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Questions for and answers from “the queen of good corporate governance”
Nell Minow, a staunch defender of shareholders’ rights and an expert in the field of corporate governance, entertained questions before ending each of her lectures on April 24 at the University of Illinois Urbana-Champaign’s new Business Instructional Facility.
While questions focused on her views related to good corporate governance, several questions related to The Corporate Library, an independent research firm she helped establish to provide analysis on corporate governance and executive compensation. Her discussion with students and faculty involved a lively exchange of ideas, case studies and possibilities. Minow is a member of the Advisory Board of the Center for Professional Responsibility in Business and Society in the College of Business.
Q: Is it getting harder to attract good directors? What are the common characteristics of a good director?
A: If you asked me what my profession was right now, in terms of corporate governance, I’d say anthropologist because that’s how I feel when I look at the board room. Yes, it is hard to get directors. But it’s even harder to get good directors. It was always easy to get bad directors. Headhunters tell me that it used to take three calls to get interested individuals. Now it takes 10 calls. It used to be that people served on 10 boards. But now, if everything is going well in the company, it takes 240 hours a year. If things are going badly, it’s a full-time job.
Directors have always been some of the most accomplished, honorable people on earth. But when you take these incredibly successful people and place them in a board room, they lose 50 IQ points and all of their courage. There’s just something about the board room that freaks everybody out. Humans have the tendency to want to blend in and be consensus builders. Look for someone who is not that.
Furthermore, if you have more than one CEO on the compensation committee, it’s a disaster. If you have former cabinet officials on the board, it’s not always, but almost always a disaster. Tennessee senators also seem to be a bad idea. I’m in the “what” business, not the “why” business, so I do not pretend to say why these things correlate, I’m just saying that they do.
Q: If you could reform accounting financial reporting and auditing, what would it look like?
A: One of the things we have tried to do when rating companies is to look at financial reporting as an element of director judgment. For me, I think it’s time for a new look at accounting with less emphasis on assets and more emphasis on risk assets. The difficult thing will be creating a gold standard and rectifying some way of going forward. Right now, I think it’s too much based on hard assets and too little based on various risks.
Q: What is your view of the CEO serving as chair? Should the positions be split?
A: The United Kingdom went from almost no split to an almost universal split, and it’s been very effective. However, in the United States, studies show there is no benefit to having only one person serve as both CEO and chair of the board. It’s really just a structural solution, and it’s been subverted by just moving around name plates rather than by making substantive changes. You don’t want the CEO overseeing the agenda or the timing and quality of information. Splitting the CEO and chairmanship has happened in one of two cases in the United States—because of a CEO succession issue or a major disaster as in the case of GM and Disney. I’m not saying it can’t work here. It just hasn’t.
Q: What do you think of proxy access, the right to place director candidates nominated by shareholders on the company’s proxy card?
A: I’m not a huge fan of proxy access; however, Mary Schapiro, the new chair of the SEC, is a fan of proxy access. I hear she is considering something that is a much more radical approach like the Swedish model, where shareholders are the nominating committee. In the 1990s, the United Kingdom conducted a brief experiment in this. Institutional investors of a much smaller universe of companies and financial institutions got together and founded their own headhunting company. It was great. The company went on to be sold and still exists today. Michigan had a very interesting approach which no one took advantage but I thought was fabulous. They created a data bank of directors and would grant a higher level of protection to those companies drawing from the data bank.
As an activist shareholder, I’m more interested in majority vote. I believe it should be hard for companies to argue to put somebody on a board if the shareholders don’t want them. It’s easier for shareholders to vote against those who are doing a bad job than to ask shareholders to come up with names. Majority vote is the way to go, but I’d like to see it as a rating standard.
Q: Is there an opportunity for activist investing in today’s market?
A: I think there is tremendous opportunity for activist investors now because stocks are at such a low. Some are even underpriced at this time. Activist investing is a traditional value investor plus. You look at a traditional investor analysis and decide who you are going to go after—those companies the world just is not recognizing for some reason. Then, you say to yourself, “I think I’ll go do something about that.”
Here’s one of my favorite examples. A company in Chicago had fabulous market share, fabulous operations and fantastic margins but shareholder returns were crap. We learned that the CEO and founder grew up during the Depression and he really liked cash. Half of the company’s assets were in cash. When we went to visit them, they had just built a $22 million factory and paid for it by check. When we asked how they decided that this was the best use of their cash, they didn’t understand our question. They had the money, so why not? We suggested they buy stock or declare a special dividend or something, but they just were not allowed to sit on cash. We went so far as to threaten to petition the government to change their SIC code change from manufacturing to piggy bank. Ultimately, the company was sold.
Q: What do you think of “Say on Pay”?
A: Giving shareholders the right to have a say on the compensation of executives is good. “Say on Pay” has been pretty effective in the countries where it has been adopted. I think it’s a good thing, and I hope it goes through.
However, I believe that the only thing that matters is changing the people on the board. Shareholders have failed so badly to act in their own interest, and I don’t see that changing anytime soon. Whenever I’m asked by people in Washington about reform, one thing I always tell them is that all of the post-Enron reforms and all of the reforms currently under consideration are all what I call supply side reforms—the supply side of corporate governance—what the company has to do, what the accountants have to do, what the board has to do. We need to focus on the demand side—what the shareholders have to do.
For example, ERISA is the largest accumulation of investment capital. The political appointee has always been a benefits person, not a capital market person. No one will ever think of ERISA as the single biggest player in capital market until they address the ability of the investors to respond in a market-based way. You can have all the “Say on Pay” you want, and you can lead a shareholder to proxy but you can’t make him think.
Q: Does The Corporate Library track all of the companies on the New York Stock Exchange? How do you select the companies you rate?
A: Right now, we cover about 3,300 companies which is about 80 to 90 percent of the market count. And we will cover any company a client wants us to cover. We also continue to feature those companies that fall off the index. The biggest request we receive is for non-US companies but because the level of data is not the same, we have not done that much analysis yet. If we do, it will be in partnership. We would not reinvent the wheel.
Q: How do you classify industries?
A: We have tried several different ways. We have used SIC codes. We right now are using a proprietary classification. One thing that companies monkey around with quite a bit is a peer group classification. A great example (of company designed peer group classification) is Timberland. Timberland makes shoes. For the purposes of compensation, Timberland’s peer group is NIKE, which is 10 times larger. And yet for that reason, Timberland pays its CEO the same as NIKE’s CEO.
Q: When you do your analysis is all the information you use public information?
A: It is all public information because that has two advantages. It has an apples to apples advantage, and it means we’re not dependent on companies to give us information. So my view is kind of like the tree falling in the forest. If the company is doing something really great, and they haven’t told anyone about it, I don’t give them credit for it.
Q: Obviously the connection between your analysis and poor performance is relevant, but can you determine which companies will do well?
A: Wouldn’t that be nice. That and astrology and we’d all be in business. Nobody knows what is going to happen. But I will say we had been watching the bail-out companies for a couple of years before they got bailed out. We’ve been pretty good at predicting the bad stuff.