The Corp Gov Camel

A camel looks like a horse that was planned by a committee.

1. Attributed to Sir Alex Issigonis, automotive designer, in Vogue Magazine, July 1958

We just got around to reading the Commonsense Corporate Governance Principles that a diverse committee of 13 corporate insiders launched last week. Among the five corporate heavyweights, six humongous institutional investors, one big pension fund (from Canada?), and a single hedge fund, everyone gets a little something. The jumbled mess that results is hardly commonsense, and most of the time barely makes any sense at all.

Yet, the Council of Institutional Investors, the National Association of Corporate Directors, corp gov luminary Nell Minow, and activist investor Nelson Peltz all praise it. Other comments range from big sloppy wet kiss (“detailed and tough-minded”) to mocking and derisive. More than one notes the irony of a group that urges separate CEO and board chair while six of them hold both jobs. We especially wish we wrote this clever takedown, from asset manager WPW.

This camel of corp gov satisfies the diverse interests on the committee, and offends none of them. Thus, the principles break no new ground. Instead, like a camel in the desert, it wanders aimlessly through a range of shopworn platitudes, hitting a few minor priorities and missing all the big ones.

Common(non)sense

In nine pages, the committee fits eight major sections, 38 subsections, and 49 bullet points. No one claims that responsive corp gov is simple or easy (ok, we did, while identifying the critical items that are indeed hard, focusing on a few major priorities, and fitting the principles of shareholder engagement into five simple points). But, this laundry list of random and randomly-organized ideas diverges from anything like commonsense principles. It devolves into a morass of detail, poorly organized and frequently conflicting.

So, what do we find there?

1. ?Collegiality is good! (Section 1.a, right up front, we think it overrated)

2. ?Tribute to diversity (Sec. 1.a, right after collegiality), reminds us that diversity on a board really means including directors who think $1 million is a lot of money

3. ?Majority vote standard (Sec. 1.b), as a sop to corp gov purists, but no enforcement, which makes no sense at all

4. ?Prefer GAAP to non-GAAP financials (Sec. 4.f), how did this end up here? which committee member wanted it?

5. ?Maybe separate CEO and BoD Chair (Sec. V), with no commonsense guidance about how to decide, although to us it’s easy

6. ?Lots of long-term thinking (“long-term” appears 17 times), which Larry Fink no doubt wrote:

7. –“Long-term shareholders should recommend potential directors if they know the individuals well and believe they would be additive to the board.” (Sec. I.c)

8. –“Creation of shareholder value, with a focus on the long term.” (Sec. II.b, on the BoD agenda)

9. –“long-term goals should be disclosed and explained in a specific and measurable way” (Sec. IV.c)

10. –“A company should take a long-term strategic view” (Sec. IV.d)

11. –“Compensation should have both a current component and a long-term component.” (Sec. VII.b)

12. ?Private company envy: “encouraging the sort of long-term thinking owners of a private company might bring to their strategic discussions” (Sec. II.b) and “take a long-term strategic view, as though the company were private” (Sec. IV.d)

13. ?Limited, controlled, and thus empty BoD contact with shareholders, as “companies may with to designate certain directors – as and when appropriate and in coordination with management – to communicate directly with shareholders on governance and key shareholder issues, such as CEO compensation” but not on key business issues, like growth and risk (Sec. IV.b)

14. ?Shareholder rights that pertain only to proxy access, (they like some forms, Sec. III.a), dual-class shares (not a “best practice”, Sec. III.b), and action by written consent and through special meetings (maybe but with skepticism about “a small minority of shareholders [abusing] the rights or [wasting] corporate time and resources, Sec. III.c); nothing about fair shareholder votes and board elections in which companies yield control to shareholders over the nominating, proxy, and election process.

Shareholder principles, too?

Somewhat stunningly, or maybe not considering the committee, we find a separate section (Sec. VIII) on obligations and requirements of investors. The preamble reads:

1. Asset managers, on behalf of their clients, are significant owners of public companies, and, therefore, often are in a position to influence the corporate governance practices of those companies. Asset managers should exercise their voting rights thoughtfully and act in what they believe to be the long-term economic interests of their clients.

Didn’t expect this in a guide to corp gov, which presumably deals with how portfolio companies should think and act. If a PM reads anything, read this section.

What’s missing?

Poison pills. Classified BoDs. Advance notice for annual meeting agenda items and BoD nominations.

And, real live PMs are missing. Seven of the most corporate institutional investors around, who mostly index their holdings, might represent a decent percentage of AUM, but do not and cannot represent the interests of all shareholders.

We don’t know what this committee hopes to accomplish with this effort. Maybe they want to try to quiet the more active of activist investors. Maybe they want to show investors, in the five corporations or seven institutional investors there, that they think about these things. What they get is a hodgepodge of ideas that glosses over the significant problems, or ignores them entirely.