Étiquette : Réglementation

L’internationalisation des codes de gouvernance contribue à la clarification des rôles des activistes


Voici un article de sensibilisation à l’internationalisation des règles de bonne gouvernance et des rôles respectifs que les actionnaires-investisseurs et les conseils d’administration sont appelés à prendre en compte.

On assiste à une plus grande volonté des actionnaires, réunis en groupes d’investisseurs institutionnels, en société de prise de position importante (hedge funds ou actionnaires activistes), de s’engager dans la gouvernance des entreprises. En fait, on peut parler d’un actionnariat de plus en plus actif à l’échelle internationale.

Cet article, publié par Jennifer G. Hill, professeure de droit corporatif à l’université de Sydney, atteste clairement, à l’instar du UK Stewardship Code, de l’importance mondiale des guides de gouvernance qui réclament un rééquilibrage des pouvoirs entre les CA (fiduciaires des actionnaires) et les regroupements d’actionnaires.

Ces codes de gouvernance émanent de différentes sources, mais tous mettent l’accent sur la gestion à long terme des affaires des sociétés. L’auteure mentionne que les codes de conduite peuvent être introduits (1) par les organismes réglementaires des pays (2) par certains regroupements industriels ou (3) par les actionnaires-investisseurs eux-mêmes.

L’article conclut que l’adoption de ces nouveaux codes de Stewardship peut aider à définir de nouvelles règles de conduite qui permettront de départager les « bons activistes des mauvais activistes » !

Les conseils d’administration doivent donc être de plus en plus conscients que le phénomène de l’engagement et de l’activisme des actionnaires est un mouvement mondial, et qu’ils devront faire preuve d’ouverture dans leur rôle de fiduciaire.

Bonne lecture ! Vos commentaires sont appréciés.

 

Good Activist/Bad Activist: The Rise of International Stewardship Codes

 

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Conflicting attitudes toward shareholder engagement and activism have colored the ongoing debate about the effect of shareholder influence on corporate governance. In the US, a distinctly negative view of investor engagement underpins much recent discussion on this topic—from the shareholder empowerment debate to current concerns about investor activism and private ordering through shareholder-initiated bylaws.

Outside the United States, however, a powerful alternative narrative about the benefits of increased shareholder engagement in corporate governance has gained traction in many major jurisdictions. This positive narrative treats investors as having an important participatory role in corporate governance, which is integral to accountability. It supports a radically different regulatory response to its negative counterpart, suggesting that shareholders should be granted stronger rights and/or encouraged to make greater use of their existing powers to engage with the companies in which they invest.

In my recent article, Good Activist/Bad Activist: The Rise of International Stewardship Codes, I examine a particularly important recent manifestation of this positive view of shareholder engagement—stewardship codes. My article, which will appear in 41 Seattle U. L. Rev. (special issue on Investor Time Horizons, forthcoming December 2017), charts the rise of international Stewardship Codes and discusses the implications of this development for the balance of power between shareholders and boards in public corporations.

International Stewardship Codes, which originated in the United Kingdom following the global financial crisis, are now proliferating throughout the world, especially in Asia. These codes indicate that in some jurisdictions, the debate today is less about controlling shareholder power than about constraining board power, by encouraging shareholders to exercise their legal rights and increase their level of engagement in corporate governance. The codes represent a generalized regulatory response to a common complaint following the 2007-2008 global financial crisis—namely, “where were the shareholders?”.

Stewardship Codes seek to ensure that shareholders, particularly institutional investors, are active players in corporate governance. Proponents of these codes have made large claims about their benefits. The UK Stewardship Code has stated, for example, that “the goal of stewardship is to promote the long term success of companies” and that “[e]ffective stewardship benefits companies, investors and the economy as a whole.”

Many countries have now jumped on the Stewardship Code bandwagon. The various Stewardship Codes around the world emanate, however, from different issuing bodies, and this can influence a code’s effectiveness. There are at least three distinct categories of Stewardship Code:

  1. those issued by regulators or quasi-regulators on behalf of the government;
  2. those initiated by certain industry participants; and
  3. codes adopted by investors themselves.

The United States joined this third category in January 2017, when the Investor Stewardship Group (ISG) released its Framework for US Stewardship and Governance (discussed on the Forum here). Although the ISG framework is voluntary, it has the backing of some of the world’s largest asset managers, including founding members, such as BlackRock, State Street Global Advisors and Vanguard.

Many of the Stewardship Codes that now operate around the world are based on the UK Stewardship Code or Japanese Stewardship Code. My article examines similarities and differences in these international Stewardship Codes. As the article shows, the recent adoption of the ISG Stewardship Principles in the US has not occurred in a vacuum. Rather, it is part of a sustained international push for greater investor involvement in corporate governance and exemplifies the increasing globalization of corporate governance.

These developments and competing narratives concerning the role of shareholders in corporate governance have significant regulatory implications. In particular, they pose future challenges to regulators in seeking to differentiate between “good activists” and “bad activists”.

The complete article is available here.

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


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

Cette semaine, j’ai relevé les dix principaux billets.

Bonne lecture !

 

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  1. 2017 Proxy Season Review: Compensation
  2. P&G Proxy Fight: Trian Pushes to Reevaluate Executives’ Incentive Compensation Goals
  3. S&P 500 CEO Compensation Increase Trends
  4. Ambiguity and the Corporation: Group Disagreement and Underinvestment
  5. The Yates Memo: Looking for “Individual Accountability” in All the Wrong Places
  6. Preventing the Next Data Breach
  7. 2017-2018 ISS Global Policy Survey
  8. Good Activist/Bad Activist: The Rise of International Stewardship Codes
  9. So You Want to Buy a Stake in a Private Equity Manager?
  10. Fiduciary Principles and Delaware Corporation Law

« Benchmark » global en matière de politique de gouvernance | ISS


Subodh Mishra, Directeur exécutif à Institutional Shareholder Services (ISS) a publié le résultat des études de ISS visant à établir un « benchmark » global en matière de politique de gouvernance.

Voici les cinq domaines de recherche :

  1. One-Share One-Vote Principle
  2. Gender Diversity on Boards
  3. Share Issuance and Buyback Proposals
  4. Virtual/Hybrid Meetings
  5. Pay Ratio Between Senior Executives and Employees

L’étude présente les résultats sous forme de tableaux assez explicites.

 

Bonne lecture !

 

2017-2018 ISS Global Policy Survey

 

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A key part of ISS’ annual global benchmark policy formulation process is a survey which is open to institutional investors, corporate executives, board members and any other interested constituencies. For the 2017-2018 policy cycle, the survey was in two parts: (1) a short, high-level Governance Principles Survey covering a limited number of topical corporate governance areas and (2) a longer, more detailed supplemental survey allowing respondents to drill down into a wider set of key issues at market and regional levels. This document summarizes the findings of the Governance Principles Survey, which closed on August 31. The supplemental survey will remain open until October 6, 2017, at 5 PM (ET).

The response to the Governance Principles Survey was strong. In total, ISS received 602 responses to the survey, from a total of 571 different organizations. Responses were received from 121 institutional investors, representing 116 organizations, including 103 asset managers and 18 asset owners. An additional 10 responses were received from organizations that represent or provide services to institutional investors; these results were aggregated with the investor responses, bringing the total investor responses to 131. Two investors provided responses to ISS after the survey’s deadline, which were not aggregated in the results. For purposes of this report, survey results are based on 129 “investor” responses.

Responses were also received from 382 corporate issuers, several of whom submitted multiple responses. Additional non-investor survey responses were received from 46 consultants/advisors to companies; 28 corporate directors; and 13 organizations that represent or provide services to issuers. Responses from these corporate constituents were aggregated with the issuer responses, bringing the total “non-investor” responses to 469.

As in past years, the largest number of respondents—more than 400 in all—were from organizations based in the United States, with 51 from groups based in Canada, and 84 from groups based in Europe and/or the U.K. Responses were also received from organizations in, but not limited to, Australia, Hong Kong, Singapore, India, Brazil, Russia and Bermuda. Many respondents have a focus that goes beyond their own home country.

Primary Market of Focus Investor Non-Investor
Global (most or all of the below) 49% 19%
U.S. 28% 62%
Continental Europe 7% 4%
Asia-Pacific 5% 3%
U.K. 4% 2%
Canada 3% 6%
Developing/emerging markets generally 2% 0%
Other (includes Australia, Switzerland, or combination of two other markets) 2% 1%
Latin America 0% 1%

The breakdown of investors by the size of their assets owned or assets under management was as follows:

Asset Size % of Investor Respondents
Under $100 million 2%
$100 million–$500 million 9%
$500 million–$1 billion 4%
$1 billion–$10 billion 19%
$10 billion–$100 billion 26%
Over $100 billion 35%
Not applicable 6%

Some of the respondents answered every survey question; others skipped one or more questions. Throughout this report, response rates are calculated as percentages of the valid responses received on each particular question from investors and from non-investor respondents, excluding blank responses. Survey participants who filled out the “Respondent Information” but did not answer any of the policy questions were excluded from the analysis and are not part of the breakdown of respondents above.

Key Findings

One-Share One-Vote Principle

The global debate over shareholders’ voting rights and multi-class share schemes has exploded in recent years thanks to a series of high-profile share issuances that deviated from one-share, one-vote. The recent initial public offering of Snap Inc. in the U.S., which offered only non-voting shares to the public, raised the stakes.

ISS solicited respondents’ views on multi-class capital structures that carry unequal voting rights.

Among investors, a large minority (43 percent) indicated that they considered unequal voting rights are never appropriate for a public company in any circumstances. An equal proportion of investors (43 percent) said unequal voting rights structures may be appropriate in the limited circumstances of newly-public companies if they are subject to automatic sunset requirements or at firms more broadly if the capital structure is put up for periodic reapproval by the holders of the low-vote shares. Only five percent of investor respondents agreed with the opinion that companies should be allowed to choose whatever capital structure they see fit.

Among non-investors, 50 percent responded that companies should be allowed to choose whatever capital structure they see fit, while 27 percent responded that a multi-class structure may be appropriate at a newly public company if subject to an automatic sunset provision or more broadly if reapproved on a periodic basis by the low-vote

shareholders. Only 11 percent responded that multi-class structures with unequal voting rights are never appropriate for a public company in any circumstances.

Among investors, one respondent commented that “where the existence of multiple share classes creates a ‘controlling entity’ as a minimum the board must be able to demonstrate how it can operate independently of that entity.” Several non-investor respondents indicated that companies should be allowed to choose their own corporate structure given that shareholders can choose not to invest in the issuer’s shares if they dislike the structure.

Gender Diversity on Boards

The global focus on increasing gender diversity in corporate boardrooms has grown in recent years. ISS asked respondents if they would consider it problematic if there are zero female directors on a public company board. More than two-thirds (69 percent) of investor respondents said “yes.” The lion’s share of these respondents (43 percent) said that the absence of women directors could indicate problems in the board recruitment process, while 26 percent of investor respondents said that although a lack of female directors would be problematic, their concerns may be mitigated if there is a disclosed policy/approach that describes the considerations taken into account by the board or the nominating committee to increase gender diversity on the board. Fewer than one in ten (8 percent) of investor respondents agreed with the statement that directors are best suited to determine the board composition and that a lack of women directors is not necessarily problematic.

Slightly less than one-quarter (23 percent) of the investor respondents indicated that they may find the lack of female directors on a board to be problematic based on a case-by-case analysis. Among the factors cited by investor respondents in making such a case-by-case determination were: the appropriateness of the existing directors based on their experience and skill sets; whether the board is composed of people who are capable of representing shareholders; company size; and turn-around situations.

Of the investor respondents who indicated that the lack of female directors on a public board is or could be problematic, the highest number cited engagement with the board and/or management as the most appropriate response. The second most popular response was to consider supporting a shareholder proposal aimed at increasing diversity. The investor respondents’ third-highest favored action was supporting a shareholder-nominated candidate.

