market participants are holding companies to the highest governance standards not issuing waivers or failing to hold companies accountable for their actions.

Improved independence.

There is an ongoing push for more independence within the governance framework. More independent directors are being appointed to boards due to wider capital distribution. Brazil is working toward implementing reforms targeting political appointments within state-owned enterprises (SOE), but progress could slow depending upon the new government’s priorities. Recently, the Brazilian Chamber of Deputies approved legislation that would allow politicians to once again be nominated to SOE boards. The Federal Senate will soon decide on the proposal, but its approval could trigger a backlash. Organizations like the Brazilian Institute of Corporate Governance are firmly positioning themselves against the law change, viewing it as a step back from recent governance progress. However, the Novo Mercado rules and Corporate Governance Code are strengthening the definition of independence and using shareholder meetings to confirm the independence of those directors.

Remote voting.

The recent introduction of the remote voting card for shareholders could have a major impact on boards. Public companies required to implement the new system should expect to see more flexibility and inclusion of minority shareholder-backed nominees on the ballot. While Brazil is making year-over-year progress toward minority shareholder protections, they continue to be a challenge.

Board effectiveness.

Experts anticipate increased pressure to upgrade board mechanics and processes, including establishing a nominations policy regarding board director and committee appointments, routine board evaluation processes, succession planning, and onboarding/training programs. CVM, along with B3 (the Brazilian stock exchange), continues to push for higher governance standards and processes. There is an increased focus on board and director assessment (whether internally or externally led) to ensure board effectiveness and the right board composition. Under the Corporate Governance Code, companies will have to comply or explain why they do not have a board assessment process.

Compensation disclosure.

For almost a decade, Brazilian companies used a court injunction (known as the “IBEF Injunction”) to avoid having to disclose the remuneration of their highest-paid executives. Now that this has been overturned, public companies will be expected to start disclosing compensation information for their highest-paid executives and board members. Companies are concerned that the disclosure may trigger a backlash among minority shareholders and negative votes against remuneration.

India

Regulatory reform.

Motivated by a desire to attract global investments, curb corruption, and strengthen corporate governance, India is continuing to push for regulatory reform. In the spring of 2018, much to the surprise of many, the Securities and Exchange Board of India (SEBI) adopted many of the 81 provisions put forward by the Kotak Committee. The adoption of the recommendations has caused many companies to consider and aspire to meet this new standard. Kotak implementation has triggered a significant wave of governance implications centered around improving transparency and financial reporting. The adoption of these governance reforms is staggered, with most companies striving to reach compliance between April 2019 and April 2020.

Board composition, leadership, and independence.

Boards will face enhanced disclosure rules regarding the skills and experience of directors, which has triggered many companies to engage in board composition assessments. Directors will also be limited in the number of boards they can serve on simultaneously: eight in 2019; seven in 2020. The top 1,000 listed companies in India will need to ensure they have a minimum of six directors on their boards by April 2019, with the next 1,000 having an additional year to comply. Among other changes are new criteria for independence determinations and changes to director compensation. Additionally, the CEO or managing director role and the chair role must be separated and cannot be held by the same person for the top 500 listed companies by market capitalization. This will significantly change board leadership and control in many companies where the role was held by the same person, and it will boost overall independence. To further drive board and director independence, the definition of independence was strengthened, and board interlocks will receive greater scrutiny.

Board diversity.

India continues to make improvements toward gender diversity five years after the Companies Act of 2013 and ongoing pressure from investors and policymakers. Nevertheless, institutional investors and proxy advisors are calling for more progress, as a quarter of women appointments are held by family members of the business owners (and are thus not independent). Starting in 2019, boards of the top 500 listed companies will need to ensure they have at least one independent woman director; by 2020, the top 1,000 listed companies will need to comply.

Board effectiveness.

The reforms also include a requirement for the implementation of an oversight process for succession planning and updating the board evaluation and director review process.

Investor expectations.

Governance stakeholders are eager to see how much progress Indian companies will make during the next 18 months, but many are not overly optimistic given the magnitude of change required in such a short period of time. Investors are setting their expectations accordingly and understand that regional governance norms will not transform overnight. While it is unclear exactly how the government and regulators will respond to noncompliance, companies and their boards are feeling anxious about the potential repercussions and penalties.

Japan

Continued focus on governance.

The Japanese government continues to be a driving force for corporate governance improvements. To make Japan more attractive to global investors, policymakers are increasingly focused on improving board accountability. Despite a trend toward more proactive investor stewardship, regulatory bodies including the Financial Services Agency continue to lead reforms, with several new comply-or-explain guidelines added to the Amended Corporate Governance Code that came into effect in 2018. These guidelines, such as minimum independence requirements, establishing an objective CEO succession and dismissal process, and the unloading of cross-shareholdings, are aimed at enhancing transparency.

Director independence.

Director independence has been a concern for investors, with outside directors taking only about 31 percent of board seats. Though some observers perceive a weakening of language in the code regarding independence, investors are unlikely to lower their expectations and standards. The amended code now calls for at least one-third of the board to be composed of outside directors (up from the quota requirement of two directors that existed previously). The change is intended to encourage transparency and accountability around the board’s decision-making process. Starting next year, ISS will adopt a similar approach to its Japanese governance policies, employing a one-third independence threshold as well.

Executive compensation.

Given recent scandals, institutional investors and regulators will continue to pay close attention to the structure of executive compensation. Performance-based compensation plans will be a major area of focus in 2019. More companies are introducing new types of equity-based compensation schemes, such as restricted stock, and are expected to follow the trend into next year. Board diversity. Over 50 percent of listed companies still have no women on their boards. To upgrade board quality and performance, investors will likely engage more forcefully on gender diversity, board composition and processes, board oversight duties and roles, and the board director evaluation process.

ESG.

In 2019, boards can expect more shareholder interest in sustainability metrics and strategy. Investors are keen to see enhanced disclosure that aids their understanding of value creation and the link to performance targets, as well as explanations concerning board monitoring.

Activist investing.

Activism continues to rise in Japan, and we expect that trend to continue. Activists are showing a willingness to demand a board seat and engage in proxy battles, and institutional investors are increasingly willing to support the activist recommendations.

Governance practices.

Investors also will be paying close attention to several other governance practices, such as the earlier disclosure of proxy materials and delivery in digital format, and protecting the interest of minority shareholders. The code further emphasizes succession planning by requiring companies to implement a fair and transparent process for the CEO’s removal and succession. As a result, more companies are introducing nominating committees and discussing

CEO succession.

Companies are also being urged to unload their cross-shareholdings (when a listed company owns stock of another company in the same listing) and adopt controls that will determine whether the ownership of such equity is appropriate. Such holdings are likely to be policed more by regulators due to the tendency of such holdings to insulate boards from external pressure, including takeover bids.

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*Jack “Rusty” O’Kelley, III is Global Leader of the Board Advisory & Effectiveness Practice, Anthony Goodman is a member of the Board Consulting and Effectiveness Practice, and Melissa Martin is a Board and CEO Advisory Group Specialist at Russell Reynolds Associates.at Russell Reynolds Associates. This post is based on a Russell Reynolds memorandum by Mr. O’Kelley, Mr. Goodman, and Ms. Martin.

 

Nouvelles perspectives pour la gouvernance en 2018


Aujourd’hui, je vous propose la lecture d’un excellent article de Martin Lipton* sur les nouvelles perspectives de la gouvernance en 2018. Cet article est publié sur le site du Harvard Law School Forum on Corporate Governance.

Après une brève introduction portant sur les meilleures pratiques observées dans les entreprises cotées, l’auteur se penche sur les paramètres les plus significatifs de la nouvelle gouvernance.

Les thèmes suivants sont abordés dans un contexte de renouvellement de la gouvernance pour le futur :

  1. La notion de l’actionnariat élargie pour tenir compte des parties prenantes ;
  2. L’importance de considérer le développement durable et la responsabilité sociale des entreprises ;
  3. L’adoption de stratégies favorisant l’engagement à long terme ;
  4. La nécessité de se préoccuper de la composition des membres du CA ;
  5. L’approche à adopter eu égard aux comportements d’actionnaires/investisseurs activistes ;
  6. Les attentes eu égard aux rôles et responsabilités des administrateurs.

À l’approche de la nouvelle année 2018, cette lecture devrait compter parmi les plus utiles pour les administrateurs et les dirigeants d’entreprises ainsi que pour toute personne intéressée par l’évolution des pratiques de gouvernance.

Bonne lecture ! Vos commentaires sont appréciés.

 

Some Thoughts for Boards of Directors in 2018

 

 

Introduction

 

As 2017 draws to a conclusion and we reflect on the evolution of corporate governance since the turn of the millennium, a recurring question percolating in boardrooms and among shareholders and other stakeholders, academics and politicians is: what’s next on the horizon for corporate governance? In many respects, we seem to have reached a point of relative stasis. The governance and takeover defense profiles of U.S. public companies have been transformed by the widespread adoption of virtually all of the “best practices” advocated to enhance the rights of shareholders and weaken takeover defenses.

While the future issues of corporate governance remain murky, there are some emerging themes that portend a potentially profound shift in the way that boards will need to think about their roles and priorities in guiding the corporate enterprise. While these themes are hardly new, they have been gaining momentum in prompting a rethinking of some of the most basic assumptions about corporations, corporate governance and the path forward.

First, while corporate governance continues to be focused on the relationship between boards and shareholders, there has been a shift toward a more expansive view that is prompting questions about the broader role and purpose of corporations. Most of the governance reforms of the past few decades targeted the ways in which boards are structured and held accountable to the interests of shareholders, with debates often boiling down to trade-offs between a board-centric versus a more shareholder-centric framework and what will best create shareholder value. Recently, efforts to invigorate a more long-term perspective among both corporations and their investors have been laying the groundwork for a shift from these process-oriented debates to elemental questions about the basic purpose of corporations and how their success should be measured and defined.

In particular, sustainability has become a major, mainstream governance topic that encompasses a wide range of issues such as climate change and other environmental risks, systemic financial stability, labor standards, and consumer and product safety. Relatedly, an expanded notion of stakeholder interests that includes employees, customers, communities, and the economy and society as a whole has been a developing theme in policymaking and academic spheres as well as with investors. As summarized in a 2017 report issued by State Street Global Advisor,

“Today’s investors are looking for ways to put their capital to work in a more sustainable way, one focused on long-term value creation that enables them to address their financial goals and responsible investing needs. So, for a growing number of institutional investors, the environmental, social and governance (ESG) characteristics of their portfolio are key to their investment strategy.”

While both sustainability and expanded constituency considerations have been emphasized most frequently in terms of their impact on long-term shareholder value, they have also been prompting fresh dialogue about the societal role and purpose of corporations.

