Archive for September, 2013

Who should sit at a Board: technology capabilities a board should have (II)

September 28, 2013 1 comment

In a precious post (, we refered to the industry expertise, as an asset a board should have if it is to perform well. We follow the path of this previous post in this one, as to the competencies boards should have.

“What should directors know to ask the right questions about technology?” This seems to be quite a usual question in lately published press articles and other related Governance forums or events, and so Elizabeth Valentine comments in her. (1)

She defends there is a need for directors understanding risk and opportunity in Technology Governance. According to her, many boards simply consider technology a tool, but not their business; she argues they should at least be able to ask the right questions about infrastructure risk, business continuity risk, security risk or IT competence risk, and of course IT projects risk.


Technology underpins every part of a business nowadays. And boards have a fiduciary duty for competence, even for technology and technology Governance, she asserts.


So, what is Enterprise Business Technology Governance?


According to Mrs. Valentine, it means “governing technology and information as assets, on value creation and competitive performance oversight against a technology backdrop. It includes the leadership, oversight and board mechanisms for governing information and technology at an enterprise level.” (2)


As Deloitte points out the way each firm uses technology determines or conditions the IT oversight role of each board. (3)


Firms may use technology differently, some may consider it as a commodity, but some other may need to consider it as a strategic differentiator:


  1. Some firms use it as a support mechanism for some functions or departments.
  2. In other firms, IT supports the Competitive Advantage.
  3. In some other IT provides the Competitive Advantage.
  4. Finally, in other companies, IT is the business.


Firms in bullet 1 probably assign technology to IT department or the Audit Committee. In case of bullet 3 firms, they often create a Technology committee, whereas in bullet 4 all board members need to be involved in technology. These differences also affect the number of technology-literate directors each board should engage, (just one could be enough in bullet 1, but all directors should have the technology skills in bullet 4 firms).


What areas are the most affected by technology?


Apart from tools at the board`s disposal, (communications, whistle-blower platforms, data analytics for decision-making…), the following matters need to catch the directors attention:


  1. Risk discussions: risk controls are facilitated by technology; business continuity and security risk are also affected by technology; also, IT operational or strategic risk need to be considered.
  2. The firm`s strategic debate: as an integral part of the business, directors need to understand how IT helps value creation processes, so as to promote every necessary input for the sustainability and wealth creation of the firm.
  3. Large IT projects: large investments, a product development dependency on IT, or some other similar situations recommend that an effective oversight is imposed on large IT projects.
  4. A relationship with an IT manager, similar to the one usually kept by boards with CFO for financial matters should also be maintained by the board; this would help directors exercise their oversight role, and also help them learn and acquire the necessary skills.


Given its growing importance and press and research coverage, we will more deeply analyse cyber-security risks in an incoming post.


(1)    Enterprise Business Technology Governance,, in her article “Boards and technology: Is scrutiny of director`s technology competence getting closer?”.

(2)    Do Boards know enough about technology to ask the right questions?, also in Valentines blog.

(3)    Deloitte, “The Tech-intelligent Board: Priorities for tech-savvy Directors as they oversee IT Risk and Strategy”, 2011.


Shareholder Activism as a Corrective Mechanism in Corporate Governance

September 21, 2013 1 comment

Rose and Sharfman, (Ohio State University and Case Western Reserve University School of Law), have just published an interesting article on this interesting topic, which we will follow through in this post.

Shareholders activism exists in a market for corporate influence, not in a market for control. Activism has two main formats: a) Performance-driven activism, which focuses in strategy, finance, operations, and so on, and b) Corporate Governance activism, (which focuses in governance, compensation and social policy, sometimes to pursue performance.

The increase of institutional investors and shareholder power has allowed activism to become more effective during the last years. In their article Rose & Sharfman try to show how aggressive activism can enhance shareholder value.

Shareholder Activism and Corporate Law.

Corporate law, in order to provide firms with a centralized and hierarchical managerial power, grants the board exclusive authority to celebrate explicit and implicit contracts, which itself leaves day-to-day operations to management, thus keeping this power out of shareholder reach.