A majority (54 percent) of the non-investor respondents answered “yes” when asked if the absence of a single woman director on a board is problematic, although more than half of these respondents said their concerns might be mitigated by a company’s disclosed policy or approach. Only around one of every five (19 percent) of non-investor respondents said that a lack of diversity was not a concern given that sitting directors are best suited to determine board composition. Of those non-investor respondents who indicated that the absence of female directors on the board may be problematic based on a case-by-case determination, comments often mirrored those of the investor respondents with respect to taking directors’ experience and skill sets into consideration. Other non-investor commenters expressed concern about adopting “quotas,” or a one-size-fits-all policy applicable to all industries and all types of companies.

Like the investor respondents, non-investors’ most commonly preferred investor action in response to a lack of gender diversity was engagement with the board and management. Unlike the investor respondents, however, the non-investors favored votes against members of the nominating committee rather than support for a shareholder nominee to the board.

Share Issuance and Buyback Proposals

Cross-market companies (i.e. incorporated in one country, listed in one or more others) can create unique corporate governance challenges given differences in legal requirements, listing standards and market norms. Voting on share issuances and buybacks at cross-market companies can be particularly complex given significant market-specific differences in shareholders’ rights to approve or ratify such capital allocation issues.

ISS asked survey respondents to provide their views on share issuances and buybacks as a general matter.

Among the investor respondents, 13 percent indicated that both share issuances and buybacks are matters for the board to decide. Forty-four percent of the investor respondents said that both share issuances and buybacks should generally be voted upon by shareholders. More than one-quarter (27 percent) of the investor respondents indicated their preference for shareholder votes on share issuances, but they favored leaving share buybacks to the board’s discretion. Combining these results, more than seven out of ten of the investor respondents favored votes on share issuances while less than half of them called for votes on buybacks.

Among non-investor respondents, a significant majority (61 percent) supported the view that both share issuances and buybacks are matters for the board to decide.

As a follow-up question, respondents were asked to provide their views specifically on share issuance and buyback proposals at U.S.-listed, but non-U.S.-incorporated companies.

Investors’ responses were split. More than one-third (36 percent) of the investors agreed that since the proposals are on the ballot due to the laws of the market of incorporation, the company should follow the customary practices of that market. At the other end of the spectrum, 26 percent of the respondents indicated that as long as the company follows customary U.S. capital market practices, the proposal should be treated as routine, so as not to disadvantage a cross-market firm vis-à-vis its US-domiciled peers. One-quarter of the investors supported a hybrid approach that is less restrictive than many European markets’ best practices but that protects shareholders from excessive dilution in situations not covered by NYSE and NASDAQ listing rules.

On the other hand, a majority of the non-investor respondents (55 percent) supported the view that as long as the company follows customary U.S. capital market practices, the proposal should be treated as routine, so as not to disadvantage a cross-market firm vis-à-vis its U.S.-domiciled peers.

Virtual/Hybrid Meetings

In the U.S., UK and some other markets worldwide, companies are permitted to use electronic means of communication to facilitate the participation of shareholders at general meetings. While there are benefits to allowing shareholders to participate remotely, some investors have raised concerns that replacing physical meetings with virtual-only meetings may hinder meaningful exchanges between board members and shareholders.

Survey respondents were asked to provide their view on the use of remote means of communication for facilitating shareholder participation at general meetings, i.e., “hybrid” or “virtual-only” shareholder meetings.

About one out of every five (19 percent) of the investors said that they would generally consider the practice of holding either “virtual-only” or “hybrid” shareholder meetings to be acceptable, without reservation. At the opposite extreme, 8 percent of the investors did not support either “hybrid” or “virtual-only” meetings. More than one-third (36 percent) of the investor respondents indicated that they generally consider the practice of holding “hybrid” shareholder meetings to be acceptable, but not “virtual-only” shareholder meetings. Another 32 percent of the investor respondents indicated that the practice of holding “hybrid” shareholder meetings is acceptable, and that they would also be comfortable with “virtual-only” shareholder meetings if they provided the same shareholder rights as a physical meeting.

Among non-investor respondents, a plurality (42 percent) indicated that “virtual-only” or “hybrid” shareholder meetings are acceptable without reservation. However, among the majority of non-investor respondents who did not support that view, 22 percent indicated that, generally, the practice of holding “hybrid” meetings is acceptable, and they would also be comfortable with “virtual-only” meetings if they provided the same shareholder rights as a physical meeting, while 15 percent did not support the practice of holding either “hybrid” or “virtual” meetings.

Pay Ratio Between Senior Executives and Employees

Barring some last minute legislative roadblock, U.S. issuers will be required to disclose the ratio of CEO pay to the pay of the median company employee in their proxy statements for the 2018 season. Similar pay ratio information will also be required of UK companies from 2018. In anticipation of these new disclosures, ISS asked respondents how they intend to analyze data on pay ratios.

Somewhat surprisingly, only 16 percent indicated that they are not planning to make use of this new information. Nearly three-quarters of the investor respondents indicated that they intend to either compare the ratios across companies/industry sectors, or assess year-on-year changes in the ratio at an individual company or use both of these methodologies. Of the 12 percent of investors who selected “other” as their response, some of them indicated a wait-and-see approach while other comments indicated uncertainty or concerns regarding the usefulness of the pay ratio data.

Among non-investor respondents, a plurality (44 percent) expressed doubt about the usefulness of such pay ratio data. Many of them expressed skepticism that the data would be meaningful, with one non-investor respondent commenting: “For a company having a widespread international exposure, the pay ratio is considered irrelevant.” Other commenters cited a variety of factors that would complicate peer comparisons, including demographic and geographic disparities and the use of part-time or contract workers. Notably, however, 21 percent of the non-investor respondents indicated that they intend both to compare the ratios across companies/industry sectors and assess year-on-year changes in the ratio at an individual company.

Respondents were also asked how shareholders should use disclosed data on pay ratios. Among investor respondents, the most frequent response was to use it as one data point in determining votes on compensation-related resolutions, followed by using it as background material for engagement with the company. Among non-investor respondents, the most frequent response was that the information as disclosed will not be meaningful to shareholders.

Appendix: Detailed Survey Responses

Survey results are based on 129 investor responses (primarily asset managers and asset owners) and 469 responses from non-investors (primarily companies and their advisers), reflecting more than one response from some organizations.

For questions that allowed multiple answers, rankings are based on the number of responses for each answer choice. Percentages for other questions may not equal 100 percent due to rounding.

1. One-Share, One-Vote Principle

The “one-share, one-vote principle”—the idea that long-term shareholder value is best protected by a capital structure in which voting power corresponds to each shareholder’s ownership stake and at-risk capital commitment—is increasingly under attack as some companies have sought to access public capital markets while insulating themselves and their management teams from perceived short-term pressures through differential voting rights. The recent IPO of Snap Inc. in the U.S. pushed the envelope by offering shares to the public with no voting rights at all. A number of other companies, such as Alphabet, Facebook and Blue Apron, utilize capital structures where public shareholders may only purchase low or zero voting rights shares. As stock markets increasingly find themselves in global competition for high-profile listings (e.g. Alibaba Group Holding, Saudi Aramco), they may feel pressure to relax or eliminate long-standing rules designed to protect investors. Short-term demand for a “hot” stock can potentially make it appear as if shareholders, as a group, do not place a high priority on voting rights. Some investors who purchase shares in an IPO may not prioritize good corporate governance and shareholder rights if they do not plan to hold their shares for the long term. Meanwhile, long-term shareholders who may normally prioritize good governance may nevertheless be forced to buy shares of companies with substandard shareholder rights as soon as those firms are included in a major stock index.

Which of the following represents your organization’s view of multi-class capital structures with unequal voting rights?

Investor Non-Investor
Companies should be allowed to choose whatever capital structure they see fit. 5% 50%
They are never appropriate for a public company in any circumstances. 43% 11%
They may be appropriate for certain newly-public companies, but should be subject to an automatic sunset provision based on time elapsed since the IPO. 18% 9%
They may be appropriate for certain newly-public companies, but should be subject to an automatic sunset provision based on the market capitalization of the company. 7% 5%
They may be appropriate for certain public companies, but should be subject to periodic reapproval by the holders of the low-vote shares. 18% 13%
Other 9% 12%

2. Gender Diversity on Boards

The focus on gender diversity in corporate boardrooms has increased in numerous markets in recent years. Many of these markets have implemented enhanced disclosure requirements, best practice recommendations or regulatory quotas to drive increased female representation on public company boards. Despite this heightened attention, there have been varying levels of progress amongst companies in increasing the number of female directors on boards and some institutional investors continue to express frustration with a perceived lack of progress in boosting gender diversity in certain markets or industry sectors.

Does your organization consider it to be problematic if there are zero female directors on a public company board?

Investor Non-Investor
Yes, the absence of at least one female director may indicate problems in the board recruitment process. 43% 25%
Yes, but concerns may be mitigated if there is a disclosed policy/approach that describes the considerations taken into account by the board or the nominating committee to increase gender diversity on the board. 26% 29%
No, directors are best-suited to determining the composition of the board. 8% 19%
Maybe, but the level of concern is based on a case-by-case determination (e.g., it depends on the country; type of company; industry sector or other factors) (Please specify below) 23% 27%

If your organization answered “Yes” or “Maybe” to the preceding question, what actions do you consider may be appropriate for shareholders to take at a company that lacks any gender diversity on the board, and/or has not disclosed a policy on the issue? (Check all that apply)

Investors’ Rank Non-Investors’ Rank
Engage with the board and/or management 1 (92) 1 (312)
Consider supporting a shareholder proposal aimed at increasing diversity 2 (83) 2 (82)
Consider supporting a shareholder-nominated candidate to the board 3 (60) 5 (39)
Consider voting against all members of the nominating/governance committee 5 (45) 4 (46)
Consider voting against the chair of the nominating/governance committee 4 (53) 3 (50)
Consider voting against the chair of the board or lead director 6 (42) 6 (35)
Consider voting against the Report & Accounts (in markets where this is an option) reflecting poor disclosure of gender diversity 7 (18) 8 (4)
Other 8 (3) 7 (21)

*Rankings are based on number of responses for each answer choice.

3. Share Issuance and Buyback Proposals

Rules regarding shareholder approval of share issuances and buybacks vary by market. US listing rules do not require shareholder approval for share repurchases, and only require shareholder approval for share issuances in excess of 20 percent of issued capital where such issuances are private placements at a price below book value or market value, or where the issuances will result in a change of control or are in connection with an acquisition. Any other share issuances, up to the number of shares authorized in the charter, do not require a shareholder vote. By contrast, many European markets in principle require shareholder approval of all share issuances and share buybacks, but allow companies to seek approval for annual mandates covering share issuances during the coming year, up to a specified percentage of issued capital, or share buybacks during the coming year.

These differing approaches to shareholder approval of share issuances and buybacks create challenges at cross-market companies. US-listed companies incorporated in markets such as the UK, Ireland and the Netherlands may, for example, be required by the laws of their country of legal domicile to seek shareholder approval for share issuances or share repurchases that would not otherwise be required under the rules of their stock market listing. In such a situation, ISS currently evaluates such proposals under the policy of the country of incorporation. However, such policies are generally aligned with local listing rules or codes of best practice, which may not strictly apply to companies not listed in those markets. Also under consideration however is that companies that are incorporated in markets requiring shareholder votes on issuances and repurchases often have a relatively large number of authorized but unissued shares, compared to their US-domiciled counterparts, and therefore the potential for dilution is correspondingly greater. Moreover, regulations and best practice codes, particularly in the UK and Ireland, distinguish between share issuances with and without preemptive rights, while preemptive rights have all but disappeared from the US market.

In light of these issues, ISS is currently reviewing its policies applicable to share issuances and buybacks at such cross-market companies.

As a general matter, which of the following best matches your organization’s views?

