RiskMetrics | Governance Center Blog

Aug
18
2010

Governance Ratings Firm Mergers Put New Light on ISS

If you were on vacation late last month, you may have missed one of the biggest corporate governance news stories of the summer, if not the year. No, it had nothing to do with financial regulatory reform, the BP mess or another fraud unearthed by the SEC. It was the announcement of a merger between The Corporate Library and GovernanceMetrics International.

One can argue that a merger of the leading corporate governance research firm (The Corporate Library) with an international corporate ratings firm (GMI) is good for the marketplace. For one thing, ISS will get some much-needed competition as it goes through some of its own changes after its parent company, RiskMetrics, was purchased earlier this year by MSCI. Read the rest of this entry »

- Gary Larkin

May
06
2010

Climate Change Disclosure Start of Long Standard-Setting Process

When SEC Chair Mary Schapiro and the rest of the commission issued interpretative guidance on climate change disclosure back in February, they said they were merely just “providing clarity and enhancing consistency” for rules that have existed for decades. Intended or not, the consequence of the guidance has put public companies one step closer to mandatory sustainability reporting.

If you are a director on a public company and have been skeptical about the need for sustainability reporting, specifically climate change disclosure, you may want to take a look at the latest data on who is voluntarily reporting. Read the rest of this entry »

- Gary Larkin

Apr
22
2010

Political Spending Accountability Index Planned for Fall

With the corporate governance community still trying to ascertain the fallout from the Citizens United v. Federal Elections Commission Supreme Court decision and the revelation [See Reuters blog here.] this week that the embattled Goldman Sachs doubled what it spent on Washington lobbyists this year, corporate political spending continues to be a worry for boards.
It is the concern over risks involved in corporate political spending that has the Center for Political Accountability becoming more aggressive in its disclosure marketing campaign.

Using the best practices on political spending policies and procedures in an upcoming handbook it is collaborating on with The Conference Board Governance Center, the Center for Political Accountability is teaming up with Baruch College’s Robert Zicklin Center for Corporate Integrity to launch an accountability index in October. Read the rest of this entry »

- Gary Larkin

Apr
16
2010

Handbook, Roundtable, Webcasts Focus on Political Spending

The campaigns leading up to the federal midterm and state general elections may have a big impact on public companies as they try to make heads or tails over the Citizens United v. Federal Elections Commission [See my Feb. 24 post.] Supreme Court decision and how it affects their corporate political contributions policies.

The 5-4 decision in January gives companies more latitude in the amount of money their political action committees can donate to candidates and referenda as it treats corporations as individuals. Meanwhile, some senators are trying to undo the decision by limiting the amount companies can contribute and making companies disclose more about those contributions.

The focus on corporate political spending has many organizations holding Webcasts and roundtables on the subject. In fact, The Conference Board in collaboration with the Center for Political Accountability is writing a handbook. Read the rest of this entry »

- Gary Larkin

Apr
08
2010

Busy Proxy Season Spawns Innovative Shareholder Services

In what is starting to shape up as one of the busiest and corporate governance-changing proxy seasons in some time, shareholder proposals picking up the most steam early on have more to do with shareholder rights, such as .advisory vote on compensation, independent board chair, right to call special meeting and review/report on political spending.

It’s no surprise that governance shareholder proposals are getting more attention than hostile takeovers this proxy season, especially given the loss of shareholder value over the last two years.

The historic importance of this year’s proxy season has not been lost on such key shareholder players as RiskMetrics and corporate governance research providers as The Conference Board Governance Center. Both have introduced innovative products timed to launch with the 2010 proxy season. RiskMetrics has replaced its Corporate Governance Quotient rating system with Governance Risk Indicators, a transparent governance rating methodology designed to reflect current best practices. It uses symbols such as up and down color-coordinated arrows instead of numeric ratings. It went into effect March 17. Read the rest of this entry »

- Gary Larkin

Mar
12
2010

Say on Pay Takes Early Lead in Proxy Season Shareholder Proposal Race

Executive compensation continues to be a hot topic in the board room and among shareholders. In the beginning of the 2010 proxy season RiskMetrics reports that four of the Top 10 governance shareholder proposals are compensation-related with advisory vote on compensation, or Say on Pay, ranked first with 46 proposals on the ballot.

