Monday, February 25, 2008

Shareholder Activism

Storm the gates! Climb aboard the ship! Ford the moat! Make our claims heard among the charlatans of corporate greed!

Earlier we noted that proxy vote strategies to promote women directors were naïve at best and ineffective at their worst.

Other more erudite women in leadership are doing a much better job at educating us about what it truly takes to become responsible, informed and enlightened and involved shareholders.

Lynn A. Stout of the UCLA School of Law recently published an article (posted on the Harvard Law School Governance Blog and the SSRN):


    which she co-authored with Iman Anabtawi, entitled: “Fiduciary Duties for Activist Shareholders.”

    “This article argues that greater shareholder power should be coupled with greater shareholder responsibility. In particular, it argues that the rules of fiduciary duty traditionally applied to officers and directors and, more rarely, to controlling shareholders, should be applied to activist minority investors as well. This proposal may seem a radical expansion of fiduciary doctrine. Nevertheless, the foundations of an expanded shareholder duty have been laid in existing case law. Moreover, there is no reason to believe that newly-empowered activist shareholders are immune to the forces of greed and self-interest widely understood to tempt corporate officers and directors. Corporate law can, and should, adapt to this reality.”

    Lynn Stout is the Paul Hastings Professor of Corporate and Securities Law , UCLA Law School:


    There are other women in leadership positions in governance who are presenting many more cogent cases for reasoned strategies (rather than bra-burnings) to foster change within corporations, today.

    Beth Young, lecturer at Harvard Law:


    teaching Shareholder Activism at Harvard Law School with Lucien Bebchuk:


    Eileen Nugent, Mergers and Acquisitions Attorney and Partner at Skadden et al.:


    Hillary Sale, F. Arnold Daum Chair in Corporate Finance and Law, University of Iowa College of Law:


    Andrea Unterberger, Assistant General Counsel and the Director of CSC® Media at Corporation Service Company:


    Ann Yerger, Executive Director Council of Institutional Investors:


    Each one of the women has provided a highly valuable contribution to the field of governance and each one is worth our time and attention.
  • Sunday, February 10, 2008

    Henry Waxman Hearings on CEO Compensation

    Representative Henry Waxman (Democrat - California 30th District) has been holding hearings on Executive Pay and the impact that Compensation Consultants might be having on escalating corporate pay levels. See the reports and transcripts at the Committee on Oversight and Government Reform, which he Chairs:
    Hearings Examine Executive Pay and Compensation Consultants (December 5, 2007)

    Friday, February 8, 2008

    Vote Your Proxy?

    The Forum of Executive Women (Philadelphia) recommended in a press release February 11, 2008 that more women should use the proxy vote process as a vehicle to get more women named to public company boards of directors. This is not a new strategy, just one that is slightly different from prior strategies that women advocates have put forward “to get invited to the boardroom ball.”

    Is it an effective strategy to “write ‘Where Are The Women?’ on a proxy ballot?” Probably NOT, since the drones who receive the proxy ballots are interested only in the vote, not the editorialization. The second recommendation was “write to significant directors/management (i.e., Non-management directors or lead director, Chair of the board, Chair of the governance/nominating committee, or Corporate Secretary).” While this might get a little more attention, it most likely will generate a response that says: “Thank you for your input, dear.” The third recommendation, “Attend the annual shareholder meeting and ask why there are no or so few women on the board,” may generate a similar response as above.

    But what if this is the answer she receives back: “As a shareholder, you have the right to submit nominations to the Nominating or Governance Committee as specified in the proxy documents. If you have one or more serious candidates, you should use the channels made available to all shareholders.”

    The reality is that by the time the proxy ballot has been published, all the decisions about corporate director nominees already have been made and your yea vote is the primary goal and objective of the process. In order to increase the number of women directors, smart women investors know they must start back much earlier in the process to have any impact at all.

  • Do you know what that company’s director nomination process looks like? It’s written in just about every Proxy Statement every published.

  • Do you know where to find proxy documentation? The documents and procedures are online at the SEC and at the company’s Investor Relations links.

  • Do you have a qualified candidate?
  • Have you availed yourself of the multiple channels of recommendation of a candidate?
  • Does your candidate fit the current priority director needs of the corporation?
  • Is your candidate suitably educated, trained, and prepared to commit to service on the board?
  • Is your candidate the best representative of all or a significant share of the shareholder interests?
  • Are you and your candidate willing to provide all of the documentation required by the nomination process?

