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

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 Rise of Engagement in the 2012 Proxy Season

For many years Georgeson’s Annual Corporate Governance Review has promoted the concept of engagement between public companies and their institutional investors. While Georgeson has noticed increased engagement, the nature of the engagement has generally been incremental and devoted to specific governance and compensation issues from year to year. After years of this slow, incremental growth, the 2012 proxy season became the Year of Engagement and witnessed a marked increase in company/shareholder interaction — engagement that was not limited to a few days out of the five- or six-week period between the mailing of the corporate proxy statement and the last days of a proxy solicitation campaign prior to the annual meeting. The types of issues discussed leading up to and during the 2012 proxy season ranged from executive compensation and board structure to negotiations with proponents over the potential withdrawal of shareholder-sponsored ballot resolutions to just open-ended discussions to understand each other better. The voting statistics contained between these covers cannot fully measure that activity — although they do make it clear that the level of communication was more frequent and intense than in the past.

…continue reading: 2012 Annual Corporate Governance Review

Corporate America has weathered (with mixed results) two years of annual “Say on Pay” votes and is gearing up for a third. One theme which emerged during 2012 is that companies should not view the annual vote as a 60-90 day event that needs to be managed as best as possible given the hand the company has been dealt (or, in some senses, the hand it has dealt for itself). Rather, companies need to view Say on Pay as a year-round exercise in which the outcome of the annual vote can be positively affected if the company “engages” successfully with its investors on the topic of executive pay.

However, the meaning of the term “engagement” in this context is by no means obvious. And, while a number of companies have implemented sound engagement programs based on an accurate assessment of corporate governance dynamics, too many common prescriptions for engagement are based more on myth than reality.

…continue reading: Myths and Realities of Say on Pay “Engagement”

Introduction

In recent years, shareholders of US public companies have increasingly invited dialogue with management, sometimes even demanding personal interaction with directors. This trend is part of a new paradigm in the corporate governance realm. Historically, despite some management engagement with shareholders, companies have seen little in the way of direct dialogue between shareholders and members of the board of directors. For most public companies, governance strategies have seldom included systematic engagement with shareholders beyond quarterly earnings calls, investor conferences and traditional investor relations efforts.

That was then, this is now. More than ever before, institutional shareholders are aggressively exerting their influence in the name of holding companies and management accountable. Emboldened (or pressured) by recent events — high-profile corporate governance and executive compensation controversies, the financial collapse and public criticism of pay disparities — these shareholders increasingly seek to influence board-level decisionmaking, often deploying incendiary buzzwords such as “corporate mismanagement,” “excessive risk taking,” “pay-for-failure” and the like. All told, the new paradigm represents a significant shift for most public companies.

In this Commentary, we discuss:

• The current state of corporate governance and signposts along the way to the existing state of affairs
• How and when public companies can benefit from shareholder engagement
• The components of an effective shareholder engagement program

…continue reading: Building Relationships with Your Shareholders Through Effective Communication

Historically, there has been little direct dialogue between individual board members and shareholders. This is changing, however, as directors, particularly lead directors, face increasing pressure to meet directly with their companies’ largest shareholders. Accordingly, at many companies, individual directors are beginning to engage with investors on an ongoing basis, and not just in response to a particular issue or crisis.

The Lead Director Network (the “LDN”), a group of lead directors, presiding directors and non-executive chairmen from many of America’s leading companies, met on June 19, 2012 to discuss the relationship between directors and major shareholders. Representatives of two institutional investors also participated in the meeting. Following this meeting, King & Spalding and Tapestry Networks have published a ViewPoints report here to present highlights of the discussion that occurred at the meeting and to stimulate further consideration of this subject.

The following provides highlights from the LDN meeting, as described in the ViewPoints report.

…continue reading: Board Engagement with Corporate Shareholders

Consistent with corporate social responsibility (CSR), firms strive to engage stakeholders through various initiatives aimed at fostering dialogue between managers and external stakeholders. Diverse forms of dialogue and broad involvement are critical to the success of stakeholder dialogue (SD) initiatives. This Director Notes describes the results of an international survey on 249 SD initiatives undertaken by firms in Germany, Italy, and the United States. The survey results highlight the limitation of current SD practices and identify a strong link between the national approach to corporate social responsibility and the firm approach to SD.

Firms seek the involvement of stakeholders in order to maximize the alignment of business activities with the interests of different organizational and social actors. [1] In particular, SD refers to all initiatives undertaken by firms to listen and communicate to stakeholders regarding a vast array of topics. [2] Many researchers have noted the positive effects SD is expected to produce:

…continue reading: Stakeholder Dialogue in Germany, Italy, and the United States

The past ten years have seen a high and increasing level of activist campaigns. There have been more than 300 activist attacks on major companies during this period. Among the major companies that have been attacked are, P&G, McDonald’s, ITW, DuPont, Motorola, Target, Pepsi, Heinz, Kraft and Home Depot. There are more than 100 hedge funds that have engaged in activism and they frequently gain the backing of ISS and major institutional investors, some of which have investments in activist funds. SEC rules do not prevent an activist from secretly accumulating a more than 5% position before being required to make public disclosure.

Hedge fund activism requires attention and warrants similar preparation as to that we recommend for responding to a hostile takeover bid. This memo is a revision of the one I did in 2007 as a supplement to my Takeover Response Checklist. In fact, some activist attacks are designed to change management or the board of the target in order to facilitate a takeover or to force a sale of the target. Careful planning and a proactive response are critical. Failure to prepare reduces a company’s ability to control its own destiny.

…continue reading: Dealing With Activist Hedge Funds

On April 26, 2012, representatives of four large, North American institutional investors met with five experienced non-executive directors of major, global corporations to explore the important topic of how corporate boards and their members should appropriately engage with shareholders. This topic has attracted great interest in recent years, triggering a fair amount of animated discussion, particularly so in the wake of the 2000–2001 corporate scandals (e.g., Enron and WorldCom) and the 2008 financial crisis.

Indeed, before and after the financial crisis, Tapestry’s corporate governance networks have discussed their responsibility to investors and met with major investing institutions in the United States, Canada, and Europe and experts, advocates, and other participants in the field of board-shareholder engagement in an attempt to determine a way forward that works for all constituencies. Shareholders, lawmakers, board leaders, and corporate governance activists have all expressed views, and they are not always in agreement. Many of the issues are laid out in a Tapestry-prepared white paper, “A Key Moment to Improve Board-shareholder Engagement,” that was shared in advance with meeting participants.

…continue reading: Advancing Board-Shareholder Engagement

Considerable accounting and finance research has attempted to identify whether reported financial statements have been manipulated by executives. Most of these classification models are developed using accounting and financial market explanatory variables. Despite extensive prior work, the ability of these models to identify accounting manipulations is modest. In the paper, Detecting Deceptive Discussions in Conference Calls, forthcoming in the Journal of Accounting Research, we take a different approach to detecting financial statement manipulations by analyzing linguistic features present in CEO and CFO narratives during quarterly earnings conference calls. Based on prior theoretical and empirical research from psychology and linguistics on deception detection, we select the word categories that theoretically should be able to detect deceptive behavior by executives. We use these linguistic features to develop classification models for a very large sample of quarterly conference call transcripts.

A novel feature of our methodology is that we know whether the financial statements related to each conference call were restated in subsequent time periods. Because the CEO and CFO are likely to know that financial statements have been manipulated, we are able to reasonably identify which executive discussions are actually “deceptive”. Thus, we can estimate a linguistic-based model for detecting deception and test the out-of-sample performance of this classification method.

…continue reading: Detecting Deceptive Discussions in Conference Calls