The Corporate Library Blog

The Value of Board Diversity: What Companies Don’t Know, But Investors Should

Over the summer, we’ve taken some time to read through the new SEC-mandated disclosures on board diversity that companies have been required to make since February.  The results are, frankly, a bit soporific.  Company after company claims to value diversity and says it makes board discussions more robust and better informed.  However, exactly how this happens is not explained.  Moreover, companies’ definitions of diversity typically lump together all kinds of personal and professional characteristics. The disclosures don’t cast much light at all on what we think is the most interesting question about board diversity:  what difference does it make, performance-wise, to have women and members of racial and ethnic minority groups serve on corporate boards?

Fortunately, academics have been investigating this question for a number of years, with intriguing results.  Empirical studies suggest that the personal aspects of diversity---especially gender diversity-- intensify board oversight and help boards make more accurate assessments of value.  These characteristics may not always translate into better performance for individual stocks, but they are likely to improve the performance of large portfolios and of the economy generally.  This suggests that institutional investors and governments have a financial interest in promoting gender and racial diversity on boards, quite apart from considerations of equality or social justice.  All of this is explained in greater detail in the report we’re releasing today, "Beyond the Boilerplate: The Performance Impacts of Board Diversity,” available as a free download from The Corporate Library's online store.

Kimberly Gladman, Director of Research and Risk Analytics

Another Misguided Piece from Professor Bainbridge

Stephen M. Bainbridge, who has been consistently wrong about just about everything since his defense of excessive CEO compensation more than 20 years ago, continues his losing streak with a blog, to make ad hominem attacks on those who want to hold the managers of public corporations accountable, meet their obligations as fiduciaries, or legitimize the concept of capitalism by protecting their investments

In a current post, Bainbridge is reduced to trying to characterize shareholders as "thin-skinned" for having the temerity to challenge his attacks.  I suppose this is consistent with his overall approach that corporate managers should be unfettered by any constraints from those whose capital is at risk as well.  

I've spent the better part of my career crossing swords with these folks and I find them a remarkably thin skinned bunch. Call them "self-appointed" or "gad flies" or "water carriers for left liberal organizations like unions" and they get all offended.

Presumably, this is his attempt at humor.  If people are offended, I suspect it is for being mischaracterized.  Once again, he is wrong on the facts and wrong on the law.

The first rule of credible disagreement is being able to state your opponent's point in a manner that meets their approval.  The second is a willingness to assume the same intentions on the part of both sides.  If there are water carriers for the left, you had better identify and criticize the water carriers for the right. 

I actually agree with Bainbridge's point that good lawyers advise their clients on the best way to meet the requirements of the law to pursue their interests, though I would not use the word "circumventing" to describe the duties of an officer of the court in upholding the law.  The legal system benefits from vigorous and rigorous application of the law by all parties, and I assume that he grants that right to shareholders as well.He quotes J.W Verret, who is writing an article about 16 "defenses" for companies to use to prevent shareholders from availing themselves of their rights under the forthcoming proxy access regulations, and who got all excited about Jim McRitchie's actually paying attention to what he was writing.  "I haven’t seen such acerbic rhetoric since I testified next to Nell Minnow [sic] of the Corporate Library when the House Financial Services Committee was first considering proxy access in 2009.  Rhetoric and invective, however, are a poor substitute for reason."  Yes, he might want to take that last point under advisement; it better describes his testimony, with unsupported and shrill claims about the irresponsibility and bad motives of shareholders (with loving disregard of any potential parallel concerns about corporate managers -- and how's that working out on Wall Street?).  I'd love to see a citation for the "acerbic rhetoric" he attributes to me.  My only recollection is asking him to support his outlandish assertions -- and his silence in response.  And any documentation for his claims that fiduciary institutional investors have any motive other than sustainable value creation over the long term?  Still crickets.  Instead all we get is his suggestion that boards defer all of their decisions to an executive committee made up of only their own appointed directors to avoid being sullied by someone who might disagree.

