Issue: Corporate Governance

Corporate Governance

By: David Milstead

Pub. Date: July 3, 2017 Access Date: September 25, 2021 DOI: 10.1177/237455680320.n1 Source URL: http://businessresearcher.sagepub.com/sbr-1863-103327-2814396/20170703/corporate-governance ©2021 SAGE Publishing, Inc. All Rights Reserved. ©2021 SAGE Publishing, Inc. All Rights Reserved. Will shareholder pressure reshape company policies? Executive Summary

The governing structure of major U.S. corporations has undergone profound changes in recent decades, due to pressure from government regulators, outside activists and restive shareholders. Boards once dominated by company insiders have been reshaped, and companies have been forced to confront a host of issues that were once peripheral questions, such as how much executives should be paid and the ethical impact of corporate behavior. But the resulting policies haven’t always satisfied company critics, and some skeptics on the other side argue that the federal government’s efforts to compel better governance have been misguided. With the Trump administration more likely to roll back business regulations than to impose new ones, fresh efforts to change corporate governance will likely come from institutional and activist investors. Among the key takeaways: The shares of companies with “good governance” have outperformed peers by a few percentage points, according to Credit Suisse research, but the effect wasn’t present in all industries. Executive compensation has increased significantly in the last 20 years, even as some shareholders have called for more restraint and companies have instituted “say-on-pay” stockholder votes. In many corporations, the rules for selecting boards allow directors to be re-elected even if a majority of shareholders do not vote in favor of retaining them. Overview

Wells Fargo CEO John Stumpf testifies to Congress about the bank’s bogus-accounts scandal. The affair cost Stumpf his job and triggered a shareholder backlash. (Andrew Harrer/Bloomberg via Getty Images)

The annual meeting of Wells Fargo shareholders in April capped an extraordinary and tumultuous year for the banking company. Wells Fargo had once been regarded as one of the best-managed big banks and most-admired companies in America, one that emerged from

Page 2 of 21 Corporate Governance SAGE Business Researcher ©2021 SAGE Publishing, Inc. All Rights Reserved. the financial crisis with hardly a blemish. But in 2016, it was laid low by revelations that thousands of employees, pressured to make sales goals, had opened accounts without their customers’ permission, resulting in millions of dollars in unauthorized fees and dented credit scores. 1 It figured that shareholders unhappy with the company’s behavior, and the resulting decline in the stock price, would let the Wells Fargo board of directors know what they thought, both in their comments and in the election for the board. Indeed, the meeting stretched to nearly three hours, with some disruptive shareholders escorted out. 2 Then, the votes were tallied. Every director got at least 50 percent and nine of 15 got two-thirds of the vote or more, results that would delight any politician running for office. 3 Yet the outcome was described by the media as a “black eye” for the board, because the typical vote for a corporate director is close to 100 percent “yes” votes. Company Chairman Stephen Sanger said the shareholders “sent the entire board a clear message of dissatisfaction.… Let me assure you that the board has heard that message, and we recognize there is still a great deal of work to do to rebuild the trust of stockholders, customers and employees.” 4 The vote “says that the large [investment] funds aren’t going to tolerate these kinds of problems, and they’re going to react,” says Charles M. Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware and a longtime expert in the field. “A company with as large and diverse a shareholding as Wells Fargo having an almost 50 percent ‘no’ vote against a director signals a) they are unhappy with what happened and b) they are willing to make that unhappiness known by withholding a vote. Which I think from a Wells Fargo standpoint is a disaster.… They’ve really got to rethink a lot; they need to refresh the board.” This intense reaction by Wells Fargo shareholders reflects the profound changes that have taken place in recent years in the governance structure of major U.S. corporations. Boards once dominated by inside players have been reshaped by a combination of government, shareholder and activist pressure. These changes have in turn forced corporations to grapple with new issues, such as executive pay levels, the environmental impact of company behavior and the ethical implications of its business practices. The questions going forward are how much these governance changes will actually influence corporate policy – and how well they will stand up under a Republican administration committed to easing business regulation. The quest for improved governance has not been limited to public companies with thousands of shareholders. In June 2017, major institutional investors in the privately held ride-sharing company Uber demanded, and received, the resignation of founder/CEO Travis Kalanick after a series of problems, including accusations of a sexist corporate culture and the revelation that Uber used software to actively evade law enforcement. The shareholders also asked for “truly independent directors” to fill two of the company’s three empty board seats. 5 The concept of corporate governance, if not the phrase, emerged over the last century as the U.S. economy evolved from an era of individual proprietors to one dominated by larger enterprises with multiple owners. The corporation became the form of business organization that accommodated this transition. But because many of these new owners had little or no role in running the business on a day-to-day basis, new questions emerged: How would the owners’ interests be represented, and who would monitor the employees who managed the corporation’s affairs? The favored structure became a board of directors, a group of individuals who were not necessarily employees but who would watch over a business’ overarching strategy and the employees who were to execute it. Corporate governance is the philosophy of ensuring that this system works. It is “the structure that is intended (1) to make sure that the right questions get asked and (2) that checks and balances are in place to make sure that the answers reflect what is best for the creation of long-term sustainable, renewable value,” wrote shareholder activists Robert A.G. Monks and Nell Minow in the fifth edition of “Corporate Governance,” a classic textbook in the field. 6 Good corporate governance “requires a complex system of checks and balances. One might say that it takes a village to make it work.” 7 Governance has come a long way in three decades. Corporate boards were often composed entirely of white males with direct ties to the company, meaning they were rarely independent of management and able to offer a detached, dispassionate critique of the company’s performance. Many were men of prominence, but they lacked specific business experience or financial expertise. “When I first started practicing in the 1960s, I was in boardrooms, [and] they were almost entirely middle-aged males and they very typically included the company’s investment banker, commercial banker and lawyer, none of whom were independent,” says John F. Olson, a partner at the law firm Gibson Dunn & Crutcher and the board chairman of the American College of Governance Counsel, a legal group of longtime practitioners of corporate governance law. “That world is long gone … some of it was brought about by advocacy groups and some of it brought about by academics and some of it was brought about by just practical experience.” Now, Minow says in an interview, “Boards are vastly more independent. When I first got into this field, O.J. Simpson was on five boards and a CEO’s father was on the [board] compensation committee. I mean, it was craziness going on. So a lot of things are much, much better, boards are much, much better, much stronger, much more independent than they were.” However, Minow adds, that doesn’t always result in what she would call more responsible policies. For example, she says, “CEOs are much more outrageously overpaid” now than they were before. “The first pay package I ever complained about was $11 million. That’s

Page 3 of 21 Corporate Governance SAGE Business Researcher ©2021 SAGE Publishing, Inc. All Rights Reserved. chump change now.” There have been two major market meltdowns in the last 15 years – the 2001-2002 market crash after the accounting scandals at Enron Corp. and WorldCom Inc. and the 2008–2009 financial crisis – and Minow argues that poor governance has played a large role in both of them. “In the last decade, we have seen a perfect storm of failures, negligence and corruption in every single category of principal and gatekeeper: managers, directors, shareholders, securities analysts, lawyers, accountants, compensation consultants, investment bankers, journalists and politicians,” Minow and Monks wrote in their 2011 book. 8 CEO Salary Soared in 1990s

Pay resumed rise after drop during recession

Note: Based on analysis of data from Compustat’s ExecuComp database, Federal Reserve Economic Data (FRED) from the Federal Reserve Bank of St. Louis, the Current Employment Statistics program and the Bureau of Economic Analysis NIPA tables. According to the source, CEO annual compensation is calculated using salary, bonus, restricted stock grants, options exercised and long-term incentive payouts for CEOs at the top 350 U.S. firms ranked by sales. Source: Lawrence Mishel and Jessica Schieder, “Stock market headwinds meant less generous year for some CEOs,” Economic Policy Institute, Ju1y 12, 2016, http://tinyurl.com/y8yuasd5

Executive compensation grew exponentially between 1965 and 2000, declined sharply during the 2007-09 recession and then began rising again.