Another common theme that underscores many of the corporate governance issues facing boards today is that corporate governance is inherently complex and nuanced, and less amenable to the benchmarking and quantification that was a significant driver in the widespread adoption of corporate governance “best practices.” Prevailing views about what constitutes effective governance have morphed from a relatively binary, check-the-box mentality—such as whether a board is declassified, whether shareholders can act by written consent and whether companies have adopted majority voting standards—to tackling questions such as how to craft a well-rounded board with the skills and experiences that are most relevant to a particular corporation, how to effectively oversee the company’s management of risk, and how to forge relationships with shareholders that meaningfully enhance the company’s credibility. Companies and investors alike have sought to formulate these “next generation” governance issues in a way that facilitates comparability, objective assessment and accountability. For example, many companies have been including skills matrices in their proxy statements to show, in a visual snapshot, that their board composition encompasses appropriate skills and experiences. Yet, to the extent that complicated governance issues cannot be reduced to simple, user-friendly metrics, it remains to be seen whether this will prompt new ways of defining “good” corporate governance that require a deeper understanding of companies and their businesses, and the impact that could have on the expectations and practices of stakeholders.

Against this backdrop, a few of the more significant issues that boards of directors will face in the coming year, as well as an overview of some key roles and responsibilities, are highlighted below. Parts II through VI contain brief summaries of some of the leading proposals and thinking for corporate governance of the future. In Part VII, we turn to the issues boards of directors will face in 2018 and suggestions as to how to prepare to deal with them.

 

Expanded Stakeholders

 

The primacy of shareholder value as the exclusive objective of corporations, as articulated by Milton Friedman and then thoroughly embraced by Wall Street, has come under scrutiny by regulators, academics, politicians and even investors. While the corporate governance initiatives of the past year cannot be categorized as an abandonment of the shareholder primacy agenda, there are signs that academic commentators, legislators and some investors are looking at more nuanced and tempered approaches to creating shareholder value.

In his 2013 book, Firm Commitment: Why the Corporation is Failing Us and How to Restore Trust in It, and a series of brilliant articles and lectures, Colin Mayer of the University of Oxford has convincingly rejected shareholder value primacy and put forth proposals to reconceive the business corporation so that it is committed to all its stakeholders, including the community and the general economy. His new book, Prosperity: Better Business Makes the Greater Good, to be published by Oxford University Press in 2018, continues the theme of his earlier publications and will be required reading.

Similarly, an influential working paper by Oliver Hart and Luigi Zingales argues that the appropriate objective of the corporation is shareholder welfare rather than shareholder wealth. Hart and Zingales advocate that corporations and asset managers should pursue policies consistent with the preferences of their investors, specifically because corporations may be able to accomplish objectives that shareholders acting individually cannot. In such a setting, the implicit separability assumption underlying Milton Friedman’s theory of the purpose of the firm fails to produce the best outcome for shareholders. Indeed, even though Hart and Zingales propose a revision that remains shareholder-centered, by recognizing the unique capability of corporations to engage in certain kinds of activities, their theory invites a careful consideration of other goals such as sustainability, board diversity and employee welfare, and even such social concerns, as, for example, reducing mass violence or promoting environmental stewardship. Such a model of corporate decision-making emphasizes the importance of boards establishing a relationship with significant shareholders to understand shareholder goals, beyond simply assuming that an elementary wealth maximization framework is the optimal path.

Perhaps closer to a wholesale rejection of the shareholder primacy agenda, an article by Joseph L. Bower and Lynn S. Paine, featured in the May-June 2017 issue of the Harvard Business Review, attacks the fallacies of the economic theories that have been used since 1970 to justify shareholder-centric corporate governance, short-termism and activist attacks on corporations. In questioning the benefits of hedge fund activism, Bower and Paine argue that some of the value purportedly created for shareholders by activists is not actually value created, but rather value transferred from other parties or from the public purse, such as shifting a company’s tax domicile to a lower-tax jurisdiction or eliminating exploratory research and development. The article supports the common sense notion that boards have a fiduciary duty not just to shareholders, but also to employees, customers and the community—a constituency theory of governance penned into law in a number of states’ business corporation laws.

Moreover, this theme has been metastasizing from a theoretical debate into specific reform initiatives that, if implemented, could have a direct impact on boards. For example, Delaware and 32 other states and the District of Columbia have passed legislation approving a new corporate form—the benefit corporation —a for-profit corporate entity with expanded fiduciary obligations of boards to consider other stakeholders in addition to shareholders. Benefit corporations are mandated by law to consider their overall positive impact on society, their workers, the communities in which they operate and the environment, in addition to the goal of maximizing shareholder profit.

This broader sense of corporate purpose has been gaining traction among shareholders. For example, the endorsement form for the Principles published by the Investor Stewardship Group in 2017 includes:

“[I]t is the fiduciary responsibility of all asset managers to conduct themselves in accordance with the preconditions for responsible engagement in a manner that accrues to the best interests of stakeholders and society in general, and that in so doing they’ll help to build a framework for promoting long-term value creation on behalf of U.S. companies and the broader U.S. economy.”

Notions of expanded stakeholder interests have often been incorporated into the concept of long-termism, and advocating a long-term approach has also entailed the promotion of a broader range of stakeholder interests without explicitly eroding the primacy of shareholder value. Recently, however, the interests of other stakeholders have increasingly been articulated in their own right rather than as an adjunct to the shareholder-centric model of corporate governance. Ideas about the broader social purpose of corporations have the potential to drive corporate governance reforms into uncharted territory requiring navigation of new questions about how to measure and compare corporate performance, how to hold companies accountable and how to incentivize managers.

 

Sustainability

 

The meaning of sustainability is no longer limited to describing environmental practices, but rather more broadly encompasses the sustainability of a corporation’s business model in today’s fast-changing world. The focus on sustainability encompasses the systemic sustainability of public markets and pressures boards to think about corporate strategy and how governance should be structured to respond to and compete in this environment.

Recently, the investing world has seen a rise of ESG-oriented funds—previously a small, niche segment of the investment community. Even beyond these specialized funds, ESG has also become a focus of a broad range of traditional investment funds and institutional investors. For instance, BlackRock and State Street both offer their investors products that specifically focus on ESG-oriented topics like climate change and impact investing—investing with an intention of generating a specific social or environmental outcome alongside financial returns.

At the beginning of 2017, State Street’s CEO Ronald P. O’Hanley wrote a letter advising the boards of the companies in which State Street invests that State Street defines sustainability “as encompassing a broad range of environmental, social and governance issues that include, for example, effective independent board leadership and board composition, diversity and talent development, safety issues, and climate change.” The letter was a reminder that broader issues that impact all of a company’s stakeholders may have a material effect on a company’s ability to generate returns. Chairman and CEO of BlackRock, Laurence D. Fink remarked similarly in his January 2017 letter that

“[e]nvironmental, social and governance factors relevant to a company’s business can provide essential insights into management effectiveness and thus a company’s long-term prospects. We look to see that a company is attuned to the key factors that contribute to long-term growth: sustainability of the business model and its operations, attention to external and environmental factors that could impact the company, and recognition of the company’s role as a member of the communities in which it operates.”

Similarly, the UN Principles for Responsible Investment remind corporations that ESG factors should be incorporated into all investment decisions to better manage risk and generate sustainable, long-term returns.

Shareholders’ engagement with ESG issues has also increased. Previously, ESG was somewhat of a fringe issue with ESG-related shareholder proxy proposals rarely receiving significant shareholder support. This is no longer the case. In the 2017 proxy season, the two most common shareholder proposal topics related to social (201 proposals) and environmental (144 proposals, including 69 on climate change) issues, as opposed to 2016’s top two topics of proxy access (201) and social issues (160). Similar to cybersecurity and other risk management issues, sustainability practices involve the nuts and bolts of operations—e.g., life-cycle assessments of a product and management of key performance indicators (KPIs) using management information systems that facilitate internal and public reporting—and provide another example of an operational issue that has become a board/governance issue.

The expansion of sustainability requires all boards—not just boards of companies with environmentally sensitive businesses—to be aware of and be ready to respond to ESG-related concerns. The salient question is whether “best” sustainability practices will involve simply the “right” messaging and disclosures, or whether investors and companies will converge on a method to measure sustainability practices that affords real impact on capital allocation, risk-taking and proactive—as opposed to reactive—strategy.

Indeed, measurement and accountability are perhaps the elephants in the room when it comes to sustainability. Many investors appear to factor sustainability into their investing decisions. Other ways to measure sustainability practices include the presence of a Chief Sustainability Officer or Corporate Responsibility Committee. However, while there are numerous disclosure frameworks relating to sustainability and ESG practices, there is no centralized ESG rating system. Further, rating methodologies and assessments of materiality vary widely across ESG data providers and disclosure requirements vary across jurisdictions.

Pending the development of clear and agreed standards to benchmark performance on ESG issues, boards of directors should focus on understanding how their significant investors value and measure ESG issues, including through continued outreach and engagement with investors focusing on these issues, and should seek tangible agreed-upon methodologies to address these areas, while also promoting the development of improved metrics and disclosure.

Promoting a Long-Term Perspective

 

As the past year’s corporate governance conversation has explored considerations outside the goal of maximizing shareholder value, the conversation within the shareholder value maximization framework has also continued to shift toward an emphasis on long-term value rather than short term. A February 2017 discussion paper from the McKinsey Global Institute in cooperation with Focusing Capital on the Long Term found that long-term focused companies, as measured by a number of factors including investment, earnings quality and margin growth, generally outperformed shorter-term focused companies in both financial and other performance measures. Long-term focused companies had greater, and less volatile, revenue growth, more spending on research and development, greater total returns to shareholders and more employment than other firms.

This empirical evidence that corporations focused on stakeholders and long-term investment contribute to greater economic growth and higher GDP is consistent with innovative corporate governance initiatives. A new startup, comprised of veterans of the NYSE and U.S. Treasury Department, is working on creating the “Long-Term Stock Exchange”—a proposal to build and operate an entirely new stock exchange where listed companies would have to satisfy not only all of the normal SEC requirements to allow shares to trade on other regulated U.S. stock markets but, in addition, other requirements such as tenured shareholder voting power (permitting shareholder voting to be proportionately weighted by the length of time the shares have been held), mandated ties between executive pay and long-term business performance and disclosure requirements informing companies who their long-term shareholders are and informing investors of what companies’ long-term investments are.

