Branding corporate governance

ASIA ONE BUSINESS

It is unfortunate that not many companies capitalise on their strong corporate governance practices even though the latter should be an integral part of their overall strategy of branding and positioning.

This observation was made by John Lim at the recent launch of the ASEAN Corporate Governance Scorecard 2014 results. Mr Lim, who is Singapore’s nominated corporate governance expert to the ASEAN Scorecard expert group, said: “Many of the Singaporean companies have not scored as well as they should as they did not fully disclose their corporate governance practices. Corporate governance is like justice, it must not only be done but also be seen to be done; hence the need for good and full disclosure.”

This lack of disclosure by companies of even their laudable attributes could be one of the reasons why SGX– listed shares are under-appreciated. Currently, around half of listed companies are trading at, or below, book value.

Listed companies, especially, need to play their part in attracting the attention of investors. They need to be more focused on communicating and branding their key assets, one of which could be their corporate governance practices.

Branding is about delivering on a promise, and doing so consistently. Most directors understand the need to market their company’s products and services, and the important role that brand values play in securing and keeping customers.

What companies need to do more is to apply this thinking to their shares.

If the company’s shares are a product and investors are the customers, what is the brand value that the company stands by? What is it that the directors and management want the shares to be known for in the market? What will keep investors buying the shares, or holding onto them for a long time? Read more here.

Corporate Japan Answers to Nobody

by William Pesek for Bloomberg View

It’s been a dreadful week for Japanese corporations. Toshiba is facing questions about its accounting practices, Sharp is asking lenders for another bailout and Takata can’t escape bad news about its airbags.

Each of these problems is bad enough on its own. Together, they raise serious questions about the state of Japan’s corporate governance. And at a time when the Nikkei stock exchange has been rising (it’s up 36 percent over the past year), those questions are in urgent need of answers. If Japan’s leading companies are managed as poorly as this past week’s events suggest, there’s little reason to believe the country’s stock market surge is sustainable.

Prime Minister Shinzo Abe has certainly tried to improve Japan’s corporate governance. Last year, Tokyo introduced a stewardship code encouraging investors to pressure underperforming CEOs, and launched an index of 400 domestic companies that regulators believe use their cash stockpiles well. Next month it will release a national code of conduct for executives: Companies will be asked to include at least two outside directors on their boards or explain why they shouldn’t have to. Abe is also asking companies to invite more women into the executive suite. Diversity in the boardroom, the government hopes, will enhance oversight.

In theory, says Nicholas Smith, Tokyo-based strategist at CLSA, “this should trigger a flurry of fevered business and balance sheet restructuring.” In practice, corporate Japan has barely budged in response to Abe’s reforms — after decades of running their affairs free of outside interference, their inertia has proven too powerful. Read more here.

How to Be an Activist Investor

by Alex Davidson for The Wall Street Journal

You, too, can be an activist investor.

Just ask hedge-fund manager Eric Jackson, who started a crusade for change at YahooInc. more than seven years ago armed with only a blog post and YouTube.

“It’s never been easier for an individual shareholder to express a point of view,” says Mr. Jackson, who used social media to galvanize support for shareholder-friendly changes at Yahoo and against members of the compensation committee responsible for approving executives’ pay packages. At the time, he and his supporters collectively owned 0.2% of Yahoo’s shares outstanding.

Conventional thinking has been that ordinary individual investors, too busy with their own work and families, don’t have the time or desire to agitate for change. With the stock market in a six-year bull market and index funds proliferating, many people have, in fact, been content to sit back and be passive investors.

But some individual investors, buoyed by the belief that good corporate governance leads to improved returns, are showing a greater interest in engaging with companies on issues such as executive pay and board structure. And shareholders—even those with limited resources—have plenty of options when it comes to being heard.

So how does one go about becoming an activist?

As with any other activity or sport, there are different levels at which investors can get involved. Read more here.

From boardroom to boss – the rising tide of directors becoming CEO

by Simon Evans for Financial Review

A growing number of non-executive directors sitting inside Australia’s corporate boardrooms are being tapped to run the entire operations as a chief executive. Sometimes it’s out of necessity because of a sudden event, and sometimes it’s because boards want someone who “knows where the bodies are buried”.

Having a broad knowledge of the inner workings of a company through sitting around the boardroom table seems to count more and more. And corporate governance experts say the pressures on companies to deliver strong returns quickly means the six-month time frame it can take for an extended global search for the right person can be a deterrent to recruiting a complete outsider.

But does poring through monthly board reports and overseeing broad strategy around a boardroom table equip a director to actually run the company?

