Already at this stage of the current proxy season, seventeen charter amendments declassifying boards of S&P 500 companies have been adopted following agreements entered into with investors represented by the Shareholder Rights Project (SRP). Details about these early results, as well as about the large number of agreed-upon management proposals to declassify expected to go to a vote at other S&P 500 companies later on, are provided below.

As described on the SRP’s website, during the 2011-12 proxy season, the SRP has been representing and advising several institutional investors – Illinois State Board of Investment (ISBI), the Los Angeles County Employees Retirement Association (LACERA), the Nathan Cummings Foundation (NCF), the North Carolina State Treasurer (NCDST), and the Ohio Public Employees Retirement System (OPERS) – in connection with the submission of precatory shareholder proposals to more than eighty S&P 500 companies that have classified boards. The proposals urge repealing the classified board and moving to annual elections, which are widely viewed as corporate governance best practice.

Through active engagement with companies receiving declassification proposals, negotiated outcomes have been obtained with forty-four S&P 500 companies receiving proposals from the SRP-represented investors (about half of the companies receiving such proposals). These forty-four companies have entered into agreements committing them to bring management proposals to declassify their boards. Overall, the forty-four companies that have entered into such agreements represent about one-third of the S&P 500 companies that had staggered boards as of the beginning of this proxy season, and have an aggregate market capitalization that exceeds (as of April 1, 2012) half a trillion dollars.

Of the forty-four agreed-upon management proposals, twenty-three management proposals have already gone to a shareholder vote. Of these twenty-three proposals, seventeen have passed, resulting in declassification of the board. The table below provides information concerning the agreed-upon management proposals that passed. As the table indicates, these proposals obtained average support of 99.08% of votes cast and 81.01% of votes outstanding.

The six management proposals to declassify that did not pass (detailed here) did receive a majority of the votes (95.51% of the votes cast on average, and 67.22% of the votes outstanding on average). However, the proposals did not pass due to the presence of high supermajority requirements.

Agreed-upon management proposals to declassify are expected to go to a vote at other S&P 500 companies later on. A list of such companies that have already made public filings that disclose the planned management proposals is available here.

In the paper, Board Structure and Monitoring: New Evidence from CEO Turnover, which was recently made publicly available on SSRN, we provide new evidence on the potential benefits of SOX and ensuing new exchange listing rules and the effectiveness of monitoring by independent directors. Although many researchers, regulators and investors believe that increasing the representation of independent directors on corporate boards can improve quality of board oversight, empirical evidence has been mixed and inconclusive. Recent research even raises doubt about the effectiveness of independent directors in monitoring CEOs.

Using the change in NYSE and Nasdaq listing rules following the passage of the Sarbanes-Oxley Act as a source of exogenous variation, we provide the first statistically convincing evidence on a causal relation between board (committee) independence and the sensitivity of forced CEO turnover to firm performance. Specifically, we find that firms that after SOX moved to a majority of independent directors or to a fully independent nominating committee experience increased sensitivity of forced CEO turnover to performance. This evidence suggests that quality of board monitoring is positively related to board independence and nominating committee independence and the causation goes from board structure to quality of board monitoring.

…continue reading: Board Structure and Monitoring

In our study, CEO Succession Practices (2012 Edition), which The Conference Board recently released, we document and analyze 2011 cases of CEO turnover at S&P 500 companies. The study is organized in four parts.

Part I: CEO Succession Trends (2000-2011) illustrates year-by-year succession rates and examines specific aspects of the succession phenomenon, including the influence on firm performance on succession and the characteristics of the departing and incoming CEOs.

Part II: CEO Succession Practices (2011) details where boards assign responsibilities on leadership development, the role performed within the board by the retired CEO, and the extent of the disclosure to shareholders on these matters.

Part III: Notable Cases of CEO Succession (2011) includes summaries of 10 episodes of CEO succession that made headlines in the past two years and that were carefully chosen to highlight key circumstances of the process.

Part IV: Shareholder Activism on CEO Succession Planning (2011) reviews examples of companies that have recently faced shareholder pressure in this area.

…continue reading: CEO Succession Practices

Although the current proxy season is still in its early stages, shareholders of twelve S&P 500 companies have already approved precatory declassification proposals that investors represented by the Harvard Law School Shareholder Rights Project (SRP) submitted. These early results, as well as the large number of such proposals expected to go to a vote at other S&P 500 companies, are described further below.

