Improving Civic Discourse

While the editors of the Columbia Journalism Review mikeswebare addressing the press in helping to rebuild the American conversation, their advice has value for all of us.

“Ideas, particularly political ideas, are meant to be shared, to redefine themselves over the blue flame of discussion…increasingly Americans live in separate information silos. In uncertain times the tribes gather close. People don’t talk to outsiders.”

The editors urge the press to help “rebuild the forum that makes democracy work by being its best self” by taking steps to “Ignore the bias bullies”, “Stand up for facts” and “Return to deep reporting backed by institutional processes” which means “lots of feedback from near and far, fact-checking, copy-checking and double-checking, all part of the practical effort to publish something as accurate as possible.

“A massive retreat into ideological niches is hardly restricted to cable TV, and it doesn’t help the nation address its challenges.”

Amen.

Directors, Your Job Is to Effectively Engage with Shareholders

Mary L. Shapiro, SEC ChairmanSEC_Schapiro1, was as plain-spoken and direct as she could be in addressing the 600 plus directors at the National Association of Corporate Directors annual conference, thanking them for inviting her to speak at a time when  “so much about what you do — and what I do — is being fundamentally transformed.”

“Speaking both as a regulator and as a former board member, I believe that it is vital that shareholders and board members move beyond the minimum required communications and become truly engaged in the shared pursuit of high quality governance.

“For boards and their companies, engagement means more than just disclosure. It means clear conversations with investors about how the company is governed — and why and how decisions are made.

“But engagement is a two-way street. Boards can also benefit from access to the ideas and the concerns investors may have. Good communications can build credibility with shareholders and potentially enhance corporate strategies.”

It wasn’t surprising then that the first question during the Q&A asked about running afoul of Regulation FD.  As she has said in the past and repeated “Reg FD doesn’t present a barrier to director-shareholder communication. “We have provided additional guidance to directors such as pre-clearing conversations, imposing no-trading restrictions on the shareholders who are talking to directors.  In short, Regulation FD is not meant to be a barrier.”

In conclusion she noted that, “Technology, investor attitudes and the way financial markets work have all changed dramatically during the past decade. The way in which we, and in which you and your shareholders communicate, must similarly change.

“The SEC cannot and is not interested in determining the communications strategies of individual companies. But we are interested in breaking down barriers that may prevent effective engagement, and affect investor confidence and, ultimately, financial performance.”

Boards should be developing communication plans now, re-examining their governance documents in light of the changing environment and developing strategies to contribute to improved governance.

CEOs, Help Your Board Prepare for Proxy Season

shareholder communicationDear CEO,

Have you given your board the tools it needs to navigate the coming proxy season?  It’s up to you to see that your board is prepared.

The Dodd-Frank Act creates new requirements for board disclosure and greater transparency.  Governance power has shifted to shareholders, who are now empowered to hold boards and management accountable. How your board moves forward in this new environment is critical.

CEOs need to see their boards as helping them to restore confidence in the system. If you wear the mantle of both CEO and chairman, it’s even more critical that you set the tone for clear disclosure and genuine engagement with shareholders. It sends a signal that you respect their importance in the long-term health of the organization.

 The new disclosure rules encourage boards to build trust with shareholders through the application of sound principles, transparent communications and actively engaging with them to secure a favorable vote. Board members will need to become better communicators.  But they need guidance in demonstrating independence and credible oversight.  Some basic communication planning should begin now.

 What may prove to be a best in class approach is for the board to articulate its principles, its own “Articles of Governance” to serve as the source for board communication and shareholder engagement.  By reviewing its current identity, which resides in governance and legal documents, the board can craft a comprehensive board governance doctrine that prepares the board for the upcoming proxy season and beyond.

 This proactive approach enables the board to discuss and decide in advance how it will handle critical issues.  By working through issues in an atmosphere of calm, the board is better prepared to face a crisis and even avoid or mitigate one.

Disclosure in governance is an area we understand well and we would be happy to assist you.

