Corporate Governance: Important Trends John M. Holcomb Institute for Enterprise Ethics May 14, 2015.
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Transcript of Corporate Governance: Important Trends John M. Holcomb Institute for Enterprise Ethics May 14, 2015.
Corporate Governance: Important Trends
John M. Holcomb
Institute for Enterprise Ethics
May 14, 2015
Topics Ethics and Compliance Corporate Political Activities Shareholder Activism Executive Succession Cybersecurity
Reputational Risk Management Failures in crisis management
BP: Wrong leader in Hayward; Lax assessment of risk; Failure to implement message on safety; Cozy relationship with regulator; Abuses in victim compensation plan
News Corp: Failure of internal controls on hacking and privacy invasion; Cozy relationship with police and governmental elites
GM: No upward communication of bad news; tradition of blaming others; Group think; board in denial
Lufthansa and Germanwings Crash Suicidal co-pilot and tragic passenger deaths Company was aware of co-pilot’s history of depression
and his previous treatment and leave of absence Lack of scrutiny in allowing him to return Current strategy of reliance on low-cost carriers Supervisory board of 20 members
10 are employee representatives 5 are women Robert Kimmitt is American representative
Ethics and Supply-Chain Management Major problem for several companies
Nike in southeast Asia, and Wal-Mart Apple and Foxconn Several companies and factory burnings in
Bangladesh Levi Strauss and control of labor practices by
contractors in China and southeast Asia. Rainforest Action Network partnership with
Home Depot on old growth forests
Importance of Roles of Board Compliance and Corporate Responsibility Committees Taking Caremark duty seriously to monitor internal controls Mitigating factor under Sentencing Commission guidelines Avoiding a charge under the McNulty Memo Complying with conditions of deferred prosecution
agreements or legal settlements Adapting to onerous burden placed on audit committees Realizing the limits of the 3 major committees – audit,
compensation, nominating committees Prevention of future fraud and legal violations
Why and How to Examine Roles of Board Compliance/Public Responsibility Committees
Penetrating any smokescreen or sham Going beyond the labels Content analysis of committee charters Length of committee charters Frequency of committee meetings Examining the numbers of women on board
committees Separating the crucial from the important
Fortune 200 Non-Audit Committees with Compliance Roles Company Committee Abbott Labs Public Policy Johnson & Johnson Regulatory, Compliance,
and Government Affairs
Pfizer (Ironic) Regulatory and Compliance
Amgen Corporate Responsibility and
Compliance AIG Regulatory, Compliance,
and Public Policy
Non-Traditional Board Committees 101 of the Fortune top 200 companies have board
committees on: Public responsibility, Sustainability, Risk management, EHS, or Regulatory compliance and risk
Public responsibility committees have an external focus while ethics and compliance committees have an internal focus.
The former are important, while the latter are crucial Best Practices: Wells Fargo has three such committees
Whistleblower Protection SEC reports that all but one whistleblower filing a complaint
under Dodd-Frank law had complained internally first and exhausted internal channels.
Payouts of $50 million so far to 15 whistleblowers Retaliation and pretaliation (action to prevent whistleblower) KBR case – SEC cracking down on confidentiality agreements Exceptions allowing corporate attorneys to blow the whistle:
Significant harm to investor Company has actively impeded the investigation Internally reported and no action taken within 120 days N.B.: May also be ethically obligated to then blow the whistle
New Rules Disclosure of investments in conflict minerals – Amnesty
International and Global Witness Report that 80 percent of companies are not in compliance; high expense for limited benefit
Rule on disclosure of pay and performance Comparison to peers Total shareholder returns, including dividends, over 5-
year period Compensation actually paid in a given year Pay gap rule yet to come
Impact of Citizens United decision on Corporate Political Involvement Business PACs Shun Endorsement Campaigns Reputational Damage Shareholder Opposition Business Shuns Independent Committees
Morgan Stanley has refused to engage in independent spending and relies on PAC
GM used bailout money to fund candidates Continued Reliance on PACs Nonprofit Groups, Super PACs, and Wealthy Donors Benefit
over the Political Parties
Roles of the Center for Political Accountability Created a model shareholder resolution Created corporate rankings and scorecard Basic emphasis is on disclosure – discussion
of disclosure on later slide
Highest Ranking Companies By all measures, IBM is the gold standard. It has a long-
standing policy prohibiting the use of corporate money for political spending. The company also has no PAC and received a perfect score in a comprehensive report by the CPA published late last year.
Still, its investors then wanted to know how much in dues the company pays to trade associations and “other organizations that can hide any contributions.” And they want a comprehensive report on lobbying activities.
Highest Ranking Companies in Political Disclosure In the CPA’s latest 2014 survey report, CSX
and Noble Energy rank the highest on political accountability and disclosure of political activities.
