The rise of shareholder activism has brought to light concerns investors have around various issues in corporate governance from executive pay to board oversight of risk. The activist environment often paints company-shareholder relations in a contentious light, but the reality is that issuers and their investors are consistently engaging with each other to reach productive solutions to achieve similar goals.
To get to the heart of these matters, the Investors Board Performance Review recently hosted a live taping at the Nasdaq MarketSite in New York City, featuring Glenn Booraem, Head of Corporate Governance of Vanguard, Bob McCormick, Chief Policy Officer at Glass Lewis, and Ed Garden, Chief Investment Officer and Founding Partner at Trian Fund Management.
According to TK Kerstetter, host of the Review as well as its sister program “Inside America’s Boardrooms,” this new platform gives large investors and proxy advisors the opportunity to provide open feedback to boards on what they’re doing well, what they need to improve on and how they should move forward. The discussion ranged various topics focused on the panelists’ roles as investors and advisors.
The things that boards have always been good at, they’ve refined and are doing better than ever—such as engagement, disclosure and working with management. This is partially because they’re working harder than ever, and also partially because they know the stakes are higher with their shareholders.
“A trending positive is that boards are communicating with shareholders better than they ever have, both in terms of their mandated disclosures going beyond compliance to use the proxy statement as a communications tool to tell their own story as well as through direct one-on-one engagement,” said Booraem.
“Twenty years ago, it was almost like the beginning of a joke: A priest, an actor, an architect and a grammar school principal walk into a boardroom … and that was an actual S&P 500 boardroom,” added McCormick. “We’ve come a long way to eliminate those crony boards and to look at the right mix of skills and experience and doing a good job of explaining it.”
Boards must have a better purview into operations and strategy, the panelists said. While the focus on compliance and risk is absolutely necessary, they need other members who have experience in the former. Ultimately, this plays into the board refreshment, diversity and skills conversation. There will be a rising need for people with operational oversight—and a need to identify and vet those candidates.
“We simply don’t spend enough time on the operations of a business and working with management to benchmark how individual business are doing,” said Garden. “When we invested in Dupont, I doubt the directors understood that five out of seven divisions that made up [the company] had lesser revenue growth and margins than smaller, standalone competitors. Think about what that means.”
While disclosures are becoming more robust and detailed, they’re just the starting point. Proxy statements are well-crafted and “lawyered up,” and they don’t tell the story you will get by engaging. A 200-word director bio in the proxy statement doesn’t communicate how the board works together. A CEO coming in to discuss his or her own pay package is “at best, uncomfortable.”
“Engagement efforts that involve board members are often in response to a high shareholder vote against—it’s almost reactionary rather than proactive,” said McCormick. “Recognizing that shareholders can be trusted—not to be kept at arm’s length and reached out to only in a panicked situation—and building that goodwill can pay dividends in developing a mutual trust and rapport.”
“Realistically, we do want to engage with everyone over time to incorporate the board perspective and our ability to convey to the board our perspective on a much broader range of issues,” said Booraem.
“We’re investing in fundamentally great companies, but where management has struggled operationally over an extended period where we feel like we understand how to get the company back on track,” said Garden. “To do that, my expectation is to have respectful confrontation. Put a spotlight on opportunities and problems, cut through any rhetoric, and attack what we can do better. We always say ‘We’d rather be rich than right.’ We’re not dogmatic, we don’t want to do anything to hurt the business, we are not here to embarrass you or fire you or make you look bad—we want the business to win.”
Boards are evolving to take more of an ownership mentality and will become more of a public/private equity hybrid in the future, Garden said. There has been a transfer of wealth from public shareholders to private equity, and public shareowners are asking themselves why private companies are doing better.
“For the past 100 years, there’s been a divide between ownership and management. But all that has changed and changed forever,” Garden added. “I could make the case that there has been a transfer of wealth from the public shareholders to private equity over the last 30 years because private equity can do something with a business that for some reason the public management team couldn’t do.”
The panelists brought up the example of Dell, which famously went private so that they could have “freedom to take a long-term view,” a sentiment working under the assumption that the current public markets overemphasize short-term gains.
This sentiment affects investments of long-term shareholders, who are willing to hold onto stocks while a company reinvests—assuming that long-term strategy is clearly communicated—rather than having to pay a huge premium if it goes private and then comes back into the public markets later on.
Dan Marcec is the Editor-in-Chief of C-Suite. For more information on Equilar data and analysis, please contact him at firstname.lastname@example.org or visit equilar.com/knowledge-center.html.