Tag Archive: shareholder

Uncle Sam as Shareholder and Regulator

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The regulatory burden on U.S. public companies continues to increase and the government’s role has expanded from that of just regulator to, in some cases, shareholder. That might leave some directors wondering how far into the boardroom Uncle Sam can reach.

A panel of financial industry and government experts convened last fall to discuss the influence of the federal government when it acts as either a shareholder or a regulator. The Clearing House Association and the University of Delaware’s John L. Weinberg Center for Corporate Governance facilitated the discussion with a program called The Government as Regulator and/or Shareholder—The Impact on Director Duties, which  included the following speakers and panel members:

  • Rolin P. Bissell, partner, Young Conaway Stargatt & Taylor LLP
  • Amy Borrus, interim executive director, Council of Institutional Investors
  • Laban P. Jackson, Jr., director, JP Morgan Chase & Co.
  • Peter A. Langerman, CEO, Franklin Mutual Advisers, LLC
  • Giovanni P. Prezioso, partner, Cleary Gottlieb Steen & Hamilton LLP
  • Gregg L. Rozansky, managing director, The Clearing House Association
  • Mary Schapiro, former chair, U.S. Securities and Exchange Commission (SEC)
  • Collins J. Seitz, Jr., justice, Supreme Court of Delaware

Charles M. Elson, director of the Weinberg Center and professor of finance, moderated the discussion.

The panel offered a wide range of perspectives, but a few common themes emerged that are applicable to directors across a variety of industries.  

Most panelists agreed that the 2010 Dodd-Frank Act was a response proportional to the 2008 global financial crisis, but expressed frustration with certain government bailouts and the political motivations influencing them. Several panelists indicated they felt uneasy about the broad scale of intervention that the federal government made into the private sector to bail out failing companies. The panelists cited the example of the U.S. Federal Reserve Bank’s $85 billion bailout of American International Group (AIG) to illustrate how far agencies reached—even in the face of the internal corruption at the company. AIG’s credit default swaps lost the company $30 billion and are often blamed as a major reason the company collapsed in 2008. Controversy swirled when in March 2009, publicly disclosed information revealed that after the bailout, employees of AIG’s financial services division were going to be paid $218 million in bonuses. A June 2010 report by the Congressional Oversight Panel (COP)—a five-member group created by Congress in 2008 to oversee the U.S. Treasury’s actions—concluded that the Federal Reserve Board’s close relations to powerful people on Wall Street influenced its decision to help AIG.

While the panelists were critical of the bailouts, they agreed that Dodd-Frank was a reasonable response to help prevent future failure of companies. Directors’ bandwidth, however, to address their corporation’s most important strategic matters, including emerging risks, may be limited by the need to spend time ensuring compliance with Dodd-Frank. Most agreed that they do not expect a lessening of regulations in the near future.

Panelists also agreed that the Delaware court system—one of the most powerful legal arbiters of U.S. corporate governance—is not designed to address scenarios in which the federal government acts as an investor. When the federal government intervenes by investing in a company to salvage it, the government becomes a shareholder with greater legal privileges than a traditional, human shareholder who might challenge corporate decisions in the Delaware courts. In the event that the government challenges a company in the federal court system, the federal government would be tried in legal institutions where the ultimate power of appeal is granted by its own founding documents. Challenges to federal sovereign immunity and the federal government as shareholder would be difficult, if not impossible, to navigate.

The line between the government as a stockholder and regulator could be blurred when the regulatory influence over the company is pervasive. This issue may be particularly acute for wholly owned subsidiaries of public companies when the government closely reviews company decision-making and expresses views on what is in the best interest of the subsidiary.

Relationships between regulators and directors—though once strained by mistrust after the financial crisis—are beginning to improve. A panelist observed that, in several global markets, relationships between regulators and directors have steadily normalized over the past year and a half, in contrast to more tense interactions of previous years. As global regulatory standards are established, markets recover and stabilize, and businesses and regulators deepen their understanding of each other.

Forming relationships with regulators should be a strategic priority for directors. Most panelists insisted that good relationships with representatives from regulatory agencies are essential. Boards should aim to keep a level of candor with regulatory contacts that could be helpful when pushing back against regulatory action and when directors have suggestions for upcoming regulations. Directors should also acknowledge that regulators have an important function to carry out in a high-pressure, multi-stakes market environment that is a challenge to navigate for regulators and companies alike. A “kicking and screaming” approach to relationships with regulators was frowned upon, as it is not productive and is insensitive to the fact that developing or implementing regulation is demanding and complex.

Directors seeking to strengthen their oversight of corporate compliance and ethics programs can access the National Association of Corporate Directors’ (NACD) publication Director Essentials: Strengthening Compliance and Ethics Oversight. The guide provides an overview of the board’s role in compliance oversight and offers practical insights about fulfilling regulatory expectations.

