Gutsy Board Governance

Gutsy Board Governance

It’s time for more backbone in the boardroom.

If you believe that your corporate governance processes are “swell,” think again. In a recent speech, U.S. Securities and Exchange Commission commissioner Luis Aguilar said many Americans lack trust in corporate America principally because of excessive compensation and a “lack of integrity among top corporate managers,” then cited research from the University of Chicago in which only 17 percent of those surveyed expressed trust in America’s large companies.

This illuminates the trust chasm between investors and corporate governance leaders. And considering that a relatively small group of corporate leaders is governing U.S. public companies with a combined value of over $26 trillion, it’s a huge problem. Despite the trust that corporate leaders may have in each other, what if we’re wrong and skeptical investors are right? What if their distrust is a voice we should be listening to more carefully? Frankly, the future of our country’s economy depends on it. It’s time to get gutsier in board governance, with more backbone in the boardroom.

And I don’t mean small, piecemeal changes made out of fear, to appease a few activists. Rather, it takes executing a comprehensive approach to corporate governance that includes a focus on strategically managing the company for long-term value, making sure the right stewards are on the board and encouraging greater shareholder communications.

Managing for the long term

In my experience, one of the biggest contributors to corporate failure is emphasis on short-term performance. Decisions are driven by making quarterly earnings projections, because being even one penny short can result in a precipitous drop in stock price and rile the activists. Therefore, in my board advisory work, I usually advise clients to not provide earnings guidance. This helps mitigate the focus on short-term profitability and provides management more room to focus on long-term strategic growth.

Corporate directors must also have the intestinal fortitude to resist demands from activist investors for short-term actions that would be destructive to long-term sustainable growth. It’s important to listen to input from all investors, but it’s more important to assure the long-term viability of the company. You can’t just do what is expedient at the moment to relieve pressure; doing the right thing is not always the easy thing.

The right stewards

There are some corporate governance activists and pundits who insist on term and age limits for directors. This is a simple, but foolish, approach to a complex issue. A few years ago, I observed a board invoke its age limit bylaw resulting in two very capable directors being forced out. Both individuals were iconic leaders in their industries, in the local community and on the national front, and both wanted to continue serving this board. However, because of the depth of their experience, they challenged the company’s leadership on certain decisions. Guess it wasn’t good to be right when those in power were wrong. In my opinion, this was a governance tragedy, as we should be encouraging more thought-provoking discussions in the boardroom rather than discouraging them. And tenured, skilled directors have the experience necessary for these challenging discussions.

Instead of implementing ineffective term and age limits, critically evaluating each director’s contribution and level of engagement ensures the right stewards of shareholder investments are in the boardroom. Requiring annual board evaluations utilizing an independent third party will provide input on areas of development and objective data on underperforming directors who should not stand for reelection. An objective evaluation process such as this is a smarter way to address director stagnation.

Encouraging shareholder communication

I have served on or advised more than 100 boards and in this work I have learned the importance of welcoming input from shareholders. After all, they are the owners of the company. The most recent vehicle for improved shareholder access to decision-making is allowing proxy access as an affirmative, proactive action, not a defensive action to appease shareholder demands. Under this process, long-tenured shareholders with a significant ownership stake have the right to nominate director candidates in the company’s annual proxy. The SEC is allowing companies to implement this on a voluntary basis, but proxy access is being promoted heavily by Institutional Shareholder Services (ISS).

But don’t stop there—rethink all aspects of shareholder communication. For example, hold regular meetings with shareholders where management can discuss the company’s customer segments and management’s strategies for capturing an unfair share of those market segments.

Unfortunately, changes in corporate governance usually don’t occur until activists or ISS threaten proxy actions or a “withhold” vote against the board. Instead, let’s gain the trust of our investors by becoming bolder in governance. There’s too much at stake to just maintain the status quo.

Mark W. Sheffert (mark@manchestercompanies.com) is founder, chairman and CEO of Manchester Companies Inc., a Minneapolis-based board and management advisory firm specializing in business recovery, transformation, performance improvement, board governance and litigation support.

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