The reaction to those crises was to codify into law what many regarded as governance best principles. Both the Sarbanes-Oxley Act of 2002 and the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 included a number of measures that governance advocates had long recommended. Sarbanes-Oxley mandated that audit committees, charged with overseeing the auditor-management relationship, be made up solely of directors independent of company management. Dodd-Frank explicitly authorized the U.S. Securities and Exchange Commission (SEC) to formulate rules for shareholders to express approval or disapproval of company compensation plans. But there are those who see the federal government’s intervention in governance matters as usurping states’ rights to regulate their domestic corporations, as well as the ability of boards of directors to make the best possible choices for their firms. Examining the governance dictates of Dodd-Frank, Stephen Bainbridge, a professor at UCLA School of Law, asked: “What do these provisions have to do with the causes and consequences of the financial crisis? In short, not much … A powerful interest group coalition centered on activist institutional investors hijacked the legislative process so as to achieve long-standing policy goals essentially unrelated to the crisis. Are Dodd-Frank’s governance provisions quackery, as were Sarbanes-Oxley’s? In short, yes.” 9 President Trump’s promise to roll back much of Dodd-Frank and many other regulations he sees as negatively affecting U.S. business

Page 4 of 21 Corporate Governance SAGE Business Researcher ©2021 SAGE Publishing, Inc. All Rights Reserved. competitiveness changes the equation. The Trump administration, coupled with a Republican Congress, moved to roll back much of Dodd-Frank in the opening days of its administration. And regardless of the outcome of those efforts, it seems unlikely that new principles of governance will emerge in the coming years from law and regulation. Instead, they may be the product of the interactions of major U.S. corporations and the large institutional and activist investors who own their shares and have the power to influence change. One example of this process is “proxy access,” a principle that allows shareholders of a certain size to nominate candidates for director to be placed directly on a company’s annual ballot to shareholders. This is in contrast to current practice, where a company’s board, selected in part by a nominating committee, puts itself forward for a vote. The SEC, which regulates Wall Street, developed a proxy access rule in 2009, but two years later it was invalidated by a federal court that said the commission had failed to conduct an adequate cost-benefit analysis. Now, however, more than half of the companies in the Standard & Poor’s 500 have their own proxy access policies, in large part because of agitation by institutional investors, particularly the New York City pension fund, says Amy Borrus, deputy director of the Council of Institutional Investors (CII), a governance-focused trade group for pension funds and other major institutional stockholders. “I think there’s definitely been an evolution,” Borrus says. “There are fewer outlier companies and outlier CEOs and outlier boards out there, and that I think speaks to the fact that corporate governance has become mainstream.… You have just in the last decade, or even the last half dozen years, traditional asset managers like BlackRock, State Street, T. Rowe Price becoming engaged on corporate governance. They have proxy voting teams, they are putting lots of resources into it, and they are paying attention. They are holding companies to it, and it’s not just the smaller public and union pension funds and religious funds that are fighting this fight.” As investors, policymakers and business executives debate issues of corporate governance, here are some of the questions they are considering: Weighing the Issues Does good corporate governance improve company performance?

There is a sense, certainly among corporate-governance advocates, that it improves company performance, and, consequently, the investment returns owners enjoy. But lack of consensus about what good governance means leaves the question open to some interpretation, and to the argument that there is insufficient evidence to declare the matter settled. “An independent board, strong controls, transparency and shareholder rights generally increase market value,” wrote Eric Johnson in an article introducing research by analysts at the Credit Suisse Research Institute, a group affiliated with the international banking giant. “But precise impacts of ‘good governance’ can be hard to pin down. Exact linkages to share price are not often obvious, governance is more important in some periods than in others, and it affects some industries more than others.” 10 The 2016 Credit Suisse research, which looked at 1,200 companies across the world, showed that in some industry sectors, the shares of companies with “good governance” – defined as having an independent board, strong controls, transparency and shareholder rights – outperformed peers by a few percentage points, an advantage that can build significantly over time. Yet while the study found this effect in industries including telecoms, basic materials, oil and gas and financials, it couldn’t demonstrate the link between good governance and stock outperformance in consumer goods and services, technology and health care. And, Credit Suisse found, governance’s influence on value seemed to be greater in bad times for the market than good. 11 There is even less evidence that “environmental and social” factors – such as a company’s policies on pollution or worker’s rights – have a positive effect on returns. Hermes Fund Managers, a leading advocate of using environmental, social and governance factors in making investment decisions, found in a 2014 study that “well-governed” members of the MSCI World equity index, as Hermes determined through its internal governance specialists and outside sources, outperformed poorly governed ones by an average of 0.3 percentage points a month. But Lewis Grant, a senior portfolio manager at the company, said environmental and social factors, such as climate-change policies, human rights, labor relations and charitable giving, were “statistically insignificant; there is no relationship.” 12 Monks and Minow argued that these effects may be nascent, however: “Strong records of social responsibility and environmental credentials increasingly resonate with the public, and many companies recognize this will lead to increased brand awareness, higher customer satisfaction, and ultimately greater shareholder value.” 13 Bainbridge, on the other hand, cites the mixed evidence about the benefits of good governance practices as a primary reason most of the governance proposals from shareholders, regulators and politicians are “quack governance.” He cites a 1999 paper by Sanjai Bhagat, a University of Colorado finance professor, and Stanford University law professor Bernard Black. They surveyed academic literature on the performance of independent boards of directors, which they defined as boards with a meaningful number of directors deemed independent of the company and its management by virtue of a lack of financial ties. “Overall,” they concluded, “there is no convincing evidence that greater board independence correlates with greater firm profitability or faster growth.” And they said there seemed to be evidence that firms with a “supermajority” of independent directors, with only one or two insiders, were less profitable than others, suggesting “it may be useful” to limit independent directors to a moderate, minority number. 14

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Former Enron employees join in prayer at a support meeting after their company collapsed in 2001. The bankruptcy fueled demands for improved corporate governance. (Hector Mata/AFP/Getty Images)

Critics of stricter corporate governance also argue that its prescriptions and rules create a “one-size-fits-all” box that all companies must fit in, regardless of corporate philosophy or entrepreneurial attitude. Martin Sorrell, CEO of the London-based global advertising agency WPP, has argued that companies with dominant shareholders or owners, which “offend” good corporate governance, perform better because they are “the strongest innovators and strongest brands.… Perhaps surprisingly, corporate structures that seem to offend customary good corporate governance may deliver better long-term results.” 15 Harvard University law professor Lucian A. Bebchuk, by contrast, argued that the matter is settled in such a way that investing in companies with good governance may not be as lucrative as in the past – precisely because investors now recognize that governance works. Bebchuk and co-authors Alma Cohen and Charles C.Y. Wang said there is a “disappearing association between governance and returns.” 16 A 2003 study by Paul A. Gompers, Joy L. Ishii and Andrew Metrick demonstrated that companies that scored better on a 24- measure “governance index” constructed by the authors outperformed lesser companies throughout the 1990s. 17 But Bebchuk and his co-authors found the correlation did not continue from 2000 to 2008. Bebchuk’s conclusion is that investors are increasingly appreciating well-governed companies and bidding up their prices. “Once stock prices came to reflect this difference, it was no longer possible to use the governance indexes to outperform the market,” Bebchuk wrote. 18 Borrus, of the Council of Institutional Investors, says there is evidence on both sides. “For every study that says yes, and there’s a positive link, there is one that says no, it doesn’t matter,” she says. “So I look at corporate governance as both a risk factor for investments in portfolios and a way to gauge the quality of the boards of companies in portfolios. It’s just common sense that if a company has good governance, it is likely to make much better strategic decisions, implement strategy decisions better, foresee risks better and become better when events throw the company off course, as eventually they will.” Can shareholders really influence executive compensation decisions?

There’s little debate that shareholders have much more influence today over corporations and their boards thanks to the current state of corporate governance. At the same time, however, executive compensation has risen significantly over the last two decades, even as more shareholders have occasionally expressed their displeasure by voting against directors or the companies’ pay plans themselves. This dichotomy suggests that many shareholders – themselves financial-industry participants – are mostly troubled either by pay practices that have now largely fallen out of favor (such as guaranteed bonuses or country-club memberships), or by situations where there is a deep