As described in detail on the SRP’s website, during the 2011-12 proxy season, the SRP has been representing and advising several institutional investors – Illinois State Board of Investment (ISBI), the Los Angeles County Employees Retirement Association (LACERA), the Nathan Cummings Foundation (NCF), the North Carolina State Treasurer (NCDST), and the Ohio Public Employees Retirement System (OPERS) – in connection with the submission of precatory shareholder proposals to more than eighty S&P 500 companies that have classified boards. The proposals urge repealing the classified board and moving to annual elections, which are widely viewed as corporate governance best practice.

Through active engagement with companies receiving declassification proposals, negotiated outcomes have been obtained with forty-four S&P 500 companies. These forty-four companies have entered into agreements committing them to bring management proposals to declassify their boards. Overall, the forty-four companies that have entered into such agreements represent about one-third of the S&P 500 companies that had staggered boards as of the beginning of this proxy season. At this stage of the proxy season, twelve agreed-upon management proposals to declassify have already been approved by shareholders.

In many of the companies receiving proposals, however, negotiated outcomes have not been obtained. In such cases, the shareholder proposals submitted by the SRP-represented investors are expected to go, or have already gone, to a vote at the 2012 annual meeting. In particular, such proposals have already gone to a vote at sixteen companies, and fourteen of them have already released voting results.

Of these fourteen proposals, twelve have already passed. The table below provides information concerning the precatory declassification proposals that passed. As the table indicates, these proposals obtained average support of 79.25% of votes cast.

Two shareholder proposals to declassify (detailed here) did not pass. Although these proposals failed to gain majority support, they received an average support of 48.55% of the votes cast.

Precatory proposals are expected to go to a vote at twenty-two other S&P 500 companies. A list of these companies is available here.

The corporate governance of banking organizations has become the focus of intense examination in the wake of the financial crisis. Because of the complexity that surrounds both the causes of the financial crisis and the weaknesses and vulnerabilities it exposed in the banking system and financial markets, it is manifestly unreasonable to suggest that better corporate governance practices at banking organizations alone could have prevented, or even substantially ameliorated, the crisis. That said, good corporate governance, including a well-functioning board of directors, is critical to a financial institution’s ability to manage its risks prudently, while operating profitably and contributing to economic growth.

In recognition of the importance of good corporate governance in the banking system, the Clearing House, an association comprised of some of the world’s largest commercial banks, has developed and submitted for public comment its Guiding Principles for Banking Organization Corporate Governance (the “Guidelines”). These principles focus on the role of the board of directors, as a cornerstone of the governance structure.

The U.S. banking system is unusual in that banking organizations in the United States, especially larger ones, are typically organized in a bank holding company structure. There is a holding company, organized as an ordinary business corporation, as the top-tier entity, which in turn owns one or more commercial banks and other operating subsidiaries. The Guidelines address governance at both the top-tier entity and bank subsidiary levels, but recognize that many risk management and governance issues may be best addressed on an organization-wide basis at the top-tier entity level.

…continue reading: The Clearing House Association Issues Draft Governance Principles

In our paper, Director Ownership, Governance, and Performance, forthcoming in the Journal of Financial and Quantitative Analysis, we study the impact of SOX on the relationship between corporate governance and company performance. A significant part of SOX and other exchange requirements increase the role of independent board members. Given that prior academic research suggests there is no positive relationship between board independence and firm performance, the above regulatory efforts are especially notable.

We find a shift in the relationship between board independence and firm performance after 2002. Prior to 2002, we document a negative relationship between board independence and operating performance. After 2002, we find a positive relationship between independence and operating performance. We find this result is driven by firms that increase their number of independent directors. An event study provides independent evidence supportive of the above results – specifically, when a company goes from being non-compliant to being compliant with SOX’s board independence requirement, the market response is significantly positive. Why might SOX be related to this positive performance? SOX and the listing standards impose new responsibilities on firms’ directors, such as regular meetings of the independent directors, approval of director nominations by independent directors, and approval of CEO compensation by independent directors. As a consequence of these policies boards began including more independent directors, and, perhaps the independent directors became more engaged in the firm’s governance processes. For example, we find that firms with greater board independence (and stock ownership of board members) are less likely to engage in a value-destroying activity, namely, acquisitions.

…continue reading: Director Ownership, Governance, and Performance

Wal-Mart appeared to commit virtually every governance sin in its handling of the Mexican bribery case, if the long, carefully reported New York Times story is true. The current Wal-Mart board of directors must get to the bottom of the bribery scheme in Mexico and the possible suppression by senior Wal-Mart leaders in Bentonville, Arkansas (the company’s global headquarters) of a full investigation.