Even Lawyers Are Telling Directors, It’s Time to Communicate

proxyaccessDuring a NACD Webinar, DC in the Boardroom:  A Board Level Briefing on Proxy Access, the three attorney panelists—David Caplan a partner at Davis Polk & Wardell, John Gorman, partner at Luse Gorman and former Special Counsel, SEC Division of Corporation Finance and Annette L. Nazareth, also a partner at Davis, Polk & Wardell and  former SEC Commissioner, all agreed that directors should enhance their communication with shareholders.  They also agreed that the time to act is now.

During this period leading up to the proxy season, directors should be engaging in some form of self-evaluation to understand what their vulnerabilities are—do shareholders have concerns about executive compensation, the capabilities of the current board of directors or other governance issues? 

Nazareth reminded the participants that “investor protections has been a focus of the SEC and one way of ensuring protection is good corporate governance.”  

Directors should “consider ways to enhance shareholder communication so that you’re not in the position of your 3% shareholders feeling that they need to nominate their own directors because they are not being represented appropriately by the current board.”

Directors, Do You have a Shareholder Engagement Program?

consultationWith the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, power has shifted to shareholders.  The 2011 proxy season is a game-changer as the rules require boards to seek shareholder support for compensation programs and even directorship candidates.

Directors, do you have a shareholder engagement program? Have you reviewed and assessed the board capacity for shareholder communication and dialogue?  Have you discussed how you will handle increased dialogue and interaction with shareholders?

The board world has changed.  Shareholders have greater power to influence board composition and executive pay based on the provisions of Dodd-Frank for proxy access, say on pay, limits on broker discretionary voting.

By remaining silent, boards increase the power of proxy advisors as the only independent guidance to shareholders on how to vote.  Boards increasingly need to engage with key shareholders, initiating communication and dialogue.

Get started now.

Opportunity for the H-P Board

Mark HurdAfter ousting HP CEO Mark Hurd for his indiscretion with a marketing contractor, falsifying expenses to conceal his relationship, and thereby failing to live up to the HP code of conduct, the Hewlett-Packard board has a chance to demonstrate to shareholders and the public that they intend to revive and enforce “tone at the top” of the storied Silicon Valley company.

Hurd and his predecessor, Carly Fiorina, who was also fired by the board, brought new meaning to the HP Way.  Certainly, it was a different company than when brilliant engineers and founders William Hewlett and David Packard were at work in the company. Their instinctive style of “managing by walking around” would be almost impossible to replicate. Fiorina, ambitious and eager to make her mark aggressively drove the Compaq merger while a subplot revealed that the HP board had its own problems as chairwoman Patricia Dunn stepped down facing felony charges. After the scandal, Hurd’s success was welcomed even if he took a cost-cutting and execution style approach to management.

With Hurd occupying both the Chairman and CEO role, Robert Ryan has served as lead director since 2008.  But it has been Mark Andreessen handling the Hurd resignation.  As the founder of another storied company, Andreessen has the gravitas to insist on a leader that not only performs well but behaves well.

Andreessen is given to greater transparency as well as sensitivity to culture and a larger group of stakeholders including investors, employees and the larger public given that he is an under-40 wildly successful entrepreneur now leading a company that provides a platform for social networking websites.

Andreessen is the spark that HP needs at this time, setting the tone and communicating what the board is doing on behalf of shareholders and stakeholders.

Dodd-Frank Reflects ‘New Normal’–”Boards Are the Problem”

shareholder activism“We’re seeing a sea-change in the environment of shareholder empowerment,” said Holly Gregory, Weil Gotshal partner and governance expert. “The Dodd-Frank bill accelerates a fundamental change, a new normal in the balance of governance power. “ She went on to note that the eighth anniversary of Sarbanes Oxley, enacted during the aftermath of WorldCom and Enron debacles,  boards were seen as the solution to the failures in corporate accountability. “In sharp contrast the new legislation reflects the view that boards are the problem and shareholders must be empowered to hold boards accountable.”

Gregory made these remarks on a National Association of Corporate Directors and Weil Gotshal webinar attended by hundreds of directors on Friday as boards try to gain a better understanding of the requirements that the new legislation that President Barack Obama signed into law on July 21, 2010.