Moreover, the business judgement rule protects directors from shareholder liability. And as a basis for this, Rose & Sharfman cite Kenneth Arrow, who argues that “information scattered over a large organization must be both filtered and transmitted to a centralized authority in order for a large organization to make informed decisions and minimize error in decision-making”.

There is nevertheless a certain accountability from boards, given the agency costs and a self-interested behavior that may appear. But given the power given to boards and management, shareholders need to face some (not insurmountable) obstacles, thus allowing some room for agency costs in order for “corporate decision making to maximize the value of centralized authority and get as close to shareholder wealth maximization as possible”.

So, activism could be considered to be beneficial in some discrete situations, forcing decision-making power to shareholders, out of the hands of board and management. In a sense, Rose & Sharfman consider this process one of efficient authority sharing.

Activism benefits are different depending on the kind of shareholder

Rose & Sharfman make a difference between several kinds of investors, because of their level of information, skills, and their willingness to interfere in the activities of the firm:

–         Insiders, they don`t participate in activist raids.

–         Liquidity traders don`t participate either, as they don`t have the skills, the interest, nor the information collecting capacities.

–         Noisy traders: low informed, they rarely participate, and they do so often opportunistically,

–         Market makers: they act similarly to the previous ones,

–         Information traders: they try to capture value based on information gaps they discover, as in the case of hedge funds, or in general, value investors.

Offensive Shareholder Activism (OSA)

It can be defined as performance-driven activism initiated primarily by a hedge fund, who targets underperforming firms, invests a large amount of cash, promotes change and eventually higher performance so that stock prices increase, and then makes a profit. Hedge funds are ready to take a hands-on approach, and provide valuable information to the firm, which constitutes the most relevant difference with other value investors:

a)      OSA as a sharing of authority. Rose & Sharfman show how information may sometimes be found not by the firm`s authority, but by other interested parties –information traders, and perhaps hedge funds-, which makes criticism to the authority something valuable, and a shift in decision-making authority in particular cases to shareholders, also valuable.

b)      Disinterested and uninformed shareholders: if shareholders are to vote, their rational apathy should be a problem; nevertheless, activism often has a previous effect, so that voting does not occur, and suboptimal decisions do not necessarily happen.

c)      Empirical approach to OSA: several studies back the idea that offensive shareholder activism enhances shareholder value, perhaps when reaching a sale of the company, a spin-off, or any other major strategy change. And some other studies also back the idea that those benefits persist in time, (not being just a short-term effect). Nevertheless, evidence does not support activism as generating value in “every firm at any time”, so a certain discretion by boards could be recommended if unwanted results are to be avoided. They should be able to adopt changes, or not, and in this latter case, so explain to shareholders.

 Short-term versus long-term investors

This is one of the main topics in the current discussion on the hedge funds`activities, between mainly Martin Lipton and Lucien Bebchuk. Rose & Sharfman separate themselves from this debate, insisting in the following points:

–         Activists provide liquidity, which is apparently welcome by all shareholders.

–         All investors value companies the same way, discounting cash flows, so at the end all of them are interested in the long-term.

–         Shot-term runs in stock prices does not usually disappear with time.

Nevertheless, some critics still persist against OSA, using for example the Intrinsic Value Argument:  according to this argument, there is not relevant information out of the reach of management and boards that can be seized by others, (such as aggressive activist shareholders). Management and boards maximize intrinsic value, which is not always shown in the stock price. The problem with this argument is the fact that sometimes offensive activists “do have” better information on some facts, and empirical studies so suggest.

Based on: Rose & Sharfman, “ Shareholder Activism as a Corrective Mechanism in Corporate Governance”, September 2013.