Explosives group Orica, theme park and fitness centre operator Ardent Leisure, copper and gold group Rex Minerals and insurer Suncorp have in the past six weeks hired chief executives from their boardrooms, joining pastoral company Elders Australia which installed Mark Allison into the chief executive role in April, 2014, swapping his previous duties as chairman. Read more here.

‘Woman’: Not a Box to Be Checked Off

by Caroline Turner for The Huffington Post

Everyone knows that having women on a company’s board of directors is good for the company’s bottom line. (If you need a refresher, click on the business case, a free download on my website.) Catalyst did a study of companies with “sustained” high representation of women — at least three women board members in a minimum of four of five years studied. These companies significantly outperformed those with sustained low representation — 84 percent higher return on sales, 60 percent higher return on invested capital and 46 percent higher return on equity.

The Catalyst study indicates that what makes a difference to the bottom line is not having a woman but having women… plural. A 2006 study by Wellesley Centers for Women concluded that “a critical mass of three or more women can cause a fundamental change in the boardroom and enhance corporate governance.” When there are three, “women are no longer seen as outsiders and are able to influence the content and process of board discussions more substantially.”

This makes sense given the phenomenon that Sheryl Sandberg and Adam Grant addressed in their article “Speaking While Female.” If there is one woman, she may not speak up, she may be talked over, or her ideas may be credited to a man who repeats them. As a result, the feminine voice will not be represented. There is no real gender diversity. There is just a token. Read more here.

The Boardroom Strikes Back

by Steven Davidoff Solomon for The New York Times

This year’s proxy season is turning out to be more hostile than ever, as companies fight back against hedge fund activists.

Companies typically have their annual meetings in the late spring, like the blooming of tulips, and they attract hordes of shareholder activists looking for profits. The activists will often try to elect directors, making proxy season not a reminder of the warming spring but a clarion call for the barbarians at the gate.

Last year, the activists won a series of stunning victories at Darden Restaurants, Sotheby’s and the real estate investment trust now known as Equity Commonwealth, among others. In each case, the companies refused to bow to the activist agenda, preferring instead to try to prevent the activists from electing directors. Each company lost after spending millions of dollars, wasting both money and their boards’ reputations.

The losses actually came as no surprise. In 2014, activists had a 73 percent success rate in electing directors, according to FactSet’s corporate governance database, SharkRepellent. Given the odds, many, including me, predicted that this year’s proxy season would be all about settling as companies sought to avoid these types of bloody losses. This would be the year that shareholder activists dominated completely as companies ran for cover.

We were wrong. Read more here.

Investors fight for greater say on boards

by Stephen Foley for The Financial Times

A campaign to win shareholders a greater say over who sits on corporate boards has exposed a rift between some of the largest asset managers in the US.

Votes on so-called “proxy access” — the right for long-term shareholders to nominate directors — have passed at two US companies, but gone down to defeat at three others.

Over 100 US companies are facing votes on the proposal in the coming weeks, as proxy access has become the largest corporate governance cause of this year’s season of annual meetings.

Fidelity, one of the largest holders of US company shares through its popular mutual funds, is opposing the push for proxy access, even when a company’s management itself supports the idea.

But BlackRock, the world’s largest asset manager, has said it will support most of the proposals, while T Rowe Price and TIAA-CREF are among its most enthusiastic supporters.

Most of the proposals on the ballot this year have been put forward by large public pension funds, including the New York City retirement system and Calpers, the Californian public employees’ fund.

Vanguard, the $3tn asset manager whose stock market tracker funds hold a piece of most US companies, is voting against the bulk of the proposals, preferring a weaker form of proxy access than is on the ballot at most companies.

The public pension funds are pushing a plan that would allow a shareholder or group of shareholders who have held stock for three years, and who hold 3 per cent of a company between them, to nominate board directors. The Securities and Exchange Commission was originally going to make proxy access compulsory, but a legal challenge prevented it from doing so. Read more here.

 

Will the corporate governance structure change?

by Deepak Patel for Business Standard

With the government notifying new rules for the appointment of independent directors (IDs) for public sector banks (PSBs), public sector insurance companies, Reserve Bank of India (RBI) and financial institutions (FIs), it has become clear that the government wants to alter the level ofcorporate governance practised in these boardrooms. However, many experts familiar with the functioning of these companies’ boards feel that it might not be enough to change the status quo and more needs to be done to change the governance structure in the boardrooms.

So what has changed?
While the Companies Act, 2013, which was implemented last year, was one step forward to give IDs more power, they were much more broadly defined – focusing more on the duty on the ID to ensure that the interest of all stakeholders are protected; particularly minority shareholders.

