Media Clips
June 2008
2008 Yale Corporate Governance Forum
By Jim McRitchie
This June 9-10, 2008 gathering of leading thinkers from the business, investment, academic communities - practitioners, and policy makers - demonstrated the Millstein Center's unique power to facilitate discussion of key issues in corporate governance. Many of the sessions were held in the Yale Law School's Levinson Auditorium. The picture at the right and all those that follow in this article are courtesy of Julie Brown Photography and the Millstein Center. What follows are a few impressions from the forum.
Technology for Boards & Shareowners
The Pre-Forum Workshop: Technology for Boards & Shareowners was divided between the needs of boards and shareowners. Bob Thomas, George Marcotte and Michael Schrage stepped through the Accenture's tools to provide boards the financial, operational, and strategic information needed to advise and monitor management's performance.
The software they demonstrated facilitated visualization through a dashboard, a balanced scorecard allowing data queries and drill down, alerts to highlight exceptional situations, as well as comparisons with outside information, such as financial disclosures from competitors. Another development was the ability to visualize what if scenarios. They provided an example where they compared a variety critical market factors and assumptions to find an optimal return on invested capital in various companies.
It was quite impressive and elicited much discussion about the quality of data and the importance of judgment factors. Other topics of discussion were wikipedia databases of scanned, taggable documents and the need to develop systems that help shareowners better evaluate the black hole of board behavior mechanisms to help determine which board members are making a substantial contribution and which are not.
The second part of the workshop was a discussion by Andy Eggers about how technology, by decreasing the cost of monitoring and implementing change, is also increasing the value of monitoring by shareowners. He discussed free rider issues and the benefits of collective action, using two developments to illustrate his points:
Eric Jackson's use of YouTube and breakoutperformance.blogspot.com
ProxyDemocracy.org, the system he has developed to enable retail shareowners to see how leading mutual and pension funds have voted and/or are voting in current corporate elections. The site also profiles funds on governance, environment, and other based on their historical voting patterns and allows users to create public or private focus lists based on a huge database of resolutions and votes. The system also allows users to enter a list of stocks to generate automatic emails about upcoming meetings and announced votes by the four funds announcing votes in advance whose data the system is currently capturing. From discussions with fund representatives at the Forum, we can expect the number of funds included in the database to increase substantially. As I have noted elsewhere, with the implementation of e-proxy and participation falling from about 20% to about 5%, mechanisms such as ProxyDemocracy, which facilitate voting based on reputational brands of institutional investors take on increased importance.
Should boards and shareowners talk to each other?
During plenary 1, moderator Stephen Davis noted that January 24, 2009 marks the anniversary of history's first known recorded dissident shareowner petition. The first instance of anyone advocating shareowner rights occurred when minority investor Isaac Le Maire filed a bill of complaints regarding the Dutch East India company on that date in 1609. The Center will be commemorating the anniversary with events focusing on shareholder rights in partnership with Dutch institutional investors.
Stephen Alogna presented highlights from a working draft policy briefing entitled, Talking Governance: Board-Shareowner Communications on Executive Compensation. After six months of interviewing research, Alogna concludes that advantages stemming from board-shareholder communications on governance outweigh the potential risks and costs.
Current communications are primarily between corporate managers and buy-side portfolio managers. Resistance between directors and investors is typically attributed to the SEC's Reg FD, but the rule should be seen as a caution, not a barricade. Alogna concludes the cost of custom legal guidance for each company could be substantially reduced if the SEC would issue guidance affirming safe harbor circumstances.
Mandatory say on pay for several years in the UK has resulted in dramatically increased dialogue there between boards and shareowners. However, foreign investors, which comprise an increasing proportion, haven't routinely been included. Compulsion, through crisis or other acute events, provides the impetus for most US corporate initiatives.
When they do engage, shareholders want to meet with the appropriate board directors, rather than management. From the company's standpoint, they are too frequently hearing an inconsistent message from fund managers and governance professionals from the same fund. Investors need to better integrate money management and governance functions.
Most US companies are meeting only with their largest shareowners, and then only when threatened with resolutions or proxy contests. However, some are recognizing that powerful voices can arise now from social networking tools. Alogna cites Eric Jackson's campaign at Yahoo, where he owned less than 100 shares, but was able to trigger eventual resignation of the CEO. Jeffrey Immelt, CEO/Chair at GE may have gotten at least part the message when he took part in a webcast answering questions from retail shareowners.
Again, there was plenty of excellent discussion from panelists and the audience. Kay Koplovitz noted that directors heading various committee need to be versed in how to discuss their issues. Claude Lamoureux said that communication can avoid expensive battles. The time to talk is when you don't have to. Mike Lubrano pointed to one of the differences in emerging markets where there is lots of dialogue but only with controlling shareholders.
