This afternoon at PLI’s Annual Securities Regulation Institute, I am sitting in on a panel entitled Governance Challenges: Moving Away from “Whack-a-Mole.” The panel features James Cheek of Bass, Berry & Sims, Stephen Brown of TIAA-CREF, the SEC’s Meredith Cross, Wachtell’s David Katz, and David Martin of Covington & Burling. Highlights from the panel include:
- Meredith Cross says as a general matter, the Commission is not a regulator of corporate governance. It is generally the responsibility of state regulators as well as listing standards of exchanges. The SEC gets involved in corporate governance when Congress tells them to (SOX). What they do is facilitate the conversation between issuers and shareholders. An example is proxy disclosure enhancements. Cross says she has asked Shelly Parratt to examine whether the disclosure enhancements have been effective.
- The other panelists say that the enhancements may have led to increased boilerplate but the Commission can only micromanage these things so much.
- Stephen Brown says his teams read hundreds of proxies and they appreciate clarity and brevity. He thinks the current process is good but not optimal. He thinks issuers are still working through what is ideal disclosure. At the end of the day, shareholders want companies to “tell their story.”
Proxy Advisory Firms:
- Cross says the proxy plumbing release includes a discussion of how to address proxy advisory firms and they have received a number of great comments on it. One of the biggest concerns are that firms are too influential but Cross doesn’t think the SEC can really regulate this. Other areas of concern for the Staff are disclosure of conflicts of interest and concerns about the accuracy of information on which the firms rely. She reminds us that accuracy is different than simply disagreeing with a proxy advisor’s point of view. Her staff has had extensive discussions with firms about selection of peer groups and says that while they had a detailed selection process, they understood that the perception of their process being flawed was growing stronger. Recently, the firms have begun to address this.
- Brown says TIAA-CREF subscribes to proxy advisors’ reports but they have their own policy. They use reports simply as research. He says many institutional investors also have their own policies so the influence of ISS and Glass-Lewis may be overblown by issuers. He advises issuers to speak up if they disagree with a proxy advisors’ report because institutional investors want to hear from them.
- Martin says it is frustrating to receive flawed or late reports but it is more important to listen to the story the proxy firm has focused on for your issuer. Respond to it by focusing your disclosure on telling your own story to rebut them.
- There are three types – governance, economic and social responsibility.
- Governance activist investor objectives: majority voting, declassify boards, give shareholders right to call special meetings and act by written consent, reduce or rescind supermajority vote provisions, and provide for shareholder proxy access. This type of activism tends to erode takeover defenses and impair board functionality.
- Economic activist investor objectives: often similar to governance but their objective is to make the company engage in value-maximizing activity which often conflicts with long-term value creation. Examples are sale of company or division, block transactions, increased merger consideration or a management/board change.
- Corporate social responsibility activist investor objectives: concerns are corporate disclosure of political spending, lobbying activities and hydraulic fracturing (fracking). This is a major concern for companies and boards as more than 900 such proposals have been filed through June 30, 2012.
- Martin says shareholder engagement is key. Boards must be briefed about who they are and what they want. They should have a dashboard showing what the company’s engagement plan is. If you get this right, it can relieve many of the trouble spots discussed above. He says it’s as easy for a company to learn about their shareholders as it is for a shareholder to learn about them.
- The board doesn’t necessarily need to get their hands dirty on a day to day basis but they should have oversight and be briefed on the plan.
- He says social media is a powerful tool, especially for small and mid companies who are not utilizing it effectively now.
- Katz says too often companies don’t realize that their credibility is going to be key in getting investors to vote their way and if the first time they meet you is during a controversy, you have already lost credibility.
- Martin says the board should demonstrate that they have active involvement in shareholder engagement. The risks are too high for not doing it.
- Brown says boards must know who is speaking to shareholders for them. Many investor relations teams he has met are not up to the task. Put a team together who know the issues front and back and if you have a “camera ready” director that helps too.
- Shareholder engagement is a board level issue.
- Effective shareholder engagement can lead to better say on pay results.
- Effective boards have active, engaged directors that challenge management in a collegial way.
We’ll be back tomorrow morning with an Enforcement Roundtable!