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Archive for the ‘Trends in Corporate Governance’ Category

Deloitte on the ingredients boards need for success (in 2016)

February 13, 2016 Leave a comment

In a recently published report, Deloitte highlights some concerns boards should have in order to maximize their performance, given the economic and investment environment, and also the current trends relevant shareholders are focusing on these days.

 You can download the report here, (1), but I will in this post refer to one of the topics they deal with, “Innovation”.

 Marc Van Caeneghem and Takeshi Fujii refer to changes in the environment coming from the technological side, (not always but eventually in the shape of disruptive new business models), and from the new relationship among employees and between them and the firm.

 They state that boards need to prepare their organizations to identify and seize opportunities to increase their market share and brand power. And there are two ways boards need to tackle the challenge: (i) they need to assure the firm is aware of how technology helps them do more, (new markets, or more share), and (ii) they should also consider the risk of the no-innovation option.

 In order to do this, Van Caeneghem and Fujii list a number of tasks: Read more…

What to do with the “Comply or Explain” Principle?

November 22, 2015 1 comment

Most European Corporate Governance codes are based in such a principle, which provides what is usually called “soft law”, that is a set of recommendations firms should follow to adopt best CG practices. They explain why they don`t comply if this is the case. The UK CG code was a leader in this approach, followed for example in Spain, but also in Singapore, etc.

Nevertheless serious critics have emerged, regarding:

  • The (low) quality of explanations,
  • The absence of shareholders´ engagement in oversight activities,
  • The lack of oversight competencies on any regulatory body, as to the kind of explanations companies offer in their CG reports.

This set-up´s main value is its flexibility, so that any firm can adopt it whatever its industry, size, structure, etc.

These are the general considerations introduced by George Hadjikyprianou (Univ. Leicester) in his paper “The Principle of “Comply or Explain” Underpinning the UK Corporate Governance Regulation: Is There a Need for a Change?, published in May 2015, (1). He then analyzes the degree to which the Principle reaches its objectives.

Is the Principle working? Read more…

Who should be covered by Corporate Governance Codes?, by Icaew

November 15, 2014 Leave a comment

The Institute of Chartered Accountants in England and Wales recently published a brief commentary on “who should be covered by Corporate Governance Codes”, (1).

They suggest a Framework Code should be drafted that covers all groups concerned with Corporate Governance.

Of course directors are affected by Corporate Governance principles and other legal obligations. But there is a growing number of codes and guidelines being published by other groups, such as auditors, institutional investors, executive firms, pay consultants, and the like. Read more…

Corporate Governance and Social Welfare

September 21, 2014 Leave a comment

In the last decades, Corporate Governance (CG) has invaded the academic and regulatory worlds, as it has been considered a (at least partially) solution for many social problems, such as gender inequity, inequality, systemic risk, etc.

Mariana Pargendler, a visiting professor at Standford, published an article in september 2014 where she investigates the origin and consequences of this dominance. (1) Read more…

Should we favor long-term shareholders? How?

January 2, 2014 1 comment

The Generation Foundation teamed with Mercer and Stikeman Elliot LLP in 2013, in order to do research on what investors and issuers thought about the possibility that loyalty-driven securities could be used as a tool to favor long-term shareholders, with the final aim that society as a whole could avoid the negative effects of short-termism that we would here take as granted. (1)

This was one in five elements previously identified in their article “Sustainable Capitalism”.(2) The new study finds out that the idea is mostly understood but rejected, in favor of some other alternatives to reward patient capitalists.

Some measures that have been proposed (some of them are already applied in France or the Netherlands) include:

–         Shareholder political rights: limiting access or reduce rights of short-term investors; or increasing those of long-term ones, with multiple voting rights that vest in time, or L-shares, (warrants that vest in time and give the right to purchase at a certain price a certain number of shares).

–         Economic rights: financial rewards to long–term shareholders , (for example additional dividends, or bonus shares).

–         Tax breaks or subsidies, (although those escape from the firm`s control, so the study doesn`t focus on it). Read more…

The increase in strategic and operational activism by shareholders.

December 26, 2013 Leave a comment

Scott Hirst, co-editor at Harvard Law School Forum on Corporate Governance and Financial Regulation, recently published at the HLS blog a post that brought forward the increase in the number and volume of shareholder activist actions connected with strategy or operational matters. (1)

As the author outlines, activism is just one of the features of the transition or rebalance of power from directors and boards, (director-centric model) to shareholders. And, even if a majority of shareholder proposals or interventions might follow their own interests or agendas, there is an increase in the number of actions that are mainly focused on the firm`s agenda, and particularly on operational or strategic matters.

These actions are the result of a relevant investment in research and analysis, so that these investors, even in big market cap firms, risk to invest large amounts of money in the hope that their views on how these companies could be restructured are favored by other investors but mainly understood by boards. Read more…

Challenges and Trends for boards in the near future

October 12, 2013 Leave a comment

There are a number of studies or surveys that try to depict a picture of boards in the near future: the challenges, the ongoing trends, the changes to come. A small description of the main topics is outlined in what follows:

  1. Composition, structure and performance.
    1. Composition. Starting with a skills matrix, knowing where a board stands, what the board ideally should have, allows to build a better skill set for the future. The board must be decided to change if needed, as turnover is normally slow; it needs to act fast if it wants to avoid to fall short in proxy contests; if so, a sharp and damaging renewal of the board forced by shareholders will not take place.
    2. Size. Increasing the size could help add the necessary skills when turnover is too slow, but size`s impact in the effective job of the board is to be considered.
    3. Specific Education. Board directors will ideally soon have specific knowledge to carry out their fiduciary duty in each of the existing board committees, whatever their original background, (finance, human resources, and so on).
    4. Independence. An independent chair, (or and effective lead director), and a number of other independent directors that will serve in the Audit, Compensation, Governance and Risk committees, (at least), will become a norm in every public company, and perhaps also in private growing companies.
    5. Industry expertise. If a board is to hold management accountable, industry expertise needs to be present at the board, which is not always the case.
    6. Shareholder support: its relevancy increases each year, so that directors feel they can`t be reelected without the shareholders`approval, so they need to be proactive to their requirements.
    7. Tenure. The idea of a term limit if independence and effectiveness is to be maintained is slowly being imposed. It may be nine, twelve, or a different number of years.
    8. Diversity. Related to the tenure, as renewal is the only source today for higher diversity, this is a great challenge. Regulators will push for results, and quotas are always at reach, so boards should really enhance their diverse experiences. Read more…