There are two main sources of confusion in the public corporate governance debate. One is the confusion about the role of public policy in corporate governance. The other is a lack of empirical knowledge among commentators about the corporate landscape and the way that today’s stock markets influence the conditions for exercising long term and value creating corporate governance. This paper tries to mitigate some of this confusion and to increase awareness in both respects.

In terms of public policy it is important to understand that the general corporate governance discussion usually takes place on two different levels. And both are legitimate. One is concerned with the everyday workings of individual companies: how they organize their internal procedures, staff their company organs and build their corporate culture. Much of this is unique to the company in question. The choices to be made are often a matter of business judgment and are seldom in a domain where policy makers and regulators have any specific expertise.

…continue reading: Who Cares? Corporate Governance in Today’s Equity Markets

As you know, over the past couple of years, together with the board members and staff of the Public Company Accounting Oversight Board, I have been working to enhance the reliability of the external audit function and its usefulness to U.S. capital markets.

I will start off with an overview of some of the more significant issues confronting the audit profession. And then I’d like to open a more interactive discussion.

I. Corporate Governance Has Evolved to Suit the Needs of Capital Markets.

I have known many of you for years. I have watched and admired how you have navigated the many changes we have seen in both the energy industry and corporate governance.

Many of us have gained significantly more experience than we expected in identifying, addressing and preventing future threats to corporate success, such as differences in cultural expectations and business practices around the world and at home. Enron had a profound effect on Houston.

As this morning’s discussion demonstrated, you recognize that your work is never done. There is no perfect governance regime for all time.

…continue reading: Challenges Facing the Audit Profession and PCAOB Initiatives

We are witnessing a change in sentiment about independent director involvement in engagement meetings with shareholders. These interactions help to:

• Establish respect and understanding;
• Create a culture of no surprises; and
• Assess the quality and independence of directors by permitting shareholders the opportunity to learn how key board functions are managed and overseen.

To facilitate these interactions, we call on the independent directors of U.S. companies to develop suitable strategies that address their responsibility to communicate with shareholders.

Companies with significant governance concerns are increasingly recognizing the value of their independent directors engaging with shareholders. We are encouraged that some independent directors are actively seeking input from their shareholders to pre-emptively manage situations, while others are interested in understanding shareholder views on certain matters. However, such practices are by no means universal, with communication often occurring unilaterally through press statements and proxy disclosures rather than in face-to-face exchanges with shareholders. We advocate for independent director meetings with shareholders to become a routine part of a board’s approach to outreach with its shareholders, rather than only in exceptional circumstances or in times of crisis.

…continue reading: A Call on U.S. Independent Directors to Develop Shareholder Engagement Strategies

I am particularly pleased to be at a conference that focuses on the role of institutional investors and their impact on corporate control, market liquidity, and systemic risk. The SEC has a great deal of interest in these areas and I hope that you will provide us with any observations that can help inform the SEC’s understanding.

Role Played by Institutional Investors

The topic of your conference recognizes the important role played by institutional investors and the great influence they exert in our capital markets. The role and influence of institutional investors has grown over time. For example, the proportion of U.S. public equities managed by institutions has risen steadily over the past six decades, from about 7 or 8% of market capitalization in 1950, to about 67 % in 2010. The shift has come as more American families participate in the capital markets through pooled-investment vehicles, such as mutual funds and exchange traded funds (ETFs).

Institutional investor ownership is an even more significant factor in the largest corporations: In 2009, institutional investors owned in the aggregate 73% of the outstanding equity in the 1,000 largest U.S. corporations.

…continue reading: Institutional Investors: Power and Responsibility

My newest book, Citizens DisUnited: Passive Investors, Drone CEOs and the Corporate Capture of the American Dream, has been in the works for the last year, and is really the culmination of thirty years of work in corporate governance, activism and government. It was prompted by frustrations and failures, in many ways. But it was through those frustrations that I gained clarity on the problems facing our nation. Not just problems in the boardroom but the larger issues of power that tie corporations to the power structure in Washington and how it affects our society. The specific thoughts that led to this book began almost two years ago with a speech I gave at ICGN in Paris and are further illuminated in some new research done for the book by GMIRatings’ Ric Marshall.

In the course of planning the book, I had begun to think of some corporations as “drones” – in the sense that they are untethered from reality and responsibility. We define them as corporations, “in which no single shareholder retains a principal position, defined by the SEC as 10 percent or more.” The owners aren’t at the helm — but manager-kings are. And there are no limits to prevent these CEOs from enriching themselves at the shareholder expense or from shifting the burden of externalities onto society.

Ric, in the meantime, had begun to find empirical data that showed that,

…continue reading: Citizens DisUnited

Banks are special, so is corporate governance of banks. It differs considerably from general corporate governance. Specific corporate governance needs exist also for insurance companies and other financial institutions. This article, Better Governance of Financial Institutions, analyzes the economic, legal and comparative research on governance of financial institutions and covers the reforms by the European Commission, the European Banking Authority, CDR IV and Solvency II up to the end of 2012. External corporate governance, in particular by the market of corporate control (takeovers), is more important for firms than for banks, at least under continental European practice.