In addition to innovative alternatives, numerous institutional investors and corporate governance thought leaders are rethinking the mainstream relationship between all boards of directors and institutional investors to promote a healthier focus on long-term investment. While legislative reform has taken a stronger hold in the U.K. and Europe, leading American companies and institutional investors are pushing for a private sector solution to increase long-term economic growth. Commonsense Corporate Governance Principles and The New Paradigm: A Roadmap for an Implicit Corporate Governance Partnership Between Corporations and Investors to Achieve Sustainable Long-Term Investment and Growth were published in hopes of recalibrating the relationship between boards and institutional investors to protect the economy against the short-term myopic approach to management and investing that promises to impede long-term economic prosperity. Under a similar aim, the Investor Stewardship Group published its Stewardship Principles and Corporate Governance Principles, set to become effective in January 2018, to establish a framework with six principles for investor stewardship and six principles for corporate governance to promote long-term value creation in American business. A Synthesized Paradigm for Corporate Governance, Investor Stewardship, and Engagement provides a synthesis of these and others in the hope that companies and investors would agree on a common approach. In fact, over 100 companies to date have signed The Compact for Responsive and Responsible Leadership: A Roadmap for Sustainable Long-Term Growth and Opportunity, sponsored by the World Economic Forum, which includes the key features of The New Paradigm.

Similarly, the BlackRock Investment Stewardship team has proactively outlined five focus areas for its engagement efforts: Governance, Corporate Strategy for the Long-Term, Executive Compensation that Promotes Long-Termism, Disclosure of Climate Risks, and Human Capital Management. BlackRock’s outline reflects a number of key trends, including heightened transparency by institutional investors, more engagement by “passive” investors, and continued disintermediation of proxy advisory firms. In the United Kingdom, The Investor Forum was founded to provide an intermediary to represent the views of its investor members to investee companies in the hope of reducing activism, and appears to have achieved a successful start.

Similarly, in June 2017, the Coalition for Inclusive Capitalism and Ernst & Young jointly announced the launch of a project on long-term value creation. Noting among other elements that trust and social cohesion are necessary ingredients for the long-term success of capitalism, the project will emphasize reporting mechanisms and credible measurements supporting long-term value, developing and testing a framework to better reflect the full value companies create beyond simply financial value. There is widespread agreement that focusing on long-term investment will promote long-term economic growth. The next step is a consensus between companies and investors on a common path of action that will lead to restored trust and cohesion around long-term goals.

 

Board Composition

 

The corporate governance conversation has become increasingly focused on board composition, including board diversity. Recent academic studies have confirmed and expanded upon existing empirical evidence that hedge fund activism has been notably counterproductive in increasing gender diversity—yet another negative externality of this type of activism. Statistical evidence supports the hypothesis that the rate of shareholder activism is higher toward female CEOs holding all else equal, including industries, company sizes and levels of performance. A study forthcoming in the Journal of Applied Psychology investigated the reasons that hedge fund activists seemingly ignore the evidence for gender-diverse boards in their choices for director nominees and disproportionately target female CEOs. The authors suggest these reasons may include subconscious biases of hedge funds against women leaders due to perceptions and cultural attitudes.

In the United Kingdom, the focus on board diversity has spread into policy. The House of Commons Business, Energy, and Industrial Strategy Committee report on Corporate Governance, issued in 2017, included recommendations for improving ethnic, gender and social diversity of boards, noting that “[to] be an effective board, individual directors need different skills, experience, personal attributes and approaches.” The U.K. government’s response to this report issued in September 2017 notes its agreement on various diversity-related issues, stating that the “Government agrees with the Committee that it makes business sense to recruit directors from as broad a base as possible across the demographic of the UK” and further, tying into themes of stakeholder capitalism, that the “Government believes that greater diversity within the boardroom can help companies connect with their workforces, supply chains, customers and shareholders.”

In the United States, institutional investors are focused on a range of board composition issues, including term limits, board refreshment, diversity, skills matrices and board evaluation processes, as well as disclosures regarding these issues. In a recent letter, Vanguard explained that it considers the board to be “one of a company’s most critical strategic assets” and looks for a “high-functioning, well-composed, independent, diverse, and experienced board with effective ongoing evaluation practices,” stating that “Good governance starts with a great Board.” The New York Comptroller’s Boardroom Accountability Project 2.0 is focused on increasing diversity of boards in order to strengthen their independence and competency. In connection with launching this campaign, the NYC Pension Funds asked the boards of 151 U.S. companies to disclose the race and gender of their directors alongside board members’ skills in a standardized matrix format. And yet, similar to the difficulty of measuring and comparing sustainability efforts of companies, investors and companies alike continue to struggle with how to measure and judge a board’s diversity, and board composition generally, as the conversation becomes more nuanced. Board composition and diversity aimed at increasing board independence and competency is not a topic that lends itself to a “check-the-box” type measurement.

In light of the heightened emphasis on board composition, boards should consider increasing their communications with their major shareholders about their director selection and nomination processes to show the board understands the importance of its composition. Boards should consider disclosing how new director candidates are identified and evaluated, how committee chairs and the lead director are determined, and how the operations of the board as a whole and the performance of each director are assessed. Boards may also focus on increasing tutorials, facility visits, strategic retreats and other opportunities to increase the directors’ understanding of the company’s business—and communicate such efforts to key shareholders and constituents.

 

Activism

 

Despite the developments and initiatives striving to protect and promote long-term investment, the most dangerous threat to long-term economic prosperity has continued to surge in the past year. There has been a significant increase in activism activity in countries around the world and no slowdown in the United States. The headlines of 2017 were filled with activists who do not fit the description of good stewards of the long-term interests of the corporation. A must-read Bloombergarticle described Paul Singer, founder of Elliott Management Corp., which manages $34 billion of assets, as “aggressive, tenacious and litigious to a fault” and perhaps “the most feared activist investor in the world.” Numerous recent activist attacks underscore that the CEO remains a favored activist target. Several major funds have become more nuanced and taken a merchant banker approach of requesting board representation to assist a company to improve operations and strategy for long-term success. No company is too big for an activist attack. Substantial new capital has been raised by activist hedge funds and several activists have created special purpose funds for investment in a single target. As long as activism remains a serious threat, the economy will continue to experience the negative externalities of this approach to investing—companies attempting to avoid an activist attack are increasingly managed for the short term, cutting important spending on research and development and focusing on short-term profits by effecting share buybacks and paying dividends at the expense of investing in a strategy for long-term growth.

To minimize the impact of activist attacks, boards must focus on building relationships with major institutional investors. The measure of corporate governance success has shifted from checking the right boxes to building the right relationships. Major institutional investors have reiterated their commitment to bringing a long-term perspective to public companies, including, for example, Vanguard, which sent an open letter to directors of public companies world-wide explaining that a long-term perspective informed every aspect of its investment approach. Only by forging relationships of trust and credibility with long-term shareholders can a company expect to gain support for its long-term strategy when it needs it. In many instances, when an activist does approach, a previously established relationship provides a foundation for management and the board to persuade key shareholders that short-term activism is not in their best interest—an effort that is already showing some promise. General Motors’ resounding defeat of Greenlight Capital’s attempt to gain shareholder approval to convert its common stock into two classes shows a large successful company’s ability to garner the

support of its institutional investors against financial engineering. Trian’s recent proxy fight against Procter & Gamble shows the importance of proactively establishing relationships with long-term shareholders. Given Trian’s proven track record of success in urging changes in long-term strategy, Nelson Peltz was able to gain support for a seat on P&G’s board from proxy advisors and major institutional investors. We called attention to importantlessons from this proxy fight (discussed on the Forum here and here).

 

Spotlight on Boards

 

The ever-evolving challenges facing corporate boards prompts an updated snapshot of what is expected from the board of directors of a major public company—not just the legal rules, but also the aspirational “best practices” that have come to have equivalent influence on board and company behavior. In the coming year, boards will be expected to:

Oversee corporate strategy and the communication of that strategy to investors;

Set the tone at the top to create a corporate culture that gives priority to ethical standards, professionalism, integrity and compliance in setting and implementing strategic goals;

Choose the CEO, monitor the CEO’s and management’s performance and develop a succession plan;

Determine the agendas for board and committee meetings and work with management to assure appropriate information and sufficient time are available for full consideration of all matters;

Determine the appropriate level of executive compensation and incentive structures, with awareness of the potential impact of compensation structures on business priorities and risk-taking, as well as investor and proxy advisor views on compensation;

Develop a working partnership with the CEO and management and serve as a resource for management in charting the appropriate course for the corporation;

Oversee and understand the corporation’s risk management and compliance efforts, and how risk is taken into account in the corporation’s business decision-making; respond to red flags when and if they arise (see Risk Management and the Board of Directors, discussed on the Forum here);

Monitor and participate, as appropriate, in shareholder engagement efforts, evaluate potential corporate governance proposals and anticipate possible activist attacks in order to be able to address them more effectively;

Evaluate the board’s performance on a regular basis and consider the optimal board and committee composition and structure, including board refreshment, expertise and skill sets, independence and diversity, as well as the best way to communicate with investors regarding these issues;

Review corporate governance guidelines and committee charters and tailor them to promote effective board functioning;

Be prepared to deal with crises; and

Be prepared to take an active role in matters where the CEO may have a real or perceived conflict, including takeovers and attacks by activist hedge funds focused on the CEO.

To meet these expectations, major public companies should seek to:

Have a sufficient number of directors to staff the requisite standing and special committees and to meet expectations for diversity;

Have directors who have knowledge of, and experience with, the company’s businesses, even if this results in the board having more than one director who is not “independent”;

Have directors who are able to devote sufficient time to preparing for and attending board and committee meetings;

Meet investor expectations for director age, diversity and periodic refreshment;

Provide the directors with the data that is critical to making sound decisions on strategy, compensation and capital allocation;

Provide the directors with regular tutorials by internal and external experts as part of expanded director education; and

Maintain a truly collegial relationship among and between the company’s senior executives and the members of the board that enhances the board’s role both as strategic partner and as monitor.

______________________________________

*Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton publication by Mr. Lipton, Steven A. Rosenblum, Karessa L. Cain, Sabastian V. Niles, Vishal Chanani, and Kathleen C. Iannone.

La lettre de BlackRock plaide pour une prise en compte des facteurs de risque environnementaux, sociaux, de gouvernance (ESG)


Aujourd’hui, je fais une première expérience de publication d’un billet en gouvernance parue sur le site du Harvard Law School Forum on Corporate Governance, le 6 février 2018.

En effet, j’édite la traduction en français d’un article publié par Abe M. Friedman*, CEO de la firme CamberView. Cette publication constitue, à mon avis, un moment décisif dans la conception de la gouvernance telle que vue par un investisseur avisé.

