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Source: New York Times DealBook, March 13, 2014 article

Corporate Governance |

Another Proposal to Repair Relations Between Boards and Investors


Increased shareholder activism, lawsuits filed by investors and continued malfeasance by  financial institutions is prompting a renewed bout of introspection by some executives, board members and investors.

This week, the Conference Board, working with a rival group of Wall Street advisers, released a set of suggestions to improve relations across corporate America.

It is the second such attempt in recent months. In February, a group calling itself the Shareholder-Director Exchange, unveiled a protocol intended to improve relations between board members and investors, who often feel alienated enough to back activist campaigns.

But the recommendations from the Conference Board look beyond the push from corporate activists and aim to address a more basic reputation problem: by and large, the public doesn’t trust big business.

“From accounting scandals to the global financial crisis, events of the past decade have damaged the reputation of business, contributing to a public distrust of business in general,” the report reads.

As an antidote, the report suggests a number of steps that at first glance seem like common sense, but are not always commonplace.

To formulate the recommendations, the Conference Board brought together company executives, institutional investors and even activist investors. Among those who participated in its development were the activist Ralph Whitworth, founder of Relational Investors and a director at Hewlett-Packard; Brian Rogers, chairman of T. Rowe Price; Fred Hassan, a partner at the private equity firm Warburg Pincus; and Charles Elson, a professor of governance at the University of Delaware.

The group put together an multipronged proposal to get public companies and their investors on the same page, and restore the public’s broken trust.

The first plea is for a commitment by all parties to listen to one another and consider varying perspectives of shareholder value. Some investors may want a short-term rise in the stock price. Others may be looking for long-term returns. And still other shareholders may be concerned with minimizing a company’s environmental impact. To create sustainable value, the Conference Board suggests, companies should listen to all these stakeholders.

Second, the report reminds directors that they should listen to investors — not only because they have a fiduciary duty to do so, but also because they can be voted out if they don’t. Though the Conference Board supports the central that role directors play at public companies today, it seeks to remind them that they should not disregard the wishes of their shareholders, even if they disagree.

Investors, meanwhile, should be more transparent about their policies and positions, the report contends. And instead of simply relying on the advice of proxy advisory firms like Institutional Shareholder Services and Glass Lewis, investors should conduct their own research before voting on corporate governance matters.

Proxy advisory firms, in turn, should do a better job of avoiding the appearance of conflicts of interest, disclosing in their recommendations to investors whether they had been paid by that company for consulting services.

When it comes to compensation, the report is short on specific recommendations, but it advocates payment policies that support “sustainable” shareholder value. In other words, bonuses that reward a short-term sale of the company are unlikely to win the trust of investors, or the public.

The Conference Board advocates dialogue between boards and investors in special circumstances, but it distinguishes itself from the Shareholder-Director Exchange by stating that “it should not be a routine method of engagement for most U.S. companies and investors.”

“Not all companies or all investors need to engage directly with each other or engage all the time,” the report reads. “Overengagement can lead to systemic overload and inefficient use of limited resources.”

Finally, the report calls for changes from the Securities and Exchange Commission. On the wish list: fewer comprehensive disclosure requirements for companies, and more scrutiny of — and changes to — the proxy voting system.

It’s a noble effort. But like the Shareholder-Director Exchange protocol, the Conference Board’s recommendations will only have an impact if other companies, board members and investors take heed.

In this age of contentions corporate governance — where activists make their case on Twitter and companies continue to adopt poison pills with ease — there is still a long way to go before business has regained the public’s trust.

A version of this article appears in print on 03/14/2014, on page B7 of the NewYork edition with the headline: Repairing Relations.

Copyright 2014 The New York Times Company



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