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Source: The Harvard Law School Forum on Corporate Governance and Financial Regulation, March 19, 2014 posting

Posted by Charles Nathan, RLM Finsbury, and Arthur H. Kohn, Cleary Gottlieb Steen & Hamilton LLP, on Wednesday March 19, 2014 at 9:37 am

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 corporate/investor engagement.

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 remedies.

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 Engagement include:

  • 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 extensive, including:

1. 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, outlined above.

2. 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.

3. 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 investigation.

We and our firms were extensively involved with the work of the Task Force.


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