The other three compensation proposals include having a retention period for stock awards (13 proposals), establishing anti-gross-ups policy (six proposals) and limiting the number of CEOs on compensation committees (three proposals). [By the way No. 2 on RiskMetrics list is shareholders’ right to call special meetings with 42 proposals.]

While Say on Pay has been considered by the SEC and included in several financial regulatory reform bills on Capitol Hill, momentum for advisory votes on compensation has picked up steam in the past year following the requirement for TARP (Troubled Asset Relief Program) recipients to hold such a vote. As of March 2, a coalition of investors reports that more than 70 Say on Pay shareholder proposals have been filed for this proxy season. And more than 50 public companies have voluntarily adopted advisory votes for compensation. Read the rest of this entry »

- Gary Larkin

Mar
03
2010

Life with Director Education Sans Accreditation

As I write this, we are in now officially in a post-accreditation era for director education. While it may not feel that much different than the past nine years, it means that organizations like The Conference Board Governance Center, The Director Network and the National Association of Corporate Directors are suddenly more accountable for the programs they provide.

Of course, this is all the result of RiskMetrics Group discontinuing its director education accreditation program as of March 1. In the end, it was a business decision for the financial research, risk management and governance service provider as it replaced its longtime Corporate Governance Quotient (CGQ) with Governance Risk Indicators (GRId). The accreditation program had been in place since the days of Institutional Shareholder Services, which eventually merged with RiskMetrics.

While I was not able to speak with someone on the record in my initial post, I did listen to a detailed Feb. 25 Webcast interview by Corporate Board Member’s TK Kerstetter with Pat McGurn, special counsel to RiskMetrics. He explained the reasoning behind leaving director education out of GRId.

“GRId is closely tied to the [RiskMetrics] voting policy of a company,” McGurn said. “Director education is not part of that when we look at the reelection of a director of a board.” However, he did hold out hope that in the future it could become a component in the GRId, if it reenters the realm of RiskMetrics’ voting policy.

McGurn reiterated what RiskMetrics said in a statement earlier this year about the decision to drop the accreditation program, although he did admit it wasn’t an easy one.

“The accreditation issue was a tougher one for us [than dropping director education from GRId],” he said. “Back in 2002, people laughed at us when we said we were going to include in the [CGQ] rating that directors were going to get continuing education. Fast forward to today, and these programs are ubiquitous. They are everywhere.”

When the director education accreditation program started, RiskMetrics looked at the length of time of a program (preferably eight hours), the quality of the faculty (they should be board members), and course material. “We wanted academic institutions and not-for-profits to get into the business,” McGurn said. “And then we wanted market forces to take over. Now we have determined it has been ‘mission accomplished’ [when it comes to director education programs].”

Kerstetter promises a second part to the interview with McGurn later this week. And it appears the fate of RiskMetrics itself should be on the table. That’s because RiskMetrics announced it has been sold to MSCI Inc., a global provider of investment decision support tools. Under the terms of the merger, MSCI will purchase RiskMetrics for $1.55 billion in a cash and stock transaction. [See story here.]

- Gary Larkin

Nov
13
2009

Executive Compensation Task Force Job Not Done Yet

When The Conference Board Task Force on Executive Compensation first met back in March, Co-Chair Robert Denham said task force members agreed there are two primary questions boards need to answer when considering executive pay: What are they paying for? How much are they paying?

Five months after the task force’s first meeting, those two questions led to a 40-page report on executive compensation that includes a list of five guiding principles. By no means does the report complete the group’s mission, according to a RiskMetrics Webcast Thursday where Denham, Co-Chair Raj Gupta and task force member Lynn Paine announced the group’s next steps. (For a copy of slides from the Webcast, e-mail governanceexchange@riskmetrics.com.)

