Forum Report

Initial Comments on Yale-Deloitte Report

            Responses to last week’s invitation to comment on the draft Yale-Deloitte paper, “Talking Governance,”[1] suggested considerable interest in the questions it raised about the communications upon which investor, corporate and government decision-makers rely.

Isolation of “governance” communications

            Most of the comments received so far from marketplace participants have been focused on the paper’s reporting of ineffective communications between “governance” professionals and the people responsible for decisions, including those within their own organizations.  A related observation was that the paper’s review of models for “dialogue” and of “Reg FD” compliance issues seemed to be based on interviews that did not include people who were familiar with conventional investor relations processes, such as conference calls and road shows.  An academic view of this was offered by Leonard Rosenthal, a Professor of Finance at Bentley College who is recognized for his research on investor access to information:[2]

My main comment is that the draft shows a lack of familiarity with the practices of investor relations (IR) professionals.

…the report needs to seriously discuss the role of investor relations professionals in board-shareholder communications, and in particular on the issue of executive compensation. Indeed, addressing how this role can enhance this communications process would greatly add to the discussion of the topic.

Foundations of governance theories

            The paper’s reports of institutional separation of “governance” from investment responsibilities, combined with the authors’ observations regarding the career interests of governance professionals in confrontational processes, stimulated new comments on old concerns about the practical validity of theories promoted by an activist network.  The “need for evidence and rigor” in the consideration of proposed practices was stated by Robert M. Daines, a Professor of Law and Business at Stanford University and Co-Director of its Rock Center for Corporate Governance, who is a co-author of a new paper examining the correlation of governance ratings to performance:[3]

A lot of what counts as governance advice is hampered by the lack of a good theory of how exactly to govern.  The vacuum leaves a lot of room for speculation.  Moreover, much of the talk about governance is directed at an audience that doesn’t necessarily need accuracy (politicians, reporters, etc).

Reconsidering the idea of advisory voting

            The most frequent and consistent response to the paper was that the idea of advisory voting on executive compensation needs to be reconsidered.  Many Forum participants who had been supportive of the Advisory Voting project when it was initiated in 2006 viewed it then as a process for collaborative communication to promote successful capitalist competition, and have now expressed misgivings about its apparent transformation into a process for confrontation to force undifferentiated conformance with bureaucratic  rules for “good governance.”  The need for a fresh look was stated by Broc Romanek, Editor of TheCorporateCounsel.net and its associated educational services for corporate legal and governance professionals, in his comments on the paper:[4]

Given that the media contains reports that some investors are now rethinking their views on “say on pay,” some of the research might be dated already, even though it's not that old. I personally talked to some investors who now find themselves on the other side; and I find myself leaning against it for now (as I have blogged about).

            We will of course be continuing our attention to these issues, and encourage your further comments on what should be considered by marketplace decision-makers.

            GL – June 25, 2008

Gary Lutin

Lutin & Company

575 Madison Avenue, 10th Floor

New York, New York 10022

Tel: 212-605-0335

Email: gl@shareholderforum.com

[presented with permission]

Len Rosenthal, Ph.D.

June 23, 2008

Comments on Working Draft of “Talking Governance” by Stephen Davis

My main comment is that the draft shows a lack of familiarity with the practices of investor relations (IR) professionals.  Indeed, there is no mention of the role of IR professionals in the board – shareholder communication process.

The paper devotes considerable attention on Regulation FD and whether discussions with shareholders or other interested investors on governance and pay would run afoul of FD.  Yet investor relation professionals through NIRI (the National Investor Relations Institute) had an important role in the writing of FD.  Investor relations professionals continue to have a significant influence on the role of FD in corporate communications, a role that is ignored in the draft.

NIRI and its members have spent considerable time thinking about corporate governance issues including communication between corporate boards and shareholders.  They have been active in looking at, and helping to shape the CDA section of the proxy.

In some companies, senior investor relations officers (IROs) have become members of corporate governance committees.  They have been able to attain this position due to their numerous contacts and discussions with major players on the sell and buy side.  As part of their job, IROs bring back “Street Intelligence” to their CEOs, CFOs and to their boards, and companies are recognizing the value of this.  All of this could be gleaned from conversations with respected senior members of the investor relations profession.

In summary, the report needs to seriously discuss the role of investor relations professionals in board-shareholder communications, and in particular on the issue of executive compensation. Indeed, addressing how this role can enhance this communications process would greatly add to the discussion of the topic.