Goldman Decides It's a Good Idea to Communicate with Shareholders

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In advance of its May 7th annual meeting with shareholders, Goldman Sachs used surprising candor in an eight-page letter in its 2009 annual report. Reiterating that it didn’t ‘bet against’ clients using short positions it took on before the residential real-estate market crashed. Rather, it was one of the first Wall Street firms to reduce its real-estate exposure, “even as some clients were sticking with their bullish bets.”

The Financial Times concludes, “The [note] is an implicit admission that Goldman’s long-held strategy of giving short shrift to criticism of its behavior and pay policies during the crisis has done little to quell the public backlash against the Wall Street bank.”

After such a mea culpa, how will Goldman Sachs handle its annual meeting?  Will it be a kabucki show or will Chairman and CEO Lloyd  Blankfein lead his directors in a sincere effort to engage with shareholders?  Blankfein has a chance to demonstrate that he’s committed to minimizing reputation risk by making the meeting a true opportunity for shareholders to question and receive genuine responses from him and the board of directors.

It’s a dramatic change and they should be preparing now.

Investor Groups See Annual Meetings as Forums for Director Accountability

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According to the Washington Post, investor groups are taking a two-pronged attack against lax corporate governance: they are pushing for legislation that gives shareholders more power and they will use shareholder meetings as a forum for holding directors accountable for oversight.

Proposals being submitted for inclusion in upcoming company proxies include

  • The right to call a special meeting
  • Independent board chairman
  • The end of the supermajority vote requirement
  • Say-on-pay
  • Review/report on political spending

Over 60 boards have proactively adopted “say on pay” in addition to those institutions that are required to offer shareholders an advisory vote on compensation by virtue of the TARP funds they received.  How involved is the board in writing and reviewing the proxies?  What do they know about the sentiment of their shareholders on these issues?

In the current environment, boards should be actively engaging with shareholders.

Prudential Sets a New Standard for Communication with Shareholders

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Not only does Prudential Financial prove that the proxy can serve as an effective communication vehicle to shareholders while fulfilling its legal requirement, but the company has added a number of innovations that set a new standard for others.

It begins with the Letter from the Board of Directors to our Shareholders: “As stewards of the Company, we are committed to governing Prudential in an an effective and transparent manner.  We hold ourselves to high standards with respect to governance “best practices” and we believe that communicating with you on significant matters is an important part of our obligation to align governance and management with the best interests of shareholders.”

The letter summarizes the way the board has been responsive to shareholders, items that will be explained in depth in the proxy but the letter enables the board to highlight its shareholder-friendly approach, from the advisory vote on executive compensation, the special financial award to 15,000 employees, clawbacks, the board’s active engagement in succession planning and how it has approached risk oversight.

It also invites shareholders to write to the board providing an email address for independent directors as well as a website for feedback on executive compensation. How simple and effective.

The proxy does a nice job of describing the current board and their qualificationsas well as a process for selecting directors including an explanation of how shareholders can recommend director candidates. The board explains its process and philosophy for compensation.

Best of all, it’s in plain English, clear, readable and understandable.

Say on Pay Is an Opportunity for Boards to Engage Shareholders

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Over 60 boards have proactively adopted “say on pay” in addition to those institutions that are required to offer shareholders an advisory vote on compensation by virtue of the TARP funds they received.  Congress has advanced legislation to mandate such advisory votes at all public companies.  Clearly, the tide is with granting shareholders the opportunity to express their opinion about the board’s handling of executive compensation.

An investor network comprised of public pension funds, labor funds, asset managers, and representatives of public companies formed a working group and spent almost three years studying the ramifications of a say on pay vote.  The companies on this working group including Intel, Prudential Financial, and most recently Colgate have enacted some form of say on pay.

“Our intention is to hold the board’s feet to the fire, so that they are asking management questions on our behalf to protect our interests,” said Anne Sheehan Director of Corporate Governance of CalSTRS.  “There is a shift in communication responsibility, board members should talk to shareholders.”

She recognizes that such dialogue with shareholders could be time consuming.  Certainly boards should have some kind of mechanism to talk to their ten largest shareholders, she said.  But smaller shareholders should have some kind of unfiltered access to the board, through a website or other method.

To the many boards that have been reluctant to adopt an advisory vote, Timothy Smith, Senior Vice President of Walden Asset Management says that the advisory vote has become a more normalized response to the executive compensation issue and is not the fringe idea it was considered several years ago.  “There’s a strong business case to adopt say on pay,” says Smith.  “It’s a good defensive strategy and removes the potential for a conflict with shareholders.”

To the boards that counter that such a vote doesn’t tell the board anything, Smith responds:  “Yes, an advisory vote is a simple yes or no. But you should know where your shareholders stand on your compensation issues.  You should never be caught not knowing what your shareholders think. You should know that before the vote.”

Engaging with shareholders on key issues is what boards should be doing anyway.

After 452, It's Time for Creative Outreach to Shareholders

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With the election of board directors too important to be considered routine, NYSE Rule 452 was amended to eliminate broker voting thereby removing typically management-friendly broker votes from director elections this year. 

But if shareholder voting on the election of directors is viewed as a critical component of good governance, how do you get registered shareholders to vote?

The SEC has launched an investor-focused Web site to help consumers invest wisely and avoid fraud. The site, www.Investor.gov provides tools and information, a way to ask questions, research brokers and even the mission of the SEC in ensuring fairness in the markets.   There’s a tab for proxy issues where the SEC explains “Your right to vote”, “Voting Your Shares”, “What You Should Do” and “How to Vote.”

Some companies see the opportunity to engage with shareholders.  Peggy Foran of Prudential Financial and has taken a creative approach, offering retail shareholders who vote their proxies an environmentally correct tote with the Prudential logo.  Or, the proxy-voting shareholder can also opt for a donation to a charity.