    Too many women believe they can simply “short-cut” the process because (1) they don’t know a process exists, (2) they don’t have confidence the process is open and fair or (3) they want an easier way into the boardroom. It’s not going to happen. So, women need to figure out the system and make it work for them.

    Most companies today are quite open about the channels they use to identify serious director candidates:

    “Directors are often are part of the company’s founding stockholders.”

    Therefore, as women become more involved in actually creating stock companies, as venture capitalists, they will increase the odds of being included among founding company directors.

    “Directors are recommended to the Board by various sources including other directors, the Company’s dealers, stockholders and a third-party executive search firm. In addition to these sources, new director candidates are identified by management or additional third-party executive search firms to assist in identifying and evaluating potential nominees.”

    Therefore, as women ensure they are recognized by these various sources (and as more women enter these categories of business themselves), then more women will be referred by these sources.

    Too many women simply reject out of hand these options, saying that “it’s all a stacked deck.” That may have been the case 50, 40, 30, 20 or even 10 years ago. But today, as a shareholder or as grouped shareholders, women potentially have the opportunity to participate in the nomination process more than ever before. If women simply reject these options with “sour grapes” arguments, they certainly will not achieve their goals of increasing the number of women directors. And frankly, if women believe it is all a con, why would women want to be a part of it? The reality is that this is serious business -– tough, but open to those women who are willing to learn how to manage it.

    A crucial consideration is the matching of (1) the competence for which the board is searching and (2) the competence of the candidate(s).

    “Candidates are evaluated in light of the current composition of the Board, the operating requirements of the Company and the long-term interests of the stockholders.”

    Very specific experience and selection elements are included in every board review of candidates. Women need to look at more than simply the “diversity” tagline of evaluation criteria: boards need many more skills than simply a match on the chromosome count.

    “In performing this evaluation, the Governance Committee considers the diversity, age, skills, experience and other factors it deems appropriate given the needs of the Board and the Company to maintain a balance of knowledge, experience and capabilities. Qualified director nominees should possess high moral character and personal integrity, high level of leadership or managerial experience, experience and knowledge relative to matters affecting the Company, the ability and willingness to contribute to the Board, the ability to exercise sound, independent business judgment, a long-term commitment to the interests of stockholders and growth of the Company, freedom from conflicts of interest, the ability to dedicate sufficient time, energy and attention to Board activities and the diligent performance of his or her duties, and reflect the diversity of the Company’s stockholders, employees, customers and communities.”

    Some women argue that Super Woman could not fit this bill. Not true. Competent women are being added to corporate boards every day – more women than ever before in our business history. Frankly, shareholders demand all this competence of all candidates.

    Finally, boards will consider director recommendations from stockholders.

    “The Board will consider director candidates recommended by the Company’s stockholders. In order to make such a nomination, the stockholder must (i) be a record holder of shares of common stock on the record date, (ii) be entitled to vote for the election of such director(s) and (iii) comply with the notice procedures set forth in the Company’s bylaws. If you would like a copy of the Company’s bylaws, please notify the Company at the address given on the first page of this proxy statement. The bylaws are also available on the Company’s web site under “Investor Relations” at “Corporate Governance.””

    It is necessary to meet the timing requirements of the bylaws, include written concurrence from the nominee that she is ready and willing to serve, and shall include “information required pursuant to Regulation 14A under the Securities Exchange Act of 1934.”


    If women shareholders truly wish to use their ownership and investment leverage to their full potential, then they will learn how to function in this aspect of the business world. If women just play at the edge of the process, marching and burning proxy voting forms, they will fail in their long term goal of taking their rightful seat in and among our nation’s corporate leadership.

    It must be an active, not a passive process. Are women shareholders up to the task? The choice is up to talented women.

    Quotations are from Asbury Automotive's 2007 proxy statement and are offered simply as one example.
  • Corporate Board Effectiveness

    The Center for Effective Organizations at the University of Southern California’s Marshall School of Business surveyed 768 corporate directors at 660 of the 2,000 largest public traded firms in the US for their 10th Annual Corporate Board Effectiveness survey (in collaboration with the executive search firm, Heidrick & Struggles).

    Heidrick & Struggles Board Effectiveness Study with USC Center for Effective Organizations

    What are the lessons from this survey for women who aspire to corporate board of director positions at large publicly traded companies? First, some perspective on the sample: about 1/3rd of the top firms responded to the survey, and the sample represented about 1.2 boards per person.