Why We Do What We Do

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A recent meeting with NACD Chair Reatha Clark King has revealed some compelling thoughts on why good corporate governance matters and why we at NACD do what we do. 

Over the last 37 years, NACD has researched, documented, and published leading boardroom practices including Blue Ribbon Commission reports, handbooks, white papers, and surveys. Our intent is to advance exemplary board leadership.

As I dug into the question of why we do what we do with directors who serve on NACD’s board, I used a classic marketing approach to define higher order, emotional benefits. A benefit-oriented discussion enables one to organize responses into a pyramid-shaped format. Product attributes serve as the foundation and subsequent perspectives provide product and end benefits, ultimately leading to emotional benefits. Capturing the emotional essence enables one to develop a sustainable, differentiated position.

When I asked the “why we do” question, I received responses such as:

  • To help directors make better decisions
  • To ensure that the perspectives of all stakeholders are heard
  • To do the best job I can
  • To represent the shareholder
  • To increase the value of the enterprise

While these responses are appropriate, there was an obvious follow-up question: “Well, why does that matter?” It reminded me of conducting in-home ethnography research and one-on-one interviews when I was in marketing at Kraft Foods–sessions that were typically enjoyable for me, but a bit painful for the participant.

The culmination of responses to “why we do what we do” can be summarized in two remarkably simple bullet points:

  • Enterprise sustainability
  • Stakeholder confidence

To me, this perspective is both impactful and relevant. First, the answers are brief and to the point. Second, each bullet point contains what I would describe as a lightning rod word–sustainability and stakeholder–and each of these words can have a variety of meanings depending on the audience.

Enterprise sustainability means, quite simply, that the company is around for a long time. An enduring enterprise provides long-term benefits to its employees and their families, to suppliers and vendors, to the community in which it operates, and to those who provide financing–bankers, investors, and donors. Further, enterprise sustainability means that the leaders of companies, both in the boardroom and the C-suite, remain aware of current and emerging issues that may impact these companies, and are engaged in robust dialogue about strategic implications. I call this strategic agility.

As a result, stakeholder confidence is established, reinforced, and bolstered.  Regardless of how a company is structured–public, private, nonprofit, mutual, or family owned–all enterprises have stakeholders, and the long-term viability of the enterprise is overseen by a board of directors.

Therefore, everything that NACD does–from our NACD Directorship 2020® initiative to our expanding range of events, resources, and services–provides unique value to NACD members to advance exemplary board leadership. The intended outcome of all of our activity is NACD members who demonstrate a commitment to not only continuously learning, but also demonstrating the courage to question the unknown and working to sharpen their strategic agility. Once this is achieved, NACD members are poised to help create sustainable enterprises and bolster stakeholder confidence.

I welcome your feedback on this topic. Please join me in sharing your views of why we do what we do.

Proxy Proposals Regarding Disclosure of Political Activity

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As reported in The Dallas Morning News and featured in Monday’s NACD Directors Daily, more than 80 percent of Americans believe there should be limits on the amount of money corporations can contribute to groups trying to influence political campaigns. More than two years after the U.S. Supreme Court’s Citizens United ruling, corporate political spending remains under scrutiny, and shareholder resolutions regarding the disclosure of political activity make up the largest portion of environmental and social policy proposals. While the number of political proposals has doubled since 2008, they have leveled off since 2011, with 116 proposals filed in 2012 to date. The average level of shareholder support for these proposals, depending on company size, sits at low to mid 20 percent, higher than the average of 18 percent support for environmental or social policy proposals.

Most shareholder proposals request disclosure of political or lobbying spending, while a small number of proposals seek to actively limit these corporate expenditures. The latter group either seeks advisory votes on political spending (averaging 7 percent support) or calls for a stop to all political spending (averaging 3 percent support).

Research studies are inconclusive regarding the effects of corporate political expenditures on shareholder value. A number of studies have found positive correlations between political contributions or lobbying activity and benefits to economic and shareholder value. Within the last few years; however, three new studies have found negative correlations, claiming that corporations involved in political spending suffer from decreased shareholder value or under perform their peers.

This proxy season, the Center for Political Accountability (CPA) submitted 51 political disclosure proposals, making it the most active shareholder activist group in this regard. It has also released its model resolution template for 2013, which may be, if this year’s trends continue, the most frequently employed political disclosure proxy proposal. On last week’s episode of BoardVision, NACD spoke with Ken Gross, head of the Political Law practice at Skadden Arps, who provided directors with insights on these shareholder proposals.

Interested directors may wish to view CPA’s 2013 Model Resolution Template.