Diligent, check-the-boxes approach is essential when a crisis hits
When it comes to identifying best practices in corporate governance, who better to learn from than former award-winners? On November 14, more than 50 general counsel, corporate secretaries and other governance professionals gathered for Corporate Secretary’s first Best Practices Symposium at the New York City offices of Marsh & McLennan. Held the day of the 2013 Corporate Governance Awards gala, the half-day forum highlighted efforts that prior award-winners and some of the latest nominees have made to improve their proxy statements and develop their compliance and ethics programs.
The event, sponsored by Diligent Board Member Services and Marsh & McLennan, also treated attendees to a fireside chat with Peter Clapman, a pioneer of shareholder activism and winner of Corporate Secretary’s lifetime achievement award in 2010. The former head of corporate governance at TIAA-CREF shared his thoughts on the future of board engagement with investors.
The first panel featured nuts-and-bolts presentations by companies that are finding innovative ways to improve the effectiveness of their proxy statements. In this era of nail-biting say-on-pay votes at so many corporations, one critical thing companies can do is carefully craft and communicate their executive compensation message to ensure readers of the proxy statement understand the context of their pay decisions, according to the senior counsel and assistant corporate secretary at a large insurance company.
Ethics and governance
A roundtable discussion on ethics gave attendees an opportunity to share best practices with each other after hearing inspiring compliance turnaround stories from a major electronics retailer and a government security contractor.
The assistant general counsel for a global engineering and construction company described the close co-ordination between the company’s legal and communications teams to ensure stakeholders were aware of the company’s governance enhancements. The firm’s in-house video team held a video competition, asking the heads of the business units worldwide to submit their own one-minute ethics videos, which were judged on how well their content related to the company’s code of conduct. Winning entries were displayed on the company website and have been incorporated into subsequent compliance and ethics training efforts by individual departments.
The deputy general counsel for the consumer electronics retailer said the most significant lesson learned from the tumultuous series of governance challenges his company had faced and overcome over the past year was to reinforce the degree to which independent board members and other structural changes put in place matter when a crisis hits.
His team believed it had created a high-quality governance program, which was previously recognized for establishing a lead independent director, the proper structure for the audit committee and a whistleblower process that was expected to fit well with other pieces of the internal governance structure.
‘You don’t know how it will perform until it meets its greatest test,’ the deputy general counsel said. The governance team had tried to get the board to address certain issues that later came to light during a public battle between the company’s former chairman and management, but those issues weren’t fully resolved. ‘Some people dislike the idea of a check-the-boxes approach, but it reinforces processes that must be followed when governance questions arise,’ he added.
The general counsel and chief compliance officer (CCO) recruited to overhaul compliance at a private government security contractor attributed much of the success in the turnaround her team was able to accomplish within two years to the quality of the compliance and ethics training her company provides, a combination of online and in-person education.
‘People are willing to buy more into compliance, governance and legal [protocols] if they feel you understand their business,’ she pointed out. ‘It’s spending a day or two days a week with people in operations. If you understand their business, they’ll take the time to understand yours.’
With its reputation already damaged and on the line, the owners of her company knew from the outset that they needed to create a top-notch program that went well beyond the usual minimum standards. It’s critical to teach employees that compliance and ethics programs are living programs that must be updated and monitored in order to continue educating the workforce, the CCO said, adding: ‘Reputation becomes a discriminator in your business.’
The butterfly effect
Peter Clapman, who now chairs the governance committee at iPass, an international wireless network, spoke about how apparently casual conversations among institutional investing colleagues can spark pivotal events in the evolution of governance. When the Delaware Court upheld companies’ right to adopt poison pill provisions in the 1980s, governance leaders at TIAA-CREF pondered what their options were. Clapman suggested filing a preparatory proposal with a few companies that had adopted such provisions, asking for a shareholder vote to ratify their poison pills.
Clapman described the reaction as ‘hysterical hostility’ from companies where TIAA-CREF had filed resolutions, accompanied by demands he be fired. TIAA-CREF ended up filing similar proposals that proxy season at 10 companies, with the SEC upholding its right to do so. And instead of being fired, Clapman, together with his team, went on to champion many other governance changes, ushering in the current era of shareholder engagement.
‘I wouldn’t have dreamed when I filed that first resolution that things would get to this point, and it’s worthwhile to ask whether the pendulum has gone too far [in the other direction],’ he said.
Clapman recommended that activist shareholders permit the CEO to be present when they meet to discuss changes with the board because it can reveal differences between directors and senior managers that might not otherwise surface.
He revealed that by doing so, he had noticed that the chief executive was often the most uncomfortable person in the room because he or she was suddenly able to see how board members, once they were given the opportunity to interact face to face with activists re-evaluated the one-sided, biased views of activist shareholders’ motivations that they had received from senior management members.
Better communications
In addition to his work at iPass, Clapman is using his decades of experience of interacting with boards in his role at CamberView Partners, where he works on behalf of management teams and boards to help them communicate more effectively with institutional investors.
‘Longer-term shareholders don’t really know what goes on in the boardroom,’ he said. Board members must convince these investors that ‘the board is alive and kicking and understands its responsibility to shareholders, and that it is spending the time and effort and has a strategic rationale for opposing the short-term activist. If they can do that effectively, the short-term activist will lose.’