“I want to emphasize that the theme within the legislation is that boards are the problem,” said Gregory.

Boards are well advised to recognize that the implementation of the legislation will fundamentally change their interactions with shareholders.  For directors who have eschewed any contact with shareholders, they must engage with shareholders in meaningful ways to elicit their support.  The sooner and more intelligently that they begin this dialogue, the better for them.

Goldman Decides It’s a Good Idea to Communicate with Shareholders

In advance of its May 7th annual meeting with shareholders, Goldman Sachs used surprising candor in an eight-page letter in its 2009 annual report. Reiterating that it didn’t ‘bet against’ clients using short positions it took on before the residential real-estate market crashed. Rather, it was one of the first Wall Street firms to reduce its real-estate exposure, “even as some clients were sticking with their bullish bets.”

The Financial Times concludes, “The [note] is an implicit admission that Goldman’s long-held strategy of giving short shrift to criticism of its behavior and pay policies during the crisis has done little to quell the public backlash against the Wall Street bank.”

After such a mea culpa, how will Goldman Sachs handle its annual meeting?  Will it be a kabucki show or will Chairman and CEO Lloyd  Blankfein lead his directors in a sincere effort to engage with shareholders?  Blankfein has a chance to demonstrate that he’s committed to minimizing reputation risk by making the meeting a true opportunity for shareholders to question and receive genuine responses from him and the board of directors.

It’s a dramatic change and they should be preparing now.

Say on Pay Is an Opportunity for Boards to Engage Shareholders

Over 60 boards have proactively adopted “say on pay” in addition to those institutions that are required to offer shareholders an advisory vote on compensation by virtue of the TARP funds they received.  Congress has advanced legislation to mandate such advisory votes at all public companies.  Clearly, the tide is with granting shareholders the opportunity to express their opinion about the board’s handling of executive compensation.

An investor network comprised of public pension funds, labor funds, asset managers, and representatives of public companies formed a working group and spent almost three years studying the ramifications of a say on pay vote.  The companies on this working group including Intel, Prudential Financial, and most recently Colgate have enacted some form of say on pay.

“Our intention is to hold the board’s feet to the fire, so that they are asking management questions on our behalf to protect our interests,” said Anne Sheehan Director of Corporate Governance of CalSTRS.  “There is a shift in communication responsibility, board members should talk to shareholders.”

She recognizes that such dialogue with shareholders could be time consuming.  Certainly boards should have some kind of mechanism to talk to their ten largest shareholders, she said.  But smaller shareholders should have some kind of unfiltered access to the board, through a website or other method.

To the many boards that have been reluctant to adopt an advisory vote, Timothy Smith, Senior Vice President of Walden Asset Management says that the advisory vote has become a more normalized response to the executive compensation issue and is not the fringe idea it was considered several years ago.  “There’s a strong business case to adopt say on pay,” says Smith.  “It’s a good defensive strategy and removes the potential for a conflict with shareholders.”

To the boards that counter that such a vote doesn’t tell the board anything, Smith responds:  “Yes, an advisory vote is a simple yes or no. But you should know where your shareholders stand on your compensation issues.  You should never be caught not knowing what your shareholders think. You should know that before the vote.”

Engaging with shareholders on key issues is what boards should be doing anyway.

A Financial Icon Offers an Agenda for Restoring Faith

John C. Bogle, the founder and former CEO of the Vanguard Group, cites a host of interesting statistics that document the changes in the investing public in his call for  the creation of a Federation of Long-Term Investors, in which institutional investors, who alone hold some 15 percent of  U.S. stocks would join together to force changes in public company governance.

In his Wall Street Journal opinion article Bogle quotes Leo Strine, vice chairman of the Delaware Court that “no longer are the equity holders of public corporations diffuse and weak.. (they represent a new and powerful form of agency.”

In the 2010 proxy season, boards of directors who develop programs of shareholder communication and active engagement with their owners will see better outcomes.