Let's do the math, shall we?  Proxy access will not put anyone on the board unless a majority of the shareholders vote in favor of the candidate.  No director will be elected without the support of a wide and very heterogeneous range of institutional and individual shareholders.  That is what capitalism means.  Proxy access and majority vote provisions are the best way (I am sure Professors Verret and Bainbridge will agree that it is far better than government intervention) to mitigate agency costs and align the interests of managers, directors, and investors and prevent the kinds of abuses that led to the atrocities of the subprime and derivatives era, and the Enron, Worldcom, Adelphia, Global Crossing, era before that. 

Nell Minow - Editor

A PRI Starter Kit

New signatories to the Principles for Responsible Investment (PRI) may sometimes feel a bit daunted by the requirement to report on their progress in implementing the Principles.  What can asset managers do if they have no specialized “green” or “social” products?  What steps can an asset owner take, other than excluding “irresponsible” investments from a portfolio?  What if the level of staff and funding you have to devote to PRI implementation is low?

The report we are releasing today, "Responsible Investment for Beginners: A Guide to Implementation and Reporting," demonstrates that signatories can take meaningful action toward the goals of the PRI, no matter their size, resource level, or degree of responsible investment experience. The guide explains how institutions can take identify actions they may already be engaged in which relate to responsible investment, but have not been recognized as such;  marshal resources of various kinds to the project of PRI implementation;  and craft a plan to move forward with concrete steps demonstrating their signatory commitment. The report also includes suggested action items for each of the six elements of the PRI.

The report is being issued for free as part of our own signatory commitment. Download it for free from The Corporate Library's website.

Kimberly Gladman - Director of Research and Risk Analytics

SIF proxy season recap call

Yesterday, I participated in a Social Investment Forum (SIF) webinar on a round up of the 2010 proxy season with fellow presenters Meg Voorhes from SIF, Conrad Mackerron from As You Sow Foundation, Sanford Lewis of the Strategic Counsel on Corporate Accountability, and moderated by Stu Dalheim from Calvert.

From the other speakers it was a bumper year for shareholder support for social and environmental proposals at companies, with two proposals receiving majority support and many more in the 20-30 percent support range. While not including broker non-votes has clearly had an impact there would appear to be growing support for such proposals and the disasters faced by Massey Energy and BP will only fuel (if you’ll forgive the pun) that support.

From me it was the usual “doom-and-gloom-what-a-mess-compensation-is-hardly-anyone’s-got-say-on-pay-and-already-there-have-been-three-nay-on-pay-votes-but-maybe-we-are-getting-the-tools-to-sort-it-out” kind of presentation. Ironically enough, given the audience, BP came in for some criticism – I mentioned my blog that found safety at the bottom of the list of performance measures – and some praise – soon to leave CEO Tony Hayward is not going to walk away with some megabuck golden pay for failure parachute as he would do if he were CEO of Occidental Petroleum, for example. From what I can make out he’s just going to collect a year’s salary and maybe a reduced pension. Of course that’s going to mean a lot of money, but it’s small change compared to what he would have received as the head of a US major multinational.

The call was recorded and if you’re a SIF member you can listen to it at your leisure.

Paul Hodgson - Senior Research Associate

H&R Block's executive compensation woes

The news that Thomas Bloch, the son of the co-founder of H&R Block (the son of the H bit, it turns out, Henry, who at 88 is still with us) and former CEO of the company is not standing for re-election to the board of directors is cause for surprise. Sounds like the Roy Disney controversy a few years ago. Yes, he was related to Walt…. And while we’re on that subject, if Mr. Block, I’m sorry, Bloch is the son of the co-founder, how come the firm is called H&R Bloch, I mean Block? An old spelling error that never got corrected because no one noticed it in time to stop the first print run of business cards…?

That aside, in the letter he sent back on the 14th of this month he seems particularly miffed about a share buyback and the new CEO’s pay package. In addition to which he has been having serious differences with current chairman Richard Breeden whom he initially supported.

I love it when board arguments get aired publicly like this. It might just seem like dirty washing but it is in fact utterly refreshing to read about what must surely go on in boardrooms all the time. I wish there was more of it, but then we’d never get any work done.