Investor Non-Investor
Share issuances and buybacks are matters for the board of directors to decide 13% 61%
Share issuances and buybacks should generally be voted upon by shareholders 44% 8%
Share issuances should be voted upon by shareholders, but share buybacks should be left to the board’s discretion 27% 14%
It depends on the market 13% 9%
Other 4% 9%

Which of the following best describes your organization’s view of share issuance and buyback proposals at US-listed, but non-US-incorporated companies?

Investor Non-Investor
As long as the company follows customary US capital market practices, the proposal should be treated as routine, so as not to disadvantage a cross-market firm vis-à-vis its US-domiciled peers. 26% 55%
As the proposals are on the ballot due to the laws of the market of incorporation, the company should follow the customary practices of that market. 36% 18%
A hybrid approach is called for, to protect shareholders from excessive dilution in situations not covered by NYSE and NASDAQ listing rules, while being less restrictive than European best practices. 25% 11%
Other (please specify) 14% 16%

4. Virtual/Hybrid Meetings

In the US, UK and some other markets worldwide, companies are permitted to use electronic means of communication to facilitate the participation of shareholders at general meetings. In some cases, companies may employ technological means to allow such participation as a supplement to the physical meeting (these are known as “hybrid meetings”), while in other cases the “virtual shareholder meeting” entirely supplants the physical meeting. In the UK, a number of companies have sought or are seeking shareholder approval to amend their articles of association in order to be able to hold hybrid or virtual-only shareholder meetings. In the US, companies have generally made the switch to a hybrid or virtual-only meeting without a shareholder vote, following changes in state laws on the matter.

Currently, the practice of holding virtual shareholder meetings is rare in the UK: only one company held a virtual meeting in 2016 and 2017. In the US, the practice is more widespread: over 160 companies held virtual-only meetings in the first half of 2017, and an additional 16 companies held hybrid meetings. Allowing shareholders to take part remotely can increase participation, and eliminating the physical meeting can reduce costs. However, some investors have raised concerns about the trend toward abandoning physical meetings, arguing that virtual-only meetings may hinder meaningful exchanges between management and shareholders, or allow management to avoid uncomfortable questions.

Please describe your organization’s view on the use of remote means of communication for facilitating shareholder participation at general meetings, i.e., “hybrid” or “virtual-only” shareholder meetings.

Investor Non-Investor
My organization generally considers the practice of holding “virtual-only” or “hybrid” shareholder meetings to be acceptable. 19% 42%
My organization generally considers the practice of holding “hybrid” shareholder meetings to be acceptable, but not “virtual-only” shareholder meetings. 36% 22%
My organization generally considers the practice of holding “hybrid” shareholder meetings to be acceptable, and would also be comfortable with “virtual-only” shareholder meetings if they provided the same shareholder rights as a physical meeting. 32% 22%
My organization does not support the practice of holding “hybrid” or “virtual” shareholder meetings. 8% 15%
Other 5% 12%

5. Pay Ratio Between Senior Executives and Employees

Beginning in 2018 (unless the rule is repealed prior to implementation), U.S. issuers will be required to report in their proxy statement the ratio of CEO pay to the pay of the median company employee. Similar rules have been proposed in the UK, where companies are already required to compare the year-on-year percentage change in compensation between the CEO and other employees (though long-term incentives are excluded). The EU Shareholder Rights Directive, which member states will have to incorporate into their local laws by 2019, requires disclosure of the annual change in each executive’s pay over five years, along with company performance and the change in average employee pay.

How does your organization intend to analyze data on pay ratios?

Investor Non-Investor
Compare the ratios across companies/industry sectors 6% 12%
Assess year-on-year changes in the ratio at an individual company 3% 8%
Both of the above 63% 21%
My organization is not planning to use this information 16% 44%
Other 12% 16%

In your organization’s view, how should shareholders use disclosed data on pay ratios? (Check all that apply)

Investors’ Rank Non-Investors’ Rank
As one data point in determining votes on compensation-related resolutions 1 (81) 3 (86)
As one data point in determining votes on directors 3 (49) 4 (29)
As background material for engagement with the company 2 (71) 2 (97)
As a risk factor to be weighed in making investment decisions 4 (46) 5 (28)
The information as disclosed will not be meaningful to shareholders 5 (16) 1 (248)
Other 6 (11) 4 (29)

*Rankings are based on number of responses for each answer choice.

 

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


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

Cette semaine, j’ai relevé les dix principaux billets.

Bonne lecture !

 

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Résultats de recherche d'images pour « harvard law school forum on corporate governance »

 

 

  1. Long-Term Pay-For-Performance Alignment
  2. Activism and Board Diversity
  3. SEC (Limited) Guidance on Pay-Ratio Disclosure
  4. Corporate Governance: Stakeholders
  5. Finding Common Ground on Shareholder Proposals
  6. Improving SEC Regulations with Investor Ordering
  7. The Long-Term Consequences of Short-Term Incentives
  8. CEO and Executive Compensation Practices: 2017 Edition
  9. Lessons from the ISS Report on the Trian/P&G Proxy Contest
  10. The Inner Workings of the Board: Evidence from Emerging Markets

Compte rendu hebdomadaire de la Harvard Law School Forum on Corporate Governance | 28 septembre 2017


Voici le compte rendu hebdomadaire du forum de la Harvard Law School sur la gouvernance corporative au 28 septembre 2017.

Cette semaine, j’ai relevé les dix principaux billets.

Bonne lecture !

 

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  1. Forging Ahead with “Entire Fairness,” or Playing it Safer (Procedurally Speaking)
  2. Activism: The State of Play
  3. New Disclosure Requirements in Form ADV
  4. Merger Negotiations in the Shadow of Judicial Appraisal
  5. SEC’s Latest Guidance on Pay Ratio Rule
  6. Enjoying the Quiet Life: Corporate Decision-Making by Entrenched Managers
  7. Oversight of the U.S. Securities and Exchange Commission
  8. CEOs and ISS’ Proxy Contest Framework
  9. The Evolution of the Private Equity Market and the Decline in IPOs
  10. Activism’s New Paradigm

Compte rendu hebdomadaire de la Harvard Law School Forum on Corporate Governance | 21 septembre 2017


Voici le compte rendu hebdomadaire du forum de la Harvard Law School sur la gouvernance corporative au 21 septembre 2017.

Cette semaine, j’ai relevé les dix principaux billets.

Bonne lecture !

 

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Résultats de recherche d'images pour « harvard law school forum on corporate governance »

 

 

  1. Equifax Data Breach: Preliminary Lessons for the Adoption and Implementation of Insider Trading Policies
  2. Better Directors or Distracted Directors? An International Analysis of Busy Boards
  3. Making Sure Your “Choice-of-Law” Clause Chooses All of the Laws of the Chosen Jurisdiction
  4. Investment Stewardship 2017 Annual Report
  5. Is There Hope for Change? The Evolution of Conceptions of “Good” Corporate Governance
  6. NYC Pension Funds Boardroom Accountability Project Version 2.0
  7. Reforms to UK Corporate Governance
  8. Sharing the Lead: Examining the Causes and Consequences of Lead Independent Director Appointment
  9. Vanguard’s Investor Stewardship
  10. Delaware Blockchain Initiative: Revitalizing European Companies’ Funding Efforts

La nomination d’un « administrateur principal indépendant » | Le compromis de la gouvernance à l’américaine


Vous avez sans doute une bonne idée de la notion d’administrateur principal (Lead director) dans le cadre de la direction du conseil d’administration. Les administrateurs de sociétés canadiennes sont cependant moins au fait de cette démarche de gouvernance, laquelle se révèle propre à la majorité des entreprises américaines.

En 1990, environ 80 % des entreprises américaines avaient une structure de gouvernance, plutôt déficiente, qui reposait sur le leadership d’une seule personne cumulant les fonctions de président du conseil (chairman) et de président directeur général de l’entreprise (PDG – CEO). Depuis les scandales des années 2000, et plus particulièrement de la crise financière de 2008, les autorités réglementaires et les bourses américaines ont exigé l’instauration d’une structure duale : un président du CA et un PDG.

La solution de compromis, qui fit largement consensus, était de nommer un administrateur principal indépendant comme président du conseil en conservant le poste de Chairman et de PDG (CEO) à une seule personne (afin de préserver l’unité de direction !). Il faut cependant savoir que la plupart des CEO des grandes corporations américaines convoitent le pouvoir absolu de l’entreprise et qu’ils n’acceptent pas facilement de le partager avec un autre Chairman (contrairement à 80 % des entreprises canadiennes qui séparent les deux fonctions).

On connaît peu les tenants et aboutissants de cette forme de gouvernance qui semble défier les principes de la saine gouvernance, notamment l’importance de préserver l’indépendance des administrateurs.

L’étude de Ryan Krause et al* tente de faire la lumière sur plusieurs questions relatives à l’exercice de l’administrateur indépendant :

(1) Qu’est-ce qui a conduit à l’adoption de cette structure de gouvernance ?

(2) Quels sont les rôles et fonctions d’un administrateur indépendant ?

(3) Comment les administrateurs principaux sont-ils choisis par leurs pairs ?

(4) La nomination d’un administrateur principal indépendant a-t-elle une incidence sur la performance de l’entreprise ?

(5) Cette structure de gouvernance est-elle une mesure de transition vers l’établissement d’une véritable séparation des rôles de Chairman et de CEO ?

À la lecture de cet article, vous constaterez certainement que les auteurs adoptent une perspective de compromis eu égard à la gouvernance. Une des limites de l’étude est que le rôle de l’administrateur indépendant n’est pas clair, notamment en ce qui concerne « l’établissement du plan stratégique, de la gestion des risques et de la gestion de crises ».

Cet article paru sur le site de la Harvard Law School of Corporate Governance vous offrira tout de même une bien meilleure compréhension de cette structure de gouvernance « à l’américaine ».

Bonne lecture ! Vos commentaires sont les bienvenus.

 

 

Sharing the Lead: Examining the Causes and Consequences of Lead Independent Director Appointment

 

 

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Many companies now use lead independent directors, yet little is known about when they are elected, who is selected, what impact their selection has on performance and if their selection prevents the future separation of the CEO and chair positions. We explore these four questions using a power perspective and largely find lead independent directors represent a power-sharing compromise between the CEO/chair and the board.

* * *

A critical issue of board governance is the tradeoff of joining or separating the CEO and board chair roles. Joining the roles provides the organization the unity of command, with a single individual leading the firm. This is very important in dynamic environments where strong leadership is required and the CEO/chair must communicate clearly to multiple audiences. Also, it can provide the board greater insight into the day-to-day operations of the firm since the leader of the board is also managing the firm. But joining the roles puts at risk the oversight role of the board since its leader is one of those it is evaluating. This has been colloquially referred to as “CEOs grading [their] own homework”. [1] To prevent this, many have argued that the CEO and chair positions must be separated to prevent the conflict of interest inherent to the CEO leading the board.

 

Highlights

 

– Power balance between the CEO and the board is a key determinant to lead independent director appointment and to who is selected.

– Lead independent director (LID) selection can affect firm performance and the likelihood of CEO/chair separation

– The managerial implication is that power-sharing can allow the CEO to remain board chair while preserving effective corporate governance

– An important open issue is the duties of the lead independent director remain vague and idiosyncratic to the individual and firm

For many years these mutually exclusive options were the only ones available, requiring boards to accept the tradeoffs inherent to each option. In 1992, Lipton and Lorsch [2] proposed a third option: retaining the CEO as board chair and the appointment of a lead independent director. This compromise solution joined together the advantages of having a single leader with the advantages of having more independent board leadership. In the early 1990s, nearly 80 percent of large, U.S.-based firms had board chairs who were also the firm’s CEO, but the scandals of the early 2000s led to greater scrutiny of joining the CEO and board chair positions, leading many firms to consider appointing a lead independent director. This was furthered by a 2008 New York Stock Exchange (NYSE) policy change requiring that listed firms with CEO/chairs appoint a presiding director to lead executive sessions. [3]

The belief that a lead independent director appointment presents a compromise solution is supported by the 2013 Director Compensation and Board Practices report from The Conference Board in collaboration with Nasdaq OMX and NYSE Euronext. For companies selecting the lead independent director structure, almost 70 percent felt that board independence is achieved through a lead independent director, with financial services firms reaching almost 80 percent. In fact, this rationale was the most highly cited reason for having a lead independent director. The study also found that as the size of the firm increases (as measured in annual revenue), the belief that lead independent director appointment provides the necessary level of independence also increases.