Comme plusieurs lecteurs sont particulièrement intéressés par les contenus en français, j’ai utilisé l’outil de traduction de Google pour faire ressortir les implications de la lettre annuelle aux PDG de Larry Fink, PDG de BlackRock.

Vous comprendrez que la traduction est perfectible, mais je crois qu’elle est compréhensible avec un minimum d’édition.

Je vous invite également à lire la dernière mise à jour des recommandations de BlackRock en vue des votes aux assemblées annuelles : Updated BlackRock Proxy Voting Guidelines

Bonne lecture !

 

Résultats de recherche d'images pour « blackrock »

 

Le mardi 16 janvier, Larry Fink, PDG de BlackRock, a publié sa lettre annuelle aux PDG décrivant une vision audacieuse liant la prospérité des entreprises à leur capacité à fournir de solides performances financières tout en contribuant positivement à la société. Intitulée « A Sense of Purpose », cette lettre souligne l’approche de plus en plus active de BlackRock en matière d’engagement actionnarial ; elle constitue son opinion selon laquelle les conseils d’administration jouent un rôle central dans la direction stratégique à long terme des sociétés ainsi que dans la prise en compte des facteurs de risque environnementaux, sociaux, de gouvernance (ESG) et de création de valeur à long terme.

La lettre est un autre signal d’un changement fondamental dans la pensée des gestionnaires d’actifs traditionnels sur des sujets que certains ont toujours considérés comme non économiques. Alors que la pression monte sur les grands gestionnaires d’actifs sur la façon dont ils « supervisent » les « portefeuilles » de leurs entreprises, ces questions sociales et environnementales sont de plus en plus considérées comme essentielles à la création de valeur et à la durabilité à long terme. La position d’avant-garde sur la responsabilité d’entreprise prise dans la lettre est un indicateur de la manière dont les attentes changeantes des propriétaires d’actifs sont intégrées dans le comportement des gestionnaires d’actifs. Pour les entreprises, ce changement a créé un nouvel ensemble d’attentes, et le potentiel d’un examen plus approfondi de la part des investisseurs qui pourraient continuer à croître dans les années à venir.

 

Thèmes clés — ESG, engagement des actionnaires, administrateurs et activisme

 

La lettre de cette année réitère un certain nombre de thèmes tirés des communications des années précédentes et explique comment BlackRock s’attend à ce que les sociétés améliorent la valeur à long terme pour les actionnaires.

 

ESG et importance de la diversité du conseil d’administration dans la création de valeur à long terme

 

La lettre de Fink souligne la conviction de BlackRock que la gestion des questions ESG est essentielle à une croissance durable. De l’avis de BlackRock, exercer la surveillance de ces défis ainsi que d’autres défis émergents à la création de valeur à long terme relève de la compétence du conseil, qui, selon M. Fink, devrait inclure une diversité de genres, d’ethnies, d’expériences et de façons de penser. Les entreprises devraient s’attendre à ce que BlackRock (et, avec le temps, d’autres grands investisseurs institutionnels) investisse plus de temps pour comprendre la gestion des risques des entreprises liée à leur impact plus large sur les communautés, la société et l’environnement. Cela signifie probablement un soutien croissant aux propositions d’actionnaires sur ces sujets et une pression accrue sur les conseils pour qu’ils démontrent qu’ils s’adressent sérieusement à ces questions.

 

Engagement des actionnaires

 

Citant le besoin d’être des « agents actifs et engagés pour le compte des clients investis avec BlackRock », la lettre appelle à un nouveau modèle d’engagement des actionnaires qui comprend des communications pendant toute l’année sur les moyens d’améliorer la valeur à long terme. Alors que M. Fink note que BlackRock a engagé des ressources importantes pour améliorer ses propres efforts d’intendance des investissements au cours des dernières années, il écrit que « la croissance de l’indexation exige que nous prenions maintenant cette fonction à un nouveau niveau. » BlackRock a l’intention de doubler la taille de ses équipes de supervision.

 

Le rôle du conseil dans la communication et la supervision de la stratégie d’entreprise pour la croissance à long terme

 

Revenant sur un thème commun des communications précédentes, la lettre de cette année souligne l’importance du conseil pour aider les entreprises à définir un cadre stratégique pour la création de valeur à long terme. Bien que le nombre moyen d’heures consacrées par les membres du conseil à leur rôle ait augmenté au cours des dernières années, M. Fink continue d’élever la barre, soulignant que les administrateurs, dont les compétences et l’expérience proviennent uniquement de réunions sporadiques, ne remplissent pas leur devoir envers les actionnaires. La lettre de cette année contient une liste de questions que les sociétés (c.-à-d. les conseils d’administration et la direction) devraient poser pour s’assurer qu’elles sont en mesure de maintenir leur rendement à long terme. Ces questions comprennent explicitement l’impact sociétal des entreprises et les importants changements structurels (tels que les conditions économiques, l’automation et les changements climatiques) qui influencent le potentiel de croissance.

 

S’engager sur l’activisme

 

Fink écrit qu’une « raison centrale de la montée de l’activisme — et des luttes intempestives par procuration — est que les entreprises n’ont pas été assez explicites sur leurs stratégies à long terme. » Il souligne, à titre d’exemple, la réforme fiscale récemment adoptée et son potentiel d’augmentation des flux de trésorerie après impôt, comme un moyen pour les activistes de cibler les entreprises qui ne communiquent pas efficacement leur stratégie à long terme. M. Fink encourage les entreprises à s’engager avec les investisseurs et autres parties prenantes au début du processus lorsque ceux-ci offrent « des idées précieuses — plus souvent que certains détracteurs ne le suggèrent », une observation cohérente avec le soutien sélectif de BlackRock aux activistes dans les luttes par procuration.

 

Recommandations aux émetteurs

 

Cette lettre représente une évolution significative de l’opinion publique de BlackRock sur la responsabilité des entreprises et des conseils d’administration de gérer activement les impacts sociétaux de leurs activités au bénéfice de toutes les parties prenantes. M. Fink affirme que l’objectif des propriétaires d’actifs est non seulement d’améliorer leurs rendements d’investissement, mais aussi de voir le secteur privé relever les défis sociaux qui assureront la « prospérité et la sécurité » de leurs concitoyens.

BlackRock n’est pas le seul à faire ce changement philosophique. Les derniers mois ont fourni des exemples de la façon dont cette nouvelle dynamique façonne les décisions de vote et d’investissement. L’été dernier, des résolutions sur la divulgation des risques climatiques ont été adoptées pour la première fois dans de grandes entreprises énergétiques. En novembre, State Street Global Advisors a révélé qu’elle avait voté contre les administrateurs de 400 entreprises qui, selon elle, n’avaient pas fait d’efforts pour accroître la diversité au sein du conseil. Plus tôt ce mois-ci, JANA Partners et CalSTRS se sont associés pour mener une campagne d’activisme sur la question de savoir si Apple permet aux parents de protéger leurs enfants en utilisant la technologie et JANA a également créé un fonds pour cibler d’autres entreprises.

Afin de répondre aux questions soulevées dans la lettre de M. Fink, les sociétés ouvertes devraient envisager :

Construire une pratique de l’engagement continu tout au long de l’année sur la gouvernance et la durabilité avec leurs meilleurs investisseurs afin de rester en contrôle de l’activisme et d’être au-devant des investisseurs face à un défi.

Expliquer le processus du conseil dans le développement de la stratégie à long terme, dans le rôle de supervision de l’entreprise ainsi que dans les discussions avec les investisseurs.

Présenter les investisseurs à une variété de membres de l’équipe de direction et, à l’occasion, à un ou plusieurs membres du conseil d’administration pour établir des relations et faire confiance, au fil du temps, à tous les dirigeants de l’entreprise.

Décrire comment les administrateurs cultivent la connaissance de l’entreprise en dehors des réunions formelles du conseil d’administration, afin de remplir leur mandat de protection des intérêts à long terme des investisseurs.


*Abe M. Friedman est Chief Executive Officer de CamberView Partners, LLC. Ce billet est basé sur une publication de CamberView par M. Friedman, Krystal Gaboury BerriniChristopher A. Wightman, et Rob Zivnuska. La recherche connexe du Programme sur la gouvernance d’entreprise inclut des résolutions sur la responsabilité sociale  par Scott Hirst (discutées sur le forum  ici).

BlackRock soutient le modèle de gouvernance basé sur la primauté accordée aux parties prenantes


Aujourd’hui, je porte à votre attention, un événement marquant dans l’application des règles de gouvernance des sociétés.

En effet, Larry Fink, le CEO de la société d’investissement BlackRock, dans une lettre adressée aux dirigeants des plus importantes entreprises, rejette le modèle de gouvernance à la Friedman, basé sur la primauté de la satisfaction des actionnaires.

Il prône de surcroît une gouvernance qui adopte le point de vue d’un développement à long terme ainsi que la prise en compte de l’ensemble des parties prenantes.

Je vous invite à lire le résumé ci-dessous, publié par Martin Lipton* sur le site de Harvard Law School Forum on Corporate Governance, afin de vous former une opinion sur le sujet.

Bonne lecture !

 

BlackRock Supports Stakeholder Governance

 

 

 

BlackRock CEO, Larry Fink, who has been a leader in shaping corporate governance, has now firmly rejected Milton Friedman’s shareholder-primacy governance and embraced sustainability and stakeholder-focused governance. January 2018 BlackRock letter to CEOs.

In our Some Thoughts for Boards of Directors in 2018 (discussed on the Forum here), we noted:

The primacy of shareholder value as the exclusive objective of corporations, as articulated by Milton Friedman and then thoroughly embraced by Wall Street, has come under scrutiny by regulators, academics, politicians and even investors. While the corporate governance initiatives of the past year cannot be categorized as an abandonment of the shareholder primacy agenda, there are signs that academic commentators, legislators and some investors are looking at more nuanced and tempered approaches to creating shareholder value.

In his letter, Larry Fink says:

We also see many governments failing to prepare for the future, on issues ranging from retirement and infrastructure to automation and worker retraining. As a result, society increasingly is turning to the private sector and asking that companies respond to broader societal challenges. Indeed, the public expectations of your company have never been greater. Society is demanding that companies, both public and private, serve a social purpose. To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate.

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Without a sense of purpose, no company, either public or private, can achieve its full potential. It will ultimately lose the license to operate from key stakeholders. It will succumb to short-term pressures to distribute earnings, and, in the process, sacrifice investments in employee development, innovation, and capital expenditures that are necessary for long-term growth. It will remain exposed to activist campaigns that articulate a clearer goal, even if that goal serves only the shortest and narrowest of objectives. And ultimately, that company will provide subpar returns to the investors who depend on it to finance their retirement, home purchases, or higher education.