Page 6 of 21 Corporate Governance SAGE Business Researcher ©2021 SAGE Publishing, Inc. All Rights Reserved. disconnect between a company’s pay and its performance. As a result, companies are trying harder to create plans that link executive pay to performance – but when the paychecks come in, the numbers are still typically higher than the year before. The rising tide of executive compensation in itself has not been enough to cause widespread shareholder blowback. There are, of course, critics. In 1978, financial journalist Roger Lowenstein has written, CEOs earned 30 times the pay of the average employee; now, according to the Economic Policy Institute, a liberal Washington think tank, they get 276 times as much. Instead of setting CEO pay by looking within an organization, Lowenstein argues, companies have for some time been using “peer groups” of similarly sized companies, in disparate industries, and typically trying to set compensation above the median of these peers, and sometimes in the 60th or 75th percentile. “Apparently every CEO is above average,” Lowenstein wrote.“ Compensation is determined in an echo chamber in which gargantuan pay is considered normal.” 19 The modern era of fights between shareholders and companies dates back to the early 1990s, as the issue of executive pay began to appear more frequently in the headlines. In 1991, ITT more than doubled CEO Rand Aroskog’s compensation even as the stock declined, and the California Public Employees Retirement System (CalPERS), the nation’s largest public pension fund, called on shareholders to withhold their votes from the company’s directors. Just 1 percent of shareholders did so, but that result “led to a massive overhaul of the company’s compensation plan,” according to Monks and Minow. 20 In 1992, the SEC allowed shareholders to submit executive-pay- related proposals for a vote on the company’s proxy ballot. 21 For much of the 1990s, however, rising share prices during the tech-stock boom mitigated the complaints: Everyone was getting rich, including ordinary shareholders, so who was to complain when the executives were raking it in, as well? The problem came at the end of that decade when tech stocks collapsed, and then the Enron and Worldcom failures of 2001 and 2002 prompted a prolonged market downturn. Yet many executives were able to walk away with their stock-option profits, locked in during the boom. (A stock option allows the holder to buy shares at a pre-set price, and becomes more profitable as the stock rises in value. If the holder exercises the options and sells the shares, the profits are banked, no matter what happens to the stock’s price afterward.) By 2007, the SEC mandated lengthy new disclosures on companies’ executive pay, and institutional shareholders were beginning a campaign for “say-on-pay” policies, in which shareholders would vote approval or disapproval on a company’s compensations plans – just in time for the 2008–09 financial crisis. 22 The Dodd-Frank Act mandated that companies conduct say-on-pay votes – nonbinding, however – at least every three years. The Council of Institutional Investors says that more than 90 percent of companies are holding annual votes. 23 Many companies, such as General Electric Co., Apple Inc. and Bank of America Corp., have elected to do it annually. Ira Kay of Pay Governance LLC, a firm that advises board compensation committees, argues that while politicians and some institutional shareholders thought say-on-pay would control excessive executive compensation, median CEO pay in the Standard & Poor’s 500 increased 27 percent for the four years after say-on-pay implementation in 2011, relative to the three years preceding it. The continued upward trend in pay suggests that say-on-pay “may have bolstered the executive pay model by documenting broad, transparent shareholder support,” Kay wrote.” 24 “I think what’s happened in the say-on-pay era is everybody thought they wanted performance-linked pay,” says Donna Anderson, vice president and corporate governance specialist for the investment company T. Rowe Price. “So we kind of force companies down this path. Plans grew more complex, they got tied to a lot more moving parts. They definitely increase what you would call the percentage of pay that’s linked to some goals. But has it really aligned outcomes and pay? I don’t think so.” One reason for this Anderson says, is that “if I am the CEO and you’re going to introduce a lot more risk into my pay plan, guess what? I’m going to demand higher target amounts.… Five years ago, if I had a 90 percent chance of making my $10 million, that was fine. Now if I have a 60 percent chance of making it, I’m going to demand $12 million. So what have we done? We’ve introduced complexity and just gotten ourselves higher absolute levels of pay, and we’ve made it so that shareholders can’t really understand what’s driving pay.” While compensation committees are now composed entirely of independent directors, they are typically Donna Anderson of T. Rowe filled with former executives or business people who prize collegiality over antagonism – and that can Price contribute to pay escalation if they fail to challenge compensation packages. While “there is less ‘I’ll scratch your back, you scratch mine’ than there used to be … independent does not mean strong-willed, necessarily,” says Rosanna Weaver, an executive compensation specialist at As You Sow, a 25-year-old nonprofit that promotes shareholder advocacy on environmental and social responsibility issues. “There is still a very high focus on collaboration, agreement,” she says. “Those are not bad qualities, but there is no particular incentive for directors to question pay, whether they are ‘independent’ or not.” Borrus of the Council of Institutional Investors says the way in which say-on-pay has been a “game changer” is that it has led to increased dialogue between companies and their shareholders. “Companies want to make sure that they get high votes, and they don’t want to be embarrassed by low votes,” she says. “They have been reaching out and talking to their shareholders in ways they never did before, and even directors are coming to the table and talking to the shareholders. And not just on executive compensation; that growing comfort in talking is starting to ripple over into comfort in talking about other issues.”

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Chipotle Mexican Grill Inc. is an example. After the company lost a say-on-pay vote in the spring of 2014, it said its “compensation committee and management team had extensive dialogue with our shareholders, including contacting shareholders representing nearly two-thirds of our outstanding common stock.” The company made several changes, including reducing the value of stock awards, changed the performance hurdles for executives to get awards, broadened the group of employees to get stock awards and improved disclosure. 25 Does the way corporate boards are elected serve the interests of shareholders?

Even UCLA’s Bainbridge, the critic of most current initiatives in corporate governance, doesn’t mince words when describing the way a corporation’s board of directors is elected by its shareholders. “Board of director elections usually look a lot like elections in the former Soviet Union – there is only one slate of candidates and the authorities know how each voter voted,” Bainbridge wrote.” 26 The election process may seem even less democratic than that to the uninitiated. In the vast majority of director elections, a company puts forward exactly the number of nominees as there are openings on the board. Shareholders are then asked to cast votes, one per share they own, for the director nominee, or to withhold their votes from one or more directors. Under “plurality voting” rules, a nominee needs only to receive more votes than any other candidate to win. If the nominee is unopposed, a single vote for is enough for election. 27 In theory, this plurality voting system means a director who casts his votes for himself can be re-elected, even if all other shareholders withhold their votes from him. That, of course, does not happen as a practical matter. But what can happen is that directors can end up with more votes withheld than cast for, the corporate equivalent of failing to get a majority of votes. “A vote for a director running unopposed it is not like political election. You are not running against anybody, you are running against yourself,” says Elson of the University of Delaware. “Usually you get 98 percent, and if you muster only a little over a majority, running against yourself, there is something terribly wrong with your leadership or perceptions of your leadership.” As a solution, many large companies have adopted what’s called a “majority voting” standard: Directors are required to resign if the votes cast for them are less than a majority. But since it’s a matter of corporate policy, rather than of regulation or law, the companies don’t have to accept the resignation. And some have not, creating what governance advocates call “zombie directors.” In a 2013 letter to the New York Stock Exchange in which it requested that a strict majority voting policy be a condition of listing on the exchange, the Council of Institutional Investors noted that in May 2013, Director Joseph L. Morea of CommonWealth REIT, a Chicago- based real estate investment trust, had 78 percent of votes withheld. He submitted his resignation, but the company’s board, as it described in a filing with securities regulators, “determined that Mr. Morea’s continued service would be in the Company’s best interest and the Board of Trustees requested that Mr. Morea accept appointment to the vacancy created by his resignation.” 28 Among smaller companies with a “plurality” standard, there are even more “zombie directors.” CII found in a 2016 study that there were 44 directors at companies in the Russell 3000, an index of 3,000 of the most valuable U.S. companies, who had failed to win majority support from investors. Of those 44 directors, 40 remained on the board. 29 “At CII, we stand behind what we were calling consequential majority voting, and we think that if you don’t get 50 percent you should step down and not be reappointed, period,” says CII’s Borrus. “Shareholders are the owners of the company, you know, and if a majority votes against a nominee, he or she should not be seated.” Support for proxy access proposals surges

More than half passed in 2015

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Source: Yafit Cohn, “The 2016 Proxy Season: Proxy Access Proposals,” Harvard Law School Forum on Corporate Governance and Financial Regulation, Aug. 26, 2016, https://tinyurl.com/yc4h8u4k

The success rate of “proxy access” proposals to let shareholders in publicly held companies nominate their own directors, instead of having management make those nominations, has surged since 2012. The average approval rate by shareholders in Russell 3000 companies increased from 30.5 percent in 2012 to 55 percent in 2015 and stood at 51.1 percent as of July 15, 2016.

