Among the many things that astounded me at the annual conference of the International Corporate Governance Network (ICGN) was the fact that few corporate directors attended. The event was held in the United States this year at the Grand Hyatt in Manhattan New York City. It lead me to ask the question –Why don’t corporate directors attend shareholder events?
TIAA-CREF hosted nearly 500 Institutional investors who represent over 18 trillion in global assets and who comprise the bulk of ICGN membership. Representatives from pension funds, hedge funds, private equity firms and fund managers all assembled to discuss issues that are so important to my fellow corporate directors. They came to the United States, the country home of the National Association of Corporate Directors, to further corporate governance. When the meetings were held in non-U.S. cities such as Rio de Janeiro, Brazil and Milan, Italy in the past it was understandable that U.S. corporate directors would be lightly represented. But this was in our backyard. Yet, in large numbers we did not attend.
In this new age of ever increasing shareholder engagement one would think that corporate directors would love to participate in discussions and hear the views of institutional investors on such key governance issues such as oversight risks, executive remuneration, shareholder responsibilities, business ethics and shareholder rights. I expected to see numerous corporate directors listening to the views of institutional investors on director independence, gender diversity, shareholder engagement and sustainability. But, they were not there. What a missed opportunity.
Prior to the conference, I signed up to participate in the “Director/Shareholder Dialogue” committee meeting only to learn that it was the only meeting that had been canceled. So, I attended the Remuneration Committee meeting instead. But, I was left wondering why the meeting was canceled. Could it have been canceled because there weren’t enough directors in attendance? Sadly, that was the case.
Where is the Trust?
Many directors shy away from any event where institutional shareholders frequent for fear of inadvertently violating Regulation FD requirements. They are afraid that socializing with shareholders might somehow lead to sharing too much information about their corporation. Or they are afraid that a shareholder might pressure them for answers, putting them in an uncomfortable position as they will always be on guard and suspicion of every encounter.
One speaker expressed it succinctly during the Shareholder Engagement session, “Directors don’t want to be ratted out.” There appears to a blatant mistrust of institutional shareholders and their proxy advisors. Corporate directors don’t even want there to be an appearance that they may be the source of an information leak. They have an inordinate amount of distrust for the activist shareholder.
Likewise, shareholders have considerable distrust of corporate directors. They believe that too many directors are being “managed” by management. That is, the information flow controlled by management creates “asymmetric risks” that are too high. Worse yet, more pervasive “tone-at-the-bottom” risks are even higher. I was surprised to learn that many shareholders struggle with engaging the corporate directors. Some fear being labeled an “activist” shareholder. These shareholders are learning to accept their shareholder rights and responsibilities which is significant part of the work performed at ICGN.
Misconception about Shareholder Activism
The term “shareholder activist” has a negative connation in the world of corporate directors. To be blunt too many directors believe them to be trouble makers who disrupt implementation of activities designed for strategic purposes. Many directors believe that activists push for short term profit taking at the expense of all else. Further, directors believe that the credo “increase shareholder value” makes them viewed as evil capitalists to the general public. However, based on the content and discussion at the ICGN conference nothing could be further from the truth.
By and large, institutional shareholders are long term holders. Most hold the shares for years, some for decades. Thus, they talk about long term growth and returns. They blame the nano-second traders and a few hedge fund investors for the negative connation of “shareholder activist.” Some institutional investor representatives are proud to be active in assessing the governance of the companies in their portfolios. They eschew the negativity. They attempt to nudge their portfolio firms to be more socially responsible. Most have signed on to the United Nation’s Principles for Responsible Investing.
Moreover, there was considerable discussion about the progress made in social responsibility. In particular the conference addressed the work of the Global Reporting Initiative (GRI), the Sustainable Stock Exchanges (SSE), the World Federation of Stock Exchanges (WFE), the Sustainable Accounting Standards Board (SASB), the Carbon Disclosure Project (CDP), and the International Integrated Reporting Council (IIRC). Attendees concluded that the initiatives were complementary and welcomed. Most importantly, the majority believe that integrated reporting will be good for capitalism. It was a group of spirited socially responsible investors who are readying themselves to engage with directors.
The institutional investors at the ICGN conference are making the link between long term corporate sustainability of which environmental sustainability is a prominent subset. Further, there are considerable efforts to select fund managers that have the same balance for socially responsible investing.
The Many Insights Observed
The conference provided many insights into the perspectives of the institutional investors. The amount of shareholder engagement is increasing and all agreed, unlike past rises in shareholder rights, this shareholder engagement movement is here to stay. It is not a fad that will fade away. It is a new paradigm that requires directors and shareholders to adapt.
Although the majority of the attendees prefer not to develop a definitive protocol for engagement, they agreed that investment relation professionals and corporate secretaries have a role to play. In fact, they encourage additional training for those professionals. Some believe that the fund managers have a role as well. While corporate directors are learning how best to engage with shareholders; shareholders are learning how best to meet with directors.
Like the NACD, the ICGN tends to focus primarily on large cap firms, which is unfortunate. It seems that the perspectives of the small and mid-cap companies are too often a second thought. On too many issues, both groups assume that the smaller firms will follow the lead of the large caps firms and that their issues are the same. It is another “tone at the top” perspective where we assume the knowledge trickles down to firms at the bottom. However, I was pleased to learn that in future conferences more attention will be given to the mid-cap and small-cap segment of the capitalistic landscape.
Engagement is more about listening. Institutional shareholders of ICGN talk about the same issues that we directors talk about, except from a different perspective. They have more of a macroeconomic perspective, versus our microeconomic perspective. They look at the long term sustainability of capitalism. If we are to make shareholder engagement a positive and fruitful endeavor we must seriously reach out to understand the shareholder perspective. The spring meeting of ICGN will be held in Tokyo and the 2014 annual conference in Amsterdam. I hope to see more of my fellow corporate directors in attendance. I missed you this year.