Posted by Charles Nathan, RLM Finsbury, and Arthur H. Kohn, Cleary
Gottlieb Steen & Hamilton LLP, on Wednesday March 19, 2014 at
Editor’s Note: Charles
Nathan is partner and head of the Corporate Governance
Practice at RLM Finsbury.
Arthur H. Kohn is a partner at Cleary Gottlieb Steen &
Hamilton LLP. This post relates to a report from The Conference
Board Task Force on Corporate/Investor Engagement, one of three
related publications released by The Conference Board Governance
Center as a result of its year-long multifaceted study of
The 2008 financial crisis
and the slow recovery that has followed has brought further evidence
tending to support the view that the structure of our corporate sector
needs adjustment, and that its faults affect the competitiveness of
our economy. The crisis has resulted, as would be expected, in a raft
of new rules and regulations, which as usual have been implemented
before there emerged any consensus about the nature of the problems.
There has also been a vigorous competition of ideas over causes and
However, one principal “organic”
focus of change has emerged, which is usually captured by the catchword
“engagement,” the corporate governance concept du jour. It seems to us
that the focus on engagement has been motivated by two principal factors.
These are, first, a desire by interested stakeholders—including various
types of institutional shareholders and other investors, directors,
management, labor, politicians and others—to increase (or perhaps retain
in some cases) their influence and leverage in the functioning of public
corporations and, second, the idea that in the realm of corporate
productivity, a collaborative, rather than adversarial, relationship
between those stakeholders, based on broadly shared principles concerning
the roles and objectives of the stakeholders is beneficial. Engagement is
viewed as a means towards those ends.
Regrettably, few discussions
about engagement dig below these big picture thoughts and the obvious
immediate tactical reasons for engagement in various contexts. On March
11, 2014, the Conference Board Governance Center released results of its
year-long multifaceted study of corporate/investor engagement, publishing
three related papers exploring the topic in great depth. The effort was
based on a belief that energized, confident and productive companies are a
necessary ingredient in the overall resurgence of our economy and that
restoring public confidence in our companies and their governance is
critical to an economic renaissance. The concrete recommendations put
forth by the Conference Board’s Task Force on Corporate/Investor
Companies and investors,
alike, should endorse the key principle that the interests of all of the
company’s stakeholders—shareholders, employees, creditors, customers,
suppliers, communities and the environment—need to be taken into account
to achieve sustainable shareholder value maximization.
The board of directors of a
company, not its investors, should play the central role in the
oversight of public companies. Directors, by virtue of their deeper
company knowledge and experience, their fiduciary duties to the company
and all of its shareowners and their ability to freely and extensively
deliberate about corporate issues, are in the best position to mediate
the interests of all of a company’s stakeholders.
The single most important
corporate governance factor is the quality of board oversight. Directors
should have appropriate processes to ensure that they have a good
understanding of the company’s business in order to provide meaningful
guidance to management.
Investors, on their part, have
a responsibility not only to have thoughtful voting policies, but also
to disclose those voting policies and how companies can contact the
investors to discuss those policies.
When investors decide to vote
(and it is clear that there are situations in which investors may
appropriately decide not to vote), they should devote sufficient time
and resources to make informed voting decisions. If investors take
advice from proxy advisors, they should use the proxy advisors’
recommendations only as one data point to supplement their own analysis.
Because proxy advisors play an
important role in advising investors on voting, it is critical that
proxy advisors adhere to the highest standard of conduct–not only
avoidance of conflicts or appearances of conflict of interest, but also
transparency in their decision making process.
Companies and investors should
engage on relevant matters of corporate governance, taken in its
broadest terms. Moreover, companies and investors need to share a common
set of policies and practices for engagement to prevent confusion and
misunderstanding about each party’s engagement activities.
To accomplish this goal,
companies and investors should utilize the Guidelines for Engagement,
developed by the Advisory Board to the Governance Center’s Task Force on
Corporate/Investor Engagement. The Guidelines provide a comprehensive
roadmap for thinking through and implementing a strategy for corporate
governance engagement between public companies and their investors. In
so doing, the Guidelines address the responsibilities and roles of a
company’s senior management and directors in fashioning an appropriate
engagement policy and, as important, the responsibilities and roles of
investors in that engagement.
The workproduct created through
the efforts of those involved in the Conference Board’s study is
The Recommendations of the Task Force on Corporate/Investor Engagement.
Task Force members—including those with experience in the corporate,
activist, private equity and institutional shareholder
communities—crafted recommendations centered around nine principles,
Guidelines for Engagement prepared by the Advisory Board to the Task
Force. The Guidelines address a variety of practical issues related
to corporate/investor engagement.
A White Paper on the Optimal Balance in the Relative Roles of
Management, Directors, and Investors in the Governance of Public
Corporations. The White Paper is a comprehensive summary discussion
of the historical, practical, economic and legal background to the
principal governance debates being played out today, which should be
useful as a primer to help understand those debates in their proper
context, as well as a valuable source for references for additional
We and our firms were
extensively involved with the work of the Task Force.
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