Just as majority voting standards are being voluntarily adopted rather than prescribed by regulators or stock exchanges, companies are also introducing proxy access policies that allow shareholders to directly nominate director candidates. Policies differ by company, as there is no regulatory or legal standard, since the SEC’s proxy access proposal was successfully challenged in court. But the typical policy, says Aeisha Mastagni, an investment officer at the pension fund for the California State Teachers’ Retirement System, allows direct nominations from shareholders who own a minimum of 3 percent of the company’s shares for at least three years; lets them nominate no more than 25 percent of the board; and allows a group of no more than 20 separate shareholders, acting together, to pool their shares to meet the 3 percent threshold. “There are quite a significant number that have adopted proxy access in the S&P 500,” Mastagni says. “I think that that number will continue to go up. There are still some companies out there that seem resistant to adopting a proxy access by law, but like with a lot of these practices, some of it just takes time. But I think it’s clearly seen as a best practice, especially by the larger companies.” Olson, the Gibson Dunn lawyer, says he recalls a General Electric executive telling him that he thought his company shouldn’t resist proxy access because anyone meeting the 3 percent threshold would be one of GE’s largest investors. The company shouldn’t be afraid of such a person and in fact should be engaging with them, Olson says the executive concluded. GE adoped proxy access in 2015, making it one of the first large companies to do so. 30 “I would say that the bulk of the business community today doesn’t find that frightening, at least among the large-cap companies, and that’s why you’re seeing it spread very rapidly,” Olson says. Background “Other People’s Money”

The corporation, as a legal entity for doing business, has been around for centuries. And for nearly as long, there have been worries about the best way to govern it. “The directors of such [joint-stock] companies, however, being the managers rather of other people’s money than of their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own,” the pioneering economic philosopher Adam Smith wrote in “The Wealth of Nations,” his 1776 classic. “Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.” Smith’s view of the corporation may have been more pessimistic than was warranted, but it points to the longstanding issue when

Page 9 of 21 Corporate Governance SAGE Business Researcher ©2021 SAGE Publishing, Inc. All Rights Reserved. company ownership and control are separated. Certainly, the concept of the corporation has contributed immensely to modern capitalism. Its structure of limited liability, in which an owner’s losses are limited to the amount of his or her investment, was a major innovation contributing to the raising and deployment of capital. As companies grew bigger, with larger and more diffuse shareholder bases, however, the disconnect between owners and managers grew larger. “Most shareholders do not wish to take part in a firm’s business activities,” wrote scholars Kenneth A. Kim and John R. Nofsinger in their text “Corporate Governance.” 31 “These shareholders act like passive investors, not active owners.… While diversifying reduces risk for the investor, ownership of many companies also makes participation and influence in those companies less likely. Therefore, investors tend to be inactive shareholders of many firms.” “There is a problem with this separation of ownership and control,” they continued. “Why would the managers care about the owners?” If managers are freed from vigilant owners, Kim and Nofsinger wrote, “they would only pursue enough profit to keep stockholders satisfied while they sought self-serving gratification in the form of perks, power, and/or fame.” In the United States, the primary regulation of corporations has occurred at the state level, where companies file their papers of incorporation. At times in U.S. history, however, particularly in reaction to widespread scandal, there have been bursts of regulatory activity at the federal level, with mixed results. By the latter decades of the 20th century, the “governance movement” took on a life independent of regulators and politicians, with large investors, academics, and other advocates attempting to accomplish through private suasion what could not be achieved through new rules and laws. The 1934 Securities Exchange Act, a reaction to the 1929 stock market crash and the Great Depression that followed, doesn’t literally mention “corporate governance,” as the term was not yet in vogue. But UCLA’s Bainbridge notes that much of the act sets forth new requirements for disclosure and transparency, concepts at the core of the modern concept of governance. And it was a precursor to battles that followed, as the president of the New York Stock Exchange opposed the legislation, arguing that the SEC, which the act established, would overreach and be able to control the management of the companies listed on the exchange. The prevailing thinking, Bainbridge said, was that “federal intervention was accepted as essential to maintaining the national capital markets.” 32 Another turning point came in the post-World War II era as the ownership of stock spread from the wealthy few to a larger number of Americans, beginning a multi-decade process of democratizing stock ownership. A signature event, said Monks and Minow, was the 1956 initial public offering of Ford Motor Co. stock. They cite journalist David Halberstam’s description of the stock sale in “The Reckoning,” his book on the U.S. auto industry: “It made ordinary citizens believe that buying stock – owning part of a giant company – was a real possibility in their lives.” 33 What that also did, of course, was accelerate the disconnect between shareholders and corporate managers, as share counts climbed into the millions and billions, and any company could have thousands of individual shareholders. The role of the director in representing the shareholder and overseeing management was arguably more important than ever. And yet a series of failures and controversies suggested directors were falling short. “The 1970s,” wrote Columbia University Law Professor Jeffrey N. Gordon in “The Rise of Independent Directors in the United States, 1950-2005,” “were characterized by a double disillusionment about corporate performance, and the passivity of directors that contributed to it.” 34 In 1970, the Penn Central Railroad collapsed. “The bankruptcy of the … Railroad, regarded as the bluest of blue chips, resonated in its day like the fall of Enron,” Gordon said. “The Penn Central story laid bare the failure of the 1950s board conception, since it became apparent that the board had little inkling of the financial troubles facing the railroad. The board was simply unaware as to how poorly the railroad had performed. Indeed, as working capital deteriorated and indebtedness escalated in the two years before the collapse, the board nevertheless approved over $100 million in dividends.” 35 Wells Fargo Stock Recovered Quickly After Scandal

Decline after fake-accounts revelation was short-lived

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Source: “Wells Fargo & Company Stock Chart,” Nasdaq, https://tinyurl.com/yacn8egc

Wells Fargo’s share price slumped after regulators announced in September 2016 they had fined the bank $185 million for falsifying more than 2 million customer accounts, but rebounded strongly in November.

Soon after came Watergate-related illegal campaign contributions, and a scandal over “questionable payments” by U.S. companies to foreign governments. “The ‘questionable payments’ scandal revealed at least as much rot as the accounting abuses in the late 1990s,” Gordon said. 36 “The reaction was to push the board away from an advisory model to a monitoring model, at least in aspiration,” Gordon wrote. “In a sense, much subsequent corporate governance reform is a working out of the forces put in motion by the 1970s. The decline of insiders on the board and the rise of independent [directors] began then; so did the regularization of [board] audit committees.” 37 The blowback, however, did not lead to much regulation or new law in the 1970s. The SEC considered various corporate governance reforms, but “after vigorous objections that the Commission had exceeded its statutory authority, the rules were substantially modified before adoption,” Bainbridge said. 38 Consumer activist Ralph Nader’s book “Taming the Giant Corporation” laid much blame for irresponsible corporate behavior at the feet of the board of directors and called for a federal corporate law and a group of full-time professional directors with limited terms. Former SEC Chairman William Cary believed state competition for corporations was producing a “race to the bottom” that sacrificed shareholder interests and that a greater federal role was therefore merited. While ultimately neither argument prevailed, said Bainbridge, “along with other similar proposals, however, they contributed to a shift in best practices and ultimately laid the groundwork for the creeping federalization of corporate law exemplified by Sarbanes-Oxley and Dodd-Frank.” 39 The 1980s were characterized by what Borrus calls “the time of corporate takeovers and imperial CEOs and very insulated boards of directors.” According to Andrei Shleifer and Robert W. Vishny, two University of Chicago finance professors who wrote a paper summarizing the climate, a combination of easy availability of money and hands-off antitrust policy during the presidency of Ronald Reagan helped create an environment in which 143 members of 1980’s Fortune 500 were acquired by other companies by the end of the decade. 40 “In the 1980s,” wrote Monks and Minow, “the seismic impact of takeovers, junk bonds, and the growth of institutional investors jolted every aspect of the corporate structure, down to its tectonic plates. Perhaps the most unexpected shift was the way the musty, academic question of ‘corporate governance’ became the focus of intense debate. Once exclusively the province of scholars and theorists, the arcane vocabulary of governance was re-forged as each of the corporation’s component groups blew cobwebs off the antique terminology and employed it to redefine its role and that of the corporation.” 41 Many corporations’ response to the takeover wave was to adopt changes to their bylaws they termed “shareholder rights plans,” and which others called “poison pills,” so named because they made a hostile acquisition unpalatable to the acquirer’s shareholders. One example