But what is the role of the lead independent director? In 2012, Wall Street Journal reporter Joann Lublin wrote,

“Lead directors could be defined by what they aren’t—independent board chairmen who share the helm with powerful CEOs. Increasingly, however, the corporate governance community is seeing them as an effective counterweight anyway. The role is a compromise that developed in the wake of the 2002 Sarbanes-Oxley Act. Lawmakers…didn’t want to force companies to split the chairman and CEO jobs. What evolved was the appointment of a director to represent fellow board members, someone who didn’t have ties to the company.“ [4]

This perspective was echoed by a member of the Lead Director Network (LDN),

“Once you’re in the role, the conditions may change and therefore the definition of your job may change. The role will have to change on a dime if the conditions change, so we shouldn’t define the role too narrowly. The definition must be fluid enough to adapt to the situation.“ [5]

The LDN [6] identified three major ways in which lead independent directors add value to board operations:

  1. They can help develop a high-performing board by keeping it focused, coordinating across committees, and ensuring board members have the information they need.
  2. They can build a productive relationship between the board and the CEO/chair by ensuring effective communication and providing feedback to the CEO/chair from the board.
  3. They can support effective shareholder communication by being the contact person for shareholders.

While many anecdotal insights into the use and responsibilities of LID exist, there is almost no empirical investigation of them. To address this, we build on the notion that the appointment of a LID is a compromise between the two attractive, but mutually exclusive options of combining or separating the CEO and board chair roles. Since much of the concern around CEOs holding the chair role centers on the CEO’s power relative to the board, we adopt the perspective that the CEO’s power relative to the board will be a determining factor in the selection of board leadership. Using this perspective, our research sought to answer four questions:

  1. What leads to LID appointment?
  2. When a LID structure is selected, who is selected as LID?
  3. What effect on performance does appointing a LID have on various performance outcomes (specifically, holding period returns, ROI, and analyst recommendations)?
  4. What effect does LID appointment have on the likelihood of CEO/Chair separation?

When is a LID selected?

 

Our first question is under what power conditions is a LID selected. Power is generally conceptualized in relative rather than absolute terms. For example, a sports team may be the most powerful in its conference but when compared with all teams it is in the middle of the pack. Accordingly, power in corporate governance is most often conceptualized as the CEO’s power relative to the power of the board. To date most theory and research has focused on powerful CEOs or powerful boards (i.e., when one is able to control the other). This research has suggested that when the CEO is powerful relative to the board, he or she will retain the chair role. Conversely, when the board is powerful relative to the CEO the positions are most often separated. But what happens when the power is balanced? To answer this, we used a composite measure of CEO power relative to the board power. Confirming prior studies, we found that when CEO power relative to board power was high that the CEO retained the board chair role, and that when the board’s power was high relative to the CEO that the positions were separated. But consistent with the notion that LID appointment is a compromise, we found that a LID was most likely to be appointed when CEO power relative to the board was balanced. In other words, when neither the CEO nor the board was powerful relative to the other, a LID was appointed to reflect this sharing of power.

This finding presents strong evidence that as CEOs or boards move away from dominance and towards more balanced power, they will gravitate toward compromise solutions such as the lead independent director. In addition, the results revealed that while lead independent director appointment is most likely to occur when CEO power is moderate, the drop-off in CEO power between lead independent director appointment and CEO-board chair separation is larger than the drop-off between no change and lead independent director appointment. This suggests that CEOs who see their power as somewhat tenuous may opt for the compromise solution as a way to placate advocates of more structural change and stave off any further reduction in power.

 

Our Methodologya

 

To analyze LID appointment, we used a sample of S&P 1500 firms from 2002 to 2012 who had a combined CEO/Chair structure, resulting in 966 firms. We collected board and director level data from BoardEx database, from the Institutional Shareholder Services (formerly RiskMetrics) database, and from company proxy statements. Firm-level financial and market data were collected from Compustat and from CRSP. Analyst recommendations were collected from the Institutional Brokers Estimates System (IBES). Finally, ownership data were collected from the Thomson Reuters Institutional Holdings database. Due to missing data, our final sample was 522 firms.

We used several dependent variables in our analysis. Our first dependent variable assessed if the firm appointed a LID, separated the CEO and chair positions, or made no change (i.e., retained the CEO/chair structure). Our second dependent variable is binary set to 1 if a LID appointment occurs and 0 otherwise. Our next set of dependent variables centered on performance. First, to measure market performance we selected stock returns to buying and holding the stock for a calendar year. Second, to measure accounting performance, we selected return on investment (ROI), which is net income divided by total invested capital. Finally, for a stakeholder performance we measured median analyst rating, which can take on five ordinal values, from 1 (strong buy) to 5 (strong sell).b Our final dependent variable is binary, set to 1 if the firm separates the CEO/chair positions after appointing a LID and 0 if they do not.

Our analysis used several independent variables as well. First, we used a composite measure for CEO power that consists of CEO tenure relative to average board tenure, the number of outside boards on which the CEO serves relative to the average number of outside boards on which each director serves, the number of outside directors who are also current CEOs, board independence, and firm performance. We standardized each of these measures and summed them to produce a standardized index of CEO power. Second, to measure individual director power we use five indicators: director tenure, number of current board seats, whether the director is a business expert, elite educational background, and financial expertise. Similar to our measure of CEO power, each of these individual variables was standardized and summed for each director-year observation to produce an index of director power. Finally, we use LID appointment as a binary variable measured as 1 if the CEO and board chair positions remained combined but an independent board member was appointed to the lead director position in a given year, and 0 otherwise.

Our analysis also contained numerous control variables such as firm size, CEO turnover, firm ownership, litigation, board interlocks, CEO equity pay, and environmental dynamism, complexity and munificence.

To analyze the data we used several forms of multiple variable regression (generalized linear latent and mixed models, fixed-effects logit, fixed-effects regression, and Cox proportional hazard) depending on the analysis being conducted.

Please see the article in Academy of Management Journal for a comprehensive explanation of data, measures, and empirical analyses.

We reverse coded this variable to aid in interpretation.

Who is selected as LID?

 

Intrigued by this finding, we examined who is selected as the LID when the firm chooses to appoint one. If power is indeed being shared between the CEO and the board, then the individual selected should embody this power-sharing. This implies that the person selected as the LID will be neither the most powerful independent board member nor the weakest. This is because if the most powerful independent director were selected, the individual might be seen as a challenger to the CEO, but if the weakest independent director were selected, he or she may be perceived as a leader in name only with no real power to control or influence the CEO/chair. To measure this, we examined the power levels of each of the independent board members relative to the other independent board members. We found that the most likely independent director selected is one with a moderate level of power. This supports the notion that the person selected as LID is as important as the decision to appoint a LID.

Taken together, these findings provide compelling evidence that CEOs and boards are compromising in both the decision to appoint a lead independent director and in who is designated as the lead independent director. This is significant as it demonstrates that the designation o

f a lead independent director is more than a symbolic gesture to appease the arbiters of good corporate governance; rather it indicates that the board is conscientious about who it selects for the role.

What effect does LID appointment have on performance?

 

Appointment of a LID impacts corporate governance outcomes, but we wanted to know if it influenced performance. In other words, if the firm has adopted a power-sharing arrangement between the CEO/chair and the board, does that affect firm outcomes? Because firm performance can be measured in many different ways, we selected market, accounting, and stakeholder performance measures, specifically:

Annual stock returns

Return on Investment (ROI)

Median analyst recommendation

Our results further support the importance of the power perspective to LID appointment. For the market and accounting measures we found no main effect of LID appointment on performance. [7] In other words, simply appointing a LID director does not affect either market or accounting performance. To explore the influence of power on this, we then examined the effect of LID appointment when the CEO/chair holds a moderate to low level of power. We reasoned that, in keeping with the power-sharing inherent to LID appointment, having a strong CEO/chair would limit the impact of the LID appointment. We found that when a LID is appointed and the CEO has a low to moderate level of power, there is a positive effect on market and accounting performance, underscoring the importance of relative power to the usefulness of having a LID. Turning to our stake-holder performance measure, we found a positive main effect of LID appointment on median analyst recommendation, and this performance effect is stronger when the CEO holds a moderate to low level of power. This suggests that analysts view LID appointment favorably and that this favorable view is stronger when the power is balanced between the board and the CEO/chair.

 

Chart 1: Performance Effect Difference between No LID & LID

Source: “Compromise on the Board: Investigating the Antecedents and Consequences of Lead Independent Director,” the Academy of Management Journal (forthcoming)

 

In addition, the positive main effect for analyst ratings but not for the other performance measures suggests that analysts respond to the symbolism of the appointment in a manner that objective metrics such as stock and accounting performance do not.

Given its outward appearance of conformity to firm oversight, it is not surprising that lead independent director appointment garners a positive overall reaction from analysts. Prior research has shown that analysts’ view increases in a board’s structural independence as positive, even when such structural changes do not produce meaningful improvements in firm governance. [8]

In contrast to the main effect, which only manifested for analyst ratings, the interaction of CEO power and lead independent director appointment was significant across all three performance measures. This suggests that appointing a lead independent director amounts to little more than window dressing when CEO power is high, but can have positive performance effects when CEO power is low. (We look at the relationship one standard deviation below and above the mean CEO power level using the CEO power measure described earlier.) Together, these results provide evidence that when the CEO is not totally dominant, the lead independent director can strike a balance between having a single leader and having proper oversight. In addition, when the CEO is dominant, the lead independent director still serves a symbolic role in placating external observers like securities analysts.

 

What effect does LID appointment have on separation?

 

Finally, we were curious about how the appointment of a LID affected the likelihood that the firm would decide to separate the CEO and chair roles in the future. If the power-sharing compromise is functioning well, then the firm may feel that separation is not necessary and the likelihood of separation will fall. To measure this we examined the likelihood of separation after the appointment of a LID and found that it decreases the likelihood of separation by almost 60 percent. Importantly, we controlled for the effect of CEO power on the likelihood of separation, given that past research has shown that CEO power by itself decreases the likelihood of separation. The effect of CEO power on separation was found to be around 33 percent. [9] We then statistically compared these two effects and found that LID appointment had a statistically higher negative effect on the likelihood of separation than CEO power. Finally, we felt that perhaps the lowest likelihood of separation would occur when a LID is appointed and the CEO has high power, but testing this we found that there was no interactive effect. This means that increasing CEO power does nothing to decrease the likelihood of separation beyond the decreased likelihood from LID appointment. In other words, appointing a LID has a stronger negative effect on separating the CEO and chair positions than CEO power, and increasing CEO power doesn’t further enhance that negative effect. The implication is that lead independent director appointment provides significant protection to the CEO/chair, independent of the CEO’s power.

 

Chart 2: Sample Governance Structure (by year)

Source: “Compromise on the Board: Investigating the Antecedents and Consequences of Lead Independent Director,” the Academy of Management Journal (forthcoming)

Managerial Implications

 

The findings of our research have several implications for corporate governance practitioners. First, balancing power between the board and the CEO does not necessarily lead to a governance impasse. We find that at parity, both the board and the CEO are willing to make important concessions to the other to fashion a functioning governance arrangement for the firm. This leads to a second implication, which is that the sharing of governance between the board and CEO is legitimate in nature. In other words, the agreement of the CEO to permit the appointment of a lead independent director of moderate power coupled with the willingness of the board to accept a lead independent director rather than calling for the separation of the CEO and board chair positions suggests a meaningful compromise. If, for example, the CEO would only accept a lead independent director with weak power, or if the board required that the lead independent director be very powerful, governance would be much more problematic and the benefits of the lead independent director would be tenuous. We see this outcome emerge in our analyses of performance outcomes; lead independent director appointment can improve firm performance, but only if the CEO is not very powerful. Finally, despite the calls from corporate governance regulators and consultants for all CEOs to relinquish the chair role, [10] our research suggests that boards and CEOs can reach a compromise that preserves the unity of command provided by CEO duality while not sacrificing robust corporate governance, as evidenced by both the performance consequences and the staying power of the lead independent director position.