Most importantly, the letter sets out the type of engagement between corporations and their shareholders that BlackRock expects in order to secure its support against activist pressure. While the whole letter needs to be carefully considered in developing investor relations engagement practices, the following is of special note,

In order to make engagement with shareholders as productive as possible, companies must be able to describe their strategy for long-term growth. I want to reiterate our request, outlined in past letters, that you publicly articulate your company’s strategic framework for long-term value creation and explicitly affirm that it has been reviewed by your board of directors. This demonstrates to investors that your board is engaged with the strategic direction of the company. When we meet with directors, we also expect them to describe the board process for overseeing your strategy.

The statement of long-term strategy is essential to understanding a company’s actions and policies, its preparation for potential challenges, and the context of its shorter-term decisions. Your company’s strategy must articulate a path to achieve financial performance. To sustain that performance, however, you must also understand the societal impact of your business as well as the ways that broad, structural trends—from slow wage growth to rising automation to climate change—affect your potential for growth.

While the BlackRock letter is a major step in rejecting activism and short-termism and is a practical guide as to investor relations, it stops short of a critical step in assuring corporations that their efforts are bearing fruit—it does not commit BlackRock to publicly state its support for a corporation under attack by an activist seeking to impose financial engineering or other short-term action before the corporation has to endure a proxy fight. This type of early concrete support would be a major factor in supporting sustainability and long-term investment.

________________________________________

*Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton publication by Mr. Lipton.

Dix thèmes prioritaires à mettre à l’ordre du jour des Boards en 2018


Aujourd’hui, je partage avec vous un article de Kerry E. Berchem et Christine B. LaFollette, associés de la firme Akin Gump Strauss Hauer & Feld, qui donne un aperçu des principales préoccupations des CA en 2018.

Ce qui est intéressant, outre les thèmes choisis, c’est l’impact de l’agenda de l’administration Trump sur la gouvernance des sociétés, notamment les points suivants :

– Assouplissements de la réglementation de la SEC ;

– Applications des directives de la SEC, en autres les efforts de remplacement de la réforme Dodd-Frank ;

– Nouveaux échanges commerciaux et applications de sanctions plus sévères ;

– La réforme de la fiscalité.

Bonne lecture ! Vos commentaires sont les bienvenus.

 

Top 10 Topics for Directors in 2018

 

1. Cybersecurity threats.

Cybersecurity preparedness is essential in 2018 as the risk of, and associated adverse impact of, breaches continue to rise. The past year redefined the upward bounds of the megabreach, including the Yahoo!, Equifax and Uber hacks, and the SEC cyber-attack. As Securities and Exchange Commission (SEC) Co-Directors of Enforcement Stephanie Avakian and Steven Peikin warned, “The greatest threat to our markets right now is the cyber threat.” No crisis should go to waste. Boards should learn from others’ misfortunes and focus on governance, crisis management and recommended best practices relating to cyber issues.

2. Corporate social responsibility.

By embracing corporate social responsibility (CSR) initiatives, boards are able to proactively identify and address legal, financial, operational and reputational risks in a way that can increase the company value to all stakeholders-investors, shareholders, employees and consumers. Boards should invest in CSR programming as an integral element of company risk assessment and compliance programs, and should advocate public reporting of CSR initiatives. Such initiatives can serve as both differentiating and value-enhancing factors. According to recent studies, companies with strong CSR practices are less likely to suffer large price declines, and they tend to have better three- to five-year returns on equity, as well as a greater chance of long-term success.

3. Managing five generations of employees.

In the coming years, employers will face the unprecedented challenge of having five generations of employees in the workplace. Companies and their boards can help address these tensions by better understanding employee expectations, encouraging cross-generation mentorship, and setting an example of generational diversity with respect to company leadership and members of the board. If managed correctly, boards and companies alike can benefit from the wisdom, collaboration and innovation that comes with generational diversity.

4. Corporate strategy.

Strategic planning with a particular focus on potential acquisitions should continue to be a high priority for boards in 2018. Boards should expect to face conflicting pressures, since shareholders will expect companies to invest in both long-term growth opportunities and short-term stock enhancement measures, including the deployment of excess cash for stock buybacks. Cross-border transactions will likely continue to be attractive options, subject to increased regulatory scrutiny in certain industries and of certain buyers.

5. Board composition.

Board diversity is being actively considered and encouraged by regulators, corporate governance groups and investors, both in the United States and internationally, and the current focus on board diversity is likely to continue. Companies should review the applicable diversity-related obligations in their jurisdictions and assess their current board composition, director search and nomination process, board refreshment practices and diversity policies.

6. Shareholder activism.

Shareholder activism has entrenched itself in the modern climate of corporate governance. In particular, shareholder activists have entered industries that, until recently, have generally steered clear of such investors, including the energy sector. There is an increased emphasis by prominent investors on challenging transactions, corporate strategy and traditional corporate governance concerns, such as board composition and staggered boards.

7. Internal investigations.

Boards are increasingly confronted with the possibility of wrongdoing implicating the company or its employees. The decision whether or not to undertake an independent internal investigation, and how, requires careful consideration and consultation with counsel, since the response of the board will have important implications for the ultimate effects on the company.

8. SEC regulatory relief.

We expect that the Trump administration and the Republican-led U.S. Congress will advance reforms in 2018 designed to encourage companies toward public ownership and to facilitate capital formation in both public and private markets. Although smaller companies will likely be the greatest beneficiaries of the proposals currently being considered, many proposals are expected to also benefit large public companies-by eliminating certain duplicative and nonmaterial disclosure requirements and by addressing concerns regarding shareholder proposals.

9. SEC enforcement.

In addition to new leadership at the SEC, ambitious legislative proposals in Congress and further developments in insider trading law have the potential to impact SEC enforcement, although certain enforcement streams, such as accounting and other disclosure-related investigations, are likely to remain largely unchanged. The SEC’s own cyber breach has brought renewed focus at the agency on information security and the integrity of trading systems. Efforts to repeal Dodd-Frank have also advanced through both chambers of Congress.

10. Trade and sanctions.

During the first year of the Trump administration, U.S. sanctions were expanded significantly to include complex new restrictions that target transactions with Iran, Russia, North Korea and Venezuela, among others. Additionally, there has been an uptick in sanctions enforcement actions, including a continued focus by U.S. enforcement agencies on officers and directors that approve, or engage in, proscribed activities. Accordingly, in an effort to avoid running afoul of U.S. sanctions, boards should be vigilant in understanding how these evolving rules apply to the business activities of their companies and management teams.

Special Bonus: Tax reform.

Tax reform has been a top priority for the Trump Administration and Republicans in Congress. After a slow start to 2017 in terms of legislative wins, the House and Senate are poised to send the first comprehensive tax reform bill to the President’s desk in more than thirty years. While the differences between the House and Senate bills still need to be resolved, the new Tax Cuts and Jobs Act is expected to pass by the end of the year and will present both benefits and challenges for companies in implementation and adaptation as unintended consequences are inevitably uncovered in the months and years to come.

The complete publication is available here.

Nouvelles perspectives pour la gouvernance en 2018


Aujourd’hui, je vous propose la lecture d’un excellent article de Martin Lipton* sur les nouvelles perspectives de la gouvernance en 2018. Cet article est publié sur le site du Harvard Law School Forum on Corporate Governance.

Après une brève introduction portant sur les meilleures pratiques observées dans les entreprises cotées, l’auteur se penche sur les paramètres les plus significatifs de la nouvelle gouvernance.

Les thèmes suivants sont abordés dans un contexte de renouvellement de la gouvernance pour le futur :

  1. La notion de l’actionnariat élargie pour tenir compte des parties prenantes ;
  2. L’importance de considérer le développement durable et la responsabilité sociale des entreprises ;
  3. L’adoption de stratégies favorisant l’engagement à long terme ;
  4. La nécessité de se préoccuper de la composition des membres du CA ;
  5. L’approche à adopter eu égard aux comportements d’actionnaires/investisseurs activistes ;
  6. Les attentes eu égard aux rôles et responsabilités des administrateurs.

À l’approche de la nouvelle année 2018, cette lecture devrait compter parmi les plus utiles pour les administrateurs et les dirigeants d’entreprises ainsi que pour toute personne intéressée par l’évolution des pratiques de gouvernance.

Bonne lecture ! Vos commentaires sont appréciés.

 

Some Thoughts for Boards of Directors in 2018

 

 

Introduction

 

As 2017 draws to a conclusion and we reflect on the evolution of corporate governance since the turn of the millennium, a recurring question percolating in boardrooms and among shareholders and other stakeholders, academics and politicians is: what’s next on the horizon for corporate governance? In many respects, we seem to have reached a point of relative stasis. The governance and takeover defense profiles of U.S. public companies have been transformed by the widespread adoption of virtually all of the “best practices” advocated to enhance the rights of shareholders and weaken takeover defenses.

While the future issues of corporate governance remain murky, there are some emerging themes that portend a potentially profound shift in the way that boards will need to think about their roles and priorities in guiding the corporate enterprise. While these themes are hardly new, they have been gaining momentum in prompting a rethinking of some of the most basic assumptions about corporations, corporate governance and the path forward.

First, while corporate governance continues to be focused on the relationship between boards and shareholders, there has been a shift toward a more expansive view that is prompting questions about the broader role and purpose of corporations. Most of the governance reforms of the past few decades targeted the ways in which boards are structured and held accountable to the interests of shareholders, with debates often boiling down to trade-offs between a board-centric versus a more shareholder-centric framework and what will best create shareholder value. Recently, efforts to invigorate a more long-term perspective among both corporations and their investors have been laying the groundwork for a shift from these process-oriented debates to elemental questions about the basic purpose of corporations and how their success should be measured and defined.

In particular, sustainability has become a major, mainstream governance topic that encompasses a wide range of issues such as climate change and other environmental risks, systemic financial stability, labor standards, and consumer and product safety. Relatedly, an expanded notion of stakeholder interests that includes employees, customers, communities, and the economy and society as a whole has been a developing theme in policymaking and academic spheres as well as with investors. As summarized in a 2017 report issued by State Street Global Advisor,

“Today’s investors are looking for ways to put their capital to work in a more sustainable way, one focused on long-term value creation that enables them to address their financial goals and responsible investing needs. So, for a growing number of institutional investors, the environmental, social and governance (ESG) characteristics of their portfolio are key to their investment strategy.”

While both sustainability and expanded constituency considerations have been emphasized most frequently in terms of their impact on long-term shareholder value, they have also been prompting fresh dialogue about the societal role and purpose of corporations.