The share buyback? The board authorized a buyback just before the stock went north. Not smart. Have to agree there. The comp for new CEO Alan Bennett (this is not the English playwright, this is a former interim CEO who according to Mr. Bloch won’t move to Kansas to be with Dorothy but continues to commute from his Florida and Connecticut homes)? Have to agree there too. A $900,000 signing bonus for someone who already worked for the company? That’s stretching the definition of signing bonus a little far. A million stock options at a special new low price? Don’t like that either. And:

The Company will provide on a tax “grossed up” basis for up to six months following the effective date of Mr. Bennett’s election as President and Chief Executive Officer: (i) reasonable and customary furnished housing and rental car expense to Mr. Bennett while in Kansas City in connection with the Company’s business and (ii) use of the Company’s Net Jet share to Mr. Bennett and his family for one round trip per week between Mr. Bennett’s Connecticut or Florida residences and Kansas City. The Company will provide Mr. Bennett with other customary health and employment benefits.

Have to agree with Mr. Bloch again. If you take the job, move. You can read all about it in the company’s 8-K filing.

Paul Hodgson - Senior Research Associate

Top ways boards can fix the pay problem

Finally, an Opinion article on CEO pay with which I can wholeheartedly agree.

Jay, where have you been all my life?

Published in this morning’s Agenda magazine, Jay Lorsch – Louis Kirstein Professor of Human Relations at HBS – has hit the nail right on the head. Not only that but he says a bunch of stuff that I’ve been saying for years but because it comes from an academic, maybe they’ll listen.

To summarize. Problems:

• most incentives don’t work because executives can’t see the link between what they are doing and what they get paid for doing
• there is no real employment market for executives so compensation surveys are a waste of paper
• creating short-term shareholder value growth is not the sole purpose of corporation

Solutions:

• decide what the strategic goals are and set these as targets and recognize that achieving them is a team effort not an individual one
• dump the compensation surveys and negotiate a rate that reflects the value of the executive to the company over time
• if golden hellos or parachutes are to be paid, these need to be contingent on achieving performance goals
• reward managers and employees according to stakeholder return, not just shareholder

Nice.

Paul Hodgson - Senior Research Associate

Small Print

A tremendous sacrifice

Events Analyst Dovid Muyderman found this astounding piece of altruism from the CEO of Polo Ralph Lauren. This is being entered in our “Supreme Sacrifice” Competition.

On July 20, 2010, the Compensation & Organizational Development Committee of Polo Ralph Lauren Corporation (the “Corporation”) and Mr. Ralph Lauren, the Corporation’s Chairman and Chief Executive Officer, agreed that commencing in fiscal 2011, the Corporation’s current fiscal year, Mr. Lauren will only be reimbursed for up to an aggregate amount of $200,000 for his personal aircraft travel for each fiscal year of his employment agreement.

This is incredibly generous of him, don’t you think? But what I found most incredible was the coincidence that they managed to find a CEO with the same name as the company? I mean that’s like having Mr. Aflac run Aflac, or Mr. A.K. Steel running AK Steel. It’s great brand… hold on there’s something coming in over the wires. Oh, how embarrassing, apparently Mr. Lauren founded the company and named it after himself. Oh, well, in that case, he was reimbursed $558,376 in fiscal 2010 for personal travel on the aircraft and in my humble opinion could probably be asked to pay for all of it.

Gross Up in the Air

Events Analyst Marge Schwietering’s interest was sufficiently piqued by this July 20th 8-K from MicroStrategy Incorporated to send it in.

The Company is authorized to make “tax gross-up” payments to Board members and executive officers of MicroStrategy who may incur income or payroll taxes in connection with their non-business use of the NetJets Aircraft. The Company is further authorized, at the sole discretion of the CEO, to make such tax gross-up payments to other employees of the Company in connection with their non-business use of the NetJets Aircraft. The authorized tax gross-up payment to be paid to (or withheld and paid to the appropriate taxing authority on behalf of) an individual in connection with such individual’s non-business use of the NetJets Aircraft will be a cash amount approximating the amount of the individual’s (i) federal and state income and payroll taxes (or in the case of an individual who may be subject to taxes on income and wages in a jurisdiction other than the U.S., the applicable taxes on income and wages in such other jurisdiction) (the “Income Taxes”) on the taxable income associated with such non-business use plus (ii) Income Taxes on the taxes that the individual may incur as a result of the payment of taxes by the Company.