For financial institutions, the scope of corporate governance goes beyond the shareholders (equity governance) to include debtholders, insurance policy holders and other creditors (debt governance). Some include the state as stakeholder, but the role of the state is better understood as setting the rules of the game in a regulated industry. From the perspective of supervision debt governance is the primary governance concern. Equity governance and debt governance face partly parallel and partly divergent interests of management, shareholders, debtholders and other creditors, and supervisors. Economic theory and practice show that management tends to be risk-averse for lack of diversification but may be more risk-prone because of equity-based compensation in end games and under similar circumstances. Shareholders are risk-prone and interested in corporate governance. Debtholders are risk-averse and interested in debt governance. Supervisors are risk-averse and interested in maintaining financial stability and in particular in preventing systemic crises.

…continue reading: Better Governance of Financial Institutions

In Warren Buffett’s model of corporate governance, managers are stewards of shareholder capital. The best managers think like owners in making business decisions. They have shareholder interests at heart. But even first-rate managers will sometimes have interests that conflict with those of shareholders. How to ease those conflicts and to nurture managerial stewardship have been constant objectives of Buffett’s long career and a prominent theme of his shareholder letters that I began collecting two decades into the stand-alone book, The Essays of Warren Buffett: Lessons for Corporate America, the third edition of which was released in March 2013.

The essays address some of the most important governance problems. The first is the importance of forthrightness and candor in communications by managers to shareholders. Buffett tells it like it is, or at least as he sees it, and laments that he is in the minority. Berkshire’s annual report is not glossy; Buffett prepares its contents using words and numbers people of average intelligence can understand; and all investors get the same information at the same time. Buffett and Berkshire avoid making predictions, a bad managerial habit that too often leads other managers to make up their financial reports.

…continue reading: Governance Buffett Style

The 2013 annual meeting season may lack the drama of last year’s Occupy protests and impending presidential election but it will still have its share of challenges for issuers. Revisions to proxy advisors’ pay models and peer groups are already spawning another round of supplemental proxies on Say-on-Pay (SOP), while threats of compensation disclosure strike suits have become this year’s unwelcome sideshow.

This spring also promises another big wave of shareholder resolutions, with over 600 filed to date, though for the most part they will repeat the prevailing themes seen in past years. Public pension funds and other institutional proponents are methodically cleaning up S&P 500 and Russell 2000 firms that still have classified boards and plurality voting in director elections. Meanwhile, retail activists are boosting their share of proposals calling for independent board chairmen and compensation reforms, in addition to their perennial filings on supermajority voting, special meetings, and written consent.

Based on submissions to date, several unexpected trends stand out. The first is a renewed blitz of resolutions on corporate campaign finance, particularly indirect lobbying activities, following the record spending in the 2012 election cycle. Although not likely to gain ground in support levels, proponents are clearly keeping up the momentum on this issue in the hopes of eventual SEC rulemaking mandating disclosure of political spending. Filings of compensation-related proposals have also escalated this year, though many of these were part of a now-abandoned campaign by the United Brotherhood of Carpenters (UBC) to promote triennial SOP votes.

…continue reading: 2013 Proxy Season Preview: Key Shareholder Proposals

The 2012 Board Practices Report (the “Report”) is the eighth edition published by the Society of Corporate Secretaries and Governance Professionals. The Report presents findings from a survey conducted in July and August 2012 of the Society’s membership, which includes 3,000 individuals from more than 1,600 companies of varying sizes, industries, and organizational structures. The questions cover 16 board governance areas, including both established board practices and new trends in board activity.

The Report and its accompanying questionnaire were developed with Deloitte LLP’s Center for Corporate Governance.

Methodology

The survey, administered via an online application, contained a total of 78 questions, not including the sub-questions applicable to questions 16, 17, 19, 37, 50, and 74. A total of 195 individuals participated in the survey, although not all questions were answered by all respondents. In such cases, an “n” value is included with the result. Results from the 2011 Board Practices Report are included where available to show trends in various sections of the Report.

Percentages are based on the number of respondents to a particular question, and in some instances, percentages that should together form a whole may not add up to 100% (e.g., 28% “Yes,” 73% “No”), due to rounding to the nearest whole digit.

Participation in the survey was confidential, and the results provided cannot be attributed to a specific company.

…continue reading: 2012 Board Practices Report

There are arguably two broad objectives to the governance of any entity including private equity (PE) funds: i) effective and accountable decision-making and ii) aligning interests of different stakeholders. This article focuses on the second of these objectives describing in more detail the difficulties in aligning interests between a general partner (GP) and a limited partner (LP) in a PE fund.

The governance of PE funds is increasingly coming into the spotlight. The Institutional Limited Partners Association (ILPA) revised its Private Equity Principles in 2011 to establish a set of best practices to govern the relationship between GPs and LPs. Also, the UNEP Finance Initiative for Responsible Investment (UNPRI) issued a second version of its guide for LPs in 2011. There are contributions from the European Private Equity and Venture Capital Association (EVCA), the Australian Private Equity & Venture Capital Association Limited (AVCAL), as well as most recently from the International Corporate Governance Network (ICGN)—all on the same topic.

…continue reading: Alignment of General and Limited Partner Interests in PE Funds