The task force, which includes 13 directors, is actively seeking endorsements from major U.S. public companies. In a Webcast moderated by Stephen Deane, a team leader of principles2 RiskMetrics’ online Governance Exchange, Denham, Gupta and Paine made a point of saying the group’s work is not done.

“The principles are getting a lot of traction now but more needs to be done as companies decide if their compensation systems [performance vs. compensation] are already aligned,” Denham said. He pointed out how important it is for boards to realize that “what” they are paying for in terms of performance is just as important as “how much” they are paying executives.

The task force also plans on contributing to the public dialogue on executive compensation by taking part in similar events as the RiskMetrics Governance Exchange Webcast and being interviewed by business news outlets. There are also plans for a director education program.

Paine, who served on The Conference Board’s Commission on Public Trust and Private Enterprise in 2003, sees some similarities in the calls to action in this year’s executive compensation task force. But the difference with the task force is its involvement in garnering support.

“This is different than the 2003 Commission on Public Trust and Private Enterprise report because there is a movement to get a broad level of support and adoption of the principles,” Paine said. “This is not a static effort; it is ongoing. It is at the very beginning of an ongoing effort.”

She recalled how executive compensation was a big issue following the accounting scandals at Enron and WorldCom in the early 2000s. “At the time, we all thought that executive pay was a huge deal. But if you look at it now, that [Enron and WorldCom] was child’s play.”

So, why has executive pay continued to be a problem in the United States despite past reforms at the start of this decade? It’s really a matter of “follow the leader,” as is in the leaders in executive pay, Paine said. “The reason a lot of these controversial pay practices got embedded at companies is because of the negotiations of executive contracts over the years,” she said. “I think there are a lot of reasons these practices exist, but that is a main one.”

Of the five guiding principles, Paine said Principle Three on avoiding controversial pay practices was the most difficult for the group to reach a consensus. The sticking point was that many of the members didn’t think it made sense to make a blanket condemnation of such practices (i.e. golden parachutes, severance agreements, tax gross-ups). “We talked about cases where some of these practices made sense,” she said.

So in the end, the task force decided to take a “comply or explain” approach with the adoption of such controversial pay practices.

For any companies interested in learning more about the task force principles, click on this link. To find out more about endorsing the principles, send an e-mail to me at gary.larkin@conference-board.org.

- Gary Larkin

Nov
10
2009

Worth Reading…Separation of CEO and Chair

The issue of whether or not to separate the roles of CEO and Chair has certainly stirred lots of conversation in board rooms across the United States, especially as shareholders and Congressmen have called for it in proxies and federal legislation.

The argument made by proponents is that having two separate leadership positions, where chair is independent, is that such a transition is evolutionary for U.S. companies and a best practice around the world. Those opposed argue that there are no proven studies that show separating the two leadership positions leads to better shareholder performance.

The Conference Board Governance Center last week released its first in a series of research digests called Board Book. The first issue’s focus is Board Leadership and CEO/Chair Separation. The publication cites a handful of papers, articles, speeches and research that analyze CEO duality. If you are a Governance Center member, you can access Board Book here (username and password needed).

In addition to the Board Book, I have compiled some more research on the subject:

