Thirteen (an auspicious or suspicious number?) top CEOs published a joint statement on what they called Commonsense Corporate Governance Principles as a full page ad in today's Wall Street Journal (and perhaps elsewhere). It was reprinted by CNBC here. Let's take a look at their key principles (which I'll highlight by marking them in blue bold text):
Truly independent corporate boards are vital to effective governance, so no board should be beholden to the CEO or management. Every board should meet regularly without the CEO present, and every board should have active and direct engagement with executives below the CEO level;
The director independence story is actually more complex, as I discussed in my book Corporate Governance after the Financial Crisis. As I explained in an interview discussing the book:
This is such an important question that I devoted an entire chapter to the ever-increasing reliance on independent directors. In it, I argue that director independence rules not only failed to prevent the financial crises of the last decade, but may well have contributed to them. I admit that’s a provocative claim, but I’m confident it’s correct.
The strict conflict of interest rules embedded in the new definitions of independence made it difficult for financial institutions to find independent directors with expertise in their industry. A survey of eight U.S. major financial institutions, for example, found that two thirds of directors had no banking experience. Given the inherent information asymmetries between insiders and outsiders, the lack of board expertise significantly compounded the inability of financial institution boards to effectively monitor their firms during the pre-crisis period. More expert boards could have done more with the information made available to them and, moreover, would have been better equipped to identify gaps therein that needed filling.
In addition, the need to find independent directors put an emphasis on avoiding conflicted interests at the expense of competence. In other words, the problem was not just that the new definition of independence excluded many candidates with industry expertise. It was also that the emphasis on objective indicia of conflicts dominated the selection process to the exclusion of indicia of basic competence and good judgment. The financial crisis thus appears, in part, to have been an unintended consequence of the Sarbanes-Oxley Act.
In addition, it's worth noting that he empirical evidence on director independence is quite equivocal. I reviewed the evidence in my paper A Critique of the NYSE's Director Independence Listing Standards, in which I argued that the evidence in favor of director independence was, at best, inconclusive. There are many studies suggesting that boards dominated by independent directors actually tend to under perform boards with a healthy admixture of insiders. In sum, contrary to the CEO letter, I believe that one size does not fit all.
Back to the CEO letter:
Diverse boards make better decisions, so every board should have members with complementary and diverse skills, back-grounds and experiences. It's also important to balance wisdom and judgment that accompany experience and tenure with the need for fresh thinking and perspectives of new board members;
But what do they mean by diversity? As I recently documented, it's a very hard term to define in this context. In addition, the business case for diverse boards is suspect at best. Kim Krawiec and her coauthors conducted a series of interviews with top business folks and reached several conclusions:
First, there is near-unanimous agreement (with only one clear dissenter) that board diversity is a good thing, a valuable outcome that is worth striving for. But second, it is very difficult for our respondents to provide examples from their experience of when board diversity has made a tangible difference. We have heard abundant stories about when other kinds of diversity—what might be called functional diversity: different business backgrounds and skills, for example—have made a difference in how effectively boards do their work. But pressing respondents for comparable stories about demographic diversity has yielded very little beyond awkward silences.
In a NY Times article, in which Krawiec opined that "there is no reason that corporate boards should remain the exclusive province of white males," she cautioned that "we must be realistic about what board diversity — and quotas, in particular — will accomplish." Why? She explains:
Both in the United States and in Europe, board diversity efforts are frequently justified by the “business case” that diversity makes companies more profitable. But that case is weak.
In fact, a number of academic studies have concluded that gender diversity on boards negatively impacts firm performance. But as such studies face several methodological hurdles, it's safe to say that although the business case for board diversity has not been proven, neither has the case against it.
Why might diversity be counterproductive? I touched indirectly on that issue in my article Why A Board? Group Decisionmaking in Corporate Governance, 55 Vand. L. Rev. 1, 47 (2002). (Draft available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=266683).
On the one hand, cumulative voting may bring a desirable diversity of viewpoints into the boardroom. On the other hand, board cohesiveness likely suffers. Whether cumulative voting is desirable for a given firm will therefore vary. Firms whose top management team requires advice from diverse sources might benefit from cumulative voting, although the high probability of adversarial relations between that team and minority shareholder interests suggests that board representation of the latter likely would prove unavailing in this regard. Firms requiring skeptical outsider viewpoints to prevent groupthink likewise might benefit from cumulative voting. Again, however, the likelihood that cumulative voting results in affectional conflict rather than cognitive conflict leaves one doubtful as to whether those benefits will be realized.