Rounding out the top ten are Becton Dickinson, Capital One, Exelon, Qualcomm, UPS, AFLAC, and Biogen
Model Resolution of the Center for Political Accountability Report soft money contributions, independent
expenditures, and payments to trade associations and other tax exempt organizations that are used for political purposes;
Identify the titles of the individuals involved in the expenditure decisions;
Disclose their political spending guidelines; and Require the board of directors to conduct oversight
of the company's political spending.
Critique of CPA Criteria Ignore key elements of corruption Inclusion of items unimportant to investors Using PAC as exclusive avenue is not even
scored Danger in check-the-box test CPA enjoys a monopoly on setting the
standard; comparison to governance ratings
Key Elements of Corruption Ignored Direct lobbying – ten times the amount
contributed to candidates Contributing to political party conventions Contributing to 501c-3 nonprofits and
foundations tied to candidates Giving specifically to judicial elections and to
candidates for state attorney general Bundling
New Scoring and Ranking Results Questions added and method – top 2 tiers Every company’s score is lowered Some in upper tier move to lower tier, and
vice versa Lots of changes in rank orders Some make dramatic moves upward
Questions Added to List of Criteria Does the company have a policy restricting bundling of political
contributions by executives? Or: Does the company disclose the money raised through bundling and then
contributed to political candidates? 6 Points Does the company restrict and/or disclose contributions to political party
conventions? 2 points Does the company restrict contributions to public policy think tanks or
foundations that have been established by or affiliated with political candidates? 2 points
Does the company disclose the amount it spends on direct lobbying of Congress or other branches of the federal government? 2 points
Does the company disclose the amount of money it spends on direct lobbying of state legislatures and/or foreign governments? 2 points
Questions Added to List of Criteria Does the company disclose the amount of money it pays to law firms or
political consultants to represent its political interests in the national or state capitols? 2 points
Does the company prohibit contributions to super PACs or c-4s? 4 points Does the company disclose amounts spent on super PACs or c-4
Committees? 4 points As to question 11 in the CPA list, it should not simply be a yes/no
question but should be allocated 6 points, with full credit given to those companies that restrict political contributions through the PAC, the legally authorized component. Companies that also ban PAC contributions should not be given more credit for political responsibility, but should be penalized.
Lower Scores with New Criteria Old Scores New Scores 90-100 A 20 80-89 B 32 70-79 C 35 60-69 D 17 0-59 F 0
90-100 A 0 80-89 B 0 70-79 C 20 60-69 D 51 50-59 F 33
Tier 2 to 1 Tier 1 to 2 Anadarko Petroleum Applied Materials Reynolds American Boston Scientific Eli Lilly Lockheed Martin
Air Products & Chemicals
Costco Illinois Tool Works Dow Chemical eBay CVS Caremark
Dramatic Move Upward for Some Pfizer
In rank 11 by CPA score In rank 6 by new score
Applied Materials In rank 17 by CPA score In rank 12 by new score
Shareholder Activism and Proxy Fights Tempur Sealy case – CEO, Chairman, and head of
governance committee all resign under investor pressure from H Partners hedge fund (10% owner); Four proxy advisory firms supported negative votes
DuPont/Trian case – “white hat” activist wanted seat on the board for Peltz; ISS backed all four Trian candidates while Glass Lewis only supported Peltz; DuPont not a broken company; Lipton acknowledged Peltz would bring value to the board
Reactions to Activist Shareholders Success rate of activists is declining More push-back from company boards Targets are now smaller companies of less
than $10 billion in assets Former activists will now settle more easily
and are focusing on other issues New players are emerging
Reactions by Opponents Fink of BlackRock
Advises firms not to pander to investors and decries short-termism
Opposes higher dividends and buybacks Advocates shifting tax policy to favor long-term
holdings Marty Lipton: “Activism has caused companies to cut
R.& D., capital investment and, most significantly, employment. It forces companies to lay off employees to meet quarterly earnings. It is a disaster for the country.”
Reputational Risk Management: Failures in Leadership and Succession Planning Hewlett-Packard: multiple chapters – from
Fiorina to Hurd to Apotheker to Whitman Invading privacy of board members and reporters
( by board chair Patricia Dunn) Questionable personal relationship and expense
account fraud (Hurd) Strategic missteps (Apotheker) Board in disarray (due to privacy scandal and
disagreements over leadership and strategy)
Failures in Leadership and Succession Planning cont.
Pfizer: from McKinnell to Kindler Preoccupation with Washington and status
(McKinnell) CEO Compensation scandal (McKinnell) Autocratic micro-management (Kindler) Reliance on the misjudgments of an HR officer
(Kindler)
Cyber security and Cyber attack Risks Target case
Has not yet recovered Board was targeted by investors
Concern over supply chain Prevention versus detection Private sector and public sector responsibilities Board skill set
Difficult to find board candidates Tech expertise does not necessarily coincide with business
expertise Committee domain – risk, audit, regulatory compliance