The Value of Independent Directors: Evidence from Sudden Deaths, Bang Dang Nguyen and Kaspar Meisner Nielsen, Chinese University of Hong Kong, May 19, 2009, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1484707. Key findings: A look at the contributions of U.S. independent directors to shareholder value from 1994-2007. Overall, authors found that independent directors provide a valuable service to shareholders.
2009 Proxy Season Highlights No. 5: Companies With Combined CEO and Chair of the Board Positions, Annalisa Barrett, The Corporate Library, March 23, 2009, www.thecorporatelibrary.com/news_docs/932032509splitceochair.pdf (There may be a fee to download this paper.) Key findings: In a study of more than 3,000 North American companies, TCL found 52 percent combined both positions, 21 percent were led by an independent director and 12 percent have boards led by a former CEO. Companies with dual roles have “troubling” governance characteristics.
2009 Spencer Stuart Board Index, Oct. 26, 2009, http://content.spencerstuart.com/sswebsite/pdf/lib/SSBI2009.pdf . Key findings: Half of all boards have only one insider, the CEO, up from 44 percent last year. And 37 percent split the chairman and CEO roles, versus 20 percent a decade ago. Of the 184 companies that split the roles, 81 have an independent chair (versus 75 last year) and 91 have a non-independent chair (down from 105 last year).
2009 Postseason Report: A New Voice in Governance: Global Policymakers Shape the Road to Reform, RiskMetrics, Oct. 16, 2009. http://www.riskmetrics.com/docs/2009-postseason-report.
Corporate Governance Commentary: Proxy Access Commentary No. 1, The Battle for Shareholder Access — The Current State of Play, Latham & Watkins, May 19, 2009. http://www.lw.com/upload/pubContent/_pdf/pub2633_1.pdf. Key findings: Sen. Charles Schumer of New York proposed a bill that in addition to issuing a shareholder proxy access rule and Say on Pay would call for independent board chairs. At last check, that bill had been referred to the Senate Committee on Banking, Housing and Urban Affairs.

- Gary Larkin

Nov
05
2009

TARP or Not, New Generation of Clawbacks Are Here to Stay

Thanks to actions taken by the G-20 at its Pittsburgh Summit in September and the U.S. Treasury’s special pay master last month, the term “clawback” will reverberate throughout the board rooms of companies worldwide in 2010. While it’s certainly not a new idea, the financial crisis has led some companies to institute such policies for poor performance or irresponsible risk-taking that go beyond the disgorgement rules of the Sarbanes-Oxley (S-O) Act.

Some U.S. public companies are adding executive compensation recovery, or clawback, policies in addition to executive compensation advisory, or Say on Pay, vote policies as a response to the financial crisis fallout. Many shareholders were angry about the awarding of bonuses at companies where companies posted lower earnings or even net losses.

What is making the idea of such policies a big issue for the coming proxy season is that the G-20 has included them in its newly approved Financial Stability Board Principles for Sound Compensation Practices and U.S. Pay Master Kenneth Feinberg is mulling over such action for the seven Troubled Asset Relief Program (TARP) recipients under his aegis.

Second Generation of Clawbacks

With the TARP and American Recovery and Reinvestment Act, a second generation of clawback policies were created that are limited to those companies that received federal bailout funds. Unlike the S-O clawback provision, the trigger under TARP and ARRA are not tied to a financial restatement. Instead, they are tied to financial statements that are later found to be materially inaccurate but not necessarily due to misconduct or fraud (i.e. if a company pays an executive a bonus when receiving TARP or ARRA funds that may have been included as income during that period).

Under S-O, the CEO and CFO of a company that, as a result of misconduct, files a restatement due to noncompliance with accounting and financial reporting standards must reimburse the company for any bonus or incentive received in the 12 months prior to the original financial statement filing. See The Conference Board’s newly released Corporate Governance Handbook: Legal Standards and Board Practices (Third Edition) for more information on this and other S-O requirements as well as their application by U.S. boards.

The law firm Morgan Lewis has a thorough presentation on executive compensation clawbacks that you can look at. (See page 14 of the presentation).

Aligning Compensation Policy with Performance Measures

The Conference Board CEO Jonathan Spector told members (See SIFMA meeting video.) of the Securities Industry and Financial Markets Association (SIFMA) at its annual meeting last week that clawback policies need to be aligned with executive performance measures.

“The principle is to pay the compensation after performance has been delivered,” he said. “That phrase is a concept that isn’t fully prevalent in companies’ management systems and in board room discussions. Companies have used the accounting system to say performance has been delivered when it hits the balance sheet.”

He thinks there needs to be more sophisticated measures of executive performance that are linked better to compensation, although he doesn’t necessarily think there needs to be accounting standard changes. Spector said he was asking SIFMA members to do two things: to endorse the Task Force principles and to go back to their companies and figure out how to apply the principles to their compensation policies.