Should short-term owners have a say on a company's strategy?
This was one of several breakout sessions with excellent discussants from industry, hedge funds and the Aspen Institute. One point was that shareowners aren't monolithic; they all have different time-frames, so it is difficult to agree on what maximizes shareowner value, assuming that is an agreed upon goal. Similarly, even among hedge funds there is a great deal of variety. David Nierenberg said his funds holds positions for an average seven years. Interestingly, he described hedge funds as personal enrichment tools for the general partner.
Nierenberg said he focuses on the allocation of resources mostly time of employees and cash flow. How are these being used to build long-term value? There was discussion of activists as thuggery or long-term partners. Andrew Shapiro of Lawndale Capital Management brought up an excellent point in response to those advocating that only long-term partners should have a say. When there is a loss of confidence in the leader and the stock is priced with the expectation of further deterioration, how much longer should the punishment go on? (before such intervention is sanctioned)
The friction is between those who want to extract value from the company and those who want to facilitate future corporate growth. Bright lines were hard to find. Nierenberg concluded that increased disclosure obligations could probably play a better role than bright line prohibitions.
Can independent board leaders change the way mutual funds behave as owners?
This break-out panel began with Louis Lowenstein summarizing his recent book, The Investor's Dilemma: How Mutual Funds Are Betraying Your Trust And What To Do About It.. Lowenstein discussed the conflict of interest built into the industry's structure. Management companies are independently owned, separate from the funds themselves, and managers profit by maximizing the funds under management because their fees are based on assets, not performance. He then went on to list a litany of problems, only a few of which I captured here:
70 - 90% of their money comes through retail brokerage firms, which, in turn, often enjoy pay to play revenue-sharing arrangements. In 2005, for example, the Edward Jones brokerage firm collected $172 million from seven favored mutual fund groups.
From 1980 to 2004, the assets of stock funds increased 90 times, from $45 billion to $4 trillion. During that same period, fees paid by investors and collected by fund managers via fund management companies soared from $288 million to $37 billion. Fees are not in proportion to the work. Economies of scale are not being passed on to shareholders.
Franklin Resources earned 100% per year on its capital. Directors can sit on literally hundreds of fund boards in the same family far in excess of the number they can really monitor.
The plethora of funds is for marketing, not better management.
In his book, Lowenstein praises Wintergreen and Fairholme funds for mirroring the Graham-Dodd philosophy of focusing on a few carefully researched stocks. Where the average mutual fund held 160 stocks, Wintergreen held 41 stocks and Fairholme held just 18 when the book was written. The annual returns of both funds were above 16 percent. At the forum, Lowenstein praised Longleaf Partners where all managers must be substantially invested in their funds. This reduces churning and at least you know fund managers are winning or losing along side of investors. See also Journey Into the Whirlwind: Graham-and-Doddsville Revisited.
John Hill, Chairman of Putnam Investments noted the frequently cited potential conflict of interest in 401(k) administration and investments but said that publication of voting records has made a difference. He cited Putnam's focus on independent directors, votes against dilution, compensation plans, etc. Trends seem to indicate their votes are having an impact. Discussion followed about how much independent analysis funds do of proxy issues.
Lauren Cohen discussed one of his recent studies, Attracting Flows by Attracting Big Clients: Conflicts of Interest and Mutual Fund Portfolio Choice, which showed that fund families secure substantial inflows by being named trustee of a 401(k) plan. Fund trustees significantly overweight their 401(k) client firm's stock to the detriment of shareowners who suffer potential losses in comparison to a more diversified portfolio.
Cohen concludes that one possible (but rather radical) remedy for the costs we bring forth in the paper is to require the trustee to be independent of the mutual fund providers in the plan. This could ostensibly rid the relationship of its embedded, and unneeded, conflict of interest.
Tracy Stewart of the Florida State Board of Administration pointed out that mutual fund proxies offer few choices and few vote. Discussion followed as to what shareholders were looking for good performance and, perhaps more importantly, good service not opportunities to participate in governance. There was also some discussion of ProxyDemocracy and the rewards and difficulties of announcing votes in advance.
There were several other sessions, including the final one with Ira Millstein, Hal Scott and William Donaldson, who took on the daunting task of trying to determine the implications for capital markets regulation in light of the recent U.S. financial crisis (bottom-left photo). And, of course, there were many opportunities to network (CorpGov.net publisher Jim McRitchie, center in bottom-right photo). If you can only attend one corporate governance conference next year, the annual Yale Corporate Governance Forum should be high on your list. Many thanks to Millstein Center staff and to Julie Brown Photography.
