08 May. 2018 | Comments (0)
On Governance is a series of guest blog posts from corporate governance thought leaders. The series, which is curated by the Governance Center research team, is meant to serve as a way to spark discussion on some of the most important corporate governance issues.
(This post originally appeared on The Securities Edge, a blog by the law firm Gunster's Securities and Corporate Governance Practice Group, which Robert Lamm co-chairs.)
A few weeks ago, I attended the “spring” meeting of the Council of Institutional Investors (CII) in Washington, D.C., (the quotation marks signifying that it didn’t feel like spring – in fact, it snowed one evening). These meetings are always interesting, in part because over the 15-plus years that I’ve been attending CII meetings, their tone has changed from general hostility towards the issuer community to a more selective approach and a general appreciation of engagement.
So, what’s on the mind of our institutional owners? First, an overriding concern with capital structures that limit or eliminate voting rights of “common” shareholders. CII’s official position is that such structures should be subject to mandatory sunset provisions; that position strikes me as reasonable (particularly as opposed to seeking their outright ban), but it’s too soon to tell whether it will gain traction.
Another top-of-mind issue is the possibility that the SEC will permit companies to impose mandatory arbitration (rather than litigation) of fraud claims arising out of IPOs (and, presumably, other offerings). A few years ago, the SEC’s position was that mandatory arbitration is against public policy, but recent comments by SEC Chair Jay Clayton (more on that below) have led to speculation that he’s prepared to permit it and perhaps looking for an opportunity to do so. It’s worth noting that CII receives a significant amount of funding from plaintiffs’ firms, to whom mandatory arbitration is anathema. On the other hand, IMHO mandatory arbitration might not work out too well for companies.
The investor community is very interested in disclosure effectiveness, and despite screeds against it by the likes of Elizabeth Warren (see my 2016 posting on this topic), most of the investors I spoke to “get it” and think the SEC has made some good strides in this area. At the same time, there is some head-scratching on where the SEC will go from here, including what is happening on EDGAR reauthorization.
Other issues of interest to investors include: the use of universal proxy cards in proxy contests (a perennial hot issue among investors but of limited to no interest to most issuers), virtual-only shareholder meetings (See related Gary Larkin On Governance blog post), better disclosure of board self-assessments, and talent/workforce issues.
I’ll only comment on a couple of speakers/panels, beginning with SEC Chair Clayton, who was the lead-off speaker. Unfortunately, he disappointed. He came across as uninterested, and while it was great that he took questions (commissioners don’t always do so), his responses to questions ranged from uninformative to downright irritation; one wonders if a staff person was going to get chewed out for setting up his appearance. (In his defense, his irritation seemed justified when one questioner kept asking about mandatory arbitration even though it was clear that we weren’t going to get any more details.) On that topic, his comments reminded me of the Oracle at Delphi in ancient Greece – everyone came away with different views of what he really meant. He said it’s not an issue that he can spontaneously raise – perhaps true – and that the SEC has plenty of higher-priority issues on its plate – also true; but he wouldn’t comment on his views, except that the matter would be carefully considered should it arise.
Chair Clayton also indicated that he’s not interested in changing the shareholder proposal rules and that he doesn’t plan to push for more regulation on dual-class voting structures or human capital disclosures.
One of the more interesting panels was on corporate culture. Without going into too many details, it’s a tough topic that doesn’t lend itself to easy solutions, and it seems clear that boards (and managements) are struggling with it. The most practical guidance I heard was that directors should do what the best directors do – keep asking tough questions until you get decent answers.
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