 

Open Questions

 

While we provide insight into the effect of power on LID appointment, several important open questions remain.

First and foremost, while the position of LID has become more legitimate, the role the LID plays on the board remains very fluid with many unknowns. For example, it is clear that the LID is a conduit between the board and the CEO/ chair. Reflecting this, a LDN member stated, “It’s my job to make sure that every director’s perspective is aired and addressed during board meetings, especially if there are differences of opinion.” [11] But what is the LID’s role in setting corporate strategy, in risk management and in crisis management, such as when the firm’s management is under investigation?

Second, how does either CEO/chair or LID succession change the corporate governance? If the LID appointment reflects a power sharing between the CEO/ chair and the board, changing either the CEO/chair or the LID could shift the balance of power and make the structure untenable.

Finally, as LIDs are increasingly used by boards, will experience as a LID emerge as a characteristic that makes a director more attractive?

Until recently, corporate governance has conceptualized board leadership as a tradeoff between unity of command and independent monitoring. The lead independent director position directly challenges this conceptualization, however, as it constitutes a compromise between the competing theoretical prescriptions. In our research, we examined this compromise board leadership structure and explore its antecedents and consequences. We find that it reflects balanced power on the board, and that it can be beneficial when the circumstances are right. It is our hope that these insights will help to guide corporate governance, particularly in the area of board leadership.

 

* * *

 

The complete article is available for download here.

____________________________________________

Endnotes:

1 James A. Brickley, Jeffrey L. Coles, and Gregg A. Jarrell, “Leadership Structure: Separating the CEO and Chairman of the Board,” Journal of Corporate Finance, 1997 pp. 189-220.(go back)

2 The NYSE requires that non-management directors meet at regularly scheduled executive sessions, that there are mechanisms for selecting a non-management director to preside at such sessions, and that companies provide a way to communicate with the presiding director (or the non-management directors as a group). See NYSE Euronext, Listed Company Manual, section 303A.03, “Executive Sessions”.(go back)

3 Martin Lipton and Jay W. Lorsch, “A Modest Proposal for Improved Corporate Governance,” Business Lawyer, 1992 48 (1): 59-77.(go back)

4 Joann S. Lublin, “Lead Directors Gain Clout as Counterweight to CEO,” Wall Street Journal, March 27, 2012.(go back)

5 Lead Director Network ViewPoints, Tapestry Network, Issue 1, July 30, 2008, page 3.(go back)

6 Ibid.(go back)

7 By main effect, we mean the direct effect of the independent variable on the dependent variable.(go back)

8 See Westphal, James D. & Graebner, Michelle E. 2010. “A matter of appearances: How corporate leaders manage the impressions of financial analysts about the conduct of their boards.” Academy of Management Journal, 53(1): 15-44.(go back)

9 In other words, for every standard deviation increase in CEO power, the likelihood of separation decreased by around 33 percent.(go back)

10 For examples of this, see MacAvoy, P. W. & Millstein, I. M. 2004. “The recurrent crisis in corporate governance,” Stanford, Calif.: Stanford Business Books. and Monks, R. A. G. & Minow, N. 2008. Corporate governance (4th ed.) Chichester, England ; Hoboken, NJ: John Wiley & Sons.(go back)

11 Lead Director Network ViewPoints, Tapestry Network, Issue 10, March 24, 2011, page 6.

*Ryan Krause is Associate Professor of Strategy in the Neeley School of Business at Texas Christian University; Mike Withers is Assistant Professor of Management in the Mays Business School at Texas A&M University; and Matthew Semadeni is Professor of Strategy at Arizona State University W.P. Carey School of Business. This post is based on a recent article, forthcoming in the Academy of Management Journal, and originally published in The Conference Board’s Director Notes series.

Lettre ouverte du président des Fonds Vanguard à l’ensemble des administrateurs de compagnies publiques


F. William McNabb III is Chairman and CEO of Vanguard; Glenn Booraem is the head of Investment Stewardship and a principal at Vanguard. This post is based on an excerpt from a recent Vanguard publication by Mr. Booraem, and an open letter to directors of public companies worldwide by Mr. McNabb.

 

Cinq questions destinées au nouveau président de Vanguard

Investment Stewardship 2017 Annual Report

 

An open letter to directors of public companies worldwide

Thank you for your role in overseeing the Vanguard funds’ sizable investment in your company. We depend on you to represent our funds’ ownership interests on behalf of our more than 20 million investors worldwide. Our investors depend on Vanguard to be a responsible steward of their assets, and we promote principles of corporate governance that we believe will enhance the long-term value of their investments.

At Vanguard, a long-term perspective informs every aspect of our investment approach, from the way we manage our funds to the advice we give our investors. Our index funds are structurally long-term, holding their investments almost indefinitely. And our active equity managers—who invest nearly $500 billion on our clients’ behalf—are behaviorally long-term, with most holding their positions longer than peer averages. The typical dollar invested with Vanguard stays for more than ten years.

A long-term perspective also underpins our Investment Stewardship program. We believe that well-governed companies are more likely to perform well over the long run. To this end, we consider four pillars when we evaluate corporate governance practices:

  1. The board: A high-functioning, well-composed, independent, diverse, and experienced board with effective ongoing evaluation practices.
  2. Governance structures: Provisions and structures that empower shareholders and protect their rights.
  3. Appropriate compensation: Pay that incentivizes relative outperformance over the long term.
  4. Risk oversight: Effective, integrated, and ongoing oversight of relevant industry- and company-specific risks.

These pillars guide our proxy voting and engagement activity, and we hope that by sharing this framework with you, you’ll have a better perspective on our approach to stewardship.

I’d like to highlight a few key themes that are increasingly important in our stewardship efforts:

Good governance starts with a great board.

We believe that when a company has a great board of directors, good results are more likely to follow.

We view the board as one of a company’s most critical strategic assets. When the board contributes the right mix of skill, expertise, thought, tenure, and personal characteristics, sustainable economic value becomes much easier to achieve. A thoughtfully composed, diverse board more objectively oversees how management navigates challenges and opportunities critical to shareholders’ interests. And a company’s strategic needs for the future inform effectively planned evolution of the board.

Gender diversity is one element of board composition that we will continue to focus on over the coming years. We expect boards to focus on it as well, and their demonstration of meaningful progress over time will inform our engagement and voting going forward. There is compelling evidence that boards with a critical mass of women have outperformed those that are less diverse. Diverse boards also more effectively demonstrate governance best practices that we believe lead to long-term shareholder value. Our stance on this issue is therefore an economic imperative, not an ideological choice. This is among the reasons why we recently joined the 30% Club, a global organization that advocates for greater representation of women in boardrooms and leadership roles. The club’s mission to enhance opportunities for women from “schoolroom to boardroom” is one that we think bodes well for broadening the pipeline of great directors.

Directors are shareholders’ eyes and ears on risk.

Risk and opportunity shape every business. Shareholders rely on a strong board to oversee the strategy for realizing opportunities and mitigating risks. Thorough disclosure of relevant and material risks—a key board responsibility—enables share prices to fully reflect all significant known (and reasonably foreseeable) risks and opportunities. Given our extensive indexed investments, which rely on the price-setting mechanism of the market, that market efficiency is critical to Vanguard and our clients.

Climate risk is an example of a slowly developing and highly uncertain risk—the kind that tests the strength of a board’s oversight and risk governance. Our evolving position on climate risk (much like our stance on gender diversity) is based on the economic bottom line for Vanguard investors. As significant long-term owners of many companies in industries vulnerable to climate risk, Vanguard investors have substantial value at stake.

Although there is no one-size-fits-all approach, market solutions to climate risk and other evolving disclosure practices can be valuable when they reflect the shared priorities of issuers and investors. Our participation in the Investor Advisory Group to the Sustainability Accounting Standards Board (SASB) reflects our belief that materiality-driven, sector-specific disclosures will better illuminate risks in a way that aids market efficiency and price discovery. We believe it is incumbent on all market participants—investors, boards, and management alike—to embrace the disclosure of sustainability risks that bear on a company’s long-term value creation prospects.

Engagement builds mutual understanding and a basis for progress.

Timely and substantive dialogue with companies is core to our investment stewardship approach. We see engagement as mutually beneficial: We convey Vanguard’s views and we hear companies’ perspectives, which adds context to our analysis.

Our funds’ votes on ballot measures—171,000 discrete items in the past year alone—are an outcome of this process, not the starting point. As we analyze ballot items, particularly controversial ones, we often invite direct and open-ended dialogue with the company. We seek management’s and the board’s perspectives on the issues at hand, and we evaluate them against our principles and leading practices. To understand the full picture, we often also engage with other investors, including activists and shareholder proponents. Our goal is that a fund’s ultimate voting decision does not come as a surprise. Our ability to make informed decisions depends on maintaining an ongoing exchange of ideas in a setting in which we can cover the intention and strategy behind the issues.

Yet our engagement activities are not solely focused on the ballot. Because our funds will hold most of their portfolio companies practically permanently, it’s important for us to build relationships with boards and management teams that transcend a transactional focus on any specific issue or vote. Engagement is a process, not an event, whose value only grows over time. A CEO we engaged with once said, “You can’t wait to build a relationship until you need it,” and that couldn’t be more true.

The opportunity to articulate our perspectives and understand a board’s thinking on a range of topics—anchored at the intersection of the firm’s strategy and its enabling governance practices—is a crucial part of our stewardship obligations. Although ballot items are reduced to a series of binary choices—yes or no, for or against—engagement beyond the ballot enables us to deal in nuance and in dialogue that drives meaningful progress over time.

There is a growing role for independent directors in engagement, both on issues over which they hold exclusive purview (such as CEO compensation and board composition/succession) and on deepening investors’ understanding of the alignment between a company’s strategy and governance practices. Our interest in engaging with directors is by no means intended to interfere with management’s ownership of the message on corporate strategy and performance. Rather, we believe it’s appropriate for directors to periodically hear directly from and be heard by the shareowners on whose behalf they serve.

* * *

Our focus on corporate governance and investment stewardship has been and will continue to be a deliberate manifestation of Vanguard’s core purpose: “To take a stand for all investors, to treat them fairly, and to give them the best chance for investment success.” Our four pillars and our increased focus on climate risk and gender diversity are not fleeting priorities for Vanguard. As essentially permanent owners of the companies you lead, we have a special obligation to be engaged stewards actively focused on the long term. Our Investment Stewardship team—available at InvestmentStewardship@vanguard.com—stands ready to engage with you and your leadership teams on matters of mutual importance to our respective stakeholders. Thank you for valuing our perspective and being our partner in stewardship.

Sincerely,

William McNabb III
Chairman and Chief Executive Officer
The Vanguard Group, Inc.

* * *

Investment Stewardship 2017 Annual Report

Our values and beliefs

“To take a stand for all investors, to treat them fairly, and to give them the best chance for investment success.”

—Vanguard’s core purpose

Vanguard’s core values of focus, integrity, and stewardship are reflected every day in the way that we engage with our clients, our crew (what we call our employees), and our community. We view our Investment Stewardship program as a natural extension of these values and of Vanguard’s core purpose. Our clients depend on us to be good stewards of their assets, and we depend on corporate boards to prudently oversee the companies in which our funds invest. That is why we believe we have a unique mission to advocate for a world in which the actions and values of public companies and of investors are aligned to create value for Vanguard fund shareholders over the long term.

We believe well-governed companies will perform better over the long term.