Back to the CEO letter:
Every board needs a strong leader who is independent of management. The board's independent directors usually are in the best position to evaluate whether the roles of chairman and CEO should be separate or combined; and if the board decides on a combined role, it is essential that the board have a strong lead independent director with clearly defined authorities and responsibilities
I agree. See my post Should the CEO also be the Chairman of the Board?, which argues that:
The empirical evidence from studies of firm performance is, at best, mixed. There simply is no unambiguous evidence that splitting the CEO and Chairman positions between two persons has a statistically significant positive impact on firm performance. Although the absence of conclusive evidence--one way or the other—may seem surprising, on close examination it makes sense. Proponents of a mandatory non-executive Chairman of the Board have overstated the benefits of splitting the positions, while understating or even ignoring the costs of doing so. The reality of such costs is confirmed, at least anecdotally, when one recalls that both Enron and WorldCom--the poster children of bad corporate governance in the last decade--had separated the CEO and Chairman positions. The board of directors has three basic functions; selecting, monitoring, and compensating the top management team; advising top management; providing access to external resources (such as where a company's banker sits on the board). Only as to the former does it seem likely that there will be benefits to appointing a non-executive Chairman.
In sum, corporate governance is not an arena in which one size fits all. Different firms have different governance needs. Boards of directors should be free to select the governance structures optimal for their unique firm without having corporate governance activists putting them in a straight jacket.
Back to the CEO letter:
Our financial markets have become too obsessed with quarterly earnings forecasts. Companies should not feel obligated to provide earnings guidance — and should do so only if they believe that providing such guidance is beneficial to shareholders;
A common accounting standard is critical for corporate transparency, so while companies may use non-Generally Accepted Accounting Principles ("GAAP") to explain and clarify their results, they never should do so in such a way as to obscure GAAP-reported results; and in particular, since stock- or options-based compensation is plainly a cost of doing business, it always should be reflected in non-GAAP measurements of earnings; and
I agree, so with no further ado, back to the CEO letter:
Effective governance requires constructive engagement between a company and its shareholders. So the company's institutional investors making decisions on proxy issues important to long-term value creation should have access to the company, its management and, in some circumstances, the board; similarly, a company, its management and board should have access to institutional investors' ultimate decision makers on those issues.
I don't necessarily disagree, but I do worry that institutional investors can have very different goals and interests than retail investors, especially the more politically active institutions such as state and local pension funds or union pension funds. I believe that top management and boards therefore need the ability to engage with institutional investors but also need the ability to tell such investors to take a hike when necessary.
I discussed this and related issues in Preserving Director Primacy by Managing Shareholder Interventions (August 27, 2013). Research Handbook on Shareholder Power and Activism, Forthcoming; UCLA School of Law, Law-Econ. Research Paper No. 13-09. Available at SSRN: http://ssrn.com/abstract=2298415:
This is a draft chapter for a forthcoming research handbook on shareholder power and activism. This chapter provides an analysis of shareholder activism based on the so-called director primacy model of corporate governance, which argues for a board-centric, rather than a shareholder-centric, understanding of corporate governance.
Even though the primacy of the board of director primacy is deeply embedded in state corporate law, shareholder activism nevertheless has become an increasingly important feature of corporate governance in the United States. The financial crisis of 2008 and the ascendancy of the Democratic Party in Washington created an environment in which activists were able to considerably advance their agenda via the political process. At the same time, changes in managerial compensation, shareholder concentration, and board composition, outlook, and ideology, have also empowered activist shareholders.
There are strong normative arguments for disempowering shareholders and, accordingly, for rolling back the gains shareholder activists have made. Whether that will prove possible in the long run or not, however, in the near term attention must be paid to the problem of managing shareholder interventions.
This problem arises because not all shareholder interventions are created equally. Some are legitimately designed to improve corporate efficiency and performance, especially by holding poorly performing boards of directors and top management teams to account. But others are motivated by an activist’s belief that he or she has better ideas about how to run the company than the incumbents, which may be true sometimes but often seems dubious. Worse yet, some interventions are intended to advance an activist’s agenda that is not shared by other investors.
This chapter proposes managing shareholder interventions through changes to the federal proxy rules designed to make it more difficult for activists to effect operational changes, while encouraging shareholder efforts to hold directors and managers accountable.
So what do we have? A mixed bag, it seems. Some feel good platitudes. Some commonsense. And some pure bunkum.
BTW, the signatories are:
- Tim Armour, Capital Group
- Mary Barra, General Motors Company
- Warren Buffett, Berkshire Hathaway Inc.
- Jamie Dimon, JPMorgan Chase
- Mary Erdoes, J.P. Morgan Asset Management
- Larry Fink, BlackRock
- Jeff Immelt, General Electric
- Mark Machin, Canada Pension Plan Investment Board
- Lowell McAdam, Verizon Communications
- Bill McNabb, Vanguard
- Ronald O’Hanley, State Street Global Advisors
- Brian Rogers, T. Rowe Price
- Jeff Ubben, ValueAct Capital