Corporate Governance Highlights

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Corporate Practitioners Should “Reach Out”

To Shareholder Proponents, Say Forum Panelists

SHAREHOLDER PROPOSALS SHOULD OPEN DIALOGUE, NOT RAISE HACKLES. If remarks by several corporate community representatives speaking at IRRC’s “Best Practices for Proxy Season 2005” forum on January 13 are a good gauge, shareholder proponents filing resolutions for 2005 meetings may find a kinder, gentler corporate response than in past years.

   Held at TIAA-CREF in New York City, the forum featured four panelists: Peter Gleason, COO and Director of Research for the National Association of Corporate Directors (NACD); Louis Thompson, President & COO of the National Investor Relations Institute (NIRI); Bart Schwartz, Deputy General Counsel of Marsh & McLennan; and Robert Lamm, Senior Vice President-Corporate Governance and Secretary of Computer Associates International. Peter Clapman, senior vice president and chief counsel, corporate governance at TIAA-CREF, moderated.

COMMUNICATION IS KEY. Improving communication with shareholders is the single most critical step to take in approaching proxy season, the panelists unanimously agreed in their closing remarks, echoing a theme struck throughout the presentation. NACD’s Gleason opened the discussion by noting the recent settlements requiring substantial out-of-pocket payments by former WorldCom and Enron directors, as penalty for their failure to prevent accounting and other abuses by company managers.  Directors are “under attack,” Gleason asserted, and the current “dysfunctional” relationship between company owners (the shareholders) and their appointed representatives (directors) must be improved through better communication.  He cited the results of a task force on this issue that was established by NACD and the Council of Institutional Investors (CII).  The task force report issued in 2004 recommended, among other things, that companies provide shareholders with contact information for the corporate secretary and at least one board member, and that directors determine what shareholder issues they, as opposed to management, should address.  A few complaints about company products or services probably would be a management issue, he suggested, while “thousands” of such complaints ought to be communicated to the board.

   Thompson from NIRI identified several roles for investor relations officers in the post-Enron environment:

• Act as the “intelligence link” between the board/management and company shareholders, especially by keeping the former apprised of “red flags,” i.e., the issues that most concern investors.
• Participate in director education with respect to information about the company’s business and industry. IR officers are well placed to assume this role, Thompson said, since they already serve that function for shareholders.
• Serve as the “corporate conscience,” in helping to determine what is in the best interests of shareholders.
• Serve as a “line of support” for company policies with respect to individual investors, who often provide the swing vote on proxy proposals.  If the IR officer cannot frame a good rationale why shareholders should support management, it may be time to question management’s policy, Thompson said.
• Help facilitate shareholder communication with the board.  In particular, Thompson noted, directors are covered under Regulation FD (regarding communication of inside information), so there should always be a management representative present during any direct communication between a director and a shareholder, to guide the director about disclosure issues.

PROPONENTS, NOT OPPONENTS. Marsh & McClennan’s Schwartz decried the practice of corporate counsels reacting to any shareholder proposal by immediately trying to figure out how to get it omitted.  That approach is “a bit curious” in 2005, he noted, after what has been a “revolution” since the scandals against boards dominated by CEOs. These days, Schwartz commented, the role of the in-house lawyer should be to help decision makers understand the proposal, consider it on its merits, and make a determination of whether or not it is in the company’s best interest, without presuming that the proponent is an opponent of the corporation.

   With respect to executive pay proposals, the general counsel should present the resolution to the compensation committee in a way that promotes discussion about the issues and objective consideration of the proposal, Schwartz said. By the same token, there should be no presumption either way on proposals related to takeover defenses, since empirical evidence is thin and various studies have shown that these both enhance and diminish shareholder value (although most recent academic studies generally support the latter view), he said. The general counsel’s role, Schwartz reiterated, should be to encourage open discussion to determine whether to talk with the proponent or seek to omit any proposals.

   Speaking as a representative of the newly named Society of Corporate Secretaries and Corporate Governance Professionals, Bob Lamm acknowledged the challenges he has faced since joining troubled Computer Associates in 2003, believing that the company’s worst governance problems were then behind it. Lamm recounted the company’s recent experience with a controversial shareholder proposal¾the “bonus clawback” resolution filed in 2004 by Amalgamated Bank’s Longview Fund, which asked the company to recoup all incentive payments that had been based on misstated financial results. Corporate secretaries should “reach out” to shareholder proponents, Lamm emphasized, even bringing a board member into the conversations if appropriate. Although Computer Associates could not accede to the proposal’s requirement for bonus clawbacks after any restatement, Lamm believed discussions with the proponent were fruitful. Even if a resolution is not withdrawn, he told the audience of corporate practitioners and consultants, the company may win kudos from shareholders for its responsiveness.

PROXY STATEMENT IS COMMUNICATION TOOL. Lamm and the other panelists also discussed recent remarks by Alan Beller, Director of the SEC’s Division of Corporate Finance, regarding the commission’s plans to review proxy disclosure rules on executive pay.  The proxy statement should be the company’s “manifesto,” Lamm urged, calling disclosures an opportunity to tell the company’s story both fully and in a positive light. The compensation committee report, in particular, should “start from scratch” every year. Added Gleason, the report should “go beyond compliance” and fully describe what the company’s incentive programs are about and what payouts would be made in various scenarios.

   The panelists also agreed that external director education programs are now seen as more boilerplate and less effective than internal, company-focused education initiatives for directors¾notwithstanding the fact that corporate governance “raters” only give credit for the external programs.—Carol Bowie

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The Forum is open to all Computer Associates ("CA") shareholders, whether institutional or individual, and to any fiduciaries or professionals concerned with their investment decisions.  Its purpose is to provide shareholders with access to information and a free exchange of views on issues relating to their evaluations of alternatives, as described in the Forum Summary.