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Corporate Governance: Important Trends

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Corporate Governance: Important Trends John M. Holcomb Institute for Enterprise Ethics May 14, 2015 – PowerPoint PPT presentation

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Title: Corporate Governance: Important Trends


1
Corporate Governance Important Trends
  • John M. Holcomb
  • Institute for Enterprise Ethics
  • May 14, 2015

2
Topics
  • Ethics and Compliance
  • Corporate Political Activities
  • Shareholder Activism
  • Executive Succession
  • Cybersecurity

3
Reputational Risk Management
  • Failures in crisis management
  • BP Wrong leader in Hayward Lax assessment of
    risk Failure to implement message on safety
    Cozy relationship with regulator Abuses in
    victim compensation plan
  • News Corp Failure of internal controls on
    hacking and privacy invasion Cozy relationship
    with police and governmental elites
  • GM No upward communication of bad news
    tradition of blaming others Group think board
    in denial

4
Lufthansa and Germanwings Crash
  • Suicidal co-pilot and tragic passenger deaths
  • Company was aware of co-pilots history of
    depression and his previous treatment and leave
    of absence
  • Lack of scrutiny in allowing him to return
  • Current strategy of reliance on low-cost carriers
  • Supervisory board of 20 members
  • 10 are employee representatives
  • 5 are women
  • Robert Kimmitt is American representative

5
Ethics and Supply-Chain Management
  • Major problem for several companies
  • Nike in southeast Asia, and Wal-Mart
  • Apple and Foxconn
  • Several companies and factory burnings in
    Bangladesh
  • Levi Strauss and control of labor practices by
    contractors in China and southeast Asia.
  • Rainforest Action Network partnership with Home
    Depot on old growth forests

6
Importance of Roles of Board Compliance and
Corporate Responsibility Committees
  • Taking Caremark duty seriously to monitor
    internal controls
  • Mitigating factor under Sentencing Commission
    guidelines
  • Avoiding a charge under the McNulty Memo
  • Complying with conditions of deferred prosecution
    agreements or legal settlements
  • Adapting to onerous burden placed on audit
    committees
  • Realizing the limits of the 3 major committees
    audit, compensation, nominating committees
  • Prevention of future fraud and legal violations

7
Why and How to Examine Roles of Board
Compliance/Public Responsibility Committees
  • Penetrating any smokescreen or sham
  • Going beyond the labels
  • Content analysis of committee charters
  • Length of committee charters
  • Frequency of committee meetings
  • Examining the numbers of women on board
    committees
  • Separating the crucial from the important

8
Fortune 200 Non-Audit Committees with Compliance
Roles
  • Company Committee
  •  Abbott Labs Public Policy
  • Johnson Johnson Regulatory, Compliance,
    and Government Affairs
  • Pfizer (Ironic) Regulatory and Compliance
  • Amgen Corporate Responsibility and
    Compliance
  • AIG Regulatory, Compliance, and Public
    Policy

9
Non-Traditional Board Committees
  • 101 of the Fortune top 200 companies have board
    committees on Public responsibility,
    Sustainability, Risk management, EHS, or
    Regulatory compliance and risk
  • Public responsibility committees have an external
    focus while ethics and compliance committees have
    an internal focus.
  • The former are important, while the latter are
    crucial
  • Best Practices Wells Fargo has three such
    committees

10
Whistleblower Protection
  • SEC reports that all but one whistleblower filing
    a complaint under Dodd-Frank law had complained
    internally first and exhausted internal channels.
  • Payouts of 50 million so far to 15
    whistleblowers
  • Retaliation and pretaliation (action to prevent
    whistleblower)
  • KBR case SEC cracking down on confidentiality
    agreements
  • Exceptions allowing corporate attorneys to blow
    the whistle
  • Significant harm to investor
  • Company has actively impeded the investigation
  • Internally reported and no action taken within
    120 days
  • N.B. May also be ethically obligated to then
    blow the whistle

11
New Rules
  • Disclosure of investments in conflict minerals
    Amnesty International and Global Witness Report
    that 80 percent of companies are not in
    compliance high expense for limited benefit
  • Rule on disclosure of pay and performance
  • Comparison to peers
  • Total shareholder returns, including dividends,
    over 5-year period
  • Compensation actually paid in a given year
  • Pay gap rule yet to come

12
Impact of Citizens United decision on Corporate
Political Involvement
  • Business PACs Shun Endorsement Campaigns
  • Reputational Damage
  • Shareholder Opposition
  • Business Shuns Independent Committees
  • Morgan Stanley has refused to engage in
    independent spending and relies on PAC
  • GM used bailout money to fund candidates
  • Continued Reliance on PACs
  • Nonprofit Groups, Super PACs, and Wealthy Donors
    Benefit over the Political Parties

13
Roles of the Center for Political Accountability
  • Created a model shareholder resolution
  • Created corporate rankings and scorecard
  • Basic emphasis is on disclosure discussion of
    disclosure on later slide

14
Highest Ranking Companies
  • By all measures, IBM is the gold standard. It has
    a long-standing policy prohibiting the use of
    corporate money for political spending. The
    company also has no PAC and received a perfect
    score in a comprehensive report by the CPA
    published late last year.
  • Still, its investors then wanted to know how much
    in dues the company pays to trade associations
    and other organizations that can hide any
    contributions. And they want a comprehensive
    report on lobbying activities.