Page 11 of 21 Corporate Governance SAGE Business Researcher ©2021 SAGE Publishing, Inc. All Rights Reserved. was a plan that would issue new shares to existing shareholders to make an acquisition more difficult; another was creating classes of shares with unequal voting rights. It was over this latter phenomenon that the SEC once again tried, and failed, to issue a new standard of corporate governance. While the New York Stock Exchange had a ban on its companies issuing shares with no voting rights or disparate voting rights, the American Stock Exchange allowed disparate voting rights under certain conditions, and the Nasdaq exchange had no prohibitions at all. The New York exchange asked the SEC for permission to allow certain kinds of these “dual-class” shares, but the commission responded with a rule to prohibit listings on any exchange, the Nasdaq included, that reduced the voting rights of existing shareholders. The rule “was the SEC’s first direct attempt to regulate substantively a matter of corporate governance applicable to all public corporations,” Bainbridge says. And it failed, as the Business Roundtable, an association of CEOs, challenged it in federal court [OK], successfully arguing that corporate governance regulation is primarily a matter for state law and the SEC had exceeded its regulatory authority. 42 As this battle was playing out, a new class of “institutional” shareholders was rising. Few people anticipated that the pension plans that invested on behalf of ordinary Americans would become such a force, Monks and Minow wrote: “Institutional holdings mushroomed in the 1970s and 1980s, creating a category of investor that was big, smart and obligated as a fiduciary to exercise shareholder ownership rights if it was ‘prudent’ and ‘for the exclusive purpose’ of protecting the interests of pension plan participants to do so.” 43 Borrus’ group, CII, was founded in 1985. “The underpinning idea was that institutional investors can have a more powerful voice if they work together rather than speak on their own,” she says. The takeover era of the 1980s came at the beginning of what would be the longest bull market of rising stock prices in history. The gains accelerated in the 1990s, as new technologies and the promise of the internet created a euphoria that drove share prices to new heights. While the governance movement continued its work, the maxim that it is often ignored in good times yet comes to forefront in bad would soon be illustrated. “In the 1990s, we saw billions of dollars of fraudulently overstated books at Cendant, Livent, Rite Aid, and Waste Management, but those were trivial distractions in a bull market fueled by dot-com companies,” said Monks and Minow. “Those days were so heady and optimistic that you didn’t need to lie.” 44 The markets peaked in March 2000, and the air began to come out of the technology bubble as investors finally questioned the viability of many of the tech companies. In the fall of 2001, investors realized Enron Corp., a Houston energy company widely admired for its innovation, had hidden billions of dollars worth of obligations through the use of poorly disclosed, complicated partnerships that had required the company to waive its code of ethics; the company soon tumbled into bankruptcy. WorldCom, a telecom company that had led the industry in financial performance, was revealed the following year to have engaged in a multibillion-dollar fraud. And they were just the biggest of several: Seven of the 12 largest bankruptcies in American history, to that point, were filed in 2002 alone. 45 From March 10, 2000 to Oct. 4, 2002, the tech-stock-heavy Nasdaq fell almost 77 percent, while the Dow Jones Industrial Average and the S&P 500 fell 27 percent and 43 percent, respectively. More than $5 trillion in market value disappeared. 46 The legislation that resulted, the Sarbanes-Oxley Act of 2002, established extensive new rules for auditing of a company’s financial statements and the ways in which the numbers were reported, as well as new rules prohibiting most loans from a company to its executives and requiring executives to forfeit bonuses (“clawbacks”) if misconduct led to their company restating its financial results. 47 Adam Smith: “Negligence and profusion … must always prevail” when ownership and management are separate. And yet, within just a few years, a second great financial collapse occurred, this one linked to the U.S. housing market, widespread mortgage fraud, and the collapse in value of billions of dollars of financial securities tied to those mortgages. Large financial institutions such as Bear Stearns, Countrywide Financial and Wachovia were acquired by healthier institutions in deals brokered by financial regulators so they would not collapse; investment bank Lehman Brothers was allowed to fail, setting off a near-panic. From October 2007 to March 2009, the S&P 500 lost 56 percent of its value. 48 The Government Accountability Office estimated that U.S. homeowners lost $9.1 billion on paper, and the United States may have lost $13 trillion in economic output. 49 The resulting Dodd-Frank Act was wide-ranging and targeted the systemic risks and failures in the financial system. But, notes Bainbridge, it also includes several provisions that embodied [OK] what its sponsors saw as needed corporate governance reform. It mandated companies hold periodic “say-on-pay” votes; said board compensation committees needed to consist only of independent

Page 12 of 21 Corporate Governance SAGE Business Researcher ©2021 SAGE Publishing, Inc. All Rights Reserved. directors; required additional executive compensation disclosures; expanded Sarbanes-Oxley’s pay clawback rules; allowed the SEC to create a proxy access rule for shareholders to nominate director candidates; and said companies must disclose whether the same person holds both the position of board chairman and CEO, and why or why not. 50 Environmental Issues Emerge

Minow says that at a meeting early in 2017 of the Council of Institutional Investors, the largest group of U.S. institutional investors, and the International Corporate Governance Network, the largest international group, climate change was the top issue. “The ideas of social investing or social responsibility and the ideas of governance are really overlapping to the point of a complete merger now.” The growing importance of environmental and social issues means U.S. investors are joining a global movement that expands the traditional notions of governance to an enterprise-wide examination of a company’s policies and their impact on the environment, workers, and ordinary citizens. To some, it’s a perversion of the fundamental relationship between an investor and the corporation. Fred Smith, the founder of the free- market-oriented Competitive Enterprise Institute, says an appropriate concept of governance is a company’s investors joining together to ask for a board to be replaced or a firm taken over if its performance lags its peers. “That’s the traditional competitive corporate governance world, and I think very productive,” he says. “But more recently … ideological groups believe the corporation ought to be playing a different role: Corporations ought to be producing a world that has no pollution, no poverty, no discrimination, and so on. In my view, that’s insane. Not only insane; it’s anti-consumer, it’s anti-democratic and everything else. Corporations like all of us play specialized roles in modern society, and the corporation does best when it tries to do something well rather than trying to do everything inadequately.” To Minow, however, environmental and social concerns are inextricably linked to corporate governance. “The best comparison would be tobacco,” she says. “For a long time everybody said, ‘Oh, tobacco is really bad.’ And then all of a sudden it became this big liability issue. What I am seeing a lot in the investor communities is that climate is the new tobacco.” Investors “really want to see every company have a strategic plan around climate change, and they are pushing very hard to get what they call client climate-competent boards.” According to Proxy Monitor, a database maintained by the free-market- oriented think tank the Manhattan Institute, there were 28 environment-related shareholder proposals placed on proxies in 2006; that number grew to 58 in 2016. 51 The proposals, according to a summary in The Wall Street Journal in 2016, “are not only becoming more frequent but also increasingly sophisticated, with resolutions evolving from requests for greenhouse gas emissions cuts to demands for disclosure of strategies to manage climate risks and for linking executive pay with sustainability performance.” 52 Mastagni of the California teacher’s retirement fund says that “for us it’s about managing risk, and so when it comes to environmental issues, we’re mostly about transparency. We look to companies to provide sustainability reports on how they are managing these risks. We do a lot of work with companies asking about their water efficiency or energy efficiency issues because that goes back to the bottom line. So for us it’s still an economic reason why we’re Nell Minow: “Climate is the new tobacco.” engaging companies on these environmental issues.” Current Situation Rise of the Activist Investor

The 1980s were marked by hostile takeover bids, launched as a surprise and financed by cheap debt. Today, there are still agitators, but for the most part they take a different tack and use principles of governance as one of their weapons, arguing that poor governance and decision-making by the board and management have made a company’s shares undervalued. “In the past few years the resurgence of hedge fund activist investors has really made a difference,” says Borrus. “No one wants to get a call from Elliott Management or Starboard [Value] or Jana Partners, Carl Icahn; you know, name your hedge fund activist. Nobody wants them in their stock. Those folks have a lot of clout and increasingly they are getting sympathetic hearings from mainstream investors, pension funds and asset managers, because the hedge fund activists have done their homework. For the most part they have compelling arguments, compelling strategies and they are getting a hearing.”