    Forty percent (40%) of the boards surveyed say that today they limit the number of boards on which outside directors can serve. In 2001, only 3% of respondents limited their fellow board members from becoming “serial directors.” That is good news for aspiring women because they no longer have to compete with men AND with the few women who were professional directors. Generally, it compels boards to reach deeper into the talent pool of prospective candidates.

    Fifty-four percent (54%) of boards limit the number of boards on which their CEO can serve. In 2001, only 23% limited the number of concurrent seats on which a CEO could serve. Again, this is good news to the extent that boards have to look farther and wider for competent CFO, CIO, CTO, and GC level talent. This is not as good news for women who finally made it to the CEO level to be told they can sit on only a limited number of seats, but we suspect that good CEOs of both genders benefit from the opportunity to focus on their jobs. The message is mixed for women at the Cxx level since they just finished competing to get to that level and now every male peer there also would be competing with the women for board seats.

    The study concludes that the practice of placing limits on multiple boards seats is “a contributing factor in the ongoing difficulty to recruit qualified directors.”

    The greatest share of respondents (74%) were outside directors. And the respondents serve on an average of between 2 and three boards, themselves (2.5 board seats each).

    Finding “qualified directors” is a challenge faced by all public company boards. Many companies have opted to reduce the size of their board rather than bring into the boardroom someone whom they believe is not qualified, not independent, does not have prior board experience or does not have domain experience in the strategic area the board considers the “gap” to be filled.

    Some women argue “there are more than enough women candidates” from the C-levels of corporate America to meet the demand. Often, women director advocates argue that corporations are the ones “not doing enough” to bring more women into the boardroom of public companies. Their arguments focus on that half of the marketplace over which women have the least amount of control or influence: trying to change what goes on in the boardroom. They attempt to “persuade” or “embarrass” corporate directors into adding women to boards.

    Corporate executives have only indirect influence on the boardroom. C-level managers make financial, risk, compensation, investment or strategic presentations and recommendations to board members. They do not dictate to boards. Directors are not responsible to C-level managers or even the CEO. Directors are responsible for oversight and governance of management in the best interests of shareholders and, to a lesser extent, the stakeholders.

    We keep hearing that “THEY [men] won’t bring women on their boards. THEY [men] won’t give women more small business contracts. THEY [men] won’t hire more women on their investment firms.”

    When is it going to be time for women to stop consuming and shopping and start investing? If women “control” such significant shares of the marketplace, why don’t they make their financial voices heard? Just a little withholding of one market commodity got Lysistrata a lot of attention. Can you imagine the possible impact of a little withholding of expenditures at Wal-Mart, McDonalds, or even investment funds?

    There is a real shortage in the supply of experienced, qualified women directors. When the number of seats held by women directors average between 3 and 4 boards, or more, economists call that “doubling up.” Demand is exceeding supply. In such cases, boards are using other boards to “certify” that a woman director is qualified rather than go out on their own to search and find women executive candidates who might be untested as a director. Experience in top management, even as someone who successfully represents the CEO’s financial or legal message to the board of directors, does not translate into affirmative evidence that a candidate can be financially independent, analytic or objective. It does not prove that a candidate has the sound collaborative skills required to debate and deliberated in the committee arena.

    “Can she meet the challenge?” always is the search committee’s most pressing question. When one board hires a woman director, that question is answered in the affirmative for other boards and that is one reason that might explain why talented women directors hold more seats. When boards say “they cannot find qualified women directors” they mean they have not yet found a woman about whom they can confidently answer the above question, “Yes, she most assuredly can.”

    Tuesday, February 5, 2008

    Director Education at UCLA Anderson

    Recently, I received notice of the UCLA Anderson School of Management's Director Education and Certification program for 2008. The next scheduled session is May 12th.

    They have a brief, but interesting, self-test to see if director candidates have a good grasp of some "fundamentals" of governance in today's business marketplace. They ask seven true/false governance questions to determine if you understand important issues facing public company boards of directors. It's the Self Assessment Test that they use to determine if you might need to take the Fundamentals Session, the first day of the Director Education program at UCLA Anderson School of Business.

    The school provides answers on another web page. It isn't just guess-work -- a couple of these questions would need elaboration to demonstrate that you understand the underlying concepts. Take the test. Do the research. Answer the questions fully, not just true or false. Maybe attend the class.

    Self Assessment Quiz.