In our annual missive last year, we wrote about the need to restore trust in our system of corporate governance generally and in relations between boards of directors and shareholders specifically. We continue to be troubled by the tensions that have developed over roles and responsibilities in the corporate governance framework for public companies. The board’s fundamental mandate under state law – to “manage and direct” the operations of the company – is under pressure, facilitated by federal regulation that gives shareholders advisory votes on subjects where they do not have decision rights either under corporate law or charter. Some tensions between boards and shareholders are inherent in our governance system and are healthy. While we are concerned about further escalation, we do not view the current relationship between boards and shareholders as akin to a battle, let alone a revolution, as some media rhetoric about a “shareholder spring” might suggest. However, we do believe that boards and shareholders should work to smooth away excesses on both sides to ensure a framework in which decisions can be made in the best interests of the company and its varied body of shareholders.

…continue reading: Preserving Balance in Corporate Governance

Ethics is in origin the art of recommending to others the sacrifices required for cooperation with oneself.” Bertrand Russell

Since the publication of its Statement and Guidance on Anti-Corruption Practices in 2009, the ICGN has actively advocated the fight against bribery and corruption as a fundamental component of the corporate governance agenda. The Statement and Guidance takes a global perspective, making clear that anticorruption is a priority in all markets.

But is it appropriate to set the same standards for anticorruption in all jurisdictions, particularly in emerging markets, where many underlying conditions are different and where bribery and corruption are particularly acute in both the public and private sectors? This was the question posed as the main discussion point at ICGN’s “Town Hall” meeting on business ethics in its June 2012 conference in Rio de Janeiro. Meeting participants, from a range of developed and emerging markets, expressed a resounding consensus that investors should not compromise their standards on anticorruption in emerging markets, even if corruption may be a more deep-rooted problem. However, while absolute standards on anticorruption should remain undiluted — beginning with a “zero tolerance” position — there may be different anticorruption strategies to apply in emerging markets, reflecting economic, cultural and legal differences.

…continue reading: Business Ethics in Emerging Markets and Investors’ Expectations Standards

According to a new study recently released by The Conference Board, U.S. corporations continue to lag far behind their counterparts in other developed economies—notably , the European Union and Japan—in transparency of environmental and social practices. In particular, the overall disclosure rate of this type of information by U.S. companies in the Russell 1000 is 10 percent, compared to 19 percent for a global sample of 3000 business organizations tracked by Bloomberg’s Environmental, Social, and Governance (ESG) database.

The new report, Sustainability Practices: 2012 Edition—a collaboration between The Conference Board, Bloomberg, and Global Reporting Initiative (GRI) Focal Point USA—covers a total of 72 environmental and social practices including: atmospheric emissions, water consumption, biodiversity policies, labor standards, human rights practices, and charitable and political contributions. For benchmarking purposes, Bloomberg ESG data is compared with the S&P 500 and the Russell 1000, and further analyzed across 11 business sectors and four revenue groups.

The following are some of the other major findings discussed in the paper.

…continue reading: Sustainability Practices in 2012

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

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

Fiscal year 2011 witnessed the SBA’s shift from domestic and foreign asset classes, to a combined global equity portfolio, with a heavier international equity weighting and a more balanced U.S. exposure. With the recent structural changes, the proportion of SBA assets invested in foreign equity markets will continue to rise, and a significant proportion may be managed internally. In 1998, for foreign equities was 7.6 percent, rising to 12.7 percent by 2003, and 18.8 percent by the end of fiscal year 2010. Upon completion of the transition to a combined global equity asset class, foreign equities composed 33 percent of FRS assets as of October 2011. As a percent of the equity asset class, foreign shares account for 56 percent and U.S. shares for 44 percent.

Coinciding with this shift, the SBA realigned its international proxy voting practices, bringing foreign voting decisions ”in-house” to match domestic SBA voting practices.

Previously, external asset managers were responsible for voting international proxies associated with SBA shares held in their funds. Since the SBA assumed this responsibility, votes are now cast by SBA staff—based on our own Corporate Governance Principles & Proxy Voting Guidelines and meeting specific research from our proxy research providers.

…continue reading: Analyzing Global Proxy Voting Practices

Investors and companies are both increasingly interested in sustainability issues. These issues typically revolve around environmental and social factors that have real but potentially long-term or contingent impacts on corporate financial value. This, in turn, makes traditional accounting metrics less valuable in assessing sustainability issues than in analysis of many other business issues. Therefore, both investors and companies – as well as groups that service or monitor and regulate them – have a growing interest in receiving meaningful corporate environmental, social, and governance (ESG) information on an ongoing basis. Despite this shared interest, investors often complain about the difficulty of gathering and truly understanding corporate ESG data, while company representatives may express concerns about “survey fatigue,” or the amount of time and resources it takes to supply the requested data to various investors and ESG research firms.

…continue reading: Finding Common Ground on Environmental and Social Metrics

Long-horizon investors have an edge. Sadly, they too often squander their advantages. That is often caused by shortcomings in their own governance structure and lack of alignment with their delegated managers. We discuss these issues in our paper, Investing for the Long Run, which was recently made publicly available on SSRN.

Long-horizon investors have the ability to reap risk premiums that are noisy in the short run and only manifest over the long run. They can acquire distressed assets when investors with over-stretched risk capacity have to sell. They can also pursue opportunities to invest in illiquid assets. The paper describes two pitfalls that hinder long-horizon investors in fully exploiting their advantage: procyclical investing and misalignment between asset owners and managers. These are intertwined. Counter-cyclical investing requires strong governance structures to withstand the temptations of selling in blind panics when asset prices drop. Agency conflicts contribute to procyclical investment behavior.

…continue reading: Investing for the Long Run

This report examines the corporate governance practices of 50 U.S. companies at the time of their initial public offerings (IPOs) and finds that pressure to update governance practices at larger companies has had only a limited effect on companies at the IPO stage.

To glean the governance practices of newly public companies, we analyze the prospectuses filed with the U.S. Securities and Exchange Commission by the 50 domestic companies with the largest IPOs (in terms of deal size) from January 1, 2009 through August 31, 2011. The deal size of the IPOs examined ranged from $132.0 million to $18.14 billion. [1]

Despite the growing pressure for seasoned issuers to use certain corporate governance provisions, corporate governance practices at the top 50 IPO companies examined remain in many ways unchanged from those of previous years (as shown by a nearly identical review of the top IPOs in the United States from 2007 to 2008). [2] The IPOs from both time frames show similar percentages for the use of classified boards, plurality voting in uncontested board elections, and fully independent audit committees. Far fewer recent IPO companies separated the role of CEO and chairman of the board—34 percent, compared with 52 percent from the previous sample.

…continue reading: Corporate Governance Practices for IPOs

Although discussions continue to be robust about effective corporate governance practices, review of the aspirational governance principles and guidelines issued by influential board, management and investor affiliated associations and pension funds indicates significant areas of agreement. Areas of apparent agreement include, for example, the appropriate voting standard in director elections (majority voting in uncontested elections with a director resignation policy, plurality for contested elections), the need for some form of independent board leadership (whether in the form of an independent chair or lead or presiding director) and the importance of formal board evaluation processes.

The Comparison of Corporate Governance Principles & Guidelines from Weil, Gotshal & Manges LLP highlights the convergence in views about effective governance practices and structures, as well as remaining areas of disagreement, by providing a side-by-side look at suggestions for board structure and practice from influential players in the investor, board and management communities. The Comparison shows a range of structures and practices that are generally acceptable, while reflecting general agreement that “one size does not fit all.”

…continue reading: Comparing Corporate Governance Principles & Guidelines