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“Activists have gotten smarter,” says John Olson of Gibson Dunn. “The sort of ‘Saturday night special’ surprise announcement of [a takeover offer] is gone. Now people who are going to try to make a hostile offer are going to contact management, and they try to do it as a friendly offer. I think both companies and activists have learned over the last couple of decades that it’s better to try to come to an accommodation than to have a prolonged battle, because at the end of the day it’s very expensive to have a battle.” Activists, says Olson, “are not looking to try and do a quick takeover, they are looking to influence the direction of the company. And they are getting more support from other institutions. I think we no longer have the Fidelities and T. Rowe Prices and Vanguards, the big investor groups, always aligned with management. They are not particularly interested in doing proxy plays or themselves seeking control, but they do want to have management consider new ideas and consider value creation.” Other Issues

Borrus of CII says her group is particularly focused on the issue of dual-class shares, a longstanding concern of the governance community that may be getting worse, not better. A number of technology companies sell their stock to the public for the first time with multiple classes of shares with unequal voting rights, allowing company founders and insiders to maintain voting control of the company even as they have a smaller economic ownership of shares. Snap Inc., the parent of Snapchat, had one of 2017’s hottest initial public offerings with a class of stock that gave public owners no vote at all on most matters. 53 “One thing that almost all shareholder groups agree on is the principle of one share one vote, that your vote should be commensurate with your economic stake in the company,” Borrus says. “That was one of the first policies that CII adopted back in the ‘80s. And we’ve seen a troubling rise, it’s still small, but a troubling rise in the number of companies going public, particularly tech companies, with dual-class shares and even triple-class shares. We have been up in arms about this from the get-go and we have pressed the [stock] index providers, you know S&P and FTSE Russell and MSCI, to keep companies like this out of the main benchmark indexes.” Carol Hansell, a Canadian lawyer who specializes in proxy matters and was a founder of the legal group the American College of Governance Counsel, says an emerging issue is companies that have stopped having annual meetings that shareholders can attend in person, instead holding “virtual” meetings that can only be viewed online or listened to via audio link. The Wall Street Journal reported that 187 companies used Broadridge Financial Solutions Inc., the main provider of virtual shareholder meeting technology, to hold such meetings in 2016, up from 28 companies in 2010. A shareholder of HP Inc. attempted to place a proposal on the company’s proxy this spring objecting to its virtual shareholder meeting, but the SEC allowed the company to leave it off the ballot. 54 “There’s obviously much more of an opportunity to control who’s speaking, so the cut and thrust you’d get in some very animated shareholder meetings, you’re unlikely to see again,” says Hansell. “How will [shareholders] ever have access to the CEO or to the board if there now is no option for them to go to an in- person meeting?” Attorneys for the law firm representing HP said in a blog post supporting the practice: “Given the potential cost savings and flexibility that can be achieved from holding virtual-only annual meetings, we expect that Amy Borrus: Dual-class shares 55 on the rise. more companies will choose to hold virtual-only annual meetings in the near future.” Looking Ahead Filling the Vacuum

The history of corporate governance initiatives suggests the federal government only acts in reaction to scandal or crisis, and attempts by national regulators to introduce new governance rules often stumble when opponents challenge them in the courts. With Trump, an avowed skeptic about government intervention in the economy, in the White House and control of both houses of Congress in Republican hands, it seems likely that any new constraints on corporations in the name of governance will not come from the federal government, but through interactions between companies and their major investors. “There is a lot of truth in that,” says Olson. “I think that we will not see from this administration many more disclosure mandates. But that’s okay because I think the pressure will be there anyway from investor groups, from activist organizations and from some major business organizations. There are some companies that are very committed to this issue.” “Nobody’s expecting there’s going to be massive regulation, but the thing you need to look at is [that] the relationship between shareholders and companies has evolved a lot,” says Hansell, tracing the path from the founding of CII in the mid-1980s to Enron in 2001 and beyond. “The ability of the institutional shareholder community to compel particular kinds of governance and to really lead on governance is just entirely different than it was in the 1980s and ‘90s … They [companies] are being held to account by shareholders, and that is a very different dynamic than in the pre-Enron period. We have underpinnings that we’ve never had before, and we have

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shareholders who are vigilant.” Mastagni of the California teachers’ fund says that a requirement for directors to win a majority of votes was supposed to be codified in Dodd-Frank but fell by the wayside. Nonetheless, she says, institutional investors like her fund “went company by company, getting them to adopt the majority vote. We have close to 500 companies in the Russell 2000 that we’ve gotten to adopt majority voting. So I think that does work.” The Treasury Department in June 2017 issued a report on “core principles of financial regulation,” saying that after four months of listening to stakeholders ranging from industry advocates to consumer groups, it had gotten “a very clear picture of redundancy, fragmentation, and inefficiency in our regulatory framework.” 56 The report outlined actions the executive branch could take to complement the Financial CHOICE Act, a bill passed by the House that rolled back a number of regulations, including significant portions of Dodd-Frank. Carol Hansell: “Shareholders … Borrus says it “remains to be seen” whether federal regulators will take a hands-off approach to are vigilant.” governance issues. Trump’s appointee as SEC chairman is Jay Clayton, a corporate attorney with the white-shoe law firm of Sullivan & Cromwell. “He is a very accomplished lawyer,” Borrus says. “You can’t assume just because someone comes from the corporate world that they are going to give miscreants a pass. So we have to assume he is a very smart guy who has a sterling record and we certainly hope that he will continue the SEC record of strong enforcement. We have no reason to believe otherwise.” Then she adds: “If the SEC slacks off, then we have to rely on private investors to defend themselves.” About the Author

A Denver-based freelance writer, David Milstead is a regular contributor to The Globe and Mail, the national newspaper of Canada. He has individually or jointly won nine national awards from SABEW, the Society of American Business Editors and Writers. In previous reports for SAGE Business Researcher, he wrote about accounting trends, corporate taxes and the fiduciary rule. Chronology

18th to mid-20th New forms of business organization spark controversy. Centuries 1776 In “The Wealth of Nations,” economic philosopher Adam Smith expresses doubts about whether a corporation can ever be run for the benefit of its owners: The directors, “being the managers rather of other people’s money than of their own,” cannot be expected to watch over it with vigilance. 1811 New York State enacts a general incorporation statute, allowing the state secretary to approve new corporations. Previously, all states required corporations to get permission from their legislatures to operate. 1820s–1830s Controversy over the new Second Bank of the United States, a private corporation that could issue notes and had a board partially appointed by the federal government, shows Americans’ mistrust of power and desire for checks and balances. 1934 The Securities and Exchange Act, a reaction to the 1929 stock market crash, creates the Securities and Exchange Commission (SEC) and emphasizes disclosure and transparency, later recognized as core concepts of corporate governance. 1956 The initial public offering of Ford Motor Co. stock marks the high point of the post-World War II democratization of share ownership, spreading stockholding from the wealthy few to more and more Americans. Late 20th Failures, scandals give rise to a movement. Century 1970 The Penn Central Railroad collapses, laying bare the failures of a board of directors that approved dividends even as the company was running out of money. 1970s A scandal over questionable corporate payments to foreign governments, occurring during the Watergate affair and soon after the Penn Central collapse, prompts widespread blowback against corporations and an attempt by the SEC to introduce corporate governance reforms.

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1980s An era of corporate raiders, dominant CEOs and boards of directors called out of touch by critics gives birth to the modern governance movement. 1985 The Council of Institutional Investors is founded to give pension funds and other big investors a united voice on governance issues. 2000–2016 Financial crises sharpen debate over governance. 2000 The financial markets, driven by a multi-year tech bubble, peak in March. 2001 Widely admired energy trader Enron Corp. collapses into bankruptcy after revelations it was hiding significant debt obligations. 2002 Telecom success story WorldCom is revealed to have committed accounting fraud. More than $5 trillion in market value disappeared.…The Sarbanes-Oxley Act attempts to address the failures of the past two years, introducing extensive new rules on how companies report financial results. 2008–2009 Another financial crisis causes a number of banks and lenders to collapse as a declining housing market undercuts the value of billions of dollars of mortgages and related securities. 2010 Congress passes the Dodd-Frank Wall Street Reform and Consumer Protection Act to address the financial crisis. Governance measures include requiring company directors to hold periodic “say on pay” shareholder votes on executive compensation and allowing the SEC to create a “proxy access” rule that would permit some shareholders to directly nominate candidates for director. 2011 The Business Roundtable and U.S. Chamber of Commerce successfully challenge the SEC’s power to implement a proxy access rule, forcing institutional investors to negotiate company by company for the rule.… According to a survey of Russell 1000 companies by the Council of Institutional Investors, just over 90 percent adopt annual say-on-pay votes, as opposed to biennial or triennial votes, the other two options in the Dodd-Frank law. 2016 Compensation consultants Willis Towers Watson find only 35 companies in the Russell 3000 where shareholders voted down say-on-pay proposals, the smallest number since 2011.

