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 (IDs) for public sector banks (PSBs), public sector insurance companies, Reserve Bank of India (RBI) and (FIs), it has become clear that the government wants to alter the level ofpractised 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, and 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 focuses more on the ‘monitoring’ part – asking ID to ensure the interest of all stakeholders; particularly minority shareholders; the rules for ID appointment in and 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.

Brazilian state firms urged to adopt tighter governance guidelines

by Adam Brown for IR Magazine

Measures aimed at regaining trust of investors amid corruption probe into state oil producer Petrobras

Brazil’s largest stock exchange operator and the country’s securities regulator have asked state-owned companies to voluntarily adhere to stricter guidelines designed to improve corporate governance to rebuild investors’ trust after a series of corruption scandals.

Exchange operator BM&F Bovespa, with the backing of Brazilian securities regulator Comissão de Valores Mobiliários (CVM), has issued a call for greater governance from companies that are partly or wholly owned by the federal or state governments, including greater disclosure, stricter internal controls and improved administration.

‘The program is based on three principles: credibility, given the need to rebuild investor confidence in state-owned enterprises; alignment of interests, fostering a shared focus for government, investors, employees and society as a whole; and best practice in corporate government, using the tools developed for this purpose over time,’ BM&F Bovespa says in a press release. Read more here.

The Corporate Governance Climate in 2015

by Patricia Lenkov for The Huffington Post

In the ever-changing and always dynamic world of corporate governance, it can be challenging to keep up with the trends and developments when not focused on these matters full-time. Post corporate implosions of the past 10 years and the subsequent regulatory changes and demands on continuous improvement and increased transparency in the boardroom have heightened the pace of change for boards everywhere. 2015 will surely continue this trend. Accordingly, here are some of the important issues from the world of corporate governance that should continue to make the news and be the subject of debate and speculation:

Gender Diversity

The topic of gender diversity in the boardroom (or lack thereof) has never been more focused on than at present. According to Catalyst, the U.S. based non-profit, women now hold 19.2% of all seats on S&P 500 boards (Catalyst Census). In Canada, the number is slightly better at 20.8% of seats on the S&P/TSX60 index.

2015 will undoubtedly see more push to increase the number of women board directors. Quotas in countries as varied as Norway, Australia and The United Arab Emirates are having an impact as other countries debate and question their own policies. It is generally surmised that here in the U.S., gender quotas will not materialize. Most believe that there are other ways to “move the needle.” This includes term limits, age limits and other board refreshment approaches (more on this later.) Nevertheless we have definitely moved past the question of whether more women in the boardroom leads to improved results because it has been proven time and again that it does.

Other Types of Diversity

To maximize effectiveness, the composition of a corporate board should reflect its customers, the employees of the company and even other stakeholders such as investors. Consequently, diversity in the boardroom does not start and end with gender. In fact, it is safe to say that diversity in the boardroom, at least here in the U.S., has been a focus of attention for some time. However, the context has historically been ethnic diversity. Read more here.


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Cefeidas Group

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