Effective corporate governance is more than the collection of a company’s formal provisions and bylaws. A board of directors serves on behalf of all shareholders and is critical in establishing trust and transparency and ensuring the health of a company—and of the capital markets—over time. This board-centric view is the foundation of Vanguard’s approach to investment stewardship. It guides our discussions with company directors and management, as well as our voting of proxies on the funds’ behalf at shareholder meetings around the globe. Great governance starts with a board of directors that is capable of selecting the right management team, holding that team accountable through appropriate incentives, and overseeing relevant risks that are material to the business. We believe that effective corporate governance is an important ingredient for the long-term success of companies and their investors. And when portfolio companies perform well, so do our clients’ investments.

We value long-term progress over short-term gain.

Because our funds typically own the stock of companies for long periods (and, in the case of index funds, are structurally permanent holders of companies), our emphasis on investment outcomes over the long term is unwavering. That’s why we deliberately focus on enduring themes and topics that drive long-term value, rather than solely short-term results. We believe that companies and boards should similarly be focused on long-term shareholder value—both through the sustainability of their strategy and operations, and by managing the risks most material to their long-term success.

Our approach

Vanguard’s Investment Stewardship team comprises an experienced group of senior leaders and analysts who are responsible for representing Vanguard shareholders’ interests through industry advocacy, company engagement, and proxy voting on behalf of the Vanguard funds. The team also houses an internal research and communications function that is active in developing Vanguard’s views, policies, and ongoing approach to investment stewardship. Our data and technology group supports every aspect of our Investment Stewardship program.

We take a thoughtful and deliberate approach to investment stewardship.

Our team supports effective corporate governance practices in three ways:

Advocating for policies that we believe will enhance the sustainable, long-term value of our clients’ investments. We promote good corporate governance and responsible investment through thoughtful participation in industry events and discussions where we can expand our advocacy and enhance our understanding of investment issues.

Engaging with portfolio company executives and directors to share our corporate governance principles and learn about portfolio companies’ corporate governance practices. We characterize our approach as “quiet diplomacy focused on results”—providing constructive input that will, in our view, better position companies to deliver sustainable value over the long term for all investors.

Voting proxies at company shareholder meetings across each of our portfolios and around the globe. Because of our ongoing advocacy and engagement efforts, companies should be aware of our governance principles and positions by the time we cast our funds’ votes.

Our process is iterative and ongoing

Our four pillars

Board

Good governance begins with a great board of directors. Our primary interest is to ensure that the individuals who represent the interests of all shareholders are independent (both in mindset and freedom from conflicts), capable (across the range of relevant skills for the company and industry), and appropriately experienced (so as to bring valuable perspective to their roles). We also believe that diversity of thought, background, and experience, as well as of personal characteristics (such as gender, race, and age), meaningfully contributes to the board’s ability to serve as effective, engaged stewards of shareholders’ interests. If a company has a well-composed, high-functioning board, good results are more likely to follow.

Structure

We believe in the importance of governance structures that empower shareholders and ensure accountability of the board and management. We believe that shareholders should be able to hold directors accountable as needed through certain governance and bylaw provisions. Among these preferred provisions are that directors must stand for election by shareholders annually and must secure a majority of the votes in order to join or remain on the board. In instances where the board appears resistant to shareholder input, we also support the right of shareholders to call special meetings and to place director nominees on the company’s ballot.

Compensation

We believe that performance-linked compensation policies and practices are fundamental drivers of the sustainable, long-term value for a company’s investors. The board plays a central role in determining appropriate executive pay that incentivizes performance relative to peers and competitors. Providing effective disclosure of these practices, their alignment with company performance, and their outcomes is crucial to giving shareholders confidence in the link between incentives and rewards and the creation of value over the long term.

Risk

Boards are responsible for effective oversight and governance of the risks most relevant and material to each company in the context of its industry and region. We believe that boards should take a thorough, integrated, and thoughtful approach to identifying, understanding, quantifying, overseeing, and—where appropriate—disclosing risks that have the potential to affect shareholder value over the long term. Importantly, boards should communicate their approach to risk oversight to shareholders through their normal course of business.

By the numbers: Voting and engagement

Engagement and voting trends

2015 proxy season 2016 proxy season  2017 proxy season
Company engagements 685 817 954
Companies voted 10,560 11,564 12,974
Meetings voted 12,785 16,740 18,905
Proposals voted 124,230 157,506 171,385
Countries voted in* 70 70 68

* The number of countries can vary each year. In certain markets, some companies do not hold shareholder meetings annually.
Note: The annual proxy season is from July 1 to June 30.

Our voting

Proxy voting reflects our governance pillars worldwide.

Meetings voted by region

Note: Data pertains to voting activity from July 1, 2016, through June 30, 2017

Global voting activity

* Includes more than 26,000 proposals related to capitalization; 8,000 proposals related to mergers and acquisitions; 16,000 routine business proposals; and 1,000 other shareholder proposals.
Note: Data pertains to voting activity from July 1, 2016, through June 30, 2017.

Our engagement

We engage with companies of all sizes.

Market Capitalization % of 2017 proxy season engagements
Under $1 billion 19%
$1 billion–under $10 billion 44%
$10 billion–under $50 billion 24%
$50 billion and over 13%

Our engagement with portfolio companies has grown significantly over time.

Number of engagements and assets represented

Note: Dollar figures represent the market value of Vanguard fund investments in companies with which we engaged as of June 30, 2017.

We engage on a range of topics aligned with our four pillars

Frequency of topics discussed during Vanguard engagements (%)

Note: Figures do not total 100%, as individual engagements often span multiple topics.

Boards in focus: Vanguard’s view on gender diversity

One of our most fundamental governance beliefs is that good governance begins with a great board of directors. We believe that diversity among directors—along dimensions such as gender, experience, race, background, age, and tenure—can strengthen a board’s range of perspectives and its capacity to make complex, fully considered decisions.

While we have long discussed board composition and diversity with portfolio companies, gender diversity has emerged as one dimension on which there is compelling support for positive effects on shareholder value. In recent years, a growing body of research has demonstrated that greater gender diversity on boards can lead to better company performance and governance.

Companies should be prepared to discuss—in both their public disclosures and their engagement with investors—their plans to incorporate appropriate diversity over time in their board composition. While we believe that board evolution is a process, not an event, the demonstration of meaningful progress over time will inform our engagement and voting going forward.

Boards in focus: Gender diversity

Engagement case studies

Gender diversity on boards was an important topic of engagement for us during the 12 months ended June 30, 2017. Below are summary examples of discussions we had on the subject.

High-impact engagement on gender diversity

Over several interactions with a U.S. industrial company, our team shared Vanguard’s perspective on board composition and evaluation. The company had undergone recent leadership transitions and was open to amending elements of its governance structure to align with best practices. We expressed particular support for meaningful gender diversity and expressed concern that the board previously had only one female director in its recent history.

Right after this year’s annual general meeting, the company announced it was adding four new directors with diverse experience, including two women. This outcome is the best-case scenario: The board welcomed shareholder input, we shared our view on best corporate governance practices, and the board ultimately incorporated our perspective into its board evolution process.

A denial of diversity’s value

A Canadian materials company that had consistently underperformed was governed by an entrenched, all-male board with seemingly nominal independence from the CEO. A 2017 shareholder resolution asked the company to adopt and publish a policy governing gender diversity on the board. Before voting, Vanguard engaged with the company to learn about its board evolution process, including its perspective on gender diversity. The engagement revealed that the company understood neither the value of gender diversity nor the importance of being responsive to shareholders’ concerns. Despite verbally endorsing gender diversity, the company resisted specifying a strategy or making a commitment to achieve it. The board, when seeking new members, relied solely on recommendations from current directors, a practice that can entrench the current board’s perspective and limit diversity. Our funds voted in support of the shareholder resolution, and we will continue to engage and hold the board accountable for meaningful progress over time.

Mixed results from an ongoing engagement

A U.S. consumer discretionary company had no women on its board, a problem magnified by its medium-term underperformance relative to peers, a classified board structure, and a lengthy average director tenure. We engaged with management twice between the 2016 and 2017 annual meetings to share our perspective on the importance of gender diversity and recommend that they make it a priority for future board evolution and director searches.

In its 2017 proxy, the company described board diversity as critical to the firm’s sustainable value and named gender as an element of diversity to be considered during the director search and nomination process. The company has since added a non-independent woman to the board. Although this move is directionally correct, it does not fully address our concerns; we will continue to encourage the company to add gender diversity to its ranks of independent directors.

Risk in focus: Vanguard’s view on climate risk

As the steward of long-term shareholder value for more than 20 million investors, Vanguard closely monitors how our portfolio companies identify, manage, and mitigate risks—including climate risk. Our approach to climate risk is evolving as the world’s and business community’s understanding of the topic matures.

This year, for the first time, our funds supported a number of climate-related shareholder resolutions opposed by company management. We are also discussing climate risk with company management and boards more than ever before. Our Investment Stewardship team is committed to engaging with a range of stakeholders to inform our perspective on these issues, and to share our thinking with the market, our portfolio companies, and our investors.

Risk in focus: Climate risk

A Q&A with Glenn Booraem, Vanguard’s Investment Stewardship Officer

Vanguard is an investment management company. Why should Vanguard fund investors be concerned about climate risk?

Mr. Booraem: Climate risk has the potential to be a significant long-term risk for companies in many industries. As stewards of our clients’ long-term investments, we must be finely attuned to this risk. We acknowledge that our clients’ views on climate risk span the ideological spectrum. But our position on climate risk is anchored in long-term economic value—not ideology. Regardless of one’s perspective on climate, there’s no doubt that changes in global regulation, energy consumption, and consumer preferences will have a significant economic impact on companies, particularly in the energy, industrial, and utilities sectors.

Why the shift in Vanguard’s assessment of climate risk, and why now?

Mr. Booraem: We’ve been discussing climate risk with portfolio companies for several years. It has been, and will remain, one of our engagement priorities for the foreseeable future. This past year, we engaged with more companies on this issue than ever before, and for the first time our funds supported two climate-related shareholder resolutions in cases where we believed that companies’ disclosure practices weren’t on par with emerging expectations in the market. As with other issues, our point of view has evolved as the topic has matured and, importantly, as its link to shareholder value has become more clear.

What is your top concern when you learn that a company in which a Vanguard portfolio invests does not have a rigorous strategy to evaluate and mitigate climate risk?

Mr. Booraem: Our concern is fundamentally that in the absence of clear disclosure and informed board oversight, the market lacks insight into the material risks of investing in that firm. It’s of paramount importance to us that the market is able to reflect risk and opportunity in stock prices, particularly for our index funds, which don’t get to select the stocks they own. When we’re not confident that companies have an appropriate level of board oversight or disclosure, we’re concerned that the market may not accurately reflect the value of the investment. Because we represent primarily long-term investors, this bias is particularly problematic when underweighting long-term risks inflates a company’s value.

Now that Vanguard has articulated a clear stance on climate risk, what can portfolio companies expect?

Mr. Booraem: First, companies should expect that we’re going to focus on their public disclosures, both about the risk itself and about their board’s and management’s oversight of that risk. Thorough disclosure is the foundation for the market’s understanding of the issue. Second, companies should expect that we’ll evaluate their disclosures in the context of both their leading peers and evolving market standards, such as those articulated by the Sustainability Accounting Standards Board (SASB). Third, they should expect that we’ll listen to their perspective on these and other matters. And finally, they should see our funds’ proxy voting as an extension of our engagement. When we consider a shareholder resolution on climate risk, we give companies a fair hearing on the merits of the proposal and consider their past commitments and the strength of their governance structure.

Engagement case studies

In the 12 months ended June 30, 2017, the topic of climate risk disclosure grew in frequency and prominence in our engagements with companies, particularly those in the energy, industrial, and utilities sectors, where climate risk was addressed in nearly every conversation we had. Below are examples of our engagements on climate risk.