What’s the obvious question here? Well, the obvious question apart from “What the hell were they thinking?” Yes, you’ve got it. What about (iii) income taxes on the income taxes on the taxes that the individual may incur as a result of the payment of taxes on the payment of taxes by the company? And what about (iv) income taxes on the income taxes on the income taxes on the taxes that the individual may incur as a result of the payment of taxes on the payment of taxes on the payment of taxes by the company? And what about (v)income taxes on the income taxes on the income taxes on the income taxes on the taxes that the individual may incur as a result of the payment of taxes on the payment of taxes on the payment of taxes on the payment of taxes by the company? Where does it end? Call the auditors!

Mr. Marchioli's Grand Slamwich

This is so good, we had to give you a lot of it. Dovid found this also, in a July 21 8-K from Denny’s.

On July 19, 2010, the Company received a letter from Mr. Marchioli notifying us that he disagreed with the statements made by the Company in the Form 8-K.

The Company’s July 15, 2010 Form 8-K statement regarding my removal from the board of directors is not accurate, and I believe that the board’s action in removing me as a director was in violation of applicable law.

Letter excerpts:

Under Article III, Section 5 of the Company’s by-laws, the board may only remove a director for cause.  There was never cause for my removal; indeed, if there had been, applicable SEC rules required you to specify the cause, which you did not do.

The corporate governance policy you relied upon to justify my removal cannot trump the by-laws.  Indeed, by its terms, it specifies that the policy does not “supersede or replace” the by-laws.

Furthermore, the board’s action improperly seeks to circumvent a shareholder vote.  The shareholders elected me to the board just this past May, and barely a month later, the board removed me without cause.

Your assertion that I “ceased to be eligible to discharge [my] duties as a member of the Board” is nonsensical.  I am the company’s largest individual stockholder and my interests are completely aligned with those of the public investors.  I have 9½ years of history as the company’s CEO and many more in the industry.  Nobody is more knowledgeable about the company.  The corporate governance policy was adopted so that if independent directors changed their outside business relationships, the board would (a) be aware of those changes and (b) have a chance to assess whether those changes in any way impact the director’s continued suitability to serve on the board.  It was never intended to allow the board to force someone from the company involuntarily and then use that involuntary change of status as a makeweight to circumvent the by-laws and a shareholder vote.

For all these reasons, I believe that the board’s action was unlawful and a breach of fiduciary duty, and that the Form 8-K disclosure the company filed on July 15, 2010 was likewise inaccurate.

It sounds like Mr. Marchioli is getting a bit Zesty (Nachos) with his former colleagues. He’s certainly giving the board some Tsing Tsing (Chicken) and generally tearing them down a few (Chicken) Strips. This was a pretty (Rib) Sizzlin’ (Skillet Dinner) letter. Next thing you know he’ll be giving it to them with the (Oreo) Blender Blaster. Good for him, we say.

On another topic entirely

It’s news to me that the British won’t even let the Iroquois Nationals Lacrosse Team into the country, never mind participate in the world championships, because they don’t recognize their Haudenosaunee passports (see headlines link). It’s a disgrace. The Iroquois invented lacrosse.

On the one hand they won’t let the Iroquois into the country but on the other British Petroleum (better known as BP) is quite happy to sell upstream assets to the Apaches. It’s double standards if you ask me.

Hold on, something’s coming in over the wires. What? It’s not the Apaches? It’s Apache Corporation? I thought there was a ban on sports teams being named after Native American tribes? It’s not a sports team? It’s an oil company? Oh, that makes sense then.

Sorry about that confusion.

Paul Hodgson - Senior Research Associate

The Corporate Library and GovernanceMetrics International Agree To Merge

For more than ten years, The Corporate Library and GovernanceMetrics International (GMI), in separate but complementary paths, have led the market for independent corporate governance information and risk analysis. Today, I am excited to announce that these two pioneering enterprises have merged, filling a void in the investment and insurance markets for a global corporate governance research and ratings resource. The combined entity provides a unique suite of services and products to meet the global corporate governance risk analysis needs of investment professionals and other stakeholders.

