The Altman Interview – Holly J. Gregory of Weil, Gotshal & Manges, LLP – Part I
This week we bring you the second interview our “The Altman Interview” series where we speak with top experts and thought-leaders having an impact on corporate governance. Our interview with attorney Holly J. Gregory covers 10 questions on hot button issues for 2010 and will be published in two parts.
Ms. Gregory is a well-known and highly respected figure in the world of corporate governance. As a partner at Weil, Gotshal & Manges, Ms. Gregory counsels corporate directors, executives and investors on the full range of governance issues and best practices. She played a key role in drafting the OECD Principles of Corporate Governance and advised the Internal Market Directorate of the European Commission on corporate governance regulation. Ms. Gregory has also served as an advisor to the World Bank and the joint OECD/World Bank Global Corporate Governance Forum on governance policy for developing and emerging markets.
In addition to her legal practice, Ms. Gregory has helped organize governance-related programs for the SEC, OECD, World Bank, Yale’s Millstein Center for Corporate Governance and Performance, Transparency International and Columbia University School of Law’s Institutional Investor Project.
FH Byrd: Of all the proposed governance changes on the horizon which one, in your opinion, if adopted, will have the most impact on corporations?
Holly Gregory: This is difficult to predict given the number and range of governance reform proposals under discussion and the fact that if implemented the reforms will interact with recent rule changes concerning broker voting in the election of directors and new SEC rule interpretations that broaden shareholder power to bring advisory proposals on matters of CEO succession and risk oversight. But if I must identify one reform that threatens to work fundamental change, it is the grant to certain shareholders of direct access to the proxy for the nomination of competing candidates for director. Proxy access removes the gating mechanism of cost from a shareholder's decision to put forward candidates to compete for board seats with the slate proposed by the board. Certain large shareholders or groups of shareholders who have held their stock for a year will be able to include their own candidates for up to 25% of the board in the company's proxy at company expense. Greatly reducing the cost of mounting a campaign to elect a director outside of the board’s own proposed slate is designed to result in more contests for board seats. According to proponents, this is necessary to make directors more accountable to shareholders. What we will have to see play out is whether more frequent contests for board seats results in positive gains from heightened accountability. Some believe that boards are already under an unhealthy degree of shareholder pressure for immediate and ever rising share price gains. (See “Overcoming Short-termism”). Increasing the threat of election contests is not likely to reduce those pressures and improve board focus on the long-term performance that is essential to sustainable economic growth. This is especially so given the increasing number of elections that are held on an annual basis (and Senator Schumer has introduced a bill in Congress that would mandate annual elections for all directors by prohibiting staggered boards). Commentary to the SEC on the proxy access rule proposal has raised legitimate concerns about the impact of proxy access on the quality of board composition, the tenor of board deliberations and the board’s ability to reach consensus after full and constructive debate. The potential for more frequent director contests may discourage busy executives at the tops of their fields from serving on boards, and greater director turnover may undermine the quality of board decisions. New directors need time to develop the company-specific knowledge required for effective decision making. Time is also needed to develop the trust among directors that allows robust discussion, constructive debate and healthy disagreement to be followed by resolution and consensus. Greater director turnover may make it more challenging for boards to develop the appropriate culture of objectivity and constructive criticism that are the hallmarks of effective oversight of management. I hope that it will turn out that these concerns are overstated or unfounded.
FH Byrd: Of the various stakeholders involved in U.S. corporate governance, who do you think will most likely benefit from proxy access, if adopted?
Holly Gregory: If the concerns that I've described are realized, proxy access will not be the panacea that the regulators intend, and shareholders as a whole will not be better off. In that scenario the primary beneficiaries will be shareholders who use proxy access to forward a specific objective or strategy that is not broadly shared by the entire shareholding body. Shareholders can no longer be thought of as powerless individuals with a common interest in corporate long-term performance that overrides other interests. The percentage of shares in the hands of institutional investors has grown considerably over the last 25 years, and these institutions and their interests are as diverse as the institutions are powerful. Public, private and union pension funds, mutual funds, private investment funds (including hedge funds), insurance companies, banks, endowments, and sovereign wealth funds are subject to varying levels of regulation, have distinct investment horizons and strategies, and exhibit varying levels of interest in the governance of portfolio companies. (What many institutions tend to have in common is their status as investment intermediaries who invest for the benefit of others and as a result face potential conflicts in managing fund assets.) Increasing diversity among shareholders brings with it heightened potential for divergent interests; this suggests a need for greater shareholder power to be accompanied with requirements for great transparency about the motives and interests of the shareholders who seek to exert the power.
FH Byrd: With the likelihood of some form of Say on Pay, how do you think corporations should be preparing?
Holly Gregory: Corporations should be reassessing how they engage with their shareholders. It is important for boards and managers to understand who their shareholders are and what issues are important to them. In a say on pay and proxy access world, the ability to communicate clearly and effectively with shareholders about strategies and objectives -- and specifically about how compensation plans are designed to create incentives for achieving strategic objectives -- will differentiate companies and be associated with greater levels of "investor peace" and board and management stability. This is the time for boards and management teams to be gearing up and thinking about shareholder relations in new, more creative and more engaged ways. Improved engagement with shareholders is the best hope companies have of avoiding or mitigating the concerns addressed in my answers to the preceding questions.
FH Byrd: With the loss of the broker vote, do you feel there will be more “vote no campaigns” in 2010?
Holly Gregory: Whether or not we see a rise in the number of "vote no campaigns” in 2010, it is a fair prediction that such campaigns will be more successful in a world in which brokers are not allowed to vote uninstructed shares in the election of directors.
FH Byrd: Do you think HealthSouth’s decision to allow reimbursement of proxy contest expenses for dissidents (earning 40% or more of the vote) will lead other boards/companies to take similar action?
Holly Gregory: This kind of "private ordering" has significant value because it reflects board judgment about how to accommodate legitimate shareholder concerns in a company specific manner. Encouraging companies and shareholders to reach their own solutions is far preferable to the imposition of strict mandates. Recent approaches to say on pay by Microsoft (which will now give shareholders an advisory vote on executive compensation every three years) and Prudential ( say on pay every two years) further reflect the private ordering approach, and provide examples of how these concepts can be distinctly tailored. If companies believed that adopting reimbursement provisions would satisfy the SEC as a replacement for mandated proxy access, I predict many companies would seriously consider adopting it.