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Dec 21, 2015

Millstein Governance Forum reconsiders the board-centric model

10th annual gathering weighs the shift toward more questioning of board decisions as investors demand more input

With investors clamoring for more influence on board composition and other governance matters, the focus of the 2015 Governance Forum hosted by the Millstein Center for Global Markets and Corporate Ownership was particularly apt: the board-centric model in the array of shareholders.

‘Corporate governance is at an inflection point,’ Bill McCracken, chair of the Millstein Center, said in his opening remarks on December 10 at Columbia Law School in New York. Although he believes it will remain board-centered, it needs to change in response to shareholder activism efforts.

‘Generally change is better done if you have input into it,’ he said. ‘Things that were uncomfortable [for directors] last year maybe need to be comfortable next year.’

Unveiling the new CROWN database that the data science lab at the Columbia Law School has developed, Professor Robert Jackson, Jr said the impetus ‘was our sense that the debate over corporate governance has been driven less by data than by beliefs.’ The Center’s hope is the new database will correct that by making it easier for governance professionals to extract data from SEC filings and to compare practices across companies and industries. Making it simpler to search for such things as the history of executive compensation at a particular company or interlocking director relationships across various boards will save investors from having to check multiple separate filings; that has the potential to better inform shareholders and lead to more probing questions about companies’ governance programs.

A panel discussion on how to revitalize the board-centric governance model focused on board refreshment with the aim of getting independent directors to think more like private equity investors with skin in the game and the industry and strategic expertise needed to put harder questions to senior management. A founding partner of a well-known hedge fund firm shared his experience of walking into a meeting of a board he’d been recently appointed to and feeling an unspoken pressure to conform. ‘A lot of my initial discussion on a board is about how respectful confrontation [with the management team] can lead to good things,’ he said.   

In an interview with Ira Millstein, founding chair of the Millstein Center, New York City Comptroller Scott Stringer said that as an active fiduciary of actively managed public pension funds, ‘we don’t rely on the board to protect our interests; we have to rely on ourselves to make sure [our portfolio companies are doing what they should to perform well into the future].’

Citing SEC research released in July, Stringer said the market value of 160 companies that have been targeted with proxy access proposals by shareholders since the SEC’s proposed proxy access rule was defeated in 2010 has risen by 0.05 percent on average. Proxy access has the potential to increase the market value of the entire market by 1 percent, or $140 billion, he added.

Stringer also emphasized the need to have the right directors in the boardroom, and the growing research that shows that diversity leads to better discussions at the board level. Beyond board composition, he said, ‘We want to make sure boards are providing pipelines for advancement for the next generation of executive leadership,’ which depends on building mentorship programs and looking more carefully for talent within one’s organization.

A panel about whether a reconsideration of the American Law Institute’s (ALI) Principles of Corporate Governance 2.01 and the purpose of the corporation is in order featured Cornell Law School professor Lynn Stout talking about how maximizing shareholder value is a relatively recent idea that took hold in the 1980s. Long-term shareholder value is unquantifiable, she said, ‘because the future is uncertain.’ But focusing exclusively on short-term value leads companies to certain pathologies, including overleveraging, share repurchases, selling off assets for cash and cuts in research and development spending to boost near-term earnings, she said.

A company’s purpose comes down to ‘managerial culture,’ said Damon Silvers, director of policy and special counsel at AFL-CIO. When a company is focused only on maximizing short-term value, it ends up not doing other things for which the state created the corporation, including enhancing the social benefits by expanding employment, he said.

Board members should be focused on keeping a company healthy if they want it to last for a long time, Stout said. While that includes ensuring the company is profitable, it doesn’t mean maximizing profits, but should include maintaining consumer loyalty and investing in R&D for future development.

Other topics included the roles that the markets and the media play in corporate governance and the use of loyalty shares to incentivize shareholders to adopt longer investment horizons.

In his closing remarks, Ira Millstein asked if it's possible to create a profile of a good board. ‘What kind of people do we want on boards? This is a major project given the array of shareholders,’ he said. ‘How is each category, from activists to pension funds, going to find the people they want? It’s not going to happen overnight. It will take a long time.’