The merger between The Corporate Library and GMI creates a leadership team consisting of some of the foremost leaders in corporate governance research. The new firm is the provider of choice for many of the world’s leading financial institutions that seek to understand the connections between corporate governance and corporate value, performance and risk.

As a combined entity, the new firm will continue to operate principally from New York City and Portland, Maine, maintaining the organizational operations and talent based in each location. Unlike many recent transactions in this market, this merger is undertaken as an opportunity to create a base upon which to grow a combined, independent business. As the new firm’s CEO and President, I look forward to exploring with my new GMI colleagues potential opportunities for integrated services and products driven by market demand.

The new firm has no immediate plans to change either of the prior companies’ systems or products. The primary goal is to meet current client needs with the combined company’s new ability to offer a full breadth of services and expanded global coverage. Clients of both The Corporate Library and GMI can rest assured they will continue to have access to the same high-quality corporate governance products and services to which they have become accustomed.

To learn more about the merger between The Corporate Library and GMI, check out our press release and answers to frequently asked questions.

Richard A. Bennett – President and CEO

Safety at the bottom of BP’s list too

I said I was going to check out BP's annual report and accounts to see what kind of safety measures were included in their performance measurement plans.

Bizarrely enough, safety’s at the BOTTOM of the list again. Well, tied at bottom, with people. Employee attitudes? Hmmm, not great at the moment I fear.

The remuneration (that’s English for “compensation”) report says that annual bonuses are based on group results and weighted:

70% on financial and operating results (including profit, cash flow, cash costs, production, reserves replacement, Refining and Marketing profitability, refining availability, and installed wind capacity),15% on safety (both metrics and progress on plans), and 15% on people(including organizational changes and employee attitudes).

And this is what the remuneration (I don’t have to translate every time do I?) report says about performance against the safety measures:

All key safety and operating metrics (including days away from work case frequency (DAFWCF), recordable injury frequency (RIF), oil spills, loss of primary containment, and process safety high potential incidents) showed good results and significant improvements in all cases from 2008.

How times change. Won’t be looking so good in the 2010 annual report.

Not only that but in a redesign of the annual bonus plan, one-third will be deferred into shares for three years and may be matched one-for-one based on, you got it, safety. This is what the remuneration (I’m not saying anything) report says about that:

At the end of this three-year period, subject to an assessment of safety and environmental sustainability, the deferred bonus would be matched with additional shares on a one-for-one basis.

I can’t see any matches forthcoming. The executives must be thinking “bummer”, but, frankly, well done, Remumeration Committee members.

Actually, I can’t see any bonus forthcoming, so there won’t be anything to defer never mind match.
And in their long-term incentives? Safety? Nowhere to be seen. Though at least they have the good grace not to pay out for below median performance.

Paul Hodgson - Senior Research Associate

Anadarko Petroleum: Safety at the bottom of the list

I know, I know, that is a totally incendiary title, but, hey, this is a blog. And I was just wondering, given the company’s involvement in the BP oil spill, whether health and safety played any part in Anadarko’s performance measurement. Of course it is nowhere to be seen in the long-term incentive plan which has the typical US-style performance measurement where what are laughably called performance shares pay out even if the company ranks 9th out of 12 against a peer group’s TSR. But safety is included in the list of metrics for the annual cash incentive… at the bottom.

No, really, safety IS at the bottom of the list for performance metrics for Anadarko’s cash incentive plan. Look at the table below. It’s given only a 10 percent weighting, while reserve additions, production volumes, capital expenditures and EBITDAX/BOE (whatever the heck that is) are all 20 percent or more. And I hate to tell the compensation committee at Anadarko, but if you add in the cash cost management factor the sum of it all comes to more than 100 percent. It’s fairly simple maths: 25+25+20+20+10+10=110.

Pretty easy to get a good bonus when even if you hit the targets, you get more than 100 percent. Not only that, but the way the results translate into the scores is frankly wacko. Capital expenditures missed the target, but the score is higher than the weighting. Same with the safety measure. Doesn’t make any sense to me.

Now, given the latest news, maybe safety should come higher up the list. Or maybe it should be the threshold. Miss the safety target and nothing pays out. Something to think about.

I’ll have a look at BP’s plan tomorrow….

Paul Hodgson - Senior Research Associate