Not only will such a move encourage shareholders to vote but it signals the company’s true desire to engage with shareholders.

Navigating this proxy season will not be easy but companies that find creative ways to engage with their shareholders will improve their position and set the stage for the future.

After 452, It’s Time for Creative Outreach to Shareholders

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With the election of board directors too important to be considered routine, NYSE Rule 452 was amended to eliminate broker voting thereby removing typically management-friendly broker votes from director elections this year. 

But if shareholder voting on the election of directors is viewed as a critical component of good governance, how do you get registered shareholders to vote?

The SEC has launched an investor-focused Web site to help consumers invest wisely and avoid fraud. The site, www.Investor.gov provides tools and information, a way to ask questions, research brokers and even the mission of the SEC in ensuring fairness in the markets.   There’s a tab for proxy issues where the SEC explains “Your right to vote”, “Voting Your Shares”, “What You Should Do” and “How to Vote.”

Some companies see the opportunity to engage with shareholders.  Peggy Foran of Prudential Financial and has taken a creative approach, offering retail shareholders who vote their proxies an environmentally correct tote with the Prudential logo.  Or, the proxy-voting shareholder can also opt for a donation to a charity.

Not only will such a move encourage shareholders to vote but it signals the company’s true desire to engage with shareholders.

Navigating this proxy season will not be easy but companies that find creative ways to engage with their shareholders will improve their position and set the stage for the future.

Leading Boards Become More Engaged in Strategy

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One of the findings from KPMG’s recent 28-city Audit Committee Roundtable Series is that leading boards are becoming more engaged in strategy as they pay greater attention to risk.

As boards take a hard look at their risk oversight process, they naturally turn to the risk element of the company’s strategy.  The SEC’s proxy disclosure rules will require boards to take a good hard look at how they oversee risk.  “If there isn’t a clear framework in place, that’s probably job number one” according to the roundtable report.

As boards engage in risk discussions, they are becoming more insistent that management provide alternatives and choices regarding the company’s strategy, as opposed to the “review and concur” approach of the past. In this way, some boards are helping to develop and determine the company’s risk appetite.

As one director said, “It takes time, effort and calories to do this right, but digging into the strategy is the only way to really understand what risks the company should or shouldn’t be taking.”

Smart CEOs look to the board in the strategy process.

How Boards Can Rebuild Confidence

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When the former general counsel of Calpers notes that boards need to assert strong independent leadership and take the steps that allow for the ” new phenomenon” of increased dialogue between directors and shareholders, you know that the idea of real director engagement with shareholders has taken root.

In his opinion article in AgendaWeek, Richard Koppes discusses the ways directors can rebuild trust.  Because Koppes has served for 30 years in highly regarded expert in corporate governance, his words should reassure directors, especially those who began their service ten years ago.

In an article “Giving Boards Their Voice”  in  the new Korn Ferry International Briefings on Talent,  I discuss  the shift–from behind-the-scenes advisors to highly accountable public figures. It  is a profound transformation that boards are only beginning to grasp.  The article discusses the importance of board-shareholder communication.  By establishing independent communication, boards and their companies may succeed in quieting dissenting shareholders and even winning the confidence of investors enabling companies to operate in the interests of the long term.

The Power of an Individual Director

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John Gillespie and David Zweig offer “solutions” to their indictment of corporate boards in their book, Money for Nothing:  How the Failure of Corporate Boards is Ruining American Business and Costing Us Trillions.  In addition to their recommendations to split the chairman/CEO role, to allow shareholders to call an extraordinary general meeting, add some clout to say-on-pay, they cite individual talented and committed directors who have helped to improve governance.

Jack Krol is cited for his role in helping Ed Breen to restore Tyco after the Kozlowski debacle, Ralph Whitworth is lauded for the ways he restored governance to Waste Management and Michele Hooper for her leadership in changing board culture and spreading those changes to multiple boards.

“Drawing on her early experience on Target’s now legendary board beginning in the 1990s, Michele Hooper, a financial expert with a University of Chicago MBA, has brought those lessons to Warner Music Group, PPG Industries, AstraZeneca, UnitedHealth Group, Seagram and DaVita.  Hooper learned from Target the value of having “a boardroom that allows for open and collegial discussion around the table without people getting upset or having a CEO who is going to put the kibosh on conversations.”

Michele has modeled excellence and has been generous about sharing what she’s learned.  As the president of the Chicago chapter of the National Association of Corporate Directors, she volunteers her time to lead one of the strongest chapters of NACD, distinguished by its highly highly effective seminar programs. A board member of the national NACD, she facilitates training sessions for directors. In her day job, she is president and CEO of the Directors’ Council, which finds candidates for boards.

By highlighting the impact of directors like Michele, the critics Gillespie and Zweig demonstrate that boards of directors are still our best hope for providing oversight to our management system.

CEOs Want Effective Governance, Too

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Perhaps the most surprising element of John Gillespie and David Zweig’s book, Money for Nothing, How the Failure of Corporate Boards Is Ruining American Business and Costing Us Trillions is the jailhouse interview with Dennis Kozlowski, who considers himself a victim of the times and a weak board. The authors conclude that the Tyco board had faded into irrelevance compared to “the power, prestige, and satisfaction provided by the acquisitions” that Kozlowski engineered.

It’s clear that strong effective boards are in everyone’s interest.  Directors who offer a strategic sounding board for management, and bring to bear their wisdom and experience as the company encounters challenges, are to be highly prized.

It will take more than just committed directors to improve corporate governance.  CEOs, whether they hold the title of chairman or not, need to make the investments in effective boards. In addition to their personal commitment to make the relationship work, they need to provide the resources and support to help directors be effective.