According to Companies Act, 2013, an ID should be a person who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience. Further, he/she should also possess ‘appropriate skills, experience and knowledge’ in one or more fields of finance, law, management, sales etc.

On the other hand, the rules recently notified for PSB, FIs, RBI and insurance companies have a much more focused tone – giving them a tenure of six years, asking for a minimum 20 years of experience from persons coming from industry, putting an age restriction at 67 years.

Moreover, the government officials who have 20 years of experience with 10 years at joint secretary or above; retired chief managing directors/executive directors of PSBs after one year of cooling period; academicians, chartered accountants and professors with more than 20 years experience ; will be the only eligible ones to apply.

“The normal expectation globally of the role of an Independent Director is essentially two-fold: advisory and monitoring,” said an expert who did not wish to be named.

“While the Companies Act focuses more on the ‘monitoring’ part – asking ID to ensure the interest of all stakeholders; particularly minority shareholders; the rules for ID appointment in state-run banksand insurance companies envisage him/her more as a ‘strategic advisor,” the expert added. ” For example, one of the acceptable qualifications of an independent director is that he or she led a reputed organisation or brought turnaround in a failing organisation.” Read more here.

Understanding Japan’s New Corporate Governance Code

by George T. Hogan for Investopedia

In December 2014, Japan’s Financial Services Agency (FSA) published a draft for public commentary of a new corporate governance code (hereafter referred to as “the code”). The voluntarily adopted code, which the government hopes will come into effect in June 2015, takes aim at a number of prickly issues such as the rights of shareholders, capital policy, cross-shareholdings, anti-takeover measures, whistleblowing, disclosure, board diversity and structure, just to name a few. Long viewed by investors as a global pariah for its poor treatment of corporate shareholders, the Japanese government hopes this new initiative will help improve the image of corporate Japan, and make its markets more palatable to foreign capital. But can it really work? This article aims to take a closer look. (To read of another initiative being undertaken by Japan’s government to improve the country’s economic standing, see article: Japan’s Strategy To Fix Its Deflation Problem.)

Corporate governance is defined as a system of rules, practices and processes by which a company is directed and controlled. It entails balancing the interests of the many stakeholders in a company, and involves a large array of parties, often with conflicting interests. Hence, what constitutes “good practice” in this context is very much a matter of perspective. In this article we make no secret that we are addressing this debate from the perspective of the shareholder, if for no other reason than that this is the very group of people whose concerns the code appears to address. (See video: Corporate Governance.)

Unfortunately, from this perspective the picture has generally been considered rather bleak. Though Japan is a global powerhouse in manufacturing and technology, with brands that are instantly recognizable almost anywhere in the world (e.g. Toyota (TM), Sony (SNE), Panasonic, Sharp, Hitachi, etc.), ask just about any long-term observer of Japan how they feel about the country’s governance record, and they won’t be short of negative anecdotes. Take Olympus as an example, where the company sacked its new foreign president after only six months when he began asking questions about management’s attempts to conceal massive investment losses dating back to the 1980’s. Read more here.

Shareholder Activism: How Will You Respond?

by Bob Lamm and Chris Ruggeri for The Wall Street Journal

If it seems like activist investors have had a more visible and powerful presence over the last few years, it’s because they have. Just under three-quarters of public company CFOs say they have experienced some form of shareholder activism—most often in the form of communication with management or the board, and sometimes in the form of proposals that have gone directly to shareholders, according to the results of Deloitte’s first-quarter 2015 CFO Signals™survey of nearly 100 CFOs of large North American companies. Moreover, about half say they have made at least one major business change specifically because of shareholder activism (share repurchases, leadership changes and divestures being the most common).¹

The trend also shows no signs of abating. In the wake of the financial crisis, Dodd-Frank and Say-on-Pay votes, shareholders have become more assertive in expressing what they want from the companies they invest in. And for CFOs, this new dynamic between public companies and shareholders presents an evolution in corporate governance that may need to be addressed.

There are several steps that CFOs can take to prepare their companies to manage increasingly vocal and influential investors. In this excerpt from CFO Insights, Bob Lamm, senior advisor, Center for Corporate Governance, Deloitte LLP, and Chris Ruggeri, principal; U.S. M&A leader, Deloitte Transaction and Business Analytics LLP, discuss how finance chiefs can identify and address company financial issues that could attract activist attention; why a more proactive engagement with the investment community is needed long before an activist campaign begins; and what some of the key components of a playbook are for responding to an activist campaign. Read more here.