Another common theme that underscores many of the corporate governance issues facing boards today is that corporate governance is inherently complex and nuanced, and less amenable to the benchmarking and quantification that was a significant driver in the widespread adoption of corporate governance “best practices.” Prevailing views about what constitutes effective governance have morphed from a relatively binary, check-the-box mentality—such as whether a board is declassified, whether shareholders can act by written consent and whether companies have adopted majority voting standards—to tackling questions such as how to craft a well-rounded board with the skills and experiences that are most relevant to a particular corporation, how to effectively oversee the company’s management of risk, and how to forge relationships with shareholders that meaningfully enhance the company’s credibility. Companies and investors alike have sought to formulate these “next generation” governance issues in a way that facilitates comparability, objective assessment and accountability. For example, many companies have been including skills matrices in their proxy statements to show, in a visual snapshot, that their board composition encompasses appropriate skills and experiences. Yet, to the extent that complicated governance issues cannot be reduced to simple, user-friendly metrics, it remains to be seen whether this will prompt new ways of defining “good” corporate governance that require a deeper understanding of companies and their businesses, and the impact that could have on the expectations and practices of stakeholders.

Against this backdrop, a few of the more significant issues that boards of directors will face in the coming year, as well as an overview of some key roles and responsibilities, are highlighted below. Parts II through VI contain brief summaries of some of the leading proposals and thinking for corporate governance of the future. In Part VII, we turn to the issues boards of directors will face in 2018 and suggestions as to how to prepare to deal with them.

 

Expanded Stakeholders

 

The primacy of shareholder value as the exclusive objective of corporations, as articulated by Milton Friedman and then thoroughly embraced by Wall Street, has come under scrutiny by regulators, academics, politicians and even investors. While the corporate governance initiatives of the past year cannot be categorized as an abandonment of the shareholder primacy agenda, there are signs that academic commentators, legislators and some investors are looking at more nuanced and tempered approaches to creating shareholder value.

In his 2013 book, Firm Commitment: Why the Corporation is Failing Us and How to Restore Trust in It, and a series of brilliant articles and lectures, Colin Mayer of the University of Oxford has convincingly rejected shareholder value primacy and put forth proposals to reconceive the business corporation so that it is committed to all its stakeholders, including the community and the general economy. His new book, Prosperity: Better Business Makes the Greater Good, to be published by Oxford University Press in 2018, continues the theme of his earlier publications and will be required reading.

Similarly, an influential working paper by Oliver Hart and Luigi Zingales argues that the appropriate objective of the corporation is shareholder welfare rather than shareholder wealth. Hart and Zingales advocate that corporations and asset managers should pursue policies consistent with the preferences of their investors, specifically because corporations may be able to accomplish objectives that shareholders acting individually cannot. In such a setting, the implicit separability assumption underlying Milton Friedman’s theory of the purpose of the firm fails to produce the best outcome for shareholders. Indeed, even though Hart and Zingales propose a revision that remains shareholder-centered, by recognizing the unique capability of corporations to engage in certain kinds of activities, their theory invites a careful consideration of other goals such as sustainability, board diversity and employee welfare, and even such social concerns, as, for example, reducing mass violence or promoting environmental stewardship. Such a model of corporate decision-making emphasizes the importance of boards establishing a relationship with significant shareholders to understand shareholder goals, beyond simply assuming that an elementary wealth maximization framework is the optimal path.

Perhaps closer to a wholesale rejection of the shareholder primacy agenda, an article by Joseph L. Bower and Lynn S. Paine, featured in the May-June 2017 issue of the Harvard Business Review, attacks the fallacies of the economic theories that have been used since 1970 to justify shareholder-centric corporate governance, short-termism and activist attacks on corporations. In questioning the benefits of hedge fund activism, Bower and Paine argue that some of the value purportedly created for shareholders by activists is not actually value created, but rather value transferred from other parties or from the public purse, such as shifting a company’s tax domicile to a lower-tax jurisdiction or eliminating exploratory research and development. The article supports the common sense notion that boards have a fiduciary duty not just to shareholders, but also to employees, customers and the community—a constituency theory of governance penned into law in a number of states’ business corporation laws.

Moreover, this theme has been metastasizing from a theoretical debate into specific reform initiatives that, if implemented, could have a direct impact on boards. For example, Delaware and 32 other states and the District of Columbia have passed legislation approving a new corporate form—the benefit corporation —a for-profit corporate entity with expanded fiduciary obligations of boards to consider other stakeholders in addition to shareholders. Benefit corporations are mandated by law to consider their overall positive impact on society, their workers, the communities in which they operate and the environment, in addition to the goal of maximizing shareholder profit.

This broader sense of corporate purpose has been gaining traction among shareholders. For example, the endorsement form for the Principles published by the Investor Stewardship Group in 2017 includes:

“[I]t is the fiduciary responsibility of all asset managers to conduct themselves in accordance with the preconditions for responsible engagement in a manner that accrues to the best interests of stakeholders and society in general, and that in so doing they’ll help to build a framework for promoting long-term value creation on behalf of U.S. companies and the broader U.S. economy.”

Notions of expanded stakeholder interests have often been incorporated into the concept of long-termism, and advocating a long-term approach has also entailed the promotion of a broader range of stakeholder interests without explicitly eroding the primacy of shareholder value. Recently, however, the interests of other stakeholders have increasingly been articulated in their own right rather than as an adjunct to the shareholder-centric model of corporate governance. Ideas about the broader social purpose of corporations have the potential to drive corporate governance reforms into uncharted territory requiring navigation of new questions about how to measure and compare corporate performance, how to hold companies accountable and how to incentivize managers.

 

Sustainability

 

The meaning of sustainability is no longer limited to describing environmental practices, but rather more broadly encompasses the sustainability of a corporation’s business model in today’s fast-changing world. The focus on sustainability encompasses the systemic sustainability of public markets and pressures boards to think about corporate strategy and how governance should be structured to respond to and compete in this environment.

Recently, the investing world has seen a rise of ESG-oriented funds—previously a small, niche segment of the investment community. Even beyond these specialized funds, ESG has also become a focus of a broad range of traditional investment funds and institutional investors. For instance, BlackRock and State Street both offer their investors products that specifically focus on ESG-oriented topics like climate change and impact investing—investing with an intention of generating a specific social or environmental outcome alongside financial returns.

At the beginning of 2017, State Street’s CEO Ronald P. O’Hanley wrote a letter advising the boards of the companies in which State Street invests that State Street defines sustainability “as encompassing a broad range of environmental, social and governance issues that include, for example, effective independent board leadership and board composition, diversity and talent development, safety issues, and climate change.” The letter was a reminder that broader issues that impact all of a company’s stakeholders may have a material effect on a company’s ability to generate returns. Chairman and CEO of BlackRock, Laurence D. Fink remarked similarly in his January 2017 letter that

“[e]nvironmental, social and governance factors relevant to a company’s business can provide essential insights into management effectiveness and thus a company’s long-term prospects. We look to see that a company is attuned to the key factors that contribute to long-term growth: sustainability of the business model and its operations, attention to external and environmental factors that could impact the company, and recognition of the company’s role as a member of the communities in which it operates.”

Similarly, the UN Principles for Responsible Investment remind corporations that ESG factors should be incorporated into all investment decisions to better manage risk and generate sustainable, long-term returns.

Shareholders’ engagement with ESG issues has also increased. Previously, ESG was somewhat of a fringe issue with ESG-related shareholder proxy proposals rarely receiving significant shareholder support. This is no longer the case. In the 2017 proxy season, the two most common shareholder proposal topics related to social (201 proposals) and environmental (144 proposals, including 69 on climate change) issues, as opposed to 2016’s top two topics of proxy access (201) and social issues (160). Similar to cybersecurity and other risk management issues, sustainability practices involve the nuts and bolts of operations—e.g., life-cycle assessments of a product and management of key performance indicators (KPIs) using management information systems that facilitate internal and public reporting—and provide another example of an operational issue that has become a board/governance issue.

The expansion of sustainability requires all boards—not just boards of companies with environmentally sensitive businesses—to be aware of and be ready to respond to ESG-related concerns. The salient question is whether “best” sustainability practices will involve simply the “right” messaging and disclosures, or whether investors and companies will converge on a method to measure sustainability practices that affords real impact on capital allocation, risk-taking and proactive—as opposed to reactive—strategy.

Indeed, measurement and accountability are perhaps the elephants in the room when it comes to sustainability. Many investors appear to factor sustainability into their investing decisions. Other ways to measure sustainability practices include the presence of a Chief Sustainability Officer or Corporate Responsibility Committee. However, while there are numerous disclosure frameworks relating to sustainability and ESG practices, there is no centralized ESG rating system. Further, rating methodologies and assessments of materiality vary widely across ESG data providers and disclosure requirements vary across jurisdictions.

Pending the development of clear and agreed standards to benchmark performance on ESG issues, boards of directors should focus on understanding how their significant investors value and measure ESG issues, including through continued outreach and engagement with investors focusing on these issues, and should seek tangible agreed-upon methodologies to address these areas, while also promoting the development of improved metrics and disclosure.

Promoting a Long-Term Perspective

 

As the past year’s corporate governance conversation has explored considerations outside the goal of maximizing shareholder value, the conversation within the shareholder value maximization framework has also continued to shift toward an emphasis on long-term value rather than short term. A February 2017 discussion paper from the McKinsey Global Institute in cooperation with Focusing Capital on the Long Term found that long-term focused companies, as measured by a number of factors including investment, earnings quality and margin growth, generally outperformed shorter-term focused companies in both financial and other performance measures. Long-term focused companies had greater, and less volatile, revenue growth, more spending on research and development, greater total returns to shareholders and more employment than other firms.

This empirical evidence that corporations focused on stakeholders and long-term investment contribute to greater economic growth and higher GDP is consistent with innovative corporate governance initiatives. A new startup, comprised of veterans of the NYSE and U.S. Treasury Department, is working on creating the “Long-Term Stock Exchange”—a proposal to build and operate an entirely new stock exchange where listed companies would have to satisfy not only all of the normal SEC requirements to allow shares to trade on other regulated U.S. stock markets but, in addition, other requirements such as tenured shareholder voting power (permitting shareholder voting to be proportionately weighted by the length of time the shares have been held), mandated ties between executive pay and long-term business performance and disclosure requirements informing companies who their long-term shareholders are and informing investors of what companies’ long-term investments are.

