corporate governance

Boards, Equality

Public companies should report on Diversity to their shareholders

There is enough evidence of the value of diversity on corporate boards now to do something truly visible about it. We deal with Say-on-Pay every year now at the public board level, so why not Report-on-Diversity?Say-on-Pay is a result of the Dodd-Frank Act. It says that the shareholders get to vote on whether they approve executive pay or not. It’s non-binding – ie. “advisory” but boards take it very seriously. They have to. Executive pay is a contentious issue, highly paid consulting firms like ISS and Glass-Lewis opine on whether the shareholders should vote for or against the executive pay packages, and the compensation committee members (like me) work hard to try to both be competitive with the CEO’s pay and take the input of the shareholders into account in the design of the pay packages.

It’s an imperfect process, and the consultants are very mixed in the quality of their analysis, but it throws attention and light onto the right issue: over time is executive compensation lining up with company performance?

So why Diversity? Because we now know that having a diverse board improves company performance. Consider:

– ION’s research that companies gain a competitive edge with more women on the board
– Catalyst’s extensive research that having women on boards improves financial performance
– University of Wisconsin-Milwaukee research that boards with a woman on them are 40% less likely to have a financial restatement

but the numbers of women on boards are not changing. As Ilene H. Lang, president and CEO of Catalyst and a member of the
WCD Global Nominating Commission, said: “Despite heightened conversation
globally around women’s representation on corporate boards, the 2012
Catalyst Census once again showed no change for the seventh consecutive year – and the challenge is not lack of qualified women.”

The reality is white men still dominate the board room.

Fran Maier of TRUSTe calls the low number of women on boards “despicable” and attributes the issue to low turnover of boards, lack of term limits, and most of all due to male board members recruiting people like them. She and Catalyst are right, it’s just not a lack of qualified candidates.

And yet today only 16% of US public company board seats are held by women, 29% of companies have no women on the board, and while 91% of the Fortune 500 have one women director, only 60% of the Technology 200 have one director — technology is significantly lagging!

I think the answer lies in transparency. I don’t think it lies in quotas as the EU is pursuing. Their notion that 40% of directors should be women by 2020 or the company faces sanctions will create a negative backlash and will not lead to the best candidates being hired. Quotas are in place in several European countries, and they certainly
make change happen fast, but I believe it diminishes the impact a woman
can have on a company if she’s known to be there because they need a
human without a Y chromosome to fulfill a quota.

But we can tackle this issue, and make change happen, if companies have to report on their diversity and the process to improve their diversity to the shareholders. The British, who like the Germans are at the bottom in the rankings of women on boards and in management, have introduced voluntary measures where companies report on their diversity and their targets.

The statistics will change if companies are required to report on the diversity statistics of their upper management and board, and present them in the MD&A. It would improve if they were required to report on the change over time and describe their diversity programs to bring more women on the board and into senior management. Even more revealing would be to require them to disclose how many diverse candidates they interviewed in the CEO and Director recruiting process. I’ve been in the room – it’s shockingly low (and I have to be very careful about when and whether I point that out since I am still always the only woman in the room – as I was years ago when this photo was taken).

Most boards want to do a good job. Most want their companies to do well and to provide good governance and oversight. Faced with the growing body of research that diversity improves financial performance, most would engage and try to improve things. Some are tone-deaf to the issue (which never fails to surprise me, even now) but educating boards and causing them to publicly report on the their diversity, their programs and their improvement over time would make change happen, and improve financial performance at the same time.

And my board at FirstRain? 50% women of course.

Read more here: http://www.sacbee.com/2012/12/11/5046274/global-nominating-commission-launches.html#storylink=c

NYSE Commission on Corporate Governance: Sense in the face of the nonsensical

As the financial markets blew up, and the wealth divide of the US opened up further, cries to change the way companies are run have grown louder and more capricious. Corporate governance has become the fig leaf a board can hide behind. Proxy advisory firms gain more Mob-like power , boards become driven by fear (consider the recent fear-based actions of the HP board) and fewer high quality execs want to serve on public boards (one of the reasons boards get so clubby – hang out with people you know and trust and it feels less risky).

Step in the NYSE to the rescue. A year ago the NYSE sponsored a Commission on Corporate Governance and yesterday they outlined their Key Governance Principles. It’s a pragmatic, sensible document (thank goodness!) that finds the balance between the needs of the shareholders and the needs of boards and management to be able to manage.

Interesting to note – the commission was lead by the indomitable Larry Sonsini of WSGR and of the 27 members the majority are lawyers – typically in the general counsel role. There are no members who you would normally think of as “management” – like CEO, GM etc. but given the topic I guess the lawyers can take the floor.