The Conference Board Task Force on Executive Compensation states that “companies should adopt clawback policies allowing them to recoup compensation from executives under certain circumstances, such as later discovered misconduct or a subsequent restatement of financial statements.”

In the United Kingdom, the HM Treasury announced shortly after the G-20 Sept. 25 release of the compensation principles that the top five banks in that country – Barclays, HSBC, Lloyds, RBS and Standard Chartered – had agreed to implement the G-20 reforms effective Jan. 1, 2010.

Feinberg on Monday told an executive compensation conference at the University of Maryland Robert H. Smith School of Business that he would determine by the end of next month how he will use his power to claw back pay at those TARP companies although he is not in negotiations to do so (See Reuters story.) If that wasn’t enough to get boards’ attention, Valero Energy Corp. announced Friday that its board has adopted policies that allow for executive compensation recovery, an advisory vote on executive compensation and disclosure of compensation consultant fees in order to determine their independence.

Valero’s actions are similar to what other companies have done over the past year as they approved Say-on-Pay measures, such as Microsoft, Verizon, MBIA, H&R Block, Blockbuster, Tech Data, Aflac and TIAA-CREF.

Consider Microsoft’s clawback policy, which focuses on executive performance measures and not so much on misconduct. “The Company will seek to recover, at the direction of the Compensation Committee after it has considered the costs and benefits of doing so, incentive compensation awarded or paid to a covered officer for a fiscal period if the result of a performance measure upon which the award were based or paid is subsequently restated or otherwise adjusted in a manner that would reduce the size of the award or payment…”

The policy does leave open the possibility of taking additional action if an executive is found to be guilty of misconduct that led to the awarding of the bonus.

As for the second generation of clawbacks, research shows a much slower pace than the first generation policies that really just reflected the S-O Act. The Corporate Library in its recent 2009 Governance Practices Series: Clawbacks (fee required) found that “the spread of clawbacks is progressing at a snail’s pace absent any legislation or regulations.” (Among the S&P 500, only 13.2 percent in 2009 had filed proxies in the first half of the year calling for clawback policies compared to 10 percent in the same period last year. That figure did not include the large number of TARP recipients subject to Treasury clawback regulations.)

According to The Conference Board Task Force on Executive Compensation Report, 64.2 percent of the top 95 companies in the Fortune 100 in October 2008 had first generation clawback policies, up from 17.6 percent in 2006. The report cites a January 2009 article in Financier Worldwide, which used data from Equilar’s 2008 Clawback Policy Report.

New Best Practice

In an Oct. 15 publication Considerations for Public Company Directors in the Current Environment, Gibson, Dunn & Crutcher LLP cites a RiskMetrics 2009 proxy voting policy that clawback provisions applicable to companies receiving TARP funds is a new “best practice.” Under most clawback provisions, companies receiving such funds must seek back bonus or incentive compensation that was based on materially inaccurate financial statements or materially inaccurate performance metric criteria.

Basically, RiskMetrics will tend to support clawback shareholder proposals if a company’s compensation policy does not align with that of TARP recipients, Gibson, Dunn wrote.

Law firms like Gibson, Dunn are advising companies to assess their compensation disclosures and have their compensation committees be aware of executive compensation practices that institutional investors and proxy advisory firms advocate, such as clawback policies and “hold-through-retirement” provisions.

- Gary Larkin

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Governance Ratings Firm Mergers Put New Light on ISS

Political Spending Accountability Index Planned for Fall

Handbook, Roundtable, Webcasts Focus on Political Spending

Busy Proxy Season Spawns Innovative Shareholder Services

Say on Pay Takes Early Lead in Proxy Season Shareholder Proposal Race

Life with Director Education Sans Accreditation

Executive Compensation Task Force Job Not Done Yet

Worth Reading…Separation of CEO and Chair

TARP or Not, New Generation of Clawbacks Are Here to Stay

Second Generation of Clawbacks

Aligning Compensation Policy with Performance Measures

New Best Practice

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