In addition to innovative alternatives, numerous institutional investors and corporate governance thought leaders are rethinking the mainstream relationship between all boards of directors and institutional investors to promote a healthier focus on long-term investment. While legislative reform has taken a stronger hold in the U.K. and Europe, leading American companies and institutional investors are pushing for a private sector solution to increase long-term economic growth. Commonsense Corporate Governance Principles and The New Paradigm: A Roadmap for an Implicit Corporate Governance Partnership Between Corporations and Investors to Achieve Sustainable Long-Term Investment and Growth were published in hopes of recalibrating the relationship between boards and institutional investors to protect the economy against the short-term myopic approach to management and investing that promises to impede long-term economic prosperity. Under a similar aim, the Investor Stewardship Group published its Stewardship Principles and Corporate Governance Principles, set to become effective in January 2018, to establish a framework with six principles for investor stewardship and six principles for corporate governance to promote long-term value creation in American business. A Synthesized Paradigm for Corporate Governance, Investor Stewardship, and Engagement provides a synthesis of these and others in the hope that companies and investors would agree on a common approach. In fact, over 100 companies to date have signed The Compact for Responsive and Responsible Leadership: A Roadmap for Sustainable Long-Term Growth and Opportunity, sponsored by the World Economic Forum, which includes the key features of The New Paradigm.

Similarly, the BlackRock Investment Stewardship team has proactively outlined five focus areas for its engagement efforts: Governance, Corporate Strategy for the Long-Term, Executive Compensation that Promotes Long-Termism, Disclosure of Climate Risks, and Human Capital Management. BlackRock’s outline reflects a number of key trends, including heightened transparency by institutional investors, more engagement by “passive” investors, and continued disintermediation of proxy advisory firms. In the United Kingdom, The Investor Forum was founded to provide an intermediary to represent the views of its investor members to investee companies in the hope of reducing activism, and appears to have achieved a successful start.

Similarly, in June 2017, the Coalition for Inclusive Capitalism and Ernst & Young jointly announced the launch of a project on long-term value creation. Noting among other elements that trust and social cohesion are necessary ingredients for the long-term success of capitalism, the project will emphasize reporting mechanisms and credible measurements supporting long-term value, developing and testing a framework to better reflect the full value companies create beyond simply financial value. There is widespread agreement that focusing on long-term investment will promote long-term economic growth. The next step is a consensus between companies and investors on a common path of action that will lead to restored trust and cohesion around long-term goals.

 

Board Composition

 

The corporate governance conversation has become increasingly focused on board composition, including board diversity. Recent academic studies have confirmed and expanded upon existing empirical evidence that hedge fund activism has been notably counterproductive in increasing gender diversity—yet another negative externality of this type of activism. Statistical evidence supports the hypothesis that the rate of shareholder activism is higher toward female CEOs holding all else equal, including industries, company sizes and levels of performance. A study forthcoming in the Journal of Applied Psychology investigated the reasons that hedge fund activists seemingly ignore the evidence for gender-diverse boards in their choices for director nominees and disproportionately target female CEOs. The authors suggest these reasons may include subconscious biases of hedge funds against women leaders due to perceptions and cultural attitudes.

In the United Kingdom, the focus on board diversity has spread into policy. The House of Commons Business, Energy, and Industrial Strategy Committee report on Corporate Governance, issued in 2017, included recommendations for improving ethnic, gender and social diversity of boards, noting that “[to] be an effective board, individual directors need different skills, experience, personal attributes and approaches.” The U.K. government’s response to this report issued in September 2017 notes its agreement on various diversity-related issues, stating that the “Government agrees with the Committee that it makes business sense to recruit directors from as broad a base as possible across the demographic of the UK” and further, tying into themes of stakeholder capitalism, that the “Government believes that greater diversity within the boardroom can help companies connect with their workforces, supply chains, customers and shareholders.”

In the United States, institutional investors are focused on a range of board composition issues, including term limits, board refreshment, diversity, skills matrices and board evaluation processes, as well as disclosures regarding these issues. In a recent letter, Vanguard explained that it considers the board to be “one of a company’s most critical strategic assets” and looks for a “high-functioning, well-composed, independent, diverse, and experienced board with effective ongoing evaluation practices,” stating that “Good governance starts with a great Board.” The New York Comptroller’s Boardroom Accountability Project 2.0 is focused on increasing diversity of boards in order to strengthen their independence and competency. In connection with launching this campaign, the NYC Pension Funds asked the boards of 151 U.S. companies to disclose the race and gender of their directors alongside board members’ skills in a standardized matrix format. And yet, similar to the difficulty of measuring and comparing sustainability efforts of companies, investors and companies alike continue to struggle with how to measure and judge a board’s diversity, and board composition generally, as the conversation becomes more nuanced. Board composition and diversity aimed at increasing board independence and competency is not a topic that lends itself to a “check-the-box” type measurement.

In light of the heightened emphasis on board composition, boards should consider increasing their communications with their major shareholders about their director selection and nomination processes to show the board understands the importance of its composition. Boards should consider disclosing how new director candidates are identified and evaluated, how committee chairs and the lead director are determined, and how the operations of the board as a whole and the performance of each director are assessed. Boards may also focus on increasing tutorials, facility visits, strategic retreats and other opportunities to increase the directors’ understanding of the company’s business—and communicate such efforts to key shareholders and constituents.

 

Activism

 

Despite the developments and initiatives striving to protect and promote long-term investment, the most dangerous threat to long-term economic prosperity has continued to surge in the past year. There has been a significant increase in activism activity in countries around the world and no slowdown in the United States. The headlines of 2017 were filled with activists who do not fit the description of good stewards of the long-term interests of the corporation. A must-read Bloombergarticle described Paul Singer, founder of Elliott Management Corp., which manages $34 billion of assets, as “aggressive, tenacious and litigious to a fault” and perhaps “the most feared activist investor in the world.” Numerous recent activist attacks underscore that the CEO remains a favored activist target. Several major funds have become more nuanced and taken a merchant banker approach of requesting board representation to assist a company to improve operations and strategy for long-term success. No company is too big for an activist attack. Substantial new capital has been raised by activist hedge funds and several activists have created special purpose funds for investment in a single target. As long as activism remains a serious threat, the economy will continue to experience the negative externalities of this approach to investing—companies attempting to avoid an activist attack are increasingly managed for the short term, cutting important spending on research and development and focusing on short-term profits by effecting share buybacks and paying dividends at the expense of investing in a strategy for long-term growth.

To minimize the impact of activist attacks, boards must focus on building relationships with major institutional investors. The measure of corporate governance success has shifted from checking the right boxes to building the right relationships. Major institutional investors have reiterated their commitment to bringing a long-term perspective to public companies, including, for example, Vanguard, which sent an open letter to directors of public companies world-wide explaining that a long-term perspective informed every aspect of its investment approach. Only by forging relationships of trust and credibility with long-term shareholders can a company expect to gain support for its long-term strategy when it needs it. In many instances, when an activist does approach, a previously established relationship provides a foundation for management and the board to persuade key shareholders that short-term activism is not in their best interest—an effort that is already showing some promise. General Motors’ resounding defeat of Greenlight Capital’s attempt to gain shareholder approval to convert its common stock into two classes shows a large successful company’s ability to garner the

support of its institutional investors against financial engineering. Trian’s recent proxy fight against Procter & Gamble shows the importance of proactively establishing relationships with long-term shareholders. Given Trian’s proven track record of success in urging changes in long-term strategy, Nelson Peltz was able to gain support for a seat on P&G’s board from proxy advisors and major institutional investors. We called attention to importantlessons from this proxy fight (discussed on the Forum here and here).

 

Spotlight on Boards

 

The ever-evolving challenges facing corporate boards prompts an updated snapshot of what is expected from the board of directors of a major public company—not just the legal rules, but also the aspirational “best practices” that have come to have equivalent influence on board and company behavior. In the coming year, boards will be expected to:

Oversee corporate strategy and the communication of that strategy to investors;

Set the tone at the top to create a corporate culture that gives priority to ethical standards, professionalism, integrity and compliance in setting and implementing strategic goals;

Choose the CEO, monitor the CEO’s and management’s performance and develop a succession plan;

Determine the agendas for board and committee meetings and work with management to assure appropriate information and sufficient time are available for full consideration of all matters;

Determine the appropriate level of executive compensation and incentive structures, with awareness of the potential impact of compensation structures on business priorities and risk-taking, as well as investor and proxy advisor views on compensation;

Develop a working partnership with the CEO and management and serve as a resource for management in charting the appropriate course for the corporation;

Oversee and understand the corporation’s risk management and compliance efforts, and how risk is taken into account in the corporation’s business decision-making; respond to red flags when and if they arise (see Risk Management and the Board of Directors, discussed on the Forum here);

Monitor and participate, as appropriate, in shareholder engagement efforts, evaluate potential corporate governance proposals and anticipate possible activist attacks in order to be able to address them more effectively;

Evaluate the board’s performance on a regular basis and consider the optimal board and committee composition and structure, including board refreshment, expertise and skill sets, independence and diversity, as well as the best way to communicate with investors regarding these issues;

Review corporate governance guidelines and committee charters and tailor them to promote effective board functioning;

Be prepared to deal with crises; and

Be prepared to take an active role in matters where the CEO may have a real or perceived conflict, including takeovers and attacks by activist hedge funds focused on the CEO.

To meet these expectations, major public companies should seek to:

Have a sufficient number of directors to staff the requisite standing and special committees and to meet expectations for diversity;

Have directors who have knowledge of, and experience with, the company’s businesses, even if this results in the board having more than one director who is not “independent”;

Have directors who are able to devote sufficient time to preparing for and attending board and committee meetings;

Meet investor expectations for director age, diversity and periodic refreshment;

Provide the directors with the data that is critical to making sound decisions on strategy, compensation and capital allocation;

Provide the directors with regular tutorials by internal and external experts as part of expanded director education; and

Maintain a truly collegial relationship among and between the company’s senior executives and the members of the board that enhances the board’s role both as strategic partner and as monitor.

______________________________________

*Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton publication by Mr. Lipton, Steven A. Rosenblum, Karessa L. Cain, Sabastian V. Niles, Vishal Chanani, and Kathleen C. Iannone.

Se poser les bonnes questions en cette période incertaine | Deloitte


Deloitte a récemment publié un document très important intitulé Courage under fire : Embracing disruption (en anglais seulement) dans lequel trois administrateurs chevronnés échangent leurs points de vue sur les grandes perturbations que les organisations mondiales sont appelées à connaître en 2017.

Les questions posées sont les suivantes :

Étant donné les attentes croissantes envers les conseils d’administration, quelles devraient être les priorités des administrateurs ?

Les appels à une meilleure communication de l’information ne cessent de se faire entendre. Comment les conseils réagissent-ils ?

Les organisations sont nombreuses à subir des perturbations numériques. Est-ce un risque incontrôlable de plus à gérer ?

Les perturbations numériques créent beaucoup d’incertitude. Les conseils d’administration réussissent-ils à bien s’adapter à cette réalité ?