Pay ratios: the case of the USA

September 19, 2013 1 comment

Should a Ceo of a retail company earn 1.795 times the average pay of a department store worker? There are probably many arguments against, but also against any prohibition or limitation to the way market freely establishes compensation for employees, whatever their rank. (1)

The Dodd-Frank law, passed by the USA Congress in 2010 urged the Securities Exchange Commission (SEC) to introduce a regulatory proposal so that public companies became forced to disclose the ratio of their Ceo pay to the average pay of rank workers. (2)

The Sec has delayed the proposal for three years, amid out loud voices on both sides, as the controversy raised by this matter has been noisy. (3) But in a vote by three against two, the Sec has finally made public their proposal on September 19th 2013 , that will now follow its path. (4)

The proposal can be described as follows:

a)      Companies shall disclose the ratio of Ceo Pay to median compensation of employees.

b)      Companies will be free to determine the way they identify the median employee.

c)      Companies shall use an already existing definition of total compensation for the median employee.

d)      Employees will be counted if hired by the firm or any subsidiary, and only if employed the last day of each fiscal year.

e)      Companies shall disclose their methodology, assumptions, adjustments, and so on, and will be allowed to complement with a narrative or additional ratios.

The proposal will be analysed and publicly commented, and follow the usual procedure.

Will that regulation be copied in other countries? In that case, will these countries follow the same flexible scheme? To be seen…..

(1) “CEO Pay 1,795-to-1 Multiple of Wages Skirts U.S. Law”, Bloomberg, April, 30, 2013.




Language and Corporate Governance.

September 19, 2013 Leave a comment

A study recently made by the Research Institute of Industrial Economics, and authored by Rebecca Piekkari, Aalto University, Finland, addressed the topic of internationalization, the corresponding language switch in board meetings, different language capacities by directors in different firms or countries, and the effects these differences generate on governance and decision-making processes in the researched firms.

It is first outlined the fact that many international  firms, even if they have reached export levels upper than 80%, still had boards dominated by nationals of the country where the firms were founded. Secondly, the author remarks that internationalization gives firms access mainly to foreign commercial (talent,  customers, supplies) and financial goods, (stock exchanges, funds), but it doesn`t always enhance shareholder returns. Why?

The paper focuses on three items:

a)     How internationalization affects board processes: when locals where not prepared to language diversity, boards tended to be less interactive, and more silent decision-making dominated the scene.

b)     Diversity as it affects processes.

c)      Language in multinational corporations.

We will mainly focus in the first subject, in how the author explains the effects on board processes stemming from the hiring of a foreign director increasing language diversity.

The research was done in nine multinational Nordic firms. In these countries, since 2000 and until 2007, the share of foreign directors increased, but only to around 15%.

The case is made differently between well-prepared companies, where English was adopted in a timely manner, and not-prepared ones, which simply changed to English without delay nor preparation.

Well prepared firms adopted English only after board materials had been switched to English for a certain time; they also had very language capable managers in their ranks; in some cases, English was the standard language used by employees, as determined by company manuals. These companies did not generally suffer in their board processes.

The unprepared firms found that their local non English-speaking directors were prevented from active and normal participation by this barrier, interaction in the board became lower, and the board meetings themselves were also shorter. Directors in these firms stated they felt discomfort in the meetings, difficulties in expressing their ideas, and less willingness or eagerness to participate, as a result. In particular, directors found difficulties in expressing disagreement, and in debating. Another effect refers to the inability of foreign directors to socialize after meetings, when local language dominated the scenario again.

As a conclusion, authors recommend to adopt a timely transition to English (or any other dominant language in the board), if discussions and decision-making processes are to be kept rich and efficient respectively.

On the other hand, the research also reflects that firms with dominantly financial internationalization are more likely to adopt English, as English native directors are hired to obtain confidence among the community of investors. But this is not so general in the commercially internationalized: this process of exporting or investing abroad seems to be sufficiently difficult, so that companies try to avoid adding a new problem: language diversity and board process and decision problems entailing from it!

Based on “The Role of Language in Corporate Governance: The Case of Board Internationalization”, published on 2013 by the Research Institute of Industrial Economics, and authored by Rebecca Piekkari, Aalto University, Finland.