Thursday, August 19, 2004

CG analytics, proxy voting and restoring investors trust

Worldwide, institutional investors are gradually becoming more active in monitoring and interfering on C. strategy, policy, and major decisions taken by management.
I would like to point to two important but often overlooked enabling components of this monitoring process and of the CG dialogue. Electronic proxy voting by pension funds, mutual funds and alike, is recently being combined with the use of CG analytics tools and software, providing electronically calculated quotients that indicate the quality of G. in a corporation.
The organizations that use these tools, institutional investors, have a natural long-term perspective towards investing and value creation. 10 years or more is normal.
I believe the combination of these factors will over time play out to have been as relevant to restoring investors trust as Sarbanes-Oxley, accounting restructuring or in fact any other measure being taken, because they increase and restore the influence and power of the shareholders. Institutional investors are ideally suited to increasingly play this important task, because they are professionally educated investors, have a natural long term view towards value creation, and they can also represent and balance out the interests of the stakeholder categories they represent. In the case of pension funds: the employees. After all, it's their pensions that must be ensured.

Tuesday, August 10, 2004

Bring shareholders into the boardroom

The many C. scandals of the past two years have highlighted the importance of effective CG. Cases that are by now notorious, such as Enron, WorldCom, Tyco, and Healthsouth, provided vivid examples of how companies and investors can be hurt when boards of directors do not do their jobs well. How can we improve board performance? One main way is by reducing the extent to which boards are now insulated from, and unaccountable to, shareholders. We need to rethink the arrangements that determine the current power of the board vis-à-vis shareholders.
Of course, in the wake of the C. scandals, some significant reforms have already taken place or are pending.
To begin, the Sarbanes-Oxley Act and the subsequent actions and rulemaking of the Securities and Exchange Commission (SEC) have imposed additional duties on boards and have tightened enforcement. For example, the new legislation prescribes procedures for the audit committees of boards, increases penalties for noncompliance with securities laws, and prohibits the granting of personal loans to executives. Still, as a good C. system must do, these reforms have left substantial discretion in the hands of C. boards.

Friday, August 06, 2004

McKinsey survey: Separate the roles of CEO and Chairman

According to a recent McKinsey survey at 150- US Directors and 44 US institutional investors, the direct impact of Corporate Governance reforms so far hasn't been particularly troublesome for executives and directors, although it has created more work for finance departments, as well as higher accounting expenses. But the reforms now being demanded by investors and activist advisory groups will be much more of a burden. The investors and directors McKinsey surveyed want companies to:
  1. Move toward separating the roles of CEO and chairman,
  2. Make directors more independent and accountable, and
  3. Scale back and restructure executive compensation so that it is aligned more closely with the creation of long-term value.

CEOs, though, are resisting the change. Yet given the growing demand for change, CEOs, directors, and investors must form a plan that works for everyone accoridng to Robert Felton from McKinsey. Since the topic of separating the roles of CEO and chairman can be highly charged and very personal, the board should discuss it solely as a business problem. Collectively, the board and the CEO need to come up with an approach that satisfies investors while retaining and motivating the CEO. At a minimum, a lead (or presiding) director should be appointed as an interim step. To bring more credibility to a role that many shareholders view as merely symbolic, however, the lead director must have clearly defined responsibilities and meaningful authority.
At the same time, the board should at least consider the idea of installing a nonexecutive chairman over time.