Two companies’ commitments to enhanced disclosure

Our team led similar engagements with two U.S. energy companies facing shareholder resolutions on climate risk. One resolution requested that the first company publish an annual report on climate risk impacts and strategy. At the second company, a resolution requested disclosure of the company’s strategy and targets for transitioning to a low- carbon economy. In both cases, when we engaged with the companies, their management teams committed to improving their climate risk disclosure. Given the companies’ demonstrated responsiveness to shareholder feedback and commitment to improving, our funds did not support either shareholder proposal. Our team will continue to track and evaluate the companies’ progress toward their commitments as we consider our votes in future years.

A vote against a risk and governance outlier For years we engaged with a U.S. energy company that lagged its peers on climate risk disclosure and board accessibility. This year, a shareholder proposal requesting that the company produce a climate risk assessment report demonstrated a compelling link between the requested disclosures and long-term shareholder value. Because the board serves on behalf of shareholders and plays a critical role in risk oversight, we believed it was appropriate to seek a direct dialogue with independent directors about climate risk. Management resisted connecting the independent directors with shareholders, making the company a significant industry outlier in good governance practice. Without the confidence that the board understood or represented our view that climate risk poses a material risk in the energy sector, our team viewed the climate risk and governance issues as intertwined. Ultimately, our funds voted for the shareholder proposal and withheld votes on relevant independent directors for failing to engage with shareholders.

A vote for greater climate risk disclosure

A shareholder proposal at a U.S. energy company asked for an annual report with climate risk disclosure, including scenario planning. Through extensive research and engagements with the company’s management, its independent directors, and other industry stakeholders, our team identified governance shortfalls and a clear connection to long-term shareholder value. The company lagged its peers in disclosure, risk planning, and board oversight and responsiveness to shareholder concerns. Crucially, although the company’s public filings identified climate risk as a material issue, it failed to articulate plans for mitigation or adaptation. A similar proposal last year garnered significant support, but the company made no meaningful changes in response. Engagement had limited effect, so our funds voted for the shareholder proposal.

* * *

This post was excerpted from a Vanguard report; the complete publication is available here.

Compte rendu hebdomadaire de la Harvard Law School Forum on Corporate Governance | 14 septembre 2017


Voici le compte rendu hebdomadaire du forum de la Harvard Law School sur la gouvernance corporative au 14 septembre 2017.

Cette semaine, j’ai relevé les cinq principaux billets.

Bonne lecture !

 

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  1. Another Road Leading to Business Judgment Review—Martha Stewart Living Omnimedia
  2. The Effects of Hedge Fund Interventions on Strategic Firm Behavior
  3. UK Announces Corporate Governance Reforms
  4. How Should We Regulate Fintech?
  5. OCC Stakes Out a Lead Role in Establishing New Deregulatory Agenda

 

Compte rendu hebdomadaire de la Harvard Law School Forum on Corporate Governance | 7 septembre 2017


Voici le compte rendu hebdomadaire du forum de la Harvard Law School sur la gouvernance corporative au 7 septembre 2017.

J’ai relevé les principaux billets, tout en me limitant au Top 10.

Bonne lecture !

 

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  1. Political Uncertainty and Firm Disclosure
  2. Corporate Governance—the New Paradigm
  3. NYDFS Cybersecurity Regulations Take Effect
  4. CFOs on Boards: Higher Pay, Lower Performance
  5. CSX Attracts New CEO and Stock Price Rises Sharply
  6. The Evolution and Current State of Director Compensation Plans
  7. Companies Should Maximize Shareholder Welfare Not Market Value
  8. Executive Compensation: A Survey of Theory and Evidence
  9. Divided Second Circuit Panel Overrules Prior Newman Insider Trading Decision
  10. Out of Sight Out of Mind: The Case for Improving Director Independence Disclosure

Révision de la réglementation eu égard à la divulgation de l’indépendance des administrateurs


L’importance du principe d’indépendance des administrateurs ne fait plus de doute, autant pour les grandes entreprises publiques (cotées), que pour les spécialistes de la gouvernance. La coalition des 13 plus grands premiers dirigeants des grandes sociétés publiques américaines énonce clairement que l’indépendance des administrateurs est un principe incontournable de bonne gouvernance.

“Truly independent corporate boards are vital to effective governance, so no board should be beholden to the CEO or management” and directors should be strong and steadfast, independent of mind and willing to challenge [management] constructively.”

Mais si le principe est largement reconnu, il ne reflète malheureusement pas la réalité de plusieurs conseils d’administration. L’article de Yaron Nili, professeur à la faculté de droit de l’Université du Wisconsin, présente la réalité à ce sujet en donnant des exemples de situation de complaisance sur les CA.

Ainsi, ce sont les administrateurs eux-mêmes qui déterminent la qualité d’indépendance de leurs pairs en déclarant, dans le rapport aux actionnaires, que les administrateurs répondent aux critères très flous des standards existants. L’article montre que l’absence d’une réglementation plus explicite à cet égard laisse les actionnaires et les investisseurs dans l’ignorance au sujet de la véritable indépendance des administrateurs.

L’auteur tire trois conclusions relatives à l’indépendance des administrateurs :

(1) La réglementation est lacunaire eu égard à la divulgation d’informations aux actionnaires et aux investisseurs. Ceux-ci sont mal informés sur le niveau d’indépendance des administrateurs ainsi que sur les biais comportementaux dont souffrent les collègues administrateurs pour évaluer ce facteur ;

(2) L’étude empirique de Yaron Nili a clairement démontré que les informations transmises aux actionnaires manquent de transparence et que les actionnaires n’ont pas accès à la « boîte noire » ;

(3) Les lacunes en matière de définition de l’indépendance des administrateurs sont issues du raisonnement qui veut que, peu importe la définition choisie, celle-ci soit toujours susceptible de souffrir d’ambiguïté et elle est de nature interprétative.

C’est donc à une réflexion en profondeur sur la gouvernance en général, et sur la qualité de l’information divulguée aux actionnaires que l’auteur nous convie.

Bonne lecture ! Vos commentaires sur ce sujet sont les bienvenus.

 

 

Out of Sight Out of Mind: The Case for Improving Director Independence Disclosure

 

 

In July 2016, a coalition of 13 CEOs and heads of major investment firms—which included names like JPMorgan Chase CEO Jamie Dimon, Berkshire Hathaway CEO Warren Buffett, General Motors CEO Mary Barra and BlackRock CEO Larry Fink—released the Commonsense Principles of Corporate Governance (discussed on the Forum here). These Principles emphasize the critical role of director independence in corporate America, stating that: “[t]ruly independent corporate boards are vital to effective governance, so no board should be beholden to the CEO or management” and that “[d]irectors should be strong and steadfast, independent of mind and willing to challenge [management] constructively.” Indeed, this recent statement echoes the importance and emphasis that academics, investors, regulators and companies alike, have placed on director independence.

Two months later, on September 7, 2016 Apple and Nike announced a new collaboration with one another on the Apple Watch. In their announcement, the companies declared their new Apple Watch Nike+ to be “the latest result of a long-standing partnership” between the world-renowned brands. Significantly, the announced initiative came on the heels of Nike appointing Mr. Tim Cook, Apple’s CEO, as Nike’s lead independent director. Despite the new collaboration, the companies did not refer to any potential conflicts of interest or to Mr. Cook’s status as lead independent director in their press release. Apple itself has similarly straddled the line regarding the independence of its “independent” directors. Bob Iger, Disney’s CEO, is one of Apple’s five independent directors. The two companies have a close and frequent business collaboration with one another, but Apple does nothing more than disclose that “in the ordinary course of its business, Apple enters into commercial dealings with Disney that it considers arms-length.” In regards to Mr. Iger’s independence, Apple has stated that it “does not believe that Mr. Iger has a material direct or indirect interest in any of such commercial dealings.”

Apple’s short statement concerning Mr. Iger’s independence is indicative of a larger practice taken by public firms. Many public companies can, and do, satisfy their stock exchange’s disclosure requirements by simply declaring that “the Board of Directors has determined that all non-employee Directors who served during [the fiscal year] are ‘independent’ under the listing standards of the [NYSE/NASDAQ].” Investors receive very little value from these unsubstantiated statements.

Indeed, in the current regulatory regime, public companies’ boards self-designate their peer directors as “independent directors” and boards are only required to disclose very specific, and very limited, information regarding their designation of a director as an “independent director”—leaving shareholders with minimal knowledge regarding the true level of independence that their elected directors actually have.

In my article, Out of Sight Out of Mind: The Case for Improving Director Independence Disclosure, which is forthcoming in the Journal of Corporation Law, I address this issue of director independence disclosures, in light of the rise of the independent board. The article makes three important contributions to the current discourse regarding director independence:

First, the article exposes a fundamental concern regarding the functional independence of “independent” directors, and highlights what it terms as the “empty” nature of the current regulatory framework. As the article details in length, the current framework can be summed up as being too much, too little, too late and too soft. It provides companies with too much discretion, as boards retain too much power to assert the independence of their peer directors and they may suffer from behavioral bias in doing so. It provides investors with too little information regarding the factual context against which a director is considered to be independent. Further, even when a director’s independence designation is scrutinized through state law, it is often too late, as these assessments are done post-hoc when it is too late to address many of the issues that director independence is meant to protect against. Finally, it is too soft, as companies’ self-designations of director independence are left uncontested and without proper vetting by the stock exchanges or the SEC, as they have shown no effort to proactively enforce their own requirements.

Second, the article is the first to provide hand-collected empirical evidence corroborating the lack of proper disclosure by companies in the context of their director independence designations. To do so, using a hand collected data set, the article analyzed the disclosure statements of one hundred public companies. To account for both large, high profile, companies as well as smaller, less visible public companies, fifty of the companies make up the Fortune 50 and the remaining 50 are Fortune 2000 small-cap companies. For each company, the company’s independence disclosure in its proxy statements in the years 2000, 2004, 2008, 2012 and 2016, were analyzed and coded. Indeed, as further analyzed in greater detail in the article, the majority of companies provide very little information about their director independence designations, potentially violating the already lax rules governing independence disclosure. Furthermore, several companies have in fact regressed over time in regards to the level of transparency they are providing to investors. In essence, much of the information that boards are expected to consider when determining whether a director is independent is contained in a “black box,” to which shareholders have no access.

Finally, the article argues that at its core, the failure of current regulatory standards to ensure an effective director independence regime stems from the fact that any independence definition is destined to suffer from ambiguity and interpretive freedom. Instead, we should recognize that the true value of director independence requirements is not only in that they strive to ensure actual independence, but rather also in that they empower investors. Each investor may have a distinctive, subjective comfort level with the myriad independence questions that may arise, balanced against the benefits that the various business and personal connections of each director may provide to the company. Information about directors’ ties and dealings gives investors a means of making informed decisions, both regarding the election of a director as well as their actual level of independence on any specific issue. As a result, effective director independence standards should facilitate an environment where companies are accountable to their investors for their choice of directors.

Therefore, responding to the SEC’s call for input on possible ways to improve the discourse regime under Regulation S-K, this article calls for a re-conceptualizing of the current approach to regulating company disclosures. This new approach will shift some of the focus from the definition and designation of a director as independent to a disclosure-based regime. Alongside the current designation regime, companies would have to disclose, for each “independent” director, the entirety of the information they considered when declaring a director as independent, including some mandatory information that is currently hard or costly to independently obtain or verify. This in turn will allow investors and regulators not only to confirm the judgment of the board on each director but also to possess a more nuanced view regarding the functional independence of each director in regards to each matter at hand.

The complete article is available for download here.

La gouvernance à l’anglaise | Commentaires d’Yvan Allaire


Yvan Allaire*, président exécutif du conseil de l’Institut sur la gouvernance (IGOPP) vient de me faire parvenir un nouvel article intitulé « La gouvernance à l’anglaise ».

Cet article intéressera certainement tous les administrateurs siégeant à des conseils d’administration qui sont à l’affût des nouveautés dans le domaine de la gouvernance.

