Strine Rips Fund Voting, Advocates Tax on Trades

For the 1,200-plus directors convened at this year’s NACD Global Board Leaders’ Summit, Delaware Supreme Court Chief Justice Leo E. Strine Jr. had words of advice that ranged from improving time management to establishing a Tobin-like tax on financial transactions. The nation’s leading jurist on corporate matters also cautioned against using electronic devices during board meetings for unrelated matters because that information may one day be discoverable in court.

Interviewed on Tuesday, Sept. 29, by NACD President Peter Gleason, Strine was at his provocative best. The proliferation of technology in the boardroom, Strine observed, may lead to an unintended consequence: the ability to discern just how engaged directors are and by what in board meetings. Strine warned of the possibility, and even the probability, of a shareholder suit that alleges inattention and seeks to support that allegation with a review of the director’s online activity when in board meetings—measuring just how much time was spent looking at material on the board portal versus sending e-mails, text-messaging family or friends, or playing fantasy football.

Boards also need to assess whether they are using their time to best effect. “There are no disciplined studies about how boards should be scheduled and what you do in certain committees,” Strine said. “The pattern is that if something is required legally or by statute, then that tends to get done first. A real challenge is to think like business people about your function as a director and how you use your time, and [recognize] that it reflects the priorities that you (as a board) set.” Strine challenged directors to set “a board budget of hours.”

Strine repeated a suggestion he has made previously that U.S. tax policy be adjusted to include a so-called Robin Hood or Tobin tax. Such a tax is named for the late Nobel Prize-winning Yale economist James Tobin, who in 1973 recommended a levy on short-term currency swaps in order to thwart speculation. A similar tax on stock trades, Strine maintains, would discourage short-term fund-hopping and generate new revenue.

Strine took issue with the voting practices of some large asset managers, noting that the sheer volume of votes created by shareholder proposals and the numbers of companies in each fund make informed voting impossible. Even the most “rational” investors, such as Fidelity Investments and the Vanguard Group, tend to vote their funds in one direction for the sake of expedience, he said. (See related content: Taking the Long View with Bill McNabb.) “It would be good for index funds to have their own voting policies. Why is the index fund voting the same way as the dividend fund?” Strine asked. “Why?”

One of the CEO’s most important jobs is to develop the next generation of leadership, Strine reminded the assembled directors, and boards should have opportunities for regular contact with up-and-comers.

Strine also recommended that boards consider the benefits of adopting a forum-selection bylaw. The inclusion of such a bylaw would allow corporations to determine where court cases are adjudicated when suits cover more than one jurisdiction. The state of Delaware in May enacted an arbitration law that is intended to provide speedier, more cost-effective dispute resolution as long as one of the companies in the dispute is domiciled in Delaware.

For further reading:  NACD Directorship featured an interview with Strine in the May/June issue.