15
Highest Ranking Companies in Political Disclosure
  • In the CPAs latest 2014 survey report, CSX and
    Noble Energy rank the highest on political
    accountability and disclosure of political
    activities.
  • Rounding out the top ten are Becton Dickinson,
    Capital One, Exelon, Qualcomm, UPS, AFLAC, and
    Biogen

16
Model Resolution of the Center for Political
Accountability
  • Report soft money contributions, independent
    expenditures, and payments to trade associations
    and other tax exempt organizations that are used
    for political purposes
  • Identify the titles of the individuals involved
    in the expenditure decisions
  • Disclose their political spending guidelines and
  • Require the board of directors to conduct
    oversight of the company's political spending.

17
Critique of CPA Criteria
  • Ignore key elements of corruption
  • Inclusion of items unimportant to investors
  • Using PAC as exclusive avenue is not even scored
  • Danger in check-the-box test
  • CPA enjoys a monopoly on setting the standard
    comparison to governance ratings

18
Key Elements of Corruption Ignored
  • Direct lobbying ten times the amount
    contributed to candidates
  • Contributing to political party conventions
  • Contributing to 501c-3 nonprofits and foundations
    tied to candidates
  • Giving specifically to judicial elections and to
    candidates for state attorney general
  • Bundling

19
New Scoring and Ranking Results
  • Questions added and method top 2 tiers
  • Every companys score is lowered
  • Some in upper tier move to lower tier, and vice
    versa
  • Lots of changes in rank orders
  • Some make dramatic moves upward

20
Questions Added to List of Criteria
  • Does the company have a policy restricting
    bundling of political contributions by
    executives? Or
  • Does the company disclose the money raised
    through bundling and then contributed to
    political candidates? 6 Points
  • Does the company restrict and/or disclose
    contributions to political party conventions? 2
    points
  • Does the company restrict contributions to public
    policy think tanks or foundations that have been
    established by or affiliated with political
    candidates? 2 points
  • Does the company disclose the amount it spends on
    direct lobbying of Congress or other branches of
    the federal government? 2 points
  • Does the company disclose the amount of money it
    spends on direct lobbying of state legislatures
    and/or foreign governments? 2 points

21
Questions Added to List of Criteria
  • Does the company disclose the amount of money it
    pays to law firms or political consultants to
    represent its political interests in the national
    or state capitols? 2 points
  • Does the company prohibit contributions to super
    PACs or c-4s? 4 points
  • Does the company disclose amounts spent on super
    PACs or c-4 Committees? 4 points
  • As to question 11 in the CPA list, it should not
    simply be a yes/no question but should be
    allocated 6 points, with full credit given to
    those companies that restrict political
    contributions through the PAC, the legally
    authorized component. Companies that also ban
    PAC contributions should not be given more credit
    for political responsibility, but should be
    penalized.

22
Lower Scores with New Criteria Old Scores
New Scores
  • 90-100 A 20
  • 80-89 B 32
  • 70-79 C 35
  • 60-69 D 17
  • 0-59 F 0
  • 90-100 A 0
  • 80-89 B 0
  • 70-79 C 20
  • 60-69 D 51
  • 50-59 F 33

23
Tier 2 to 1 Tier 1 to 2
  • Anadarko Petroleum
  • Applied Materials
  • Reynolds American
  • Boston Scientific
  • Eli Lilly
  • Lockheed Martin
  • Air Products Chemicals
  • Costco
  • Illinois Tool Works
  • Dow Chemical
  • eBay
  • CVS Caremark

24
Dramatic Move Upward for Some
  • Pfizer
  • In rank 11 by CPA score
  • In rank 6 by new score
  • Applied Materials
  • In rank 17 by CPA score
  • In rank 12 by new score

25
Shareholder Activism and Proxy Fights
  • Tempur Sealy case CEO, Chairman, and head of
    governance committee all resign under investor
    pressure from H Partners hedge fund (10 owner)
    Four proxy advisory firms supported negative
    votes
  • DuPont/Trian case white hat activist wanted
    seat on the board for Peltz ISS backed all four
    Trian candidates while Glass Lewis only supported
    Peltz DuPont not a broken company Lipton
    acknowledged Peltz would bring value to the board

26
Reactions to Activist Shareholders
  • Success rate of activists is declining
  • More push-back from company boards
  • Targets are now smaller companies of less than
    10 billion in assets
  • Former activists will now settle more easily and
    are focusing on other issues
  • New players are emerging

27
Reactions by Opponents
  • Fink of BlackRock
  • Advises firms not to pander to investors and
    decries short-termism
  • Opposes higher dividends and buybacks
  • Advocates shifting tax policy to favor long-term
    holdings
  • Marty Lipton Activism has caused companies to
    cut R. D., capital investment and, most
    significantly, employment. It forces companies
    to lay off employees to meet quarterly earnings.
    It is a disaster for the country.

28
Reputational Risk Management Failures in
Leadership and Succession Planning
  • Hewlett-Packard multiple chapters from Fiorina
    to Hurd to Apotheker to Whitman
  • Invading privacy of board members and reporters (
    by board chair Patricia Dunn)
  • Questionable personal relationship and expense
    account fraud (Hurd)
  • Strategic missteps (Apotheker)
  • Board in disarray (due to privacy scandal and
    disagreements over leadership and strategy)

29
Failures in Leadership and Succession Planning
cont.
  • Pfizer from McKinnell to Kindler
  • Preoccupation with Washington and status
    (McKinnell)
  • CEO Compensation scandal (McKinnell)
  • Autocratic micro-management (Kindler)
  • Reliance on the misjudgments of an HR officer
    (Kindler)

30
Cyber security and Cyber attack Risks
  • Target case
  • Has not yet recovered
  • Board was targeted by investors
  • Concern over supply chain
  • Prevention versus detection
  • Private sector and public sector responsibilities
  • Board skill set
  • Difficult to find board candidates
  • Tech expertise does not necessarily coincide with
    business expertise
  • Committee domain risk, audit, regulatory
    compliance
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