In addition, the board must also review – and fix as necessary – the numerous company internal governing systems, processes and procedures that appear to have been non-existent or to have failed. And, most importantly, it must define the CEO’s core role as one which truly fuses high performance with high integrity, and does not exalt performance at the expense of integrity – and possibly discipline or remove the past CEO (still on the board) or the current CEO.

The essential allegations in the Times story are as follows:

For a substantial period before 2005, the CEO of Wal-Mart in Mexico and his chief lieutenants, including the Mexican general counsel and chief auditor, knowingly orchestrated bribes of Mexican officials to obtain building permits, zoning variances and environmental clearances, and also falsified records to hide these payments. When the lawyer in Mexico directly responsible for bribery payments had a change of heart and reported the scheme to Wal-Mart lawyers in the United States, those lawyers hired an independent firm which, after an initial look, recommended a major inquiry.

…continue reading: Wal-Mart Bribery Case Raises Fundamental Governance Issues

In our forthcoming Journal of Financial Economics paper, Endogeneity and the Dynamics of Internal Corporate Governance, we use a well-developed dynamic panel generalized method of moments (GMM) estimator to alleviate endogeneity concerns in two aspects of corporate governance research: the effect of board structure on firm performance and the determinants of board structure. It is well known that theoretical and empirical research in corporate finance is complicated by the endogenous relation that exists between the control forces operating on a firm and its decisions. Jensen (1993) broadly classifies these control forces (i.e., governance in a broad sense) as capital markets, the regulatory system, product and factor markets, and internal governance. In much of the extant corporate finance research, researchers attempt to either explain the causes or examine the effects of corporate finance decisions as related to one or more of these control forces. Empirical research often involves determining the causal effect, if any, of a firm characteristic (X) on some measure of firm profits or value (Y). This is usually done using the inference from a regression of Y on X along with several control variables (Z). The question is often framed as: holding Z constant, does X have an economically and statistically significant causal effect on Y?

…continue reading: Endogeneity and the Dynamics of Internal Corporate Governance

Staggered boards have long been a key mechanism for insulating boards of publicly traded firms from shareholders. This year, several institutional investors and a program working on their behalf have used shareholder proposals to move a large number of publicly traded firms away from such structures. Despite strong and expected criticism from the usual suspects, shareholders should welcome and support this work.

The Shareholder Rights Project, a clinical program that I run at Harvard Law School, assists public pension funds and charitable organizations in improving corporate governance at publicly traded companies. During this proxy season, we represented and advised five such clients – the Illinois State Board of Investment, the Los Angeles County Employees Retirement Association, the Nathan Cummings Foundation, the North Carolina State Treasurer, and the Ohio Public Employees Retirement System – in connection with their submission of proposals for a vote at the annual meetings of more than 80 companies on the Standard & Poor’s 500-stock index.

The proposals urge companies with a staggered board, which allow shareholders to replace only a few directors each year, to place all board members up for election every year. Such a move to annual elections is viewed by investors as a best practice of corporate governance. By enabling shareholders to register their views on all directors each year, annual elections make boards more accountable to shareholders.

…continue reading: Giving Shareholders a Voice

Governing boards in the for-profit and nonprofit contexts share many legal precepts: the oversight role, the decision-making power, their place in the organizational structure, and their members’ fiduciary duties. But in the nonprofit setting, misconceptions about corporate governance abound. Are board members primarily fundraisers? Cheerleaders? A rubber stamp to legitimize the actions and decisions of the executives? Do they run the organization to the extent staff is unable? Are they window-dressing to spruce up the organization’s letterhead? If they are rich or famous, must they attend board meetings? How do they know whether they are doing a good job, or when it is time to go? Despite the common ancestry and legal underpinnings, nonprofit corporate governance places heightened demands on trustees: a larger mix of stakeholders, a more complex economic model, and a lack of external accountability. This post explores how substituting a charitable purpose for shareholders’ interests affects the board’s role.

In organizations of all kinds, good governance starts with the board of directors. The board’s role and legal obligation is to oversee the administration (management) of the organization and ensure that the organization fulfills its mission. Good board members monitor, guide, and enable good management; they do not do it themselves. The board generally has decision-making powers regarding matters of policy, direction, strategy, and governance of the organization.

…continue reading: Nonprofit Corporate Governance: The Board’s Role