Resources for Further Study Bibliography

Books

Bainbridge, Stephen M., “Corporate Governance After the Financial Crisis,” Oxford University Press, 2012. A skeptic of modern corporate governance principles explains why many current initiatives are “quack governance.” Clifford, Steven, “The CEO Pay Machine: How it Trashes America and How to Stop it,” Blue Rider Press, 2017. A former CEO and board compensation committee chairman examines how CEO pay has spiraled upward and makes recommendations on how to reverse the trend. Kim, Kenneth A., and John R. Nofsinger, “Corporate Governance,” Second Edition, Pearson/Prentice Hall, 2007. Two finance professors offer a basic introduction to the principles of corporate governance. Monks, Robert A.G., and Nell Minow, “Corporate Governance,” Fifth Edition, Wiley, 2011. A pre-eminent textbook on corporate governance, by the founders of the governance research firm GovernanceMetrics International, that covers the subject’s intricacies while remaining readable. Stout, Lynn, “The Shareholder Value Myth,” Berrett-Koehler Publishers Inc., 2012. A Cornell University law professor argues that the widespread belief that corporations must maximize shareholder value is wrong.

Articles

Bebchuk, Lucian A., “Investing in Good Governance,” The New York Times, Sept. 12, 2012, http://tinyurl.com/y7f383z9. A Harvard law professor discusses why the stocks of well-governed companies may no longer outperform those of the bad ones. Larcker, David, and Brian Tayan, “Chairman and CEO: The Controversy over Board Leadership,” Harvard Law School Forum on

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Corporate Governance and Financial Regulation, July 26, 2016, http://tinyurl.com/y9aqchps. Two Stanford University Graduate School of Business academics survey data on companies separating – and sometimes recombining – their chairman and CEO jobs. Lowenstein, Roger, “CEO Pay Is Out of Control. Here’s How to Rein It In,” Fortune magazine, April 19, 2017, http://tinyurl.com/kqnbnm2. A longtime business journalist says companies are inflating pay by using the wrong comparisons and compensation goals that are too easy to hit. McGregor, Jena, “The ‘zombie directors’ who lurk on corporate boards,” The Washington Post, Nov. 7, 2016, http://tinyurl.com/y8aw57t4. The newspaper’s leadership columnist examines the U.S. system of electing corporate directors and what happens when a director loses.

Reports and Studies

“How Corporate Governance Matters,” Credit Suisse Research Institute, January 2016, http://tinyurl.com/y867ln5p. The Swiss bank’s research affiliate says that in some sectors a focus on corporate governance can reward investors with market outperformance. “International Comparison of Selected Corporate Governance Guidelines and Codes of Best Practice,” Weil, Gotshal & Manges LLP, June 2014, http://tinyurl.com/yab2eq3t. An international law firm surveys corporate-governance practices across a number of countries and outlines their differing approaches, based in part on their legal traditions. Bhagat, Sanjai, and Bernard Black, “The Uncertain Relationship Between Board Composition and Firm Performance,” Business Lawyer, May 1999, pp. 921–963, http://tinyurl.com/y7pbtbft. Two academics argue that there is no convincing evidence that greater board independence correlates with greater company profitability or growth. Faleye, Olubunmi, “Does One Hat Fit All? The Case of Corporate Leadership Structure,” May 10, 2007, http://tinyurl.com/ycdxrmab. A Northeastern University finance professor concludes that it may be counterproductive to require every company to separate its chairman and CEO positions. Gompers, Paul A., Joy L. Ishii and Andrew Metrick, “Corporate Governance and Equity Prices,” Quarterly Journal of Economics, Vol. 118, No. 1, pp. 107-155, February 2003, http://tinyurl.com/y9zbsmjk. Three academics construct a “governance index” and show that, at that time, companies scoring better outperformed those that scored worse. The Next Step

Corporate Social Responsibility

Gibson, David, “Doing good and doing well: Faith-based investing converts the skeptics,” Religion News Service, USA Today, May 31, 2017, https://tinyurl.com/yb5fjf2s. Faith-based investors are putting their money into corporations that align with their religious beliefs in hopes they can influence companies on issues such as climate change, human trafficking and racial diversity. Kolhatkar, Sheelah, “Is Socially Responsible Capitalism Losing?” The New Yorker, June 5, 2017, https://tinyurl.com/yddcw7oq. “Conscious capitalism” stresses that businesses must consider employees, customers and the community, not just shareholders, when making decisions. But many in the investment community still react negatively to companies that try to give more employee benefits or address social issues. Rushe, Dominic, “Shareholders force ExxonMobil to come clean on cost of climate change,” The Guardian, May 31, 2017, https://tinyurl.com/yasuygqg. Sixty-two percent of ExxonMobil shareholders voted for a measure requiring the oil giant to more clearly report on how climate change will affect its businesses, despite opposition from the company’s management. Last year, the same proposal received 38 percent.

Executive Compensation

Clifford, Steven, “How Companies Actually Decide What to Pay CEOs,” The Atlantic, June 14, 2017, https://tinyurl.com/y8xdced3. The former CEO of King Broadcasting Co., who was a member of multiple compensation committees, details how a model of “external equity,” along with complex bonuses and CEO influence, sent executive pay to new heights. McGregor, Jena, “The surprising role where women consistently earn more than men,” The Washington Post, May 26, 2017, https://tinyurl.com/ycxzdb45. Among S&P 500 companies in 2016, female CEOs outearned their male counterparts, and some experts believe the reason might be that women are running larger companies. Melin, Anders, Ellen Proper and Cynthia Koons, “Mylan Shareholders Reject Drugmaker’s Executive Pay Package,” Bloomberg, June 22, 2017, https://tinyurl.com/y74hvrqf. The majority of Mylan investors voted against the drugmaker’s 2016 compensation program because of the reported $97.6 million package for Chairman Robert Coury – but the vote was nonbinding and observers doubt there will be changes to executive compensation.

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Investor Pressure

Chaudhuri, Saabira and David Benoit, “Nestle Unmoved by Demands From Activist Investor Third Point,” The Wall Street Journal, June 26, 2017, https://tinyurl.com/y8lrr5bs. Activist investor Daniel Loeb recently purchased $3.5 billion in Nestle shares with his hedge fund Third Point, making him one of the company’s top 10 investors. He is now pressuring Nestle and its new CEO Mark Schneider to increase growth, asking for changes such as selling off some of its more than 2,000 brands. Cheng, Evelyn, “GE Shares pop 4% after Immelt leaves, giving activist Peltz ‘what he wanted,’” CNBC, June 12, 2017, https://tinyurl.com/yakvhx3e. General Electric Chairman and CEO Jeff Immelt is stepping down Aug. 1, and pressure from Nelson Peltz, CEO of Trian Fund Management, an investment fund that is among the largest investors in GE, may have been a contributing factor in the decision. Foster, Tom, “The Shelf Life of John Mackey,” Texas Monthly, June 2017, https://tinyurl.com/y8j7d952. A journalist charts the rise of Whole Foods and explains how investor pressure helped lead to the company’s decision to sell to Amazon.

Shareholders Meetings

Caffrey, Michelle, “This Week in Comcast: Shareholders push back over virtual meeting,” Philadelphia Business Journal, June 13, 2017, https://tinyurl.com/ycgkv5ya. Comcast chose to hold an online-only shareholders meeting for the second year in a row, upsetting some shareholders who worried that the virtual meeting silences some participants and inhibits open discussion. Feloni, Richard, “How the Walmart shareholders meeting went from a few guys in a coffee shop to a 14,000-person, star-studded celebration,” Business Insider, June 2, 2017, https://tinyurl.com/ybrrnp3b. Walmart’s shareholder meetings have grown from small, quiet events in the 1970s to massive, star-studded affairs featuring thousands of employees and days of activities. Morgenson, Gretchen, “Meet the Shareholders? Not at These Shareholder Meetings,” The New York Times, March 31, 2017, https://tinyurl.com/ydfxlo8e. Last year, 154 companies held online-only shareholders meetings, an increase of 133 from five years earlier, but critics say these companies are using virtual meetings to avoid accountability. Organizations

American College of Governance Counsel c/o Frank M. Placenti, Squire Patton Boggs LLP, 1 E. Washington St., #2700, Phoenix, AZ 85004 1-602-528-4004 www.amgovcollege.org Professional, educational and honorary association of lawyers recognized for their achievements in the field of corporate governance. Council of Institutional Investors 1717 Pennsylvania Ave., N.W., Suite 350, Washington, DC 20006 1-202-822-0800 www.cii.org @CouncilInstInv Coalition of major investors, particularly public pension funds, that has advocated for corporate governance changes since 1985. Economic Policy Institute 1225 I St., N.W., Suite 600, Washington, DC 20005 1-202-775-8810 www.epi.org @EconomicPolicy Liberal think tank that tracks trends in executive pay and publishes annual studies of the ratio of CEO pay to the average worker. Glass Lewis 1 Sansome St., Suite 3300, San Francisco, CA 94104 1-415-678-4110 www.glasslewis.com @glasslewis Major proxy advisory service, which advises its investing clients on how to vote on governance matters. Institutional Shareholder Services 1177 Avenue of Americas, 2nd floor, New York, NY 10036 1-646-680-6350

