Volume 1:Issue #20 Friday, October 2, 2009
Edited by Francis H.Byrd
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As We See It Commentary from The Altman Group

Comments on ABA Task Force On Delineation Of Governance Roles & Responsibilities – You Can’t Know Where You Are Going Unless You Know Where You Have Been (Or Where You Are)!
Francis H. Byrd, Managing Director and Corporate Governance Practice Co-Leader

This past August, the ABA Section of Business Law Corporate Governance Committee released a report discussing the delineation of roles in the U.S. governance system. This report is an excellent piece covering the role in law of directors, management and shareholders.  It provides some history on how the roles have evolved, and the conflicts inherent between and amongst the groups.  It should be a must read for not only corporate boards, senior managers and investors, but for regulators and legislators as well.

Members of the task force come from nearly all sides of the on-going corporate governance debates and bring varied perspectives. The report takes a holistic, moderate and, yes, legal approach reminding readers that these roles are legal designations with specific rights and responsibilities.  The report counsels those of us involved with pressing for governance reforms not to demonize the opposition.  It also makes a number of recommendations to directors, executives and shareholders worth serious consideration.

Key Recommendations:

For Boards:
• Boards (and managers) should recognize that promoting a high level of transparency and communication about long-term strategies should support the near-term value of the corporation to the benefit of both short-term and long-term investors. Boards may need to become more active in working with and encouraging corporate management to revamp shareholder communication efforts.
• Disclose with greater clarity how boards assess their compensation approach in connection with the company’s strategic objectives and risk appetite.

For Shareholders:
• Act on an informed basis and form company-specific judgments regarding governance issues while avoiding reliance on rigid “check the box” approaches.
• Institutional investors who rely on others to advise them on governance matters should critically assess advisors’ analytic capabilities, resources and potential conflicts of interest.
• Shareholders should carefully consider the circumstances in which a board decision not to implement an advisory (or precatory) shareholder resolution – or not to follow a particular governance practice – should give rise to a campaign to withhold votes or vote against directors.
• Consider the long-term strategy of the corporation as communicated by the board in determining whether to initiate or support shareholder proposals. Investors should favor a tailored governance approach that is tied to the individual corporation’s long-term goals and objectives.

For Regulators and Legislators:
• Reform discussions should include an assessment of how the distinct interests of long-term and short-term shareholders will likely be affected, with special care taken to ensure that short-term shareholders are not unduly enabled to take actions that could undermine the long-term interests of the corporation and other shareholders.
• Carefully consider how best to encourage the responsible exercise of power by key participants in the governance of corporations so as to promote long-term value creation. Encouraging shareholder interest in long-term investment, for example by rewarding long-term holding through tax incentives and potentially enhanced voting rights is worth exploring.

There are only two flaws with the report, both minor. First, it is not immediately clear whether there were any participants from the hedge fund community.  Second, in the discussion of the changing demographic of the institutional investor community, the report notes that investor views are not monolithic, but failed to note that many of the activist institutions – long-term investors – invest funds with hedge funds and private equity firms, further complicating the question of what investors really want.

Despite these small concerns, this monograph provides a context for discussions of U.S. governance reform.  Lets hope that folks at the SEC and Congress take these views into consideration.