The Conference Board
Governance Center Blog
JUL
21
2013
By Chuck Nathan,
Partner and Senior Advisor, RLM Finsbury
JPMorgan shareholders’ recent rejection of a
proposal to split the CEO and Chairman positions was the most talked about
proxy vote during the 2013 annual meeting season. While the 68% to 32%
vote against was a resounding victory for Jamie Dimon and JPMorgan’s
board, what is less clear is whether the vote signals any significant
change in a long-standing, fundamental disconnect on proxy voting between
portfolio managers and corporate governance decision makers at
institutional investment managers.
Many people do not realize that in most cases
portfolio managers don’t control the voting lever on governance matters.
While portfolio managers always have had a seat at the table on votes
related to economic matters (for example, a merger or acquisition), when
it comes to corporate governance issues, a separate internal group of
corporate governance specialists typically is charged with deciding how to
vote portfolio shares; or, in some cases, voting is outsourced to one of
two proxy advisory firms staffed by corporate governance specialists. As a
result, decisions on governance-related proxy votes are usually made by
corporate governance advocates who vote in accordance with what they
consider as “best practices.” Because there is no convincing empirical
evidence that these so-called best practices lead to shareholder wealth
creation, votes cast on this basis are an expression of an ideology that
all too frequently is divorced from, or worse, ignores economic
consequences.
The dichotomy between governance ideology and
shareholder wealth creation is illustrated by the long-running debate
about mandatory splitting of CEO and Chairman roles. Portfolio managers
and analysts tend to have a practical, “don’t tinker with success”
philosophy when it comes to corporate governance matters that do not have
obvious economic or financial implications. As a result, this group
generally does not support mandatory separation, except in cases in which
a company has a concrete governance problem which could be solved by the
separation of CEO and board chair. On the other hand, those with the
voting power on governance matters usually vote to separate the functions
of CEO and board chair as a matter of principle, without considering how
well the company is performing or whether separating the roles will lead
to poorer performance.
So, does the JPMorgan shareholder vote, as
some governance theorists believe, signal a significant move toward
eliminating this philosophical schism at institutional investment
managers? The optimists who believe change is afoot interpret the JP
Morgan proxy results as evidence of the emergence of a more rational
system in which investment decision makers are fully integrated into the
voting process, leading to financially informed votes on corporate
governance issues.
While I would like to side with these
optimists, I find myself in the glass-is-half-empty group. It seems to me
that rather than being the result of some progress on voting philosophy at
institutional investors, the outcome of the Dimon vote was largely
attributable to the strategy utilized by JPMorgan to position this vote as
a referendum on Dimon’s and the board’s leadership – thereby giving it
economic significance – instead of as a corporate governance best
practices issue. By so doing, and by mounting a highly effective
communications campaign opposing the proposal, JPMorgan made it impossible
for portfolio managers not to care enough to demand a big voice in
determining how to vote.
A significant reason JPMorgan was able to
achieve this strategic positioning of the vote is because it is the
largest bank in the United States and has the ability to get a hearing
everywhere it wants. Given its prominence, recent success, and the star
power of its CEO and Chairman, JPMorgan may have been in a unique position
to transform the nature of the proposal into an economic issue and make it
one that portfolio managers controlled.
Considering the Dimon vote in this light
suggests that while the biggest U.S. companies may be able to prevail
against corporate governance advocates on selected issues, by and large,
they and their smaller, less powerful brethren will continue to be
subjected to an expanding corporate governance agenda based on perceptions
of best practices that lack empirical support.
The JPMorgan vote was indeed a victory for
JPMorgan, its board and Jamie Dimon. But it is unlikely that it was the
game-changer in the world of corporate governance that optimists are
hoping it is. While certain large institutional investors have modified
their voting procedures to include portfolio managers on all issues, most
have not or have done so in a way that leaves corporate governance
advocates with full control over voting decisions.
For the time being at least, the separate
universes of investment decision making and voting decision making that
permeate U.S. investment managers are continuing along parallel paths.
Absent JP Morgan’s successful strategy of imbuing this proxy vote with
compelling economic significance, we may very well have seen a different
outcome. The challenge for any board that believes shareholder value is
best served by defying the conventional governance wisdom remains great.
About the Guest Blogger:
|
Charles Nathan, Partner & Senior Advisor, RLM Finsbury |
|
Chuck Nathan
advises global clients on M&A, financial transactions, governance, Board
issues and shareholder matters.
Prior to joining
RLM Finsbury, Nathan was partner at Latham & Watkins, where he represented
companies and financial advisors in many significant, high-profile mergers
and acquisitions.
Nathan has been
named by the National Association of Corporate Directors as one of the 100
most influential corporate governance professionals for two consecutive
years. He is the renowned author of many articles on M&A and corporate
governance topics, is a frequent panelist at M&A and corporate governance
seminars and programs, teaches M&A at Yale Law School, and has chaired a
number of bar association committees. Nathan received his B.A. from The
Johns Hopkins University and his J.D. from Yale Law School, where he
graduated summa cum laude.
|