Le document discute de deux mesures particulièrement novatrices et audacieuses, même si le principe « Conformité ou explication » prévaut toujours : (1) la rémunération des dirigeants et (2) la prise en compte de toutes les parties prenantes de l’entreprise par le conseil d’administration

Je vous invite à lire le compte rendu sur le site de l’IGOPP.

Bonne lecture !

 

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La gouvernance à l’anglaise | Yvan Allaire

 

Avec la publication récente de ses intentions en suite à une vaste consultation, le gouvernement du Royaume-Uni propose une réforme de la gouvernance des sociétés à la fois prudente et audacieuse, comportant un certain nombre de mesures (controversées) sur deux enjeux précis :

  1. La rémunération des dirigeants;
  2. La prise en compte de toutes les parties prenantes de l’entreprise par le conseil d’administration

 

1. La rémunération des dirigeants

 

Le programme annoncé contient des propositions sur des questions longuement débattues.

– Ainsi, le gouvernement, par voie d’amendements législatifs, veut exiger la publication du rapport entre la rémunération du PDG et la rémunération médiane des employés de la société au Royaume-Uni; la société devra expliquer les variations de ce ratio d’une année à l’autre.

– Le gouvernement veut susciter des changements au code de gouvernance des entreprises pour que celles-ci doivent tenir compte d’une expression significative d’insatisfaction exprimée lors d’un vote consultatif sur la rémunération. Une expression significative reste à définir, mais le seuil pourrait s’établir à 20% ou plus de votes négatifs; le gouvernement promet d’agir par voie législative si l’approche incitative ne donne pas les résultats souhaités.

– Le gouvernement s’engage à présenter des amendements juridiques pour exiger que les sociétés inscrites en Bourse fournissent des explications plus claires de leurs politiques de rémunération ainsi que l’éventail de rémunérations pouvant résulter d’incitatifs complexes en actions et options sur le titre. Le gouvernement tiendra également des consultations sur la proposition d’augmenter de trois à cinq ans la période minimale requise avant qu’un dirigeant puisse encaisser les options ou les actions reçues comme rémunération incitative.

– Le gouvernement s’engage également à commanditer un examen d’un sujet d’une grande actualité : comment s’assurer que les rachats d’actions ne servent pas comme artifice pour atteindre des cibles de performance financière et ainsi gonfler la rémunération des dirigeants. Cet examen évaluera également si de tels rachats d’actions peuvent mener à un sous-investissement en actifs productifs.

 

2. La prise en compte de toutes les parties prenantes de l’entreprise par le conseil d’administration

 

La loi anglaise sur les sociétés par actions, tout comme la loi canadienne, enjoint que la responsabilité du conseil est envers la société et ses parties prenantes. L’article 172 de la loi anglaise de 2006 est plus explicite que la loi canadienne :

Text of Section 172 of the Companies Act 20069 | Duty to promote the success of the company

(1) 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, and in doing so have regard (amongst other matters) to —

(a) the likely consequences of any decision in the long term,

(b) the interests of the company’s employees,

(c) the need to foster the company’s business relationships with suppliers, customers and others,

(d) the impact of the company’s operations on the community and the environment,

(e) the desirability of the company maintaining a reputation for high standards of business conduct, and

(f) the need to act fairly as between members of the company.

Toutefois, deux jugements de la Cour suprême du Canada donnent une interprétation assez similaire de la responsabilité du conseil d’administration envers les parties prenantes de la société (voir à cet effet le texte d’Allaire et Rousseau, Gouvernance et parties prenantes, IGOPP, juillet 2014).

– Au Royaume-Uni (comme au Canada), les conseils d’administration sont rarement explicites sur leur façon de se conformer à cette responsabilité envers les parties prenantes autres que les actionnaires. Le gouvernement compte donc présenter des amendements législatifs pour obliger toutes les sociétés (privées et publiques) à expliquer comment le conseil se conforme aux exigences de la loi en ce qui concerne les intérêts des employés ainsi que ses relations avec les fournisseurs, les clients et autres parties.

– Le gouvernement entend susciter des avis sur des changements au Code de gouvernance pour exiger que les sociétés inscrites en Bourse adoptent, sur une base Se conformer ou Expliquer, l’un ou l’autre des trois mécanismes suivants pour représenter au conseil les intérêts des employés :

(1) Désigner un administrateur indépendant pour que la voix des employés soit entendue au conseil d’administration;

(2) Créer un conseil consultatif des employés;

(3) Nommer un membre du conseil choisi parmi les employés.

– Le gouvernement a choisi à ce stade de ne pas élargir cette représentation aux autres parties prenantes. Il entend inviter le groupe GC100 (les cent plus grandes sociétés ouvertes) à fournir avis et lignes directrices pour une interprétation pratique des devoirs des administrateurs en vertu de l’article 172 de la loi sur les sociétés.

 

Autres sujets

 

Le gouvernement déposera des amendements législatifs pour que route les entreprises privées comptant plus de 2000 employés doivent rendre compte publiquement de leurs arrangements de gouvernance.

Bien que la diversité au conseil ne faisant pas l’objet de cette consultation, le gouvernement rappelle son engagement envers les objectifs établis par le Davies Review, soit qu’en 2020, 33% des membres des conseils des entreprises du FTSE ainsi que 33% des membres de leurs comités de direction soient des femmes; cet objectif ne pourra être atteint que si 40% des nominations jusqu’à terme seront des femmes.

Ce projet de réforme de la gouvernance ne va pas aussi loin que l’auraient souhaité bon nombre d’observateurs, mais aussi loin que le pragmatisme britannique et la puissante contre-réforme ne le permettaient. Mélange de consultations, de déférence envers des intermédiaires et d’activisme législatif mesuré, cette réforme a le mérite de mettre la table pour une discussion d’enjeux importants, mais souvent occultés.

*Yvan Allaire, Ph. D. (MIT), MSRC, Président exécutif du conseil, yallaire@igopp.org

Compte rendu hebdomadaire de la Harvard Law School Forum on Corporate Governance | 31 août 2017


Voici le compte rendu hebdomadaire du forum de la Harvard Law School sur la gouvernance corporative au 31 août 2017.

J’ai relevé les principaux billets, tout en me limitant au Top 10.

Bonne lecture !

 

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Deux événements récents qui auront un effet important sur la gouvernance


Martin Lipton, fondateur de la firme Wachtell, Lipton, Rosen & Katz qui se spécialise dans les fusions et les acquisitions ainsi que dans les affaires relatives à la gouvernance, présente deux événements récents susceptibles d’améliorer la gouvernance des sociétés.

L’objectif recherché par ces changements est de promouvoir les investissements à long terme et le développement durable.

 

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Ainsi, le billet de Lipton paru sur le site de Harvard Law School of Corporate Governance fait un sommaire des propositions en Grande-Bretagne et aux États-Unis :

 

In the U.K., government proposals for corporate governance reform center on :

(1) better aligning executive pay with performance and with explaining, if not actually improving, worker wages by publicizing and focusing the attention of corporate directors on the ratio of average worker wages to executive compensation,

(2) improving governance by emphasizing that Section 172 of the Company Law, a constituency statute, provides that directors owe fiduciary duties not just to shareholders, but to customers, suppliers, workers and the community and economy. There is a provision for worker-board engagement by a designated independent director, a formal worker advisory council or a director from the workforce. The report directly relates improving stakeholder governance to mitigating inequality in the U.K. society.

In the U.S., Vanguard sent a letter to the boards and CEOs of all of the corporations in the Vanguard portfolios worldwide setting forth its views on governance, engagement and stewardship. It also issued its 2017 investment stewardship report.

The report sets forth Vanguard’s policy for dealing with activist pressure and contains illustrations of how Vanguard dealt with several actual activist campaigns.(See our memo on today’s Vanguard letter.)

The U.K. government report and the Vanguard letter and report, together with the effort by the World Economic Forum to promote acceptance of The New Paradigm: A Roadmap for an Implicit Corporate Governance Partnership Between Corporations and Investors to Achieve Sustainable Long-Term Investment and Growth issued last year by its International Business Council, gives hope that they will spark additional efforts that together will alleviate the pressure, by asset managers for short-term performance and by activist hedge funds for quick gains from financial engineering, against long-term investment in R&D; capex and reinvestment in the business; building strong employee relations, employment stability and employee training; and sustainability and good corporate citizenship.

Voir l’article ci-dessous.

Bonne lecture !

Corporate Governance—the New Paradigm

Compte rendu hebdomadaire de la Harvard Law School Forum on Corporate Governance | 24 août 2017


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Compte rendu hebdomadaire de la Harvard Law School Forum on Corporate Governance | 10 août 2017


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Compte rendu hebdomadaire de la Harvard Law School Forum on Corporate Governance | 2 août 2017


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Guide pratique à la détermination de la rémunération des administrateurs de sociétés | ICGN


Aujourd’hui, je vous suggère la lecture d’un excellent guide publié par International Corporate Governance Network (ICGN). Ce document présente succinctement les grands principes qui devraient gouverner l’établissement de la rémunération des administrateurs indépendants (« non-executive »).

Il va de soi que la rémunération des administrateurs ne représente qu’une part infime du budget d’une entreprise, et celle-ci est relativement très inférieure aux rémunérations consenties aux dirigeants ! Cependant, il est vital d’apporter une attention particulière à la rémunération des administrateurs, car ceux-ci sont les fiduciaires des actionnaires, ceux qui doivent les représenter, en veillant à la saine gestion de la société.

Il est important que le comité de gouvernance se penche annuellement sur la question de la rémunération des administrateurs indépendants, et que ce comité propose une politique de rémunération qui tient compte du rôle déterminant de ces derniers. Plusieurs variables doivent être prises en ligne de compte notamment, la comparaison avec d’autres entreprises similaires, les responsabilités des administrateurs dans les différents rôles qui leur sont attribués au sein du conseil, la nature de l’entreprise (taille, cycle de développement, type de mission, circonstances particulières, etc.).

Personnellement, je suis d’avis que tous les administrateurs de sociétés obtiennent une compensation pour leurs efforts, même si, dans certains cas, les sommes affectées s’avèrent peu élevées. Les organisations ont avantage à offrir de justes rémunérations à leurs administrateurs afin (1) d’attirer de nouvelles recrues hautement qualifiées (2) de s’assurer que les intérêts des administrateurs sont en adéquation avec les intérêts des parties prenantes, et (3) d’être en mesure de s’attendre à une solide performance de leur part et de divulguer les rémunérations globales.

Le document du ICNG propose une réflexion dans trois domaines : (1) la structure de rémunération (2) la reddition de comptes, et (3) les principes de transparence.

On me demande souvent qui doit statuer sur la politique de rémunération des administrateurs, puisqu’il semble que ceux-ci déterminent leurs propres compensations !

Ultimement, ce sont les actionnaires qui doivent approuver les rémunérations des administrateurs telles que présentées dans la circulaire de procuration. Cependant, le travail en aval se fait, annuellement, par le comité de gouvernance lequel recommande au conseil une structure de rémunération des administrateurs non exécutifs. Notons que les comités de gouvernance ont souvent recours à des firmes spécialisées en rémunération pour les aider dans leurs décisions.

C’est cette recommandation qui devrait être amenée à l’assemblée générale annuelle pour approbation, même si dans plusieurs pays, la juridiction ne le requiert pas.

En tant qu’administrateur, si vous souhaitez connaître le point de vue du plus grand réseau de gouvernance à l’échelle internationale, je vous invite à lire ce document synthétique.

Bonne lecture. Vos commentaires sur le sujet sont sollicités.

 

ICGN Guidance on Non-executive Director Remuneration – 2016

 

 

 

Compte rendu hebdomadaire de la Harvard Law School Forum on Corporate Governance | 20 juillet 2017


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J’ai relevé les principaux billets, tout en me limitant au Top 1o.

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Compte rendu hebdomadaire de la Harvard Law School Forum on Corporate Governance | 13 juillet 2017


Voici le compte rendu hebdomadaire du forum de la Harvard Law School sur la gouvernance corporative au  13 juillet 2017.

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