Title: Corporate Governance: Important Trends
1Corporate Governance Important Trends
- John M. Holcomb
- Institute for Enterprise Ethics
- May 14, 2015
2Topics
- Ethics and Compliance
- Corporate Political Activities
- Shareholder Activism
- Executive Succession
- Cybersecurity
3Reputational 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
4Lufthansa 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
5Ethics 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
6Importance 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
7Why 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
8Fortune 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
9Non-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
10Whistleblower 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
11New 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
12Impact 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
13Roles 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
14Highest 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.
15Highest 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
16Model 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.
17Critique 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
18Key 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
19New 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
20Questions 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
21Questions 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.
22Lower 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
23Tier 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
24Dramatic 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
25Shareholder 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
26Reactions 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
27Reactions 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.
28Reputational 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)
29Failures 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)
30Cyber 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