May 03, 2011
Institutional Shareowners Debate Corporate Governance
by Robert Kropp
In a panel discussion held during the Milken Institute Global Conference, hot topics such as
executive compensation, board diversity, and government regulation are addressed.
Milken Institute Global Conference is currently underway in Los Angeles. A panel discussion
held yesterday, entitled T
he New Era of Shareholder Activism, addressed the increasing influence of institutional
investors on corporate behavior.
The panel, which was moderated by Clifton Robbins,
the CEO of Blue Harbour Group, an investment advisory firm, included Janet Cowell, Treasurer for
the State of North Carolina; Joseph Dear, Chief Investment Officer of the California Public Employees' Retirement System (CalPERS);
Robert Grady, Chairman of the New Jersey State Investment Council; William Royan, Vice President of
Relationship Investing at Ontario Teachers' Pension
Plan; and Anne Sheehan, the Director of Corporate Governance at California State Teachers' Retirement System (CalSTRS).
Referring to increased activism by institutional investors, Sheehan said, "As a pension fund,
it really is all about risk mitigation and returns for us. A priority is that boards of directors
are accountable to us." She advised companies, "If a shareholder asks a question, take the time to
"For funds like CalPERS, you can't divest and leave, so you have to pay
attention to governance," Dear said. "The purpose is to improve the performance of the portfolio,
but there's another benefit. Who is holding the management and boards accountable? After 25 years
of the corporate governance movement, there's a well-articulated strategy of funds to be involved.
On the corporate side, now there's a great deal of attention paid."
For years, CalPERS has
published an annual Focus List, in which companies whose share value underperforms that of peers
are publicly named. However, last year, after Wilshire Associates, an investment consulting and
services firm, found that "privately engaged companies significantly outperformed those companies
named to the public Focus List," CalPERS altered its policy.
"The idea is better
performance," Dear said. "If you can get it through quiet dialogue, then so much the better."
The Dodd-Frank Wall Street Reform and Consumer Protection Act that passed last year included a
number of provisions addressing shareowner rights, some of which, such as proxy access, are
currently the subject of litigation, as Dear pointed out. One provision that has become a
Securities and Exchange Commission (SEC) regulation is Say on Pay, and this year all public
companies are holding an advisory vote on executive compensation.
Asked by Robbins how a
company should interpret the results of a shareowner vote on executive compensation, Sheehan said,
"If a company only gets 65% approval, it has an issue with its pay structure somewhere. Our
informal position at CalSTRS is if a company gets less than 80%, there's something going on."
Addressing the frequency of such a vote, she added, "We understand why companies want a vote
every three years, but the proxy advisory firms and the large funds are supporting an annual vote."
Royan said, "Ontario Teachers is opposed to Say on Pay. The best way to improve the
board's accountability and actions is to improve the board. If investors think a no vote on Say on
Pay is necessary, then they probably have concerns around the board itself." He advocated a change
from a staggered model of board elections to one in which directors are elected every year instead.
"Say on Pay is here," Sheehan replied. "But the board is our representative, which we
elect. At CalSTRS, if we don't like the pay structure, we always withhold votes on the compensation
To encourage greater board diversity, CalPERS and CalSTRS are collaborating on
a Diverse Director DataSource, which will be managed by GovernanceMetrics International. In a press
release announcing the initiative, Sheehan stated, "There is demonstrated economic value from
having a board of directors that is diverse not only in gender but in age and experience, and we
believe that makes it a shareowner value issue."
"There is no shortage of people who are
capable of being directors," Sheehan said during the panel discussion. "We do need to increase the
Differences among panel members arose when the subject of government regulation was
addressed. Citing statistics that initial public offerings (IPOs) in North America now comprise
only 16% of the world's total, Grady stated, "Dodd-Frank is net negative." He asserted that new
regulations would impede the flow of capital necessary for growth.
saying, "The financial crisis needed more than one thing to go wrong, and it's easy to blame
regulation. We were in thrall to ideas about market efficiency and the rationality of actors which
do not apply in the real world. What's astonishing now is how that belief is reasserting itself,
that anything the government does which interferes with the perfect efficiency of markets is bad."
"Government regulation can enable much more rapid change across companies at the same
time," he continued. "We may pay a price in slower growth and lower returns, but what we almost
experienced was the collapse of the worldwide economic system. There are millions of Americans out
of work because of it."
One of the most important Dodd-Frank regulations affecting
shareowner rights addresses proxy access, or the right of shareowners to submit alternate slates of
candidates for corporate boards of directors. Observing that proxy access is "currently the subject
of litigation in the courts," Dear said, "When the SEC gets its rule approved, it will be a policy
change that affects the ability of investors to interact with all boards. That's why public policy
advocacy is a very important part of corporate governance work."
"It's all about creating
value. That's why we're in this business," Sheehan said. "I know some people think it's a social or
political agenda, but it's really about unlocking the value of companies."