Vous pouvez télécharger le document ci-dessous.

Bonne lecture !

Courage under fire : Embracing disruption |  Deloitte

 

 

Le point sur la gouvernance au Canada en 2016 | Rapport de Davies Ward Phillips Vineberg


Le rapport annuel de Davies est toujours très attendu car il brosse un tableau très complet de l’évolution de la gouvernance au Canada durant la dernière année.

Le document qui vient de sortir est en anglais mais la version française devrait suivre dans peu de temps.

Je vous invite donc à en prendre connaissance en lisant le court résumé ci-dessous et, si vous voulez en savoir plus sur les thèmes abordés, vous pouvez télécharger le document de 100 pages sur le site de l’entreprise.

Cliquez sur le lien ci-dessous. Bonne lecture !

Rapport de Davies sur la gouvernance 2016

 

Davies Governance Insights 2016, provides analysis of the top governance trends and issues important to Canadian boards, senior management and governance observers.

insights_governance_2016_fr_thumbnail

The 2016 edition provides readers with our take on important topics ranging from shareholder engagement and activism to leadership diversity and the rise in issues facing boards and general counsel. We also provide practical guidance for boards and senior management of public companies and their investors on these and many other corporate governance topics that we expect will remain under focus in the 2017 proxy season.

 

Le point sur la gouvernance au Canada en 2016 | Rapport de Davies Ward Phillips Vineberg


Le rapport annuel de Davies est toujours très attendu car il brosse un tableau très complet de l’évolution de la gouvernance au Canada durant la dernière année.

Le document qui vient de sortir est en anglais mais la version française devrait suivre dans peu de temps.

Je vous invite donc à en prendre connaissance en lisant le court résumé ci-dessous et, si vous voulez en savoir plus sur les thèmes abordés, vous pouvez télécharger le document de 100 pages sur le site de l’entreprise.

Cliquez sur le lien ci-dessous. Bonne lecture !

Rapport de Davies sur la gouvernance 2016

 

Davies Governance Insights 2016, provides analysis of the top governance trends and issues important to Canadian boards, senior management and governance observers.

insights_governance_2016_fr_thumbnail

The 2016 edition provides readers with our take on important topics ranging from shareholder engagement and activism to leadership diversity and the rise in issues facing boards and general counsel. We also provide practical guidance for boards and senior management of public companies and their investors on these and many other corporate governance topics that we expect will remain under focus in the 2017 proxy season.

 

Éthique, démission et parachutes dorés | une délicate alchimie


Le séminaire à la maîtrise de Gouvernance de l’entreprise (DRT-7022) dispensé  par Ivan Tchotourian*, professeur en droit des affaires de la Faculté de droit de l’Université Laval, entend apporter aux étudiants une réflexion originale sur les liens entre la sphère économico-juridique, la gouvernance des entreprises et les enjeux sociétaux actuels.

Le séminaire s’interroge sur le contenu des normes de gouvernance et leur pertinence dans un contexte de profonds questionnements des modèles économique et financier. Dans le cadre de ce séminaire, il est proposé aux étudiants de l’hiver 2016 d’avoir une expérience originale de publication de leurs travaux de recherche qui ont porté sur des sujets d’actualité de gouvernance d’entreprise.

Cette publication numérique entend contribuer au partage des connaissances en gouvernance à une large échelle. Le présent billet expose le résultat des recherches de Margaux Mortéo et de Léonie Pamerleau sur les liens entre la rémunération des dirigeants, les effets de la démission du PDG et les questions éthiques sous-jacentes.

Dans le cadre de ce billet, les auteurs reviennent sur l’affaire Volkswagen, notamment sur la légitimité des parachutes dorés dans les cas de démission « obligée ». Ils se questionnent également sur les valeurs éthiques dans de tels cas.

Bonne lecture ! Vos commentaires sont appréciés.

 

Éthique, démission et parachutes dorés | une délicate alchimie

par

Margaux Mortéo et Léonie Pamerleau

 

La légitimité des parachutes dorés : Le cas de Volkswagen

Volkswagen, une entreprise automobile leader sur le marché, a fait face à l’un des plus gros scandales dans ce secteur[1]. À la suite de la découverte des tricheries utilisées par la firme afin de commercialiser des véhicules diesel tout en cachant leurs effets polluants, le PDG de Volkswagen (Martin Winterkorn) a décidé le 23 septembre 2015 de démissionner de son poste. Or, cette démission, qui s’inscrit dans un processus quasi habituel des dirigeants face à de telles circonstances, ne semble pas si légitime au regard de certains aspects en raison de l’énorme parachute doré, aussi appelé golden parachute. Cela soulève en effet plusieurs aspects, notamment la responsabilité d’un dirigeant face à des dégâts causés à l’environnement et ce que cela engendre au regard de la réputation de l’entreprise, « actif stratégique le plus important sur le plan de la création de valeur » [2].

Une démission en quête de légitimité ?

Cette pratique est loin d’être un cas isolé. En juillet dernier, le PDG de Toshiba (Hisao Tanaka) a démissionné de ses fonctions suite à un scandale comptable [3]. Cette pratique démontre une quête de légitimité de la part des puissants dirigeants de sociétés. La raison est simple : ces derniers semblent entachés d’une immunité du fait de leur position, mais décident cependant de céder leur place pour le bien-être de leur entreprise, en portant sur leurs épaules le poids de l’entière responsabilité. Martin Winterkorn a même déclaré que son départ avait pour but de permettre à Volkswagen de « (…) prendre un nouveau départ ».

h-CEO-PAY-640x362

Cette décision, très médiatisée, tente de redorer l’image de l’entreprise, sans compter le fait que le PDG n’a pas tout perdu dans l’affaire.

L’étonnante attribution d’un parachute doré confortable

Démissionner semble honorable, mais quand Martin Winterkorn a la garantie d’obtenir près de 28,5 millions d’euros et de prétendre jusqu’à 60 millions d’euros, les objectifs de son départ peuvent avoir le mérite d’être revus. Bien que paraissant légitime, la démission d’un dirigeant de société cotée est souvent accompagnée de golden parachute. Ce qui est intéressant c’est que le contrat qui instituait Winterkorn à la tête d’une des plus importantes sociétés automobiles prévoyait que ce parachute doré lui serait accordé… quelles que soient les raisons de son départ.

La presse n’a pas manqué à son devoir d’information du public en dénonçant cette situation d’autant plus que « (…) les parachutes dorés ainsi que les bonus et primes des dirigeants sont de plus en plus élevés et dépassent ce que l’on peut imaginer » [4] et que l’échec (et le départ) d’un dirigeant fait « (…) partie des risques normaux du métier de patron » [5].

Face à d’énormes scandales, comme celui de Volkswagen, il est normal de se questionner sur la légitimité de telles sommes. Bien que le dirigeant ait pour ambition un nouveau départ de la société, pourquoi dans ce cas bénéficier de bonus qui coûtent à la société ? L’illusion est bonne, mais elle n’est somme toute pas parfaite. Martin Winterkorn a laissé croire que son intérêt n’était porté que vers les actionnaires, les administrateurs et les parties prenantes, mais le fait de pouvoir prétendre à 60 millions d’euros remet tout en cause.

Et l’éthique dans tout cela ?

Si la loi permet de telles sommes de départ, et ce même en cas de fraude, quand est-il de l’éthique ? Ces indemnités de départ, quel que soit leur nom sont-elles légitimes dans un contexte de prise de conscience de la responsabilité sociétale des entreprises (RSE) ? Les parties prenantes sont-elles respectées face à ce genre de comportement ?

Sachant qu’à l’heure actuelle il est impossible d’ignorer complètement les enjeux entourant la RSE, il est normal de se questionner relativement à la légitimité de parachutes dorés [6]. Dans le cas de Volkswagen plus précisément, il est possible de voir les actionnaires se lever et tenter d’empêcher le président d’obtenir son golden parachute, notamment au regard des résultats boursiers moyens de l’entreprise [7].

Vont-ils le faire ? Ne sont-ce pas aux administrateurs eux-mêmes à réagir [8] ? Tant de questions et d’interrogations en réponse au scandale du géant automobile allemand restent en attente de réponses.


[1] Frank Zeller, « Tests manipulés : Volkswagen savait », LaPresse, 27 septembre 2015, en ligne : http://auto.lapresse.ca/actualites/volkswagen/201509/27/01-4904281-tests-manipules-volkswagen-savait.php (consulté le 30 novembre 2015).

[2] Olivier Mondet, « La réputation de l’entreprise est-elle un actif spécifique ? », CREG Versailles, vendredi 21 mars 2014, en ligne : http://www.creg.ac-versailles.fr/spip.php?article732 (consulté le 30 novembre 2015).

[3] « Démission du patron de Toshiba, impliqué dans un vaste scandale comptable », L’OBS à la une, 21 juillet 2015, en ligne : http://tempsreel.nouvelobs.com/topnews/20150721.AFP4308/scandale-toshiba-demission-du-pdg-hisao-tanaka-et de-deux-de-ses-predecesseurs.html (consulté le 30 novembre 2015).

[4] Ivan Tchotourian, « Une décennie d’excès des dirigeants en matière de rémunération : repenser la répartition des pouvoirs dans l’entreprise : une solution perse porteuse de risques », Paris, LGDJ, 2011, p. 9, en ligne : https://papyrus.bib.umontreal.ca/xmlui/bitstream/handle/1866/5208/ChapitreRemunerationetPouvoirs2011_IT.pdf (consulté le 10 décembre 2015).

[5] J. El Ahdab, « Les parachutes dorés et autres indemnités conventionnelles de départ des dirigeants : approche pluridisciplinaire et comparée », Rev. Sociétés, 2004, p. 18.

[6] Christine Neau-Leduc, « La responsabilité sociale de l’entreprise : quels enjeux juridique ? » Droit social, 2006, p. 956.

[7] Jena McGregor, « Outgoing Volkswagen CEO’s exit package could top $67 million », Washington Post, 24 septembre 2015.

[8] « Boards are responsible for limiting excess pay », Financial Times, 17 avril 2016, en ligne : http://www.ft.com/cms/s/194a5de6-02fa-11e6-af1d-c47326021344, Authorised=false.html?siteedition=uk&_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2F194a5de6-02fa-11e6-af1d-c47326021344.html%3Fsiteedition%3Duk&_i_referer=&classification=conditional_standard&iab=barrier-app#ixzz4677JCobn (consulté le 18 avril 2015).

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*Ivan Tchotourian, professeur en droit des affaires, codirecteur du Centre d’Études en Droit Économique (CÉDÉ), membre du Groupe de recherche en droit des services financiers (www.grdsf.ulaval.ca), Faculté de droit, Université Laval.