Page 18 of 21 Corporate Governance SAGE Business Researcher ©2021 SAGE Publishing, Inc. All Rights Reserved. www.issgovernance.com @issgovernance Oldest and largest proxy advisory service, giving voting advice to clients. International Corporate Governance Network Saffron House, 6-10 Kirby St., London, EC1N 8TS, UK +44 (0) 207 612 7011 www.icgn.org @ICGNCorpGov Global group of governance professionals and investors who advocate for good governance. Manhattan Institute for Policy Research 52 Vanderbilt Ave., New York, NY 10017 1-212-599-7000 www.manhattan-institute.org http://www.proxymonitor.org @ManhattanInst Free-market think tank that maintains Proxy Monitor, a database of shareholder proposals. MSCI 7 World Trade Center, 250 Greenwich St., New York, NY 10007 1-212-804-3900 www.msci.com @MSCI_Inc Stock-index provider with a governance-research division stemming from its 2014 acquisition of GMI Ratings, which was a combination of three major governance-research firms. Notes

[1] Matt Levine, “Wells Fargo Opened a Couple Million Fake Accounts,” Bloomberg View, Sept. 9, 2016, http://tinyurl.com/hamesgx. [2] Ross Kerber and Dan Freed, “Wells Fargo Board Gets Black Eye in Shareholder Vote,” Reuters, April 25, 2017, http://tinyurl.com/ycw484ob. [3] Wells Fargo 8-K securities filing, April 25, 2017, http://tinyurl.com/y9f84zx9. [4] Kerber and Freed, op. cit. [5] Mike Isaac, “Uber Founder Travis Kalanick Resigns as C.E.O.,” The New York Times, June 21, 2017, http://tinyurl.com/y9dtxv76; Mike Isaac, “How Uber Deceives the Authorities Worldwide,” The New York Times, March 3, 2017, http://tinyurl.com/hbhonl6. [6] Robert A.G. Monks and Nell Minow, “Corporate Governance,” Fifth Edition, Wiley, 2011, p. xxii. [7] Ibid., p. xxiii. [8] Ibid. [9] Stephen M. Bainbridge, “Corporate Governance after the Financial Crisis,” Oxford University Press, 2012, p. 15. [10] Eric Johnson, “Does Corporate Governance Matter?” Credit Suisse corporate website, Jan. 20, 2016, http://tinyurl.com/ya8esqbu. [11] Ibid. [12] Steve Johnson, “Good governance is good for the wallet,” Financial Times, May 11, 2014, http://tinyurl.com/ycqj78l2. [13] Monks and Minow, op. cit., p. 184. [14] Sanjai Bhagat and Bernard Black, “The Uncertain Relationship Between Board Composition and Firm Performance,” Business Lawyer, Vol. 54, pp. 921–963, http://tinyurl.com/y7pbtbft. [15] Mark Sweney, “Sorrell: companies that offend good governance tend to perform better,” The Guardian, March 3, 2017, http://tinyurl.com/zkry9rh. [16] Lucian A. Bebchuk, Alma Cohen and Charles C.Y. Wang, “Learning and the Disappearing Association Between Governance and Returns,” Journal of Financial Economics, Vol. 108, No. 2, pp. 323–348, May 2013, http://tinyurl.com/ycjok33e.

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[17] Paul A. Gompers, Joy L. Ishii and Andrew Metrick, “Corporate Governance and Equity Prices,” Quarterly Journal of Economics, Vol. 118, No. 1, pp. 107–155, February 2003, http://tinyurl.com/y9zbsmjk. [18] Lucian A. Bebchuk, “Investing in Good Governance,” The New York Times, Sept. 12, 2012, http://tinyurl.com/y7f383z9. [19] Roger Lowenstein, “CEO Pay Is Out of Control. Here’s How to Rein It In,” Fortune, April 19, 2017, http://tinyurl.com/kqnbnm2. [20] Monks and Minow, op. cit., p. 368. [21] Ibid. [22] Paul Hodgson, “A Brief History Of Say On Pay,” Ivey Business Journal, September/October 2009, http://tinyurl.com/y7tlqem8. [23] “Say-On-Pay Frequency: A Fresh Look,” Council of Institutional Investors, December 2016, http://tinyurl.com/y7cyx6ra. [24] Ira Kay, “Did Say-on-Pay Reduce or ‘Compress’ CEO Pay?” Harvard Law School Forum on Corporate Governance and Financial Regulation blog, March 27, 2017, http://tinyurl.com/yd3yv753. [25] “An Advisory Vote to Approve the Compensation of our Executive Officers as Disclosed in this Proxy Statement,” Chipotle Mexican Grill Inc., March 16, 2015, http://tinyurl.com/y9c49p22. [26] Bainbridge, op. cit., p. 222 [27] “Spotlight on Proxy Matters – The Mechanics of Voting,” U.S. Securities and Exchange Commission, May 23, 2012, http://tinyurl.com/y8tvyfhq. [28] Jeff Mahoney, letter from Council of Institutional Investors to John Carey, NYSE Euronext, June 20, 2013, http://tinyurl.com/yclba3fn. [29] Jena McGregor, “The ‘zombie directors’ who lurk on corporate boards,” The Washington Post, Nov. 7, 2016, http://tinyurl.com/y972rvvk. [30] Ted Mann and Joann S. Lublin, “GE to Allow Proxy Access for Big Investors,” The Wall Street Journal, Feb. 11, 2015, http://tinyurl.com/ybfpvnj3. [31] Kenneth A. Kim and John R. Nofsinger, “Corporate Governance,” Second Edition, Pearson/Prentice Hall, 2007. [32] Bainbridge, op. cit., p. 28 [33] Monks and Minow, op. cit., p. 113 [34] Jeffrey N. Gordon, “The Rise of Independent Directors in the United States, 1950-2005: Of Shareholder Value and Stock Market Prices,” Stanford Law Review, 2007, Vol. 59. p. 1514, http://tinyurl.com/ya3k7adx. [35] Ibid., p. 1515. [36] Ibid. [37] Ibid. [38] Bainbridge, op. cit., p. 30. [39] Ibid., pp. 51-52. [40] Andrei Shleifer and Robert W. Vishny, “The Takeover Wave of the 1980s,” Science, Aug. 17, 1990, http://tinyurl.com/y9rckeb2. [41] Monks and Minow, op. cit., p. 130. [42] Bainbridge, op. cit., pp. 30–31. [43] Monks and Minow, op. cit., p. 130. [44] Monks and Minow, op. cit., p. xxi. [45] Ibid. [46] Tara Clarke, “The Dot-Com Crash of 2000-2002,” Money Morning, June 12, 2015, http://tinyurl.com/ycyr5qk4.

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[47] “Key Provisions of the Sarbanes-Oxley Act of 2002,” Rhoads & Sinon LLP, Aug. 2, 2002, http://tinyurl.com/nosvqfm. [48] “11 historic bear markets From the Great Depression to the Great Recession,” NBCNEWS.com, undated, accessed June 20, 2017, http://tinyurl.com/y9fkq57d. [49] Eleazar David Melendez, “Financial Crisis Cost Tops $22 Trillion, GAO Says,” Huffington Post, Feb. 14, 2013, http://tinyurl.com/b895h9w. [50] Bainbridge, op. cit., p. 14. [51] “Shedding light on the influence of shareholder proposals on corporations,” Proxy Monitor interactive database, accessed May 25, 2017, http://tinyurl.com/yc6jtf95. [52] Mara Lemos Stein, “Environmental Proxy Proposals Are Making More Demands,” The Wall Street Journal, Nov. 28, 2016, http://tinyurl.com/yd5m8o9e. [53] Hazel Bradford, “Snap IPO igniting furor; institutions not pleased,” Pensions & Investments, March 20, 2017, http://tinyurl.com/y8m2y2vt. [54] Tatyana Shumsky, “SEC Backs ‘Virtual-Only’ Annual Meeting Option,” The Wall Street Journal, Jan. 12, 2017, http://tinyurl.com/y7semgx8. [55] Ibid. [56] “Treasury Releases First Report on Core Principles of Financial Regulation Stimulating Economic Growth, Increasing Access to Capital & Taxpayer Protection Are Top Priorities,” U.S. Department of the Treasury, June 12, 2017, http://tinyurl.com/y9cnn7h4.

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