Here are the 10 core principles – and my interpretation. I sit on two public boards and so welcome some sense being injected into the corporate governance discussion…

The 10 core principles outlined by the NYSE Commission on Governance are as follows:

The Board’s fundamental objective should be to build long-term sustainable growth in shareholder value for the corporation;
Stating the obvious – thankfully – and some people need reminding (HP anyone?)

Successful corporate governance depends upon successful management of the company, as management has the primary responsibility for creating a culture of performance with integrity and ethical behavior;
Yes, management runs the company NOT the board. Something I am acutely aware of as a CEO, and very sensitive to as a board member. Only the CEO knows everything needed to integrate a final decision.

Good corporate governance should be integrated with the company’s business strategy and not viewed as simply a compliance obligation;
Filling out forms and surveys, and reviewing a committee charter once a year is not governance. That’s mailing it in. Governance works when management cares about it as much as the head of the company’s Governance committee – not always the case.

Shareholders have a responsibility and long-term economic interest to vote their shares in a reasoned and responsible manner, and should engage in a dialogue with companies thoughtful manner;
ie. Activist hedge funds interested in only a quick flip don’t help. Likewise don’t follow ISS scores blindly, talk to the company before you vote.

While legislation and agency rule-making are important to establish the basic tenets of corporate governance, corporate governance issues are generally best solved through collaboration and market-based reforms;
The agencies have a black eye after the sub-prime disaster – and more regulation is not likely to help. It’s no substitute for sensible, thinking people at the top on both sides.

A critical component of good governance is transparency, as well governed companies should ensure that they have appropriate disclosure policies and practices and investors should also be held to appropriate levels of transparency, including disclosure of derivative or other security ownership on a timely basis;
Translation – transparency cuts both ways guys

The Commission supports the NYSE’s listing requirements generally providing for a majority of independent directors, but also believes that companies can have additional non-independent directors so that there is an appropriate range and mix of expertise, diversity and knowledge on the board;
Founders and key technologists are absolutely invaluable in strategy discussion. Really, really important (especially in complex companies like one I sit on – Rambus). Blind slavery to all independent directors (except the CEO) is not smart in technology.

The Commission recognizes the influence that proxy advisory firms have on the markets, and believes that it is important that such firms be held to appropriate standards of transparency and accountability;
Did you know that ISS will provide a recommendation on a public company and advise funds whether to vote for managements recommendations – but the company has to buy a piece of software from ISS for $20,000 in order to run the “model” that will tell them how ISS will calculate their score so they can fix it?

The SEC should work with exchanges to ease the burden of proxy voting while encouraging greater participation by individual investors in the proxy voting process;
Make it easier guys and more people will vote. You need the votes of the shareholders to know what they really think – after all in the end they own the company.

The SEC and/or the NYSE should periodically assess the impact of major governance reforms to determine if these reforms are achieving their goals, and in light of the many reforms adopted over the last decade the SEC should consider the expanded use of “pilot” programs, including the use of “sunset provisions” to help identify any implementation problems before a program is fully rolled out.
Sensible. Try before you mandate. These are complex systems and the interaction between the moving parts is not always obvious.

Overall – I love it! Nice job.

Ed: You can see a video of Larry describing the commission’s process and outcomes here.


Activism is still on a roll

Six months ago I posted on how activism is on the rise – and now in early November one of the top stories of the year is the activist shareholder Jana’s successful play around CNET. This is written up in a terrific Bloomberg trend piece on activist investors – definitely worth reading if you are interested in how activists operate. In one case they describe how a specific focus on vulnerabilities of the by-laws and other corporate governance issues can create openings and weakness they can take advantage of. The devil is, as usual, in the details.

With current rock-bottom prices for a lot of companies, the extreme value style of activist investment would seem to have a good run in front of it. Even without the ready liquidity of former times, the private equity firms still are sitting on a considerable amount of cash – when very few others are – and the activists with strong reputations are potentially at the front of the line as new money comes in.

But while activists get a bad rap much of the time, they are not always bad for companies. CEOs and boards can get complacent, enjoying moderate returns, or even declining returns, but not having the vision or courage to break out and try another strategy. While I am (for obvious reasons) pretty sympathetic, I have a board member who is an activist hedge fund manager – Charlie Frumberg at Emancipation Capital – and he is thoughtful and substantive in the positions he takes and the companies he gets personally involved in turning around, breaking up or selling.

You can see a household name example of the difference of opinion between management and an activist shareholder in the Minneapolis Star Tribune’s article on Ackerman and Target. In this case there is definitely a schism long term strategy – specifically whether Bill Ackman’s push to get Target to sell out its land holdings to generate a short-term investment return is good for the company in the long run.

I think, in the end, most boards are responsible (I know the two I sit on take their responsibilities very seriously) and running a large company is a hard complex task that can look much easier from the outside. But